Dies ist eine HTML Version eines Anhanges der Informationsfreiheitsanfrage 'DG Trade and Nord Stream 2'.




Department of War Studies
Ref. Ares(2019)5061282 - 02/08/2019
& King’s Russia Institute
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Assessing Nord Stream 2: 
regulation, geopolitics & energy 
security in the EU, Central 
Eastern Europe & the UK
Professor Andreas Goldthau




Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK
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About the Publication 

Published by
The European Centre for Energy and Resource Security (EUCERS) was established in the Department of 
War Studies at King’s College London in October 2010. The research of EUCERS is focused on 
promoting an understanding of how our use of energy and resources affects International Relations, 
since energy security is not just a matter of economics, supply and technological change. In an era 
of globalization energy security is more than ever dependent on political conditions and strategies. 
Economic competition over energy resources, raw materials and water intensifies and an increasing 
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About the Author
Andreas Goldthau is Fellow with King’s Russia Institute, Professor of Public Policy at Central  
European University and Associate with the Belfer Center for Science and International Affairs, 
Harvard Kennedy School. His academic career includes appointments with the RAND Corporation, 
the German Institute for International and Security Affairs and SAIS, Johns Hopkins University, 
where he also serves as an Adjunct Professor in the MSc program in Energy Policy and Climate.  
Dr Goldthau’s research interests focus on energy security and on global governance issues related  
to oil and gas.
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Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK
Contents
Executive Summary 
06
Acknowledgements 06
Introduction and scope of the study 
07
Nord Stream 2, Eurasian energy geopolitics and the EU regulatory state 
09
European gas market dynamics 
11
Shifts in market structure 
11
Europe’s gas balance and supply options 
12
Gazprom’s export challenge 
16
The political economy of Russia’s gas sector 
16
Russian gas outlook 
17
Gazprom’s Europe strategy 
17
Nord Stream 2 and EU energy regulation 
21
Reviewing the legal context 
21
The geopolitical perspective 
23
Discussing Nord Stream 2 impact on EU gas markets and energy security 
26
As-is: gas market developments since 2011 
26
Impact on Central European gas markets 
27
An eye on South Eastern Europe 
29
Impact on the UK 
30
Does Nord Stream 2 present a security of supply threat for Europe? 
31
Conclusion: Nord Stream 2 and Europe’s choice 
34
References 35

Contents 

List of figures
Figure 1: Possible routes of Nord Stream 2 
08
Figure 2: EU gas pricing structures, USD/MMBtu 
11
Figure 3: EU gas supply and demand: select projections, bcma 
13
Figure 4: Dynamics in Russian gas production: Gazprom and competitors 
16
Figure 5: Russian gas: comparative cost structures and export routes 
19
Figure 6: East-West cross-border gas flows, select European countries, in bcm 
26
Figure 7: Selected Central European hub and cross-border import prices,  
2012–2014 (EUR/MWh) 
28
Figure 8: UK-continental European gas trade, bcm 
30
Figure 9: Russian gas import prices to Ukraine and Russian gas discounts, 2015 
32
List of boxes
Box 1: Eco-efficiency of LNG and pipeline gas 
20
Box 2: Energy Union and external EU energy policy 
24

 


Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK
Executive Summary
This study assesses the geopolitical, regulatory and  
so that the UK can continue sourcing from international 
energy security aspects as discussed in the context of Nord 
LNG markets and continental Europe, which maintains 
Stream 2. The study makes the following main points:
gas-on-gas competition.
l  The EU will remain an import market in gas going 
l  Energy security concerns over Nord Stream 2 as expressed 
forward, and its import gap will widen. Significant 
by East European leaders seem to define energy security 
changes in market structure will force Gazprom to take 
exclusively in terms of diversified routes and suppliers. 
choices regarding its market strategy. In case Gazprom 
Market logic, however, suggests that energy security 
opts for optimizing market share, this will put pressure 
is primarily enhanced through competition policy and 
on revenues. 
structural market changes. Integrated markets help 
keeping players that some see as keeping a too dominant 
l  Gazprom faces severe challenges related to a complex 
market position, such as Gazprom, in check and foster 
political economy on its home market and the imperative 
price competition.
to diversify its export portfolio beyond Europe. Nord 
Stream 2 is part of Gazprom’s strategy to minimize transit 
l  The future of Ukraine will not hinge on it remaining a 
risk to its prime export market, the EU, for which the 
transit country for Russian gas. Whilst the country will 
company is ready to put down significant investment. 
indeed lose transit fees should the bulk of Russian gas 
On a marginal costs basis, Nord Stream 2 might emerge 
exports to Western Europe no longer flow through the 
an important hedging strategy against competitively 
country, it stands to gain in terms of lower gas prices.
priced US LNG imports.
l  Nord Stream 2 will be built and operated in a contested 
l  Nord Stream 2 will enhance the liquidity of Central 
geopolitical environment. It is important to acknowledge 
European gas hubs in EU gas trading and pricing, and 
this environment in order to appreciate the complex 
strengthen their role as continental price markers. As a 
political dynamics possibly informing regulatory decisions 
corollary, Central European gas markets are set to integrate 
as taken by EU authorities.
further, which may give consumers choice and increase 
gas-on-gas competition in the region. Russian gas might 
l  The Commission already experimented with using its 
regulatory tools in the foreign policy domain and vis-à-vis 
end up competing with Russian gas but also with gas 
external actors, including Gazprom. This suggests that it 
from other sources.
is not the legalistic reading of EU energy law which will 
l  While Nord Stream 2 does not exert significant 
determine the viability of Nord Stream 2, but the degree to 
impact on South Eastern Europe, the situation of SEE 
which Commission will interpret its mission as a political 
nonetheless merits attention. Of primary importance are 
or regulatory one.
interconnectors to North-Western markets, notably in the 
shape of the ‘Vertical Corridor’ linking Greece to Austria.
l  Nord Stream 2 demonstrates that Europe needs to take 
choices on whether the Commission emerges a political 
l  With regard to the UK, Nord Stream 2 gas will likely 
actor in its own right or whether it remains a powerful 
exert structural or pricing effects only, if at all. Its most 
competition watchdog; and whether EU rules are 
important contribution to UK energy security might lie 
applicable across the board or be applied so that they 
in keeping the continental North-Western markets liquid, 
follow political objectives.
Acknowledgements
This study was produced as part of a one-year fellowship on Eurasian energy at King’s Russia Institute. The Institute and 
the author gratefully acknowledge the financial support of Shell, OMV, Wintershall, Uniper and Engie. The author would 
also like to thank the participants at a peer event at King’s for their insightful comments and feedback. A particular thanks 
goes to King’s Adnan Vatansever for all his scholarly trust, his continued support and his excellent management of the entire 
process. The author would also like to thank the European Centre for Energy and Resource Security for inspiring discussion 
and great cooperation.

Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK 

Introduction and scope of the study
On September 05, 2015, Russia’s Gazprom and its 
meddling – their role as transit countries. It has therefore 
five Western European partner companies signed the 
also been argued that the Nord Stream 2 project runs 
Shareholder Agreement on Nord Stream 2 at the Eastern 
counter to the EU’s stated objective to keep Ukraine a 
Economic Forum in Vladivostok. Almost a year later, 
transit country for Russian gas exports to Europe, and  
Gazprom’s CEO Alexei Miller on June 16 2016 at the St. 
more broadly the spirit of the Energy Union, the EU’s 
Petersburg Economic Summit reported the completion of 
latest energy policy initiative (see European Commission 
the first pipeline tenders. The proposed pipeline, which 
2015a). On March 07 2016 nine East European leaders 
will largely follow the route of existing Nord Stream, is 
signed a letter against Nord Stream 2, whilst Amos 
set to carry 55 bcm of gas a year from Russia’s Baltic coast 
Hochstein, the U.S. special envoy for international 
to Germany’s Greifswald as of 2019, in two strings of 27.5 
energy affairs, suggested that the pipeline ‘revives the 
bcm each.1 It will be operated by the Zug (CH) based 
Cold War line as an economic one’ (Politico 2016a). EU 
Nord Stream 2 consortium, which is planned to comprise 
Commissioner for Climate Action and Energy Miguel 
Russia’s Gazprom (50 percent stake), Germany’s Uniper 
Cañete called the project ‘not a commercial project 
(10 percent) and Wintershall (10 percent), UK’s Royal 
only’ but one that has significant political implications 
Dutch Shell (10 percent), Austria’s OMV (10 percent) and 
(Bloomberg 2016). In short, as much as Nord Stream 2 
France’s Engie (formerly GDF Suez, 10 percent) (Nord 
is a commercial project between a Russian and Western 
Stream 2 AG 2016).2
energy companies, it is also subject to heated debates about 
European energy security, Russian gas supplies and EU 
Technically, the pipeline will stretch some 1200 kilometers 
foreign policy preferences more generally.
under the Baltic Sea which makes it one of the world’s 
longest undersea pipelines, and it will operate without 
This study assesses the geopolitical, regulatory and energy 
compressor stations on the way. Politically, however, the 
security aspects as discussed in the context of Nord Stream 
expansion of Nord Stream – a pipeline of another two 
2. More to the point, it assesses a set of questions: what role 
strings of 27.5 bcm each – is strongly contested. Together, 
might Russian gas play in the European import portfolio, 
Nord Stream and Nord Stream 2 will have 110 bcm of 
and what informs Gazprom’s export strategy in this regard? 
export capacity for Russian gas, which compares to overall 
What is the legal environment pertaining to Nord Stream 
exports of 130 bcm to Europe and Turkey in 2015 (Gazprom 
2 and how do geopolitics play into relevant regulatory 
Export 2016). Numerically, Nord Stream 2 might therefore 
choices? What will be its potential impact on Europe and 
make other export routes redundant, notably the Ukrainian 
EU gas market structures? More specifically, what will be 
transit network. Moreover, Gazprom is on record to stop 
its impact on Eastern and South Eastern Europe and on 
shipping gas through the country upon the expiry of existing 
the UK? And how can the findings be interpreted in light 
contracts in 2019 (Interfax Ukraine 2015). As a corollary, 
of energy security concerns? This study seeks to explore 
this is argued to have fiscal implications for Ukraine as 
these questions and to offer a set of tentative answers – to 
the country stands to lose some estimated USD 2 billion 
the extent possible, by adopting a long term perspective, 
of transit fees a year (Reuters 2015a). On similar grounds, 
stretching into 2040.
other East European transit countries such as Poland and 
It is important to note that this study does not seek to 
Slovakia have voiced objections against Nord Stream 2. 
generate statements on whether Nord Stream 2 is desirable 
More importantly, possibly, it is geopolitical aspects that 
or not, whether it is likely that Nord Stream 2 will be built 
make Nord Stream 2 a contested project. Concerns are 
or remain in the planning phase, or on legal views adopted 
rooted in deep-seated fears over Moscow’s increasingly 
by EU authorities. Instead, it aims at shedding light on the 
assertive foreign policy – not the least in Ukraine. Russian 
complex dynamics and multi-faceted aspects pertaining 
gas supplies, therefore, are also discussed in the context 
to Nord Stream 2, with a view to informing the analytical 
of national security, a reason why many new EU member 
debate surrounding the project. This caveat is merited also 
states – and Washington DC – have pushed for higher 
with a view to Nord Stream 2 remaining a ‘moving target’, 
diversification of the European gas import portfolio. 
as political decisions and legal verdicts remain imminent, 
By some, Nord Stream 2 is seen as cementing Russia’s 
whilst market structures remain in flux.
dominant role in EU gas suppliers and depriving Eastern 
The next section sets the scene and elaborates in more 
Europe of an important insurance policy against Russian 
detail on the geopolitical dynamics pertaining to Nord 
Stream 2. Section 3 explores Europe’s shifting gas market 

This study will refer to the initial two-string pipeline as Nord Stream 
fundamentals and a changing international pricing regime. 
and the additional strings as Nord Stream 2.
Section 4 focuses on Gazprom in this new context and 

A shareholder agreement among the six involved parties is in place, 
sheds more detailed light on the domestic challenges the 
but not in force. This study will refer to the involved parties and 
Russian monopolist is facing. Section 5, then, assesses EU 
future shareholder as ‘consortium’ however acknowledging that the 
partnership structure is not in force yet.
energy regulation and its implications for Nord Stream 2. 



Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK
The section discusses the legal perspective but also offers a 
and South Eastern Europe, and the UK. The section also 
geo-economic interpretation of EU energy law. Section 6 
discusses energy security concerns as expressed by the nine 
discusses the impact of Nord Stream 2 on EU gas markets 
East European leaders against the study’s findings.  
and energy security. Here, focus is placed on Central 
A seventh section concludes.
Figure 1: Possible routes of Nord Stream 2
Finland
Estonia
Russia
Sweden
Latvia
Belarus
Lithuania
Nord Stream 2 route options 
under investigation
Russia
Nord Stream 1 & 2 pipelines
EEZ
Poland
EEZ disputed
0 25 50 
100 
150  200
Territorial waters
Kilometres
Source: Nord Stream AG, http://www.nord-stream2.com/download/image/20, accessed 08.04.2016

Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK 

Nord Stream 2, Eurasian energy geopolitics and 
the EU regulatory state
Although frequent reference is made to the long-standing 
Heiligendamm summits (Goldthau and Sitter 2014), and 
nature of European-Russian energy relations, the latter 
triggered EU level policy responses in the shape of the 2010 
have barely been of purely commercial character. Gas 
Regulation on Gas Security (European Parliament and the 
trade dates back to the 1970s, when the USSR started 
Council 2010). Unsurprisingly, Russia’s 2014 annexation 
deliveries to Western Europe, against the stated objection 
of Crimea immediately led to renewed concerns about the 
of Washington where fears arose that its allies might 
security of gas supply among European leaders, who in turn 
become dependent on the ‘Evil Empire’ and hence less 
reacted with sanctions against Russia, also targeting its oil 
reliable partners. Observers tend to point to the smooth 
industry. In short, if there indeed was a time when Russian-
nature of gas deliveries for most of the past 30 or so years, 
European energy relations were characterized by mutual 
and the fact that even during the heydays of the Cold War, 
trust and cooperation, these times were gone by 2009 at 
Moscow abstained from cutting supplies to its customers. 
the latest. It is in this context that Nord Stream 2 has to be 
Yet, more recently, a series of gas disputes raised serious 
analyzed – as a commercial project embedded in a charged 
concerns in Europe over the future of this relationship. 
geopolitical context.
The most important incidents occurred in 2006 and 2009, 
Against this backdrop, Europe started to reconsider the 
when Russia and Ukraine quarreled over gas deliveries 
extent to which Russian gas should play a role in the EU 
and prices, resulting in temporary cut offs of gas supplies 
energy mix going forward, and what elements an effective 
to downstream customers in Europe. Western observers 
hedging strategy should involve. Key elements of this 
established a causal link between the timing and intensity 
rethink include the above mentioned Regulation on Gas 
of these conflicts and Ukraine’s ‘Orange Revolution’ and  
Security (2010), which makes clear reference to a ‘difficult’ 
its subsequent re-orientation toward the West. 
international political environment and the possibility of 
supply disruptions. The Regulation aims at enhancing 
In Europe, the effects of what at the core was a contractual 
cooperation among EU member states, includes Preventive 
dispute were particularly felt in 2009, when a 13-day 
Action and Emergency Plans and fosters the build-up 
long gas supply cut to 16 EU member states particularly 
of reverse flow capacity in gas infrastructure, in addition 
impacted East European countries and their economies. 
to setting supply standards and supporting alternative 
To be sure, Gazprom also faced severe costs related to 
sources of gas in the shape of LNG. Moreover, the 2014 
the standoff, which by some estimates amounted to USD 
Energy Security Strategy (European Commission 2014c) 
1.5 billion (Stern, Pirani, and Yafimava 2009, 61). Yet the 
– explicitly mentioning the gas disputes of 2006 and 2009 – 
2009 crisis for many highlighted the political links between 
stresses the importance of diversifying supplies and routes, 
Gazprom and the Russian government, and the strategic 
and of reducing Russia’s dominant role in the EU’s energy 
importance of Russian gas exports for the Kremlin. In fact, 
import portfolio. 
studies suggest that energy and Russian foreign policy are 
much closer linked than commonly assumed, with oil or gas 
Referring to the stress tests commissioned by Brussels in 
deliveries either being a cause of Russian intervention or 
the fall of 2014 – a reaction to mounting political tensions 
a means thereof. For instance, an analysis by the Swedish 
in Ukraine and Russia’s annexation of Crimea – and the 
Defense Research Agency, commissioned in the wake of the 
fact that several EU countries still exhibit a significant 
2006 gas crisis, suggests that of the 55 incidents involving 
energy security risk pertaining to external gas supplies, 
Russian energy supplies to foreign countries between 1991 
the Commission on February 16 2016 adopted a ‘Security 
and 2005, only 11 can be labeled entirely ‘non-political’ 
of Supply Package’ which centrally includes a revision 
(Larsson 2006), 262). Prominent post-2006 examples 
of the Regulation on Security of Gas Supply, gives 
include Russia stopping crude deliveries to Lithuania’s 
the Commission the powers to vet Intergovernmental 
Mažeikių Nafta refinery (2006), Georgia being cut off from 
Agreements (IGA) between EU countries and third 
Russian gas supplies in 2006, the explosion of a Turkmen 
suppliers, and lays out an LNG Strategy (European 
gas export pipeline to Russia (2009), and even a standoff 
Commission 2016g).
with ally Belarus (2007), which involved the threat of 
In addition, the EU prioritized 195 ‘Projects of Common 
stopping gas deliveries (Woehrel 2009).
Interest’ (PCI) in gas and electricity infrastructure, the 
These incidents, and particularly the Russian-Ukrainian gas 
most significant of which will receive supportive funding 
disputes of 2006 and 2009 had far reaching political effects 
of up to €5.35 billion from the Connecting Europe Facility 
and resulted in lasting damage done to Russia’s reputation 
(CEF) until 2020. In addition to enhancing competition 
as an energy supplier. What is more, energy security 
PCIs must ‘boost the EU’s energy security by diversifying 
experienced a sudden return to the top of policy agendas in 
sources’ in order to be eligible for financial support 
the context of the G8, notably during the St Petersburg and 
(European Commission 2016f). To be sure, rather than 

10 
Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK
building the physical infrastructure, ECF funding supports 
tensions with Russia, however, pro-market regulation 
proposed projects by way of funding feasibility and design 
arguably also emerged as a means to check Gazprom’s 
studies, market surveys, or regulatory and environmental 
ambitions on the European gas market. This particularly 
assessments. With this, its primary role is facilitating, clearly 
pertains to infrastructure projects to the extent they are 
leaving the job of implementing the project to market 
subject to the Third Energy Package, in which case they 
actors. The importance of PCI status – in addition to the 
may not be operated without Brussels’ consent. A case in 
rather symbolic EU endorsement – lies in prioritizing what 
point here, which we shall discuss in further detail below, is 
EU Commissioner Šefčovič refers to as the ‘hardware’ of a 
South Stream, a Russia-sponsored pipeline project which 
more resilient EU energy system: fostering bi-directional 
was intended to help circumvent Ukrainian transit and bring 
flow capacity, integrating national energy markets and 
Gazprom gas into South Eastern Europe. South Stream 
making gas more fungible a commodity within Europe. 
consisted of an offshore part through the Black Sea landing 
Energy infrastructure PCIs therefore complement the EU’s 
in Bulgaria and onshore extensions to Austria’s Baumgarten 
regulatory ‘software’ in the shape of European energy law 
hub. The Commission hinted that the Intergovernmental 
(European Commission 2015c).
Agreements (IGAs) governing South Stream’s onshore 
parts might breach TEP provisions, in addition questioned 
These measures come on the back of the EU’s move 
Bulgarian procurement, as a consequence of which the 
toward a more competitive internal energy market which 
entire project was halted end of 2014. When insisting on 
started with the Commission’s 1990 initiative to liberalize 
legal and regulatory clarity, and the application of EU law in 
the electricity and gas sector. Since then, three regulatory 
the case of the South Stream project, the Commission also 
‘packages’ fundamentally reshaped the European energy 
set a precedent for future pipeline infrastructure projects 
sector. The 1998 package fostered limited and gradual 
bringing non–EU gas into the Union, and particularly their 
market opening (European Parliament and the Council 
onshore extensions. 
1998). The second ‘package’ in 2003 went further and 
introduced independent energy regulators, made EU 
To be sure, the Commission’s ruling on TPA provisions 
countries adopt a regulated access tariff and stipulated the 
remains firmly within the remits of what is typically 
goal of non-discriminatory third party access (TPA) to 
referred to as the European ‘regulatory state’ (Majone 1994; 
energy infrastructure (European Parliament and the Council 
McGowan and Wallace 1996; Moran 2002). As such, the 
2003). The Third Energy Package of 2009, then, fully 
EU’s policy toolbox is restricted to law and regulation 
enforced TPA provisions through ownership unbundling, 
(rather than involving gunboats and troops), and the main 
detailed the operative modes for transmissions system 
focus rests on creating markets and making them work 
operators (TSOs) and equivalent models (independent 
(rather than on foreign or security policy). Yet, as the case 
system operators/ISOs and independent transmission 
of South Stream indicates and as we shall discuss in further 
operators/ITOs), and led to the establishment of an EU 
detail in section 5, the regulatory state toolbox, albeit 
level representation of national regulatory agencies (ACER) 
restricted, can be used in very strategic ways. With this, 
and of TSOs (ENTSO) (European Parliament and the 
laws and regulation are not mere neutral acts conducted by 
Council 2009b; European Parliament and the Council 
a Brussels based regulator. Rather, they become means for 
2009c; European Parliament and the Council 2009d; 
targeted action and for policy purposes other than European 
European Parliament and the Council 2009e). ENTSO-G 
energy market integration. This is where rather ‘soft’ legal 
and ENTSO-E, the European Network Transmission 
policy instruments acquire what Goldthau and Sitter 
Operators for gas and electricity, were also tasked with 
(2015b) termed a ‘hard edge’, also vis-à-vis foreign actors 
developing Ten Year Network Development Plans 
such as Russia’s Gazprom.
(TYNDP) for European energy infrastructure.
Overall, the Nord Stream 2 project operates in a 
Although there still exists a significant heterogeneity in 
different environment than its predecessor, Nord 
national energy governance models (some EU countries 
Stream. Admittedly, the latter faced similar criticism and 
also fall short of fully transposing the Third Energy Package 
considerable opposition from Eastern EU countries, related 
into national law and implementing it), the EU’s efforts 
to an alleged over-dependence on Russian gas and related 
to the liberalize energy sector have deep effects. The 
security implications. This culminated in Poland’s then-
incumbent model of nationally fragmented energy markets 
defense minister Sikorski likening the German-Russian 
characterized by monopoly utility companies and long-
project to the infamous Molotov-Ribbentrop Pact of 1939 
term gas supply contracts (LTCs) started to give way to an 
(Euractiv 2009). And yet, Nord Stream was planned during 
increasingly integrated EU market where largely privatized 
a time when Russia was by and large seen as a partner still, 
companies compete and hubs now cover more than half of 
geopolitical tensions over Ukraine were at relatively low 
overall traded gas (IGU 2014). As Andersen et al. (2016) 
levels, and – probably most importantly – the liberal EU 
argued, this represents the ‘triumph of liberalization as a 
energy paradigm was only in the making. As this study  
policy paradigm’.
will argue, it is precisely the broader geopolitical context  
in which EU regulatory decisions need to be read.
The EU’s push for three consecutive liberalization packages 
was clearly intended to extend the Single European Market 
Before exploring the legal context in more detail, the next 
to the energy sector. Against the backdrop of emerging 
section turns to the changing dynamics in EU gas demand.

Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK 
11 
European gas market dynamics
European gas markets are in flux. A number of factors 
together at that time: a financial crisis that pushed major 
will fundamentally impact on gas demand dynamics 
economies including the US and Europe into recession, 
going forward, change the incumbent market structure, 
depressing gas demand; US shale gas production taking off, 
and affect gas companies and their traditional business 
reducing US LNG import needs; and substantial Middle 
models. These centrally include a shifting international 
East LNG capacity coming online at exactly that time. 
market environment, European policy frameworks, and EU 
In fact, the post-2008 environment amounted to a ‘perfect 
decarbonzation targets. All of these directly or indirectly 
storm’ for natural gas, as a glut of LNG was in search for 
impact on the EU’s demand trajectory in natural gas 
new destinations outside the US and hit depressed European 
and the pricing models that come with it. In addition, a 
markets instead, where demand was down around 40 bcm 
European gas balance tilting toward heavier imports going 
compared to before-crisis levels. This set in motion a well-
forward warrant strategic decisions on supply options. 
documented chain of events, at the end of which incumbent 
European market structures had given way to new, and 
Shifts in market structure
arguably more competitive, models. First, additional LNG 
Having seen extraordinary growth rates for some three 
intake depressed gas prices on the UK’s National Balancing 
decades in a row, European gas demand flattened out by 
Point (NBP) which widened the spread between spot 
the mid-2000s. Demand peaked around 2010 at 543 billion 
markets and oil-indexed LTCs. In turn, European mid-
cubic meters (bcm) (IEA 2014). Since then, European gas 
stream energy trading companies started to feel the heat 
demand decreased consistently and by the end of 2013 
from their downstream customers. This, and second, made 
stood at 471 bcm (IEA 2015b). This is for reasons related 
European companies including E.ON, RWE, GDF Suez, 
to market maturity, rising competition from renewables 
OMV and Eni renegotiate their supply contracts with a 
but also cheap coal, a series of relatively mild winters, 
view to adjusting price levels downward and to indexing a 
and a persisting economic crisis. At the same time, the 
larger part of the pricing mechanism to (cheaper) spot gas. 
international market environment turned from a sellers’ 
Key suppliers, including Norway’s Statoil and eventually 
ma
25 rket to a buyers’ market. Three major factors came 
also Russia’s Gazprom granted discounts and adjusted 
Figure 2: EU gas pricing structures, USD/MMBtu
20 
15 
10 


11
11
11
11
Jul 
Jan 08
Apr 08
Jul 08
Oct 08
Jan 09
Apr 09
Jul 09
Oct 09
Jan 10
Apr 10
Jul 10
Oct 10
Jan 
Apr 
Oct 
Jan 12
Apr 12
Jul 12
Oct 12
Jan 13
Apr 13
Jul 13
Oct 13
Jan 14
Apr 14
Jul 14
Oct 14
Jan 15
Apr 15
Jul 15
Oct 15
Jan 16
German border price Russian gas 
German border price NL gas 
Algerian LNG into Spain 
UK NBP 
Source: Energy Intelligence Group, author’s calculations

12 
Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK
pricing structures, moving contracts further away from the 
As a consequence of all the above, large utilizes such 
incumbent oil-indexed LTC model. Finally, and adding 
as RWE or E.ON, which traditionally relied on LTCs 
to this, the Commission in a series of contractual re-
and rents locked-in through a monopoly structure in the 
negotiations with Gazprom, Sonatrach and GDF/ENEL/
midstream and end consumer gas markets, have come to 
ENI (who held LNG swap agreements with Nigeria’s 
face huge difficulty. In fact, as Stern and Rogers (2014b) 
NLNG) put a final end to destination clauses entailed in 
argue, the ‘business model for mid-stream energy trading 
LTCs and pushed for gas market liberalization (for a detailed 
companies in Europe is becoming gradually obsolete’. 
discussion see Talus (2011)). Within a short period of time, 
Reacting to demand side changes, structural market shifts 
this perfect storm eroded the traditional model which had 
and a policy priority put on low carbon energy services, 
governed the European market for decades. As of 2013, 
several European gas utilities have split, pooling their fossil 
and although there still exist significant regional differences 
assets (including gas) in separate ‘bad bank’ entities, with 
within Europe, more than half of overall EU gas demand is 
E.ON (now Uniper) representing the prime example.
priced against spot not oil (IGU 2014). As a consequence 
of price discounts and revised pricing structures, spot and 
Europe’s gas balance and supply options
pipeline gas started to converge again. (For a detailed 
A key question for external supplies into Europe lies in 
discussion of EU gas markets see (Boersma 2015).)
Europe’s gas balance going forward. It is outside the scope 
of this study to model the European gas balance out to 
Going forward, the international market environment is 
2040. An analysis of available scenario analyses from the 
projected to remain soft this side of 2020. Until then, as 
public and the private sector, however, generally points to 
the IEA suggests, additional global LNG capacity will 
two key trends: a flattening demand coupled with declining 
increase by 40 percent compared to 2015 levels (IEA 
domestic production. That said, existing projections vary 
2015a). A further internationalizing and increasingly liquid 
widely, as do their underlying assumptions on key input 
gas market will arguably perpetuate the dynamics started 
factors such as oil price developments, economic growth, 
in 2008. Going forward the US is projected to emerge a 
cost structures for RES or policy or indeed also projected 
significant exporter of LNG, with additional ripple effects 
timelines.
for international markets and indeed European gas pricing 
dynamics, an aspect we shall return to below. Moreover, 
The IEA in their New Policies Scenarios projects gas 
natural gas also started to push coal out of the US energy 
demand to remain flat in the European Union through 
mix, as Henry Hub gas prices bottomed out and replaced 
2040. By that time, consumption is estimated to stand at 
coal as a fuel of choice in the power sector. In fact, on a 
466 bcm a year, roughly the same levels the IEA reports for 
monthly basis, gas surpassed coal in US power generation in 
2015 (IEA 2015b). It is particularly in the power sector that 
April 2015, and is set to do so on an annual basis as of 2016 
gas will gain market share, whereas it will lose in buildings/ 
(EIA 2016b). As a consequence, US coal exports picked up, 
heating and industry. Honoré (2014) uses a sectoral and 
the effects of which are felt in the European power sector 
country based, bottom-up approach and largely confirms 
where gas came under additional pressure. As a side effect, 
the estimates for a mid-range outlook. In her analysis, 
EU CO  emissions rose again, even if only temporarily.
2
European gas demand is slow to recover to pre-2008 levels, 
and any growth will remain modest up to 2030. Eurogas 
The changing natural gas landscape comes against the 
suggests a European demand between 437 – 585 bcm by 
backdrop of European policies pertaining to decarbonization. 
2035, depending on policies favorable or hostile to natural 
The EU’s push for a low carbon future, as epitomized in 
gas (Eurogas 2013). The updated impact assessment 
its 20-20-20 goals, the 2030 Energy Strategy and the 2050 
accompanying the EU Commission’s Energy Roadmap 
Roadmap, puts a policy priority on the transition toward a 
2050, which is based on the PRIMES model and looks 
sustainable energy system, by way of supporting renewables 
favorable at RES policies and their growth in the EU energy 
(RES), energy efficiency measures and reducing the share 
mix, assumes an annual gas consumption of 397669 ktoe or 
of fossil fuels in the energy mix (European Commission 
429 bcm in 2040 (European Commission 2014d).
2011b; European Parliament and the Council 2009a). This is 
not the place to discuss in detail the merits or pitfalls of EU 
Flat demand or an only modest increase in consumption 
carbon policies, nor the largely diverging national policies 
contrasts with domestic gas production levels projected 
in this regard. Suffice to say that large economies, and 
to fall sharply. By 2040, the IEA assumes indigenous 
indeed the ones that matter most for Nord Stream 2 such 
supplies to stand at 92 bcm a year, a reduction of 81 bcm 
as Germany, are at the forefront of such policies. As BNEF 
compared to 2013 levels. This, in turn, calls on imports 
data suggest, grid parity for solar and wind power becoming 
to cover 83 percent of EU demand. BP suggests similar 
a reality in various Europe countries, which is a function of 
numbers and estimates that imports will make up for almost 
pro-RES regulation, subsidy policies (phasing out in many 
three-quarters of Europe’s gas consumption by 2035 (BP 
places) and rapidly faltering installation costs (Bloomberg 
2015a). In their Ten-Year Development Plan for European 
2015b). This is not to suggest that the end is near for gas in 
energy infrastructure, ENTSO-G forecasts conventional 
the European energy mix. But a policy priority put on low 
gas production within the EU to contract up to 68 percent 
carbon regulation coupled with a positive discrimination of 
until 2035, in case projects with pending Final Investment 
RES put natural gas second rank in the merit order. 
Decisions do not materialize (ENTSO-G 2015). This ties 

European gas market dynamics 
13 
Figure 3: EU gas supply and demand: select projections, bcma
700 
600 
500 
400 
300 
200 
100 

2015 
2020 
2025 
2030 
2035 
2040 
ENTSOG production 
IEA production* 
Eurogas demand Environment Scenario 
EU COM production 
IEA demand* 
Eurogas demand Slow Development Scenario 
EU COM demand 
*2013 data for 2015
Sources: ENTSO-G, IEA, EU Commission, Eurogas
into the Commission’s projection of 95373 ktoe or 103 bcm 
Middle East and the Former Soviet Union, which jointly 
of domestic production in 2040 (European Commission 
hold roughly 70 percent of the world’s conventional gas 
2014d). The causes for the decline in production are 
supplies (BP 2015b). As the world’s largest import market 
manifold, and range from maturing fields (UK) to pricing or 
for gas and a USD 18 trillion economic bloc with one of 
policy environments disfavoring investment into production 
the world’s highest purchasing power, the EU gas market 
capacity (such as the Netherlands putting a cap on 
should be an attractive export destination, where companies 
production). In addition, Norwegian production – formally 
of reserve holding countries compete for market share. 
a non-EU country but tied to the Union through the EEA 
Russia has for long been the supplier of choice, a function 
– is projected to peak in the 2020s and to slowly contract 
of geographic proximity, resulting cost structure advantages 
thereafter, reaching 84 bcm in 2040 (IEA 2015b). 
and the political support Russian-European energy deals 
have enjoyed in the Cold War and thereafter. We shall 
Notwithstanding the spread between individual projections 
discuss the prospects of Russian gas in Europe’s import 
and the status assigned to natural gas features in the EU’s 
portfolio in further detail in the next section. Suffice to 
future energy portfolio, the overall finding is that even as 
state here that in the context of rising geopolitical tensions, 
demand flattens out the Union faces a widening import gap. 
Europe is keen to diversify its import portfolio beyond 
Again contingent on the study and its assumptions, this gap 
Russia, which warrants a brief discussion of the alternatives.
may well be significantly above 100 bcm a year compared to 
A major challenge in diversifying gas supplies lies in the 
current levels. This will cement Europe’s role as the world’s 
political turmoil besetting Northern Africa and parts of the 
largest – and still comparably high priced – import market 
Middle East. Cases in point are post-Arab Spring Libya 
for natural gas.
which descended into civil war effectively prohibiting 
To be sure, demand side measures, energy efficiency gains 
investment into the energy sector going forward; post-war 
and fuel switches – leaving aside ‘silver bullet’ solutions 
Iraq which is at risk of breaking up into separate entities; 
such as technology leapfrogging – may alleviate some of the 
and the fierce conflict in Syria and the Levant, which 
pressure arising from a growing supply gap in the European 
impacts on regional political and economic stability more 
gas balance. Ceteris paribus, however, the question emerges 
broadly. It is important to note that some of these conflicts 
where the additional supplies might be sourced from. In 
are likely to persist and carry on for decades. Representing 
terms of supply options, the EU as a market indeed is 
the archetype of ‘intractable conflicts’, it is their ‘self-
comfortably located at first sight. It is surrounded by some 
perpetuating cycle of hostility’ (Jones 2015) that will  
major reserve holding countries in Northern African, the 
impact on and in fact limit investment opportunity and 

