Baltic Security And The Nord Stream Two Pipeline

A new natural gas pipeline project agreed between German and Russian companies is causing concern in the Baltic Sea region. Nord Stream Two is a new pipeline that Russia wants to build directly to Germany under the Baltic Sea. The proposed pipeline would increase Europe’s dependence on Russian gas. It would threaten Ukraine’s energy security. It would harm the European Union and contradict the Energy Union. It would also send a bad political signal by rewarding Russia. Proponents of the pipeline claim that it is a straightforward business project. Yet understanding the pipeline requires looking at political, commercial, and legal issues.

Background

The first Nord Stream pipeline, which was completed in 2011, was itself an immensely controversial project, both within Germany and across Europe. For one thing, the Nord Stream construction agreement was signed only two weeks before Germany’s 2005 parliamentary elections. Chancellor Gerhard Schoeder, who had strongly backed the pipeline, lost the elections. Yet following his defeat, he was named head of the Nord Stream shareholders’ committee literally days after stepping down as chancellor, creating the strong appearance of conflict of interest.

Many Europeans, especially in the Baltic region and in East Central Europe, were skeptical of the pipeline from the start. They feared Nord Stream’s geopolitical ramifications. A direct gas connection between Russia and Germany, many analysts worried, would allow the Kremlin to divide the EU by threateninggas supply to Germany’s eastern neighbors while continuing to supply Germany. Fears that Russia might reduce gas supplies were shown to be well founded when it halted contracted natural gas exports to European countries in winter 2006 and winter 2009.

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While the worst-case scenarios of Nord Stream One have not come to pass, concerns about corruption and about Russian influence appear to have been valid. Schroeder, for example, has remained involved in Nord Stream to this day. Just weeks after annexing Crimea, Russian President Vladimir Putin hosted a lavish 70th birthday party for Schroeder in St. Petersburg. Schroeder has publicly advocated cancelling economic sanctions against Russia for the annexation of Crimea and invasion of eastern Ukraine. In September 2015, with Schroeder still on board at Nord Stream, Gazprom signed an agreement with the Austrian firm OMV, the French company ENGIE (formerly GDF Suez), and the German energy trusts BASF and E.ON, for construction of a new “Nord Stream Two” pipeline from Russia to Germany under the Baltic Sea.

Measures that the EU introduced in order to strengthen competition have prevented Nord Stream One from operating at full capacity. The EU’s “Third Energy Package” of regulations prohibits monopolistic ownership and use of energy pipelines on EU territory. These regulations limit the quantities of imported Russian gas that transit Nord Stream One under the Baltic Sea, because the follow-on pipelines carrying that gas overland through Germany to other countries must share their volume with other suppliers. The result is that Nord Stream One has not achieved its full commercial aims. It is noteworthy that Europe’s gas supply has not suffered, even though Nord Stream One volumes are only about half of design capacity.

Implications

EU antitrust regulation is one obstacle to Nord Stream Two, but it is far from the only stumbling block. The EU’s recent Energy Union initiative, launched last year, is leading to further regulation requiring energy market liberalization. The Energy Union also mandates a political concern with security of energy supply. Nord Stream Two would both fail to increase competition in the European energy market and threaten the energy supply security of the EU’s Central and Eastern European members.

It is very unlikely that Nord Stream Two could ever be commercially viable. Gazprom is much weaker today than it was a decade ago; its revenues have collapsed due to low energy prices. Consequently, it cannot self-finance the project. EU gas demand has declined and may remain stagnant. At the same time, US liquefied natural gas imports are competitive with overland and undersea imports from Russia. Norway, too, may increase its gas production, and that development would further assure European gas supply.

Although Nord Stream Two would not cross the territory of the Baltic states and they would not receive gas from it, the project affects their environmental and geopolitical interests. The environmental problems are clear enough. The required environmental impact statements for Nord Stream One were criticized for underestimating impacts on fisheries, birds, and other forms of life. There are dangers of leakage and poisoning, and from disturbing the sediment and bottom currents. These environmental issues affect all three Baltic states. The geopolitical issues are straightforward: if Nord Stream Two is built, Russian gas would bypass Ukraine, threatening the financial integrity of the Ukrainian state as well as the energy supply security of the East Central European states.

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What is in it for Germany? Germany’s significance as Russia’s gas distributor for much of Central and Western Europe would rise if Nord Stream Two became operational. However, Chancellor Angela Merkel has been very conscious of Germany’s leading role in Europe’s efforts to stand up to Russian aggression in Ukraine. One reason she is not moving against the Nord Stream Two contract is that the political aftermath of the refugee crisis has weakened her politically. Nord Stream Two is strongly backed by economic circles close to the Bavaria-based Christian Social Union party. The Social Democratic Party leader Sigmar Gabriel is even more sympathetic to it. It is not yet clear, however, whether the European Commission will let the Nord Stream Two pipeline move forward. The Commission has issued an energy supply security regulation requiring that it reviews intergovernmental accords. The firms involved in the pipeline have countered by denying that any intergovernmental accord is involved, saying that the pipeline is a purely commercial matter between companies.

Conclusion

Nord Stream Two is uneconomical and is unlikely to increase Europe’s energy supply security. It would provide a pretext for additional Russian naval activity in the Baltic Sea to ‘protect’ the pipeline. It would increase geopolitical pressure on the countries of Central Europe while dealing another blow to Ukraine. Despite claims that Nord Stream Two is a commercial project, it has little commercial justification. It faces wide opposition in Europe as yet another Kremlin attempt to increase the continent’s dependence on Russian energy. Natural gas represents about one-quarter of EU energy consumption, and the EU imports almost two-thirds of the natural gas it consumes. Nord Stream One at full capacity represents 12% of all European gas consumption and 18% of all imported gas. These proportions would double if Nord Stream Two is constructed.

Nord Stream Two would also harm Baltic security, shifting the geopolitical context by increasing Russia’s influence. One concrete step that the United States could take is to incentivize the shipment of liquefied natural gas to Europe. The first shipment from the United States only recently arrived there. Most American energy firms are focusing mainly on exporting to Asia, but the EU is looking to diversify its sources, suppliers, and routes for energy imports in the long term. Importing gas from the US would meet these goals. It would also help to avoid the many negative geopolitical consequences of building Nord Stream Two.