14 
Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK
hence supply capacity going forward. This puts in question 
expanding Chinese demand. Turkmenistan in 2014 
the region’s ability to fill a widening European import gap 
exported 25 bcm to China, which is set to increase to 
going forward.
65 bcm by 2020, notably through the enhanced Central 
Asia – China pipeline (NGE 2015b). Kazakhstan and 
Against this backdrop, the EU turned to the ‘Southern 
Uzbekistan are intent to follow suit. Post-sanctions Iran, 
Corridor’ as a priority for securing alternative, that is 
finally, has frequently been named a possible supplier of 
non-Russian, sources. Broadly targeting gas supplies in the 
natural gas for Europe. Yet, the country’s export capacity 
Caspian region, the Southern Corridor involves an upstream 
remains restricted by significant infrastructure investment 
segment, notably in Azerbaijan and possibly Turkmenistan 
needs which in the domestic gas sector alone amount to 
or even Iran going forward; a midstream segment in the 
some estimated USD 20 billion (EIA 2016a). Moreover, 
shape of transit countries, centrally including Georgia 
it remains questionable whether Iran will find most value 
and Turkey; and a downstream segment particularly 
in exporting gas to Europe, or in exporting it at all. Buyers 
benefitting Southern Europe (notably Italy) and possibly 
in the region have indicated interest, including Pakistan. 
South-Eastern Europe (SEE). To be sure, the Southern 
More importantly, possibly, Iran may want to use natural 
Gas Corridor emerged in energy policy debates as early 
gas for fostering domestic economic development in a 
as in 2002, when plans were launched for constructing the 
post-sanction environment and for building a competitive 
Nabucco pipeline, initially intended to bring 31 bcm of 
industrial base. So while the country is projected to produce 
Caspian – notably Iranian – gas to Europe by 2020. (The 
290 bcm by 2040 (IEA 2015b), not much might become 
project in 2013 lost out against TANAP / TAP3, the rivaling 
available for Europe and its Southern Corridor. Overall, and 
pipeline system bringing gas from Azerbaijan’s Shah Deniz 
as confirmed by pertinent studies such as Dickel (2014) et 
II field to Europe by the end of the decade.) Yet, it was 
al and Pirani (2012), Caspian exports will materialize but 
particularly in the context of the Russian-Ukrainian gas 
remain limited in volume through the 2030s and thereafter. 
disputes that the Southern Gas Corridor gained political 
traction as integral part of the EU’s energy security 
Second, there are strategic considerations impacting on 
strategy (European Commission 2008). The EU granted 
the EU’s inclination to make the Southern Corridor a 
financial assistance to the Southern Gas Corridor under 
key route of gas supplies. These relate to the challenge 
the Connecting Europe Facility (CEF) and gave TAP and 
entailed in pipeline infrastructure transiting several national 
TANAP the status of ‘Projects of Common Interest’, which 
jurisdictions. In essence, each state Caspian molecules 
prioritize strategically important energy infrastructure. It 
have to cross along the way to Europe sits on what may 
also invested political capital in the shape of the Southern 
be termed a ‘geographical monopoly’ (Stevens 2009). 
Gas Corridor Advisory Council, launched in February 
This gives these states leverage over what some may want 
2015, and a series of energy diplomacy initiatives reaching 
to export and others import. Monopolies, by their very 
out to the Caspian states.
definition, seek to extract rents, which in its simplest 
form comes in the shape of transit fees. While these can 
However, a brief assessment of the Southern Corridor 
be dealt with in contractual arrangements, problems 
suggests three important limitations to it becoming a major 
pertaining to ‘obsolescing bargaining’ might over time 
supply route for the EU’s energy supplies going forward. 
shift the negotiating power further to the transit country. 
First, there are doubts whether upstream capacity in the 
Once pipelines are laid and capital is sunk, transit states 
Caspian will see significant increases. Existing upstream 
are therefore likely to pressure for more favorable (read: 
capacity feeding into TANAP hinge on Azerbaijan’s Shah 
lucrative) terms. An example of a country turning its 
Deniz fields, whose second phase is set to raise overall 
geographical monopoly position into economic rent is 
production to 25 bcma by 2018. By 2019, TANAP is set 
Ukraine, which for long benefited from relatively low gas 
to feed 10 bcm into TAP and further into Europe. Yet, 
prices (this changed in 2009), and which arguably also 
although Azerbaijan plans to expand gas production 
sought to turn its control of the bulk of Russian gas exports 
significantly going forward, volumes destined for Europe 
to Europe into a political bargaining chip. While this 
remain limited. Dickel et al (2014) estimate that a mere 
amounts to a purely rational strategy, it triggered an equally 
3-8 bcm of Azerbaijan’s additional production may end up 
rational response by Russia and European importers – Nord 
being available for Europe, notably for reasons related to 
Stream, which lowered the share of Russian gas transiting 
transit states Georgia and Turkey taking their share, and 
Ukraine from 80 percent in the mid-2000s to around 50 
increasing domestic consumption in Azerbaijan (25). 
percent as of 2011.
Turkmenistan, Kazakhstan and Uzbekistan could produce 
further gas to Europe but they seem to prefer exports 
Arguably, the Southern Corridor will come with 
eastwards. This is on the one hand because of persisting 
comparable challenges. Although TANAP will be governed 
legal disputes pertaining to gas transit through the Caspian 
by the Energy Charter Treaty regime, the EU will not have 
Sea, and on the other hand due to a strong push to service 
the means to enforce transit or exert influence over any of 
the involved parties – including transit country Georgia. 
The Energy Community, the EU’s Vienna-based vehicle 

The Trans Adriatic Pipeline (TAP) takes Azeri gas from the 
Transanatolian Pipeline (TANAP) into South-Eastern Europe and 
for exporting its regulation into the ‘near abroad’, will 
further into Italy.
prove powerless as neither of the TANAP transit countries 

European gas market dynamics 
15 
is a signatory state to it. Moreover, emerging debates 
in the European import portfolio going forward, LNG 
surrounding Turkey becoming an ‘energy hub’ (FT 2015) 
may indeed be cost competitive with pipeline gas under 
point to the pivotal position the country is aspiring when 
certain circumstances. The problem here is not the EU’s 
it comes to energy transit and trade. Indeed, Turkey has 
lack of LNG regasification capacity, which in 2015 stood 
been keen on building a position as a transit state for both 
at 191 bcm (EU-28), with another 23 bcm being under 
Caspian and Russian gas destined for Europe. Besides EU-
construction (GIE 2015). Rather, it is that – in addition to 
supported projects such as TANAP and TAP it remained 
LNG being largely outcompeted by cheaper pipeline gas, 
open to Russia-sponsored projects such as Turkish Stream 
as a result of which utilization rates hovered at less than 20 
(the South Stream successor) or an expanded Blue Stream 
percent in 2015 – LNG infrastructure does not exist where 
pipeline, both running across the Black Sea.
needed, nor does the pipeline infrastructure to ship gas to 
demand centers. This particularly applies to the Baltics 
Leaving aside a detailed discussion of the prospects of these 
and Central and South Eastern Europe, where additional 
individual projects, it is not inconceivable, and indeed to be 
sources of supply would provide for optionality on supplies. 
expected from a rational choice perspective, that Turkey 
As a consequence, the Commission is intent to help fund 
– as any transit country – would try and turn its ‘transit 
new LNG import facilities, for which it also eyes the 
monopoly’ position into political value, even more so as it 
support of the European Investment Bank (EIB) and the 
becomes home to a growing number of pipelines carrying 
European Fund for Strategic Investments (EFSI).
both Caspian and Russian molecules to Europe. As the 2016 
events surrounding the refugee crisis vividly demonstrated, 
Another key element in the EU’s LNG strategy are 
Turkey does not shy away from ‘issue-linkage’, as it 
interconnectors so that gas can move within the European 
demanded a change in the EU visa regime for Turkish 
market and respond to price differentials, and to back these 
citizens in return for cooperation in migration policy. 
up by storage capacity. More to the point, infrastructure 
Arguably, therefore, the EU will try and hedge external 
priorities for South Eastern Europe focus on two corridors, 
influence and limit the importance of Southern Corridor 
one from the planned Krk LNG terminal in Croatia 
states in the EU’s overall gas import portfolio.
towards the east, and another one from Greece northwards. 
Regarding the Baltics, the primary focus will be placed on 
Third, questions arise regarding infrastructure capacity and 
connecting Finland and the Baltic States to European gas 
use. As hinted by Offenberg (2016), Azerbaijan’s SOCAR 
market networks. The Commission regards physical gas 
is effectively in the position of a gatekeeper for additional 
infrastructure, as laid out by its LNG strategy and defined 
volumes feeding TANAP, due to is majority stake in the 
by the choice of funded PCI projects, as the ‘hardware’ 
shareholder structure which gives the company 58 percent 
of a resilient EU gas market going forward. However, as 
while Turkey’s BOTAŞ and the UK’s BP hold minority 
stressed by Energy Commissioner Šefčovič, this hardware 
shares of 30 percent and 12 percent respectively. SOCAR 
only works in conjunction with market regulation, the 
will face little incentive to allow competing gas supplies into 
underlying ‘software’. The LNG strategy therefore also puts 
TANAP, even if not fully utilized by the time it reaches its 
emphasis on implementing pro-market policies flanking 
final capacity of 31 bcm in 2026. This, as Offenberg argues, 
energy infrastructure investment (as infrastructure policies 
may put in question the degree to which Turkmen or 
more broadly). This ties back to the Commission’s ‘liberal 
Iranian gas – even if eventually available – may find its way 
project’ in EU energy markets and its broader mission of 
into the Southern Corridor and into Europe.
market creation. It is in this vein that Brussels put a key 
In addition to prioritizing the Southern Gas Corridor, the 
focus on the creation of regional gas hubs, particularly in 
EU aims at tapping the increasingly globalizing market of 
Eastern Europe, and the successive transition to gas-on-gas 
Liquefied Natural Gas (LNG) and therefore fostered the 
competition and spot pricing.
development of infrastructure to bring more LNG into 
the European gas balance. This is the primary goal of the 
In addition, and finally, the Commission recommends to 
LNG Strategy as tabled by the European Commission in 
politically flank these efforts by way of establishing high 
2016 (European Commission 2016b). As we shall discuss 
level talks with LNG producing countries, as part of its 
in more detail when analyzing the role of Russian gas 
‘energy diplomacy’ efforts.


16 
Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK
Gazprom’s export challenge
Gazprom, the Russian partner in the Nord Stream 2 project, 
thus effectively disincentivizing non-Gazprom investment 
faces several challenges. Two merit specific attention in  
in upstream capacity. On the other hand, the 2009 Russian 
this context: a complex political economy in the Russian 
gas flaring regulation made oil companies look for ways 
energy sector, which translates into increasing pressure  
to access the condensate market in order to market their 
from Gazprom’s competitors on the domestic market; and 
associated gas. Russia’s efforts toward domestic netback 
the need to diversify away from its key revenue making 
pricing further incentivized that marketization strategy. 
export market, the EU. Both impact on its export strategy 
Competition among Russian gas companies also grew when 
going forward.
it comes to supplying the domestic power sector. This adds 
to Rosneft, the Russian oil incumbent, taking over TNK-BP 
in 2012, which in addition to crude assets came with a  
The political economy of Russia’s gas sector
gas portfolio (Belyi and Goldthau 2015). As a result, non-
It is fair to state that energy resources are of strategic 
Gazprom gas production reached more than 25 percent  
importance for the Russian economy and the country’s 
in Russia’s total gas output (Platts 2013).
political leadership. The country is home to 17 percent 
As a consequence of their growing market power, the 
of the world’s conventional gas reserves (BP 2015b), 
‘Independents’ – a term which in fact blatantly ignores 
and overall the natural resource sector contributes 19 
Novatek’s strong ties to the Russian leadership as well as 
percent to Russia’s gross domestic product (Worldbank 
Rosneft’s state ownership – have taken legal steps against 
2014), a number which tends to even underestimate the 
Gazprom’s incumbent monopolist position in the domestic 
importance of the energy industry for domestic economic 
gas infrastructure. Gazprom always defended this monopoly 
development. In fact, because growth is significantly 
position with its public service obligation to keep the gas 
driven by large infrastructure investment, the energy sector 
flowing to households and industry, which does not apply 
resumes a key role in the country’s economy. Moreover, 
to the Independents. Still, the latter pushed for an end 
oil and gas revenues account for over half of the Russian 
Gazprom’s export monopoly in gas. As for LNG, this was 
budget income and two thirds of total export revenues 
met with success, as a result of which Rosneft and Novatek 
(EIA 2014). They are also the source of significant rent 
are keen on entering the LNG market. Although Gazprom 
opportunities, which have contributed to ensuring the 
retains control over the Russian trunk pipelines, Gazprom’s 
stability of the current political system as well as the power 
competitors are testing the incumbent export regime, for 
of incumbent political actors, including President Vladimir 
instance in the case of the 10-year 2 bcm gas deal concluded 
Putin. While gas revenues represent a smaller share in 
between Novatek and EON, effectively a swap agreement 
federal income compared to oil revenues, the sector is key 
(Reuters 2012).
in driving the industrial development particularly in the 
Eastern provinces, for instance in the shape of Gazprom’s 
Against this backdrop, Gazprom faces two intertwined 
gasifikatsiya program. Finally, the Russian – and formerly 
challenges related to the domestic political economy of 
Soviet – leadership has always strategized the development 
of the domestic gas sector against the backdrop of the 
broader international political context. This goes all the way 
Figure 4: Dynamics in Russian gas production: 
back to the 1970s when Moscow inked its first gas supplies 
Gazprom and competitors
with West European countries, as part of a policy of détente. 
bcm
%
Because of the strategic nature of the Russian gas industry, 
700
30
it is state ownership that prevails as the sector’s dominant 
600
25
governance pattern, with the Russian government holding 
500
the majority share in Gazprom, the key player.
20
400
This, however, is not to suggest that the role of Gazprom 
15
is uncontested within Russia. To the contrary, although 
300
10
in public debates Gazprom is portrayed as a mighty 
200
Russian gas monopolist, the incumbent has seen the rise 
100
5
of domestic competition which may also impact on its 
traditional export monopoly. Domestic competition was on 
0
0
1990 
2005 2006 2007 2008 2009 2010  2011  2012 2013
the one hand triggered by prudent regulatory steps toward 
third party access in Russia’s Unified Gas Supply System 
Others
Gazprom
(UGSS) network, which had remained under Gazprom’s 
Rosneft
Share of independent 
control. This secured Gazprom’s dominant position on the 
Novatek
producers
domestic market as the company was able to force emerging 
competitors such as Novatek to sell their gas at low prices, 
Source: ERI RAS 2014

Gazprom’s export challenge 
17 
Russian gas: on the one hand, its monopoly position on the 
demand prospects which made Gazprom look east. In May 
domestic market has come under pressure, and is in fact 
2014, Gazprom and China National Petroleum Corporation 
eroding. This will impact on its investment decisions. On 
(CNPC) inked a much-noticed 30-year contract on Russian 
the other hand, Gazprom needs to react on the strategic 
gas deliveries of 38 bcm per annum, a deal President 
positioning of its competitors, and particularly their efforts 
Vladimir Putin called an ‘epic event’ (Bloomberg 2014). 
to ship gas abroad. This will influence the company’s  
Reflecting Gazprom’s determination to ‘go east’, RAS in 
export strategy. 
their Baseline scenario estimates that by 2040 roughly 30 
percent of Russia’s total of 310 bcm of natural gas exports 
Russian gas outlook
will go into Asia (which includes LNG). In case of high 
Asian demand, this share will rise to 40 percent even, or 155 
Naturally, projections on Russia’s energy outlook for the 
bcm overall (ERI RAS 2014). (For a discussion of Russia’s 
next two and a half decades differ widely. Russia’s draft 
Asia and China strategy see (Chow and Lelyveld 2015; 
Energy Strategy up to 2035, presented in 2014, sets a target 
Henderson 2014).
of 935 bcm of annual gas production, which compares to 
585 bcm of consumption by that year (Министерство 
Still, Russia’s gas balance offers sufficient capacity to satisfy 
энергетики Российской Федерации 2014). These 
additional European import needs going forward. In fact, 
numbers roughly square with estimates of the Russian 
most studies, including the ones remaining rather skeptical 
Academy of Sciences, which in their baseline scenario 
regarding the European gas outlook (including ENTSO-G 
suggest production levels of 870 bcm by 2040 (and 970 
(2015)), expect Russia to remain a major import source 
bcm presuming significant growth in Asian demand). 
for Europe. In their excellent study on Gazprom’s supply 
Consumption in the baseline scenarios stands at 474 bcm by 
options to Europe out to 2030, Henderson and Mitrova 
that year (ERI RAS 2014). The IEA in their New Policies 
(2015) identify a wide range of scenarios for Russian gas in 
Scenario remains more cautious and suggests 720 bcm of 
the European import portfolio. At a minimum, these would 
production by 2040 and 412 bcm of domestic consumption 
be set by the Take-or-Pay volumes defined by existing 
(IEA 2015b). 
LTCs, which by 2030 stand at 79 bcm. A mid-range 
estimate puts Russian gas at a 30 percent share of overall 
In the mid-term, Russia is set for what Henderson and 
European demand (the current levels), resulting in 178 bcm. 
Mitrova (2015) term a ‘gas bubble’. This is a function  
Finally, a high case scenario results in 254 bcm into Europe, 
of stagnating domestic demand, depressed exports into 
provided Gazprom maintains its current import share of 70 
Europe and the Former Soviet Union, past investment 
percent. (The remaining import gap, naturally, would need 
decisions taken in a more benign price environment and the 
to be filled by non-Russian sources, and particularly LNG.) 
rise of the Independents as gas producers. It is particularly 
Other available studies seem to support Henderson and 
Gazprom that was hit hardest by these developments, as 
Mitrova’s mid-range estimate. RAS estimates 50 percent of 
a consequence of which the company’s production fell 
all Russian gas exports, or 155 bcm, to go to Europe by 2040 
to a record low of 443.9 bcm in 2014 (Gazprom 2015a). 
(ERI RAS 2014). The IEA is more cautious and projects 
Observers expect this situation to last out to the 2020s. 
around 140 bcm of Russian gas exports to OECD Europe in 
Russia’s draft energy strategy until 2035 regards the 
2040, including to Turkey, which is some 10 bcm less than 
energy sector, and notably gas as a key driver for moving 
today (IEA 2015b).
the country from ‘resource-based to resource-innovative 
development’4 (Министерство энергетики Российской 
Федерации 2014). While it remains to be seen to  
Gazprom’s Europe strategy
what extent this strategy will materialize, one can still 
So how will Gazprom’s export strategy toward Europe, its 
expect gas eventually regaining traction in the country’s 
traditional customer base, take shape against these trends? 
energy economy.
The European market is where the company makes the 
Against the backdrop of maturing fields in Western Siberia 
bulk of its revenues, and where it in 2014 sold 146.6 bcm 
and the Tyumen region, Russian gas production will see 
of gas or 33 percent of its overall output and 70 percent of 
an eastward shift going forward. Besides the North-West 
its exports (Gazprom 2015b), so it is the market Gazprom 
Siberian Yamal Peninsula, which RAS projects to add 
cannot let go. Moreover, the company has good reasons to 
between 180 bcm and 235 bcm of capacity by 2040 and 
assume that Europe might need additional supplies going 
which Gazprom CEO names as a supply base for Nord 
forward, a function of declining indigenous production and 
Stream 2, new production will come from Eastern Siberia 
policies discriminating against heavy-polluting fossil fuels 
(95 bcm) and the Far East (80 to 90 bcm) (ERI RAS 2014). 
such as coal (see Figure 3). In terms of export infrastructure, 
In addition to replacing ageing fields, this also reflects 
Gazprom faces the challenge of having to transit its gas 
Russia’s ambition to serve growing Asian demand. Indeed, 
through third countries in order to market it. This is a 
Russia and Gazprom have for long been keen to tap the 
function of the breakup of the Soviet Union, as a result of 
growing Asian gas market. In particular, it is Chinese 
which Gazprom inherited an export pipeline system which 
had been built across the then-integrated Soviet bloc, but 
4  Original text: ‘переход от ресурсно-сырьевого к ресурсно-
which became Balkanized once FSU countries gained 
инновационному развитию’
independence. Today, Gazprom exports gas westward 

18 
Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK
through Ukraine gas network (151 bcm nominal throughput 
through Ukraine’s Southern pipeline branch connecting to 
capacity of Soyuz, Druzhba and Trans-Balkan) and the 
the Trans-Balkan pipeline (though these are comparably 
Yamal Europe Pipeline (Belarus and Poland, 33 bcm). In 
small and amount to some 15 bcm a year).
addition to the ‘geographical monopoly’ issue discussed 
This somewhat erratic behavior comes against the backdrop 
above, such as setting also presents challenges related to the 
of Gazprom having a track record in misreading strategically 
maintenance of the transit grid. A case in point is Ukraine, 
important political and economic developments, and their 
where a long-standing lack of investment into an aging 
potential impact on the company’s business prospects. A 
pipeline network brings about significant leakage rates 
case in point is South Stream (onshore), where Gazprom’s 
(Roshchanka and Evans 2014) and effectively limits the 
leadership clearly underestimated the power of EU energy 
throughput capacity to some estimated 90 bcm.
market rules, and indeed the ability of the European 
Gazprom’s answer to this situation was essentially to 
Commission to stop the project on the basis of its reading of 
diversify export routes, preferably offshore.5 Yet, arguably, 
EU law. Another example is US shale gas, which the senior 
Gazprom pursed this strategy without a masterplan. In fact, 
Gazprom leadership for long dismissed as a temporary 
various strategic shifts characterize the company’s decisions 
phenomenon, and whose effects on global LNG markets 
since the mid-2000s. Following on the gas crises of 2006 
were underestimated. Overall, therefore, and as stressed by 
and 2009, Gazprom and the Russian leadership intensified 
various observers, Gazprom’s export strategy to a certain 
efforts to diversify its export routes, which include Blue 
degree appears reactive to shifting political environments 
Stream through the Black Sea (16 bcm) and Nord Stream 
in key transit countries and broader market developments, 
through the Baltic Sea (55 bcm). Moreover, Gazprom 
and driven by short term concerns rather than long term 
championed the construction of the 63 bcm South Stream 
strategy (Aslund 2010; Henderson and Mitrova 2015). 
pipeline, rivaling both the Southern Corridor projects as 
That said, Gazprom’s key preference remains clear: 
preferred by the EU (Nabucco and TANAP/ TAP), and 
retaining its presence on the crucial European market. 
Ukrainian transit. South Stream was replaced by Turkish 
For this, as demonstrated by the significant costs coming 
Stream in December 2014, a pipeline initially planned at a 
with shifting pipeline plans – South Stream is reported to 
63 bcm capacity on which Turkey’s BOTAŞ and Russia’s 
leave behind 4.5 billion in stranded assets (Sutyagin 2014) 
Gazprom signed a Memorandum of Understanding in 
in the shape of unused steel pipes – Gazprom is ready 
December 2014. Turkish Stream was supposed to get around 
to invest significant sums in physical infrastructure. Put 
the Third Party Access problem by way of making landfall 
differently, it is not necessarily costs that inform the choice 
in Turkey instead of Bulgaria, an EU country. The Russian 
of Gazprom’s export routes. Rather, it is the reduction of 
gas would then be sold at the Greek-Turkish border, rather 
transit risk that seems to feature prominently in Gazprom’s 
than further-on in the European downstream market. This, 
long term infrastructure investment. While Gazprom indeed 
however, would have required moving the delivery points as 
incurred a reported loss of USD 1.5 billion during the gas 
stipulated in Gazprom’s LTCs with European customers, a 
standoff of January 2009, it is still remarkable how heavily 
considerable challenge and one that would require additional 
the company factors in the possibility of future export 
infrastructure investment to market the gas downstream. 
bottlenecks through Ukraine or other existing routes.
Moreover, a more detailed assessment of the projects 
economics led to it being downscaled to 32 bcm. This 
An alternative way of framing this is to say that Gazprom 
added to disagreements over price levels for the volumes 
reveals a preference for retaining flexibility in export 
Turkey would take off. Russia-Turkey relations souring in 
options. A quick back-on-the-envelope calculation on 
2015, culminating in the downing of the Russian Sukhoi 
nominal export capacity – which admittedly say little 
Su-24 warplane and the subsequent Russian sanctions 
about flow rates and the pipeline’s capacity to deal with 
against Turkey, effectively led to a halt of the project. The 
peak demand situations – suggests that even without Nord 
latest twist in Gazprom’s export strategy came with the 
Stream 2 existing capacity to Europe (and Turkey) exceeds 
announcement of Nord Stream 2 in June 2015. Although the 
current exports by 100 bcm per year, though technically 
expansion of Nord Stream had for long been an option, Nord 
this number is down to roughly 50 bcm if the current state 
Stream 2 taking shape in earnest came to the surprise of most 
of the Ukrainian transit grid is factored in. Adding Nord 
observers. Flanking announcements around Nord Stream 2, 
Stream 2, this brings up export capacity to more than 300 
Gazprom’s Deputy CEO Medvedev declared the company 
(respectively 250) bcm, roughly double (or 100 bcm on top) 
will end transit through Ukraine upon the expiry of existing 
of current volumes Gazprom sends west. In case shelved 
supply contracts in 2019, ‘even if hell freezes’ (Interfax 
plans for pipelines through Turkey into South Eastern 
Ukraine 2015). This statement was qualified just half a year 
Europe are revived, this number would further increase. 
later, when Gazprom hinted that Ukraine could be kept 
as a gas transit country even beyond 2019 (Reuters 2016; 
The question arising in this context is which strategy 
TASS 2016). Indeed, short of Turkish Stream materializing, 
Gazprom will pursue in Europe going forward when it 
Gazprom will need to transit gas destined for Turkey 
comes to marketing its gas. In the ‘good old days’ – the 
time referred to by both European gas managers and their 
Russian counterparts when describing a gas world where 

Gazprom tried to buy the Ukrainian and Belarussian gas transit grids 
but only succeeded with the latter where it now holds a majority stake.
LTCs secured long term demand for Gazprom and supply 


Gazprom’s export challenge 
19 
for European utilities, and oil indexation took care of the 
It is beyond the scope of this study to carry out detailed 
price risk – this question was essentially irrelevant. As the 
estimates of comparative costs structures of US LNG and 
post-2008 international pricing environment turned more 
Russian pipeline gas. What existing analyses based on 
competitive, Gazprom opted for revenue maximization and 
marginal costs suggest, though, is that Gazprom will face 
for long clung on to oil indexation even as LNG flooding 
difficulty in maintaining current price levels going forward, 
spot markets started to depress European hub prices. 
if it at the same time wants to defend market share. If 
Gazprom maintains oil indexation as an important element 
This seems to change and Gazprom arguably started to  
in its pricing strategy into Europe, it will feel pressure to 
shift toward defending market share. This does not mean 
adjust prices (downward) to the extent US LNG cargos 
that Gazprom is ready to give up oil-indexation once and 
start competing on an SMRC basis. This pressure will 
for all, but the company has shown readiness to adapt to 
become even more pronounced should oil prices rebound 
changing circumstances. Though officially remaining firm 
(low prices at present help Russian oil-indexed gas to stay 
on keeping indexation mainly tied to crude and crude 
competitive). In case Gazprom moves further toward spot 
products, Gazprom started to grant discounts, bringing 
indexation, this will happen automatically, a function of hub 
down overall price levels, and enhance spot–indexation 
prices reacting to competition from LNG. 
through the retroactive payments model (Mitrova and 
This relates back to the issue of export strategy. In fact, 
Molnar 2015). This, clearly, is a function of the changing 
if marginal costs play a role, then the choice of export 
international environment and the European market having 
infrastructure may form an important element in Gazprom’s 
become a lot more price sensitive than it used to be in 
efforts to stay competitive (see Figure 5). According to 
the past. An additional reason lies in European regulation 
estimates by Wood Mackenzie, Nord Stream and the 
and the fact that EU competition watchdogs started to 
Ukrainian transmission system come with different cost 
investigate Gazprom’s business model, including alleged 
structures, related to differing tariffs, export duties and 
discriminatory pricing. In fact, the EU’s push for market 
transit fees (notably in a post-2019 environment when  
liberalization was met with great criticism from Moscow. 
the latter will rise significantly (Interfax Ukraine 2016)).6 
Third Party Access requirements were interpreted as 
motivated by political considerations, not market regulation, 
and were seen as attempts to expropriate Gazprom’s assets. 
Figure 5: Russian gas: comparative cost structures 
Russian Foreign Minister Lavrov called the antitrust charges 
and export routes
against Gazprom ‘unacceptable’ and deplored that the 
2009 energy package was applied retroactively (EurActiv 
6.00
2015). President Putin even issued a decree aimed at 
shielding Gazprom and other ‘strategic’ companies from EU 
5.00
Flexible
investigations (FT 2012). Eventually, Russia filed complaint 
against the EU energy laws with the WTO. 
4.00
Still, Gazprom seems to tacitly accept changing 
mmbtu
3.00
circumstances and adapt its strategy. This strategy, 
essentially, is about defending market share by way 
US$/
2.00
of competing on the price. As OIES analysis suggests, 
Gazprom indeed started to accept the coexistence of oil-
1.00
indexed LTCs and gas hub trade, which might eventually 
lead the company to embrace full market principles (Stern 
0.00
Upstream
Upstream
Upstream
Upstream
and Rogers 2012). Yet, defending market share may come 
SRMC
LRMC
SRMC
LRMC
at a cost: potentially declining revenues on the European 
market. Some indicative calculations conducted by 
Nord Stream
Ukraine
Henderson and Mitrova (2015) suggest that on a Long 
Run Marginal Costs (LRMC) basis, Russian gas remains 
Export duty
Ukrain premium post-2016
competitive with US LNG even at currently low Henry 
Tariff ex-Russia
Tariff in Russia
Hub prices. Yet, the moment liquefaction costs are regarded 
 
Upstream LRMC
Upstream SRMC
as sunk, US LNG will prove significantly more competitive 
Source: Wood Mackenzie, courtesy of Shell
both against NBP and LTC gas. OIES’ Henderson and 
Mitrova estimate that at a USD 2 Henry Hub price level, 
US LNG could come into Europe at below USD 4 per 
MMBtu, and even a USD 5 Henry Hub level import prices 
would be a bit above USD 7 per MMBtu. Moreover, EIA 
projections suggest that Henry Hub prices might stay at 
6   At the June 2016 St Petersburg Economic Forum (SPIEF), Gazprom 
USD 5 MMBtu all through 2040 (EIA 2016a). This suggest 
CEU Miller hinted that the Nord Stream transit fee would amount to 
that Russian LTC gas, even at adjusted levels, would have 
USD 2.1/tcm per 100km, which compares to a current fee for Ukrainian 
hard times competing against LNG. 
transit of USD2.5/tcm per 100km – roughly 20 percent more.

20 
Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK
This is important as it might support Gazprom’s claims  
be poorly maintained, leading to methane leakage (see 
that it is commercial logics not geopolitics underpinning  
Box 1). Admittedly, eco-efficiency stands to influence 
its export strategy.
Gazprom’s export strategies only at the margins. While 
ecological benefits present a well justified case for a 
It may be argued that Figure 5 is hardly indicative for the 
European audience, Gazprom is likely to prioritize other 
competitiveness of gas sent through the planned Nord 
factors, including costs, market competitiveness and transit 
Stream 2 pipes, as infrastructure costs are not factored 
security. With this, we turn to the legal aspects surrounding 
in, whereas the Ukrainian pipeline network is amortized. 
Gazprom’s planned export infrastructure to Europe.
Yet, arguably the costs pertaining to the Ukrainian transit 
infrastructure are not entirely sunk either, as the ageing 
pipeline network requires significant investment, with 
Box 1: Eco-efficiency of LNG and pipeline gas
estimates ranging from 5.3 billion (Naftogaz) to USD 
3.2 billion (European Union) USD 9 billion (Gazprom) 
Pipelines are likely to be more ecological in terms of 
(IHS CERA and Ministry of Energy and Coal Industry 
carbon footprint than LNG, while shorter and modern 
of Ukraine 2012). Moreover, this is not to suggest that 
pipelines are less GHG intensive than longer and older 
the cost estimates as presented in Figure 5 are directly 
ones. Evaluating the entire logistics /supply chain, 
comparable to the ones presented by OIES. So while 
the EU Commission’s JRC finds that LNG is more 
they do not necessarily allow drawing conclusions on 
GHG intensive than pipeline gas due to the addition 
the export strategy Gazprom will adopt as a reaction to 
processing that LNG requires, higher evaporation 
tougher competition on the European market, they still are 
rates during transport, and the comparably higher 
indicative on the possible choice if marginal prices are the 
energy input during production, liquefaction, 
determining factor.
shipping, and transport and storage (Kavalov, 
Petric, and Georgakaki 2010). It is only at very long 
Eco-efficiency may, finally, factor into the choice of export 
distances that LNG comes out as less GHG intensive 
routes, bearing in mind the declared European goal of 
and ‘breaks even’ once transportation exceeds 6000 
reducing the carbon footprint of its energy system. A 
km. When comparing pipelines, the shorter the 
detailed eco-efficiency analysis of existing and planned 
distance covered, the higher the pipeline pressure and 
export infrastructure is beyond the scope of this study. 
the fewer compressor stations along the way, the lower 
Suffice to state here that modern pipelines with low leakage 
the resulting carbon footprint.
rates tend to outperform Soviet infrastructure systems 
which, as in the case of the Ukrainian grid, also tend to 

Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK 
21 
Nord Stream 2 and EU energy regulation
As the European Union moves toward a fully integrated 
The case of the Ostsee Pipeline Anbindungsleitung 
energy market and eventually an ‘Energy Union’, an 
(OPAL), Nord Stream’s southward onshore extension, 
analysis of Nord Stream 2 merits a discussion of the 
illustrates the implications: as per Article 15, ownership, 
pertinent EU energy regulation. This section first discusses 
operation and marketing were separated. In terms of 
key aspects pertaining to gas infrastructure in this regard, 
operation, OPAL is currently exempt from certain TEP 
and reviews the arguments as made in the current legal 
requirements. This, however, comes with the caveat 
debate. Second, the section offers a strategic reading of EU 
that dominant suppliers to the Czech gas market are 
energy regulation which embeds regulation as applied by the 
not allowed to book more than 50 percent of OPAL’s 
Commission in the broader context of energy geopolitics.
exit capacity at the Czech border (Bundesnetzagentur 
2009a; Bundesnetzagentur 2009b). (The Gazelle pipeline, 
carrying the gas onward in the Czech Republic, received 
Reviewing the legal context
full TPA exemption, whereas NEL, the Nordeuropäische 
The legal context of Nord Stream 2 is generally defined by 
Erdgasleitung onshore extension going west, operates 
EU energy regulation, and specifically in the shape of the 
without exemption (European Commission 2011a; 
2009 Third Energy Package (TEP). Two aspects warrant 
Kommission der Europäischen Gemeinschaften 2009). 
a separate discussion in this context: the implications of the 
Under the current exemption, OPAL therefore represents a 
Third Energy Package on the onshore extension of Nord 
bottleneck for Nord Stream, as its entry capacity of 36 bcm 
Stream 2; and its applicability on the offshore parts, i.e. the 
is neither fully booked nor fully used. As a consequence, 
two subsea strings. Both represent two distinct projects and 
Nord Stream is reported to having run at only half its 
separate pieces of infrastructure, both physical and legally. 
capacity at times (Reuters 2015c). 
That said, they can hardly be analytically separated: if 
Even in the event that all of OPAL’s capacity may be used 
one part does not come through, the other part remains 
going forward,7 Nord Stream 2 will require additional 
worthless, and the investment stranded as there arguably 
onshore capacity to bring molecules to market. This 
exist few competitors that would be interested in using 
additional infrastructure comes in the shape of EUGAL, a 
particularly offshore infrastructure. 
new 51 bcm onshore pipeline to follow OPAL on its route to 
In strictly legal terms, the TEP’s Gas Directive 2009/73 
the Czech border. This raised comments to the effect that 
details three aspects that are central for the operation of gas 
Nord Stream 2 will face legal difficult in putting in place 
infrastructure: the unbundling requirement, which warrants 
and operating new connecting pipelines (Riley 2015). And 
the separation of pipeline operation from ownership (Article 
indeed, the historical track record of Gazprom’s dealings 
15); Third Party Access (TPA), which a pipeline operator 
with the Commission in the case of OPAL suggests that 
must grant to market competitors (Article 13); and security 
any model based on Article 36 involves a lengthy and 
of supply risks which need to be taken into consideration 
cumbersome process. After the Commission in 2011 set 
when certifying operators involving non-EU companies 
the utilization cap at 50 percent, lowering an initially 100 
(Article 11, the so-called ‘Gazprom clause’). No rule 
percent exemption granted by the German authorities in 
without exception though: Article 36 of the Gas Directive 
2009, Gazprom for years sought to get permission for also 
provides the option to grant an exemption from TPA and 
using the remaining transmission capacity if not used by 
unbundling requirements for major new infrastructure 
competitors. In the wake of Ukraine crisis a decision on this 
projects or projects significantly increasing the capacity 
issue was deferred by the Commission (Interfax Energy 
of existing infrastructure. The precondition is that the 
2014) and as a consequence Gazprom’s application remains 
infrastructure project enhances energy security in gas and 
in a limbo to this date. This procedural aspect extends to 
market competition, and that the exemption does not tilt 
a more geopolitical reading of how TEP rules are applied, 
risk assessments into the project’s favor. Still, Article 36 
which we will turn to in the next section in more detail.
defines that ‘the infrastructure must be owned by a natural 
Yet, contrary to more skeptical views, there is reason to 
or legal person which is separate at least in terms of its 
assume that the regime governing additional onshore 
legal form from the system operators in whose systems that 
pipeline capacity might indeed satisfy TEP provisions 
infrastructure will be built’. In terms of process, unbundling 
if materializing as planned. For the post-2019 period 
and TPA requirements need to be ensured by the national 
additional infrastructure needs were indeed earmarked 
regulator when certifying a new TSO, but the decision 
with German authorities and fed into the German network 
must eventually be vetted by the European Commission. 
development plan (FNB 2016). However, incremental 
This gives the latter the final say on the matter. Article 11, 
capacity requirements were assessed based on a broader 
by contrast, is under the auspices of the national authorities 
as Gas Directive asks national regulators to consider supply 
7   Note that OPAL’s exemption regime was granted reluctantly, and then-
security risks when certifying the ownership or operation of 
Energy Commissioner Oettinger stressed that it would be ‘exceptional’ 
gas infrastructure.
(Oettinger 2010).

22 
Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK
market survey which takes into account supply increments 
Presenting a somewhat special case, Norwegian import 
from Nord Stream 2 but also infrastructure request from 
pipelines are governed by the provision of the European 
other market participants, that is the TSOs active in 
Economic Area (EEA) which Norway is part of. As such, 
GASPOOL, the Northern German gas market area 
Norway is subject to Single Market Rules and therefore 
(GASCADE Gastransport GmbH 2015). As part of new 
obliged to fully implement EU energy law (Talus 2011). As 
infrastructure needs in the GASPOOL area, EUGAL is 
a consequence, Norway transposed European regulation 
set to take Nord Stream 2 gas into the Central European 
into national law and restructured its energy sector with a 
market. Yet, rather than setting up a new operator for 
view to bringing it in line with the EU regime. This meant, 
the pipeline, EUGAL is planned to be built and run by 
among other, dismantling the former Norwegian export 
an existing and certified ITO – Gascade (GASCADE 
monopoly in gas (GFU) and enforcing TPA provisions 
Gastransport GmbH 2016). Moreover, capacity booking  
(Andersen, Goldthau, and Sitter 2015; Goldthau and Sitter 
for GASPOOL including entry and exit capacity will 
2015a). Moreover, because TEP rules would represent an 
happen on the common PRISMA platform, not with 
obstacle to the involvement of external suppliers in gas import 
Gascade, the operator.
infrastructure, Article 34 of Directive 2009/73 exempts 
upstream infrastructure from TEP requirements. The obvious 
It amounts to speculation to what extent past experience 
intention of Article 34 is to encourage the construction of gas 
informs the choice of the legal and operational construct, or 
import infrastructure linking suppliers from EEA countries, 
whether Gazprom eventually decided to fully embrace EU 
that is countries that adopted the EU regulatory regime such 
infrastructure regulation. Clearly, however, Gazprom is keen 
as Norway, to the internal gas market. 
to avoid similar problems as they pertained to South Stream 
(onshore) and also follow a different pathway than the one 
Turning east and to Yamal Europe, the pipeline bringing 
taken in the case of OPAL (which was based on Article 
Russian gas into Poland, its Polish section was indeed 
36). This different pathway involves an institutionalized 
fully made subject to EU energy law. Russia opposed the 
process between market participants, network and 
Commission’s legal requests pertaining to the operational 
transmission operators and regulators in order to determine 
model of Yamal but eventually had to give in. The pipeline 
overall additionally needed capacity. Further, while the 
now operates an ISO model (European Commission 2014a). 
lawyers’ verdict is still out, the regime governing EUGAL 
Yet, Yamal directly supplies the Polish market after entering 
indeed seems to satisfy TEP requirements pertaining to 
the EU, and as such is not a veritable import pipeline. The 
legal, institutional and technical separation of operation, 
crossing of Exclusive Economic Zones of Finland, Sweden 
ownership and sales.
and Denmark, an argument also raised in this context, is 
also unlikely to make the case for EU intervention on Nord 
While it is undisputed that the onshore extension of 
Stream 2. EEZs are governed by the United Nationals 
Nord Stream 2 system will be subject to EU energy law, 
Convention of the Law of the Seas (UNCLOS) not EU law, 
observers have hinted that TEP rules also extend to offshore 
and according to Articles 58 and 79 of UNCLOS subsea 
infrastructure – the two subsea strings of Nord Stream 2 
pipelines may be laid in the EEZ of other states.9
(Riley 2015). An important issue here is the nature and 
legal definition of the pipeline. For the Nord Stream 2 
Overall, it is therefore hard to maintain the argument that 
consortium, the 55 bcm extension represents an import 
Nord Stream 2 will be subject to EU energy rules. Yet, 
pipeline, whose only function it is to bring gas to the border 
Pirani and Yafimava’s reference to import infrastructure 
of the internal gas market. As such, Nord Stream 2 would 
from Northern Africa also touches upon another issue, 
not fall under the rubric of transmission infrastructure and 
which is a lack of consistency in applying EU law to major 
hence the scope of the TEP., and it would be comparable 
gas infrastructure projects. Most pipelines which bring gas 
to existing pipelines carrying non-EU gas to Europe. In 
into Europe operate under an exemption regime or have 
fact, historic precedent suggests that import pipelines are 
not been made subject to TEP rules at first place – Nord 
not subject to EU energy regulation. In this context, Pirani 
Stream being a case in point here. Making the offshore parts 
and Yafimava (2016) point to offshore pipelines bringing 
of Nord Stream 2 fully subject to EU law would, therefore, 
gas from North Africa into Europe which were not made 
arguably entail an element of arbitrariness. Moreover, it 
subject to Commission ruling. Indeed, neither Green 
is the nature and function of Directives to define the legal 
Stream (Libya-Italy) nor the Maghreb Europe Pipeline 
guidelines whilst leaving it to case law, then, to further 
(Algeria-Morocco-Spain), Medgaz (Algeria-Spain), 
specify secondary EU law and rules on pertinent aspects 
the Transmed-Pipeline (Algeria-Tunisia-Italy) or Galsi 
of the Directive. However, because of few existing cases 
(Algeria-Italy) were asked to fulfill unbundling or TPA 
and a track record of past exemptions or the outright non-
requirements.8
application of EU regulation to gas infrastructure, there 
exists ample room for politically motivated interpretations  
of EU regulation.
8  Legal aspect of offshore pipelines as they pertain to environmental 
impact assessment, health and safety aspects or force majeure 
At the time of writing, the Commission itself has not adopted 
provisions, are typically covered by Intergovernmental Agreements 
an official legal position on Nord Stream 2 and its onshore 
(IGAs) between the supplier and the importing country. The obvious 
exception here is Nord Stream, for which an IGA was never concluded, 
and which the Commission ‘tolerates’ despite its unclear legal status.
9  I owe this point to Ana Stanic of E&A Law.

Nord Stream 2 and EU energy regulation 
23 
extension. Moreover, the EU’s competition watchdog will 
a reality) or TAP (Nabucco’s de facto successor). In the 
need to follow due process and let national authorities go 
case of Nabucco, the Commission in 2008 decided to 
first. This includes environmental approvals as required in 
grant a 25-year long 50 percent exemption from TPA 
countries whose territory Nord Stream 2 will be transiting. 
requirements and from the rules on tariffs, and renewed that 
(The Environmental Impact Assessments arguably present 
decision in 2013 (European Commission 2013a), while TAP 
minor regulatory challenges, given the precedent of Nord 
enjoys a 25-year full exemption from TPA requirements 
Stream, whose route the additional two strings will largely 
(European Commission 2013b).10 Moreover, TANAP/
follow.) However, EU Commissioner for Climate Action 
TAP were made a priority project as part of Europe’s 
and Energy Miguel Cañete made clear that when it comes 
‘Southern Corridor’ aimed at diversifying gas supplies. In 
to new pipelines, the Commission will be ‘vigilant about the 
the case of the Russia-sponsored South Stream, by contrast, 
rigorous application of EC law’ (European Parliament 2015). 
Brussels turned its regulatory big guns against the project’s 
The Directorate General for Energy, which Cañete oversees, 
onshore parts (Goldthau and Sitter 2015a). This included 
also issued an opinion suggesting that EU energy regulation 
questioning the conformity of the South Stream partner 
would apply to both the onshore extension of Nord 
countries’ IGAs with Gazprom, objecting against Bulgarian 
Stream 2 and its offshore section to the extent it falls under 
procurement procedures and warning against the country’s 
territorial jurisdiction of EU member states (Bloomberg 
considerations to label South Stream an interconnector 
2016). Moreover, there is indication suggesting that the 
(which may have opened the door for Article 36). Leaving 
Commission indeed regards Article 11 an issue that needs to 
aside questions over legal interpretation, the timing of the 
be assessed in detail. For instance, Commissioner Šefčovič 
Commission’s intervention – which happened in the context 
argued that ‘[…] eastern European countries will clearly have 
of Ukraine crisis – can be questioned. In December 2014 
their energy security decreased’ because of Nord Stream 2 
Moscow abandoned South Stream whilst TANAP, the  
(Bloomberg 2015a). With this, we turn to a more geopolitical 
BP-led project in the Southern Corridor feeding TAP, 
reading of EU energy law.
moved ahead. 
Moreover, the Commission cited Ukraine conflict as the 
The geopolitical perspective
reason for putting on hold its ruling on Gazprom’s request 
for further TPA exemptions for the OPAL pipeline, which 
As part of its ‘market making strategy’, the EU sought 
would enable Gazprom to book unused capacity beyond 
to integrate the EU gas market, enhance physical 
its current 50 percent share. Yet, although the remaining 
infrastructure and put in place adequate regulatory 
50 percent capacity attracted no third party interest 
frameworks aimed at preventing market abuse. This is, 
when auctioned off in fall 2015 as per request from the 
on the one hand, clearly a function of the EU’s main 
Commission, the EU’s competition authority did not alter 
mission – political and economic integration – and of the 
its position on OPAL. If the goal of the TPA regime is to 
liberal paradigm it is built on. Three ‘energy packages’ as 
test market demand and ensure market competition, then 
discussed above underpin the EU’s drive to expand free 
the fall 2015 auction clearly stood this test. Therefore, as 
market principles also to the energy sector. The primary 
argued by Pirani and Yafimava (2016) ‘the EC decision 
goal of EU regulation here is to enhance consumer choice, 
look[s] increasingly illogical, strongly suggesting that it  
market transparency, hub trading and competition in natural 
may have been political rather than regulatory’ (30).
gas. The EU’s regulatory efforts also aim at enhancing 
market robustness and resilience. Whilst the liberal market 
Further, it arguably is not only EU regulation as applied by 
paradigm informs the EU’s gradual opening of national 
the Commission that can be interpreted as part of broader 
gas markets, it can therefore also be a tool for addressing 
political scheming. It also the design of the regulation itself. 
increasing insecurity over (Russian) supplies, (Ukrainian) 
An example here is the Article 11 of the Third Energy 
transit or other external energy challenges.
Package, which enables national European transmission 
operators to reject the certification of an external company 
Taking this further, scholarly analysis suggests that although 
in case of ‘supply security’ risk. This regulatory provision 
the EU as an actor lacks many of the attributes of nation 
applies to non–EU firms only, and clearly was designed 
states – treasury, troops and tanks in particular – the 
with Gazprom in mind (Cottier, Matteotti-Berkutova, and 
Commission started to strategically use its regulatory tools 
Nartova 2010). In other words, EU regulatory provisions 
in the foreign policy domain and vis-à-vis external actors, 
themselves bear an element of selective and targeted action.
including Gazprom. A case in point is the EU’s somewhat 
arbitrary practice of granting exemptions to pipeline 
What is more, the EU started to extend domestic market 
projects. As discussed above, the Third Energy Package 
rules beyond its territory. Indeed, the EU for long sought 
stipulates that companies cannot feed gas into pipelines 
to shape international markets by way of projecting its own 
which they operate (the unbundling requirement) and 
regulatory regime onto the international stage (Bradford 
have to grant infrastructure access to third parties (the TPA 
2016; Damro 2015), and to make neighboring non-EU 
requirement). It can be argued that the Commission used 
states comply with EU rules (Lavenex 2014). The material 
its power to grant exemptions from these requirements to 
basis of this ‘Brussels effect’ (Bradford 2012) was a sizeable 
pipelines that were politically more favorable such as the 
internal market – the world’s largest by total GDP –, whilst 
Nabucco pipeline (which eventually failed from becoming 
the ideational background was provided by the liberal 

24 
Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK
outlook of its regulatory state model. In the energy sector, 
a case in point is the Energy Community, which in essence 
Box 2: Energy Union and external EU  
serves as a vehicle to bring non-EU countries under the EU 
energy policy
energy regime. Yet, the EU’s quest for exerting (regulatory) 
influence on non-EU actors and establishing a rule based 
The Energy Union, as adopted in 2015, integrates 
framework for energy investment and trade might well 
various existing policies on the EU level, and aims at 
blend into using regulatory tools for non-commercial 
transforming them into a more coherent framework. 
ends, i.e. objectives that go beyond mere market-making 
Its goals are supply security (now ranking top) and 
(Andersen, Goldthau, and Sitter 2016). An example is 
full market integration, in addition to fostering 
Ukraine adopting the EU energy acquis as part of its 
energy efficiency, climate action and low carbon 
obligations as an Energy Community member, which due 
technologies. Although observers suggested that the 
to TPA and unbundling provisions stand to also alter the 
Energy Union remains a far cry from indeed giving 
transit regime for Russian gas – arguably a political goal, 
the EU the much discussed ‘single voice’ in external 
rather than one related to market making. 
energy affairs (Youngs and Far 2015), the move itself 
is remarkable as it for the first time unites different 
Taking the idea of market might one step further, Donald 
energy policy agendas under one umbrella framework. 
Tusk, former Polish Prime Minister and now President of 
Moreover, as the history of the EU suggests, novel 
the European Council, argued in the Financial Times that 
policy frameworks tend to start small. Institutional 
‘A united Europe can end Russia’s energy stranglehold’ 
spillovers as well as mission creep on part of the 
(Tusk 2014). His article was written in the context of 
implementing administration – the EU Commission – 
Russia’s annexation of the Crimea and the war in Eastern 
then tend to lead to a gradual scaling up of that policy. 
Ukraine and kick-started the Energy Union, the EU’s 
Already now, the Energy Union is represented in the 
latest energy policy initiative. The initial Energy Union 
European Commission by Vice President Šefčovič, 
proposal as presented by Tusk entailed various elements 
it started to build up own administrative capacity 
that would build on and indeed utilize the sizeable internal 
and expertise, and it is politically sanctioned by the 
energy market in order to put Russia (and possibly other 
European Council (European Council 2016; European 
external suppliers) into a less favorable position. A case in 
Council and Council of the European Union 
point is the proposed – and eventually dropped – purchase 
2015). This gives the whole initiative a much more 
vehicle for joint European gas imports from third countries. 
benign start and political clout compared to other – 
Along similar lines, and reinforcing Tusk’s point, Maroš 
eventually successful – initiatives the EU launched 
Šefčovič, the Commission’s Vice President for the Energy 
in the past. It is therefore not inconceivable that the 
Union, argued that ‘[…] we should also use our political and 
Energy Union, albeit remaining still incoherent to 
economic weight as the biggest energy buyer in the world 
date, will eventually emerge an important element in 
a little bit more vehemently in our relationship with our 
the EU’s external energy affairs, including in its gas 
principle energy suppliers’ (Politico 2016b). This gives EU 
relations with Russia.
energy policy an outright geopolitical spin: a large roughly 
500 bcm gas market, the world’s largest in terms of imports, 
may well serve as a means to coerce non-EU actors into 
and other applicable EU legislation as well as the objectives 
changing their behavior, particularly if these actors need 
of the Energy Union’ (European Council 2015). This not 
that very European market as a prime export destination. 
only signals support for a potentially tough stance adopted 
This approach makes market access the key tool for  
by the Commission. It also elevates the Energy Union 
exerting geo-economic power and influence (Goldthau  
objectives to political guidelines for regulation as applied. 
and Sitter 2015b). 
The Energy Union among other defines energy security 
To be sure, it is unlikely that the EU will develop a 
and a Strategic Partnership on energy with Ukraine as key 
monopsony in natural gas which at the very end runs 
goals for the EU (European Commission 2015a). Whilst the 
counter to EU market principles. Nor will the Energy Union 
objectives of the Energy Union do not have legal character, 
do away with the liberal market paradigm the EU is built 
the European Council decision suggests that they now 
on. Yet the Energy Union clearly represents an attempt to 
define the broader political context in which EU regulation 
react to geopolitical shifts in the European neighborhood 
should be put to operation. 
and a more assertive Russia, the bloc’s key energy suppliers. 
Arguably, therefore, the most important impact of the 
It certainly envisages the use of the entire regulatory 
Energy Union with regard to Nord Stream 2 – for now 
toolbox at EU level in a more strategic and more targeted 
– is that it defines several overarching objectives of EU 
way, toward external actors, with a view to serving the goal 
energy policy, which may serve as reference points for 
of ensuring ‘energy security, solidarity and trust’. 
the Commission’s stance on new and Russia-sponsored 
In this context it is worth noting that the European 
infrastructure. By extension, these references points 
Council – the EU heads of states – in their December 2015 
hand EU policy makers a formidable instrument to push 
declaration clearly stated that ‘Any new infrastructure 
their foreign policy priorities also by way of interpreting 
should entirely comply with the Third Energy Package  
European rules on gas infrastructure, including keeping 

Nord Stream 2 and EU energy regulation 
25 
Ukraine as a transit corridor and maintaining the status 
Commission as the guardian of the treaties, and as the 
quo in existing import infrastructure for Russian gas. 
Union’s competition watchdog, would further move toward 
Strategies may include national regulators dragging their 
becoming a political actor which, according to current-
feet (e.g. Polish authorities extending investigations into the 
Commission President Jean-Claude Juncker, is precisely 
Nord Stream 2 joint venture), or the Commission setting 
how the College should view its mandate (European 
precedents on Nord Stream 2, for instance by arguing that 
Commission 2015b). It is outside the scope of this study to 
Nord Stream 2 represents a transmission pipeline according 
judge whether such an approach is politically or normatively 
to Article 2 of Directive 2009/73. In this case, the pipeline 
desirable, or whether it is legitimate. For sure, however, it 
could be exempt from TEP provisions but nevertheless 
would make the EU leave the realm of the liberal paradigm, 
needs to be unbundled with third party access ensured. 
give European energy regulation a more mercantilist touch 
(This admittedly represents a theoretical option only – it 
and question the neutrality of EU law as it arguably is 
is inconceivable how to put such a ruling into practice.) In 
applied selectively. 
each of these cases Russia will be forced to fulfill its export 
In all, the point here is that the legal environment leaves 
commitments through existing pipelines, including the 
ample room for a more strategic political reading of relevant 
Ukrainian and Eastern European transit networks (arguably, 
EU regulation. It therefore is not the regulatory framework 
South Stream, if revived, would experience a similar fate,  
in the strict sense that will determine how and under 
as would Turkish Stream).
what legal conditions Nord Stream 2 will move ahead (it 
With this, the role of the Commission would also change 
probably will) and operate. Instead, it is material interests 
from a neutral market regulator to one that intervenes 
of EU member states and the broader international security 
in the market with the goal of a specific outcome – in 
environment as perceived by key EU decision makers that 
this case, regarding the choice of the transit route. The 
will arguably be decisive.

26 
Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK
Discussing Nord Stream 2 impact on EU gas 
markets and energy security
This leaves the question what likely impact Nord Stream 
far remain on the drawing board), the Southern Corridor 
2 might have on EU gas market structures and energy 
(which remains restricted to TANAP/TAP) and Ukrainian 
security. Whilst this chapter argues that the aggregate 
transit (which remains an option, as per Gazprom’s 
impact of Nord Stream 2 on EU gas markets is primarily 
statements). We deliberately abstain from generating 
of structural nature, its regional effects are highly 
detailed scenarios on the use of pipelines, Gazprom’s 
contextualized, and therefore merit a separate analysis. In 
ability to fulfill its export commitments at existing pipeline 
what follows, we discuss the effects of Nord Stream 2 with a 
capacity or the possible effect of Nord Stream 2 on other 
focus on Central and South Eastern Europe, and on the UK.
transit routes, notably Ukraine. The study by Pirani and 
Yafimava (2016), is comprehensive here, and any attempt 
As-is: gas market developments since 2011
to construct own scenarios would be repetitive. Instead, we 
primarily rely on descriptive statistics on EU gas market 
As demonstrated by the deep shifts that occurred on gas 
trajectories post Nord Stream, and what likely impact might 
markets only since 2008, it is hard to present a robust 
be extrapolated for Nord Stream 2.
outlook on the implications of Nord Stream 2 all out to 
2040. Yet, it is certainly possible to draw some tentative 
In fact, it is particularly in Central Eastern European 
conclusions on the project’s structural impact on European 
markets that significant shifts happened in the aftermath of 
gas markets going forward. For this, we assume Nord 
Nord Stream coming online. These relate to deep changes 
Stream 2 will be built, as will be crucial additional onshore 
in gas trade patterns. First, gas flows started to reverse (see 
infrastructure, notably EUGAL (see below). We also 
Figure 6). While traditional gas would travel from East 
assume ceteris paribus conditions for Turkish Stream or 
(Russia) to West (transiting Ukraine / Belarus and feeding 
South Stream (projects on freeze or abandoned), a possible 
Slovakia /Poland), West-to-East trade picked up. This 
expansions of Blue Stream or Yamal Europe (which so 
trend coincides if not correlates with Nord Stream 2 coming 
Figure 6: East-West cross-border gas flows, select European countries, in bcm
70.00 
60.00 
50.00 
40.00 
30.00 
20.00 
10.00 
0.00 
2010 
2011 
2012 
2013 
2014 
2015 
Nord Stream 
FRG-CZ 
CZ-FRG 
CZ-SLK 
SLK-CZ 
SLK-UA 
UA-SLK 
Source: IEA 2016

Discussing Nord Stream 2 impact on EU gas markets and energy security 
27 
online. Second, country level analysis reveals significantly 
mentioned Czech supply agreement, in addition to the 
varying degrees of this change: gas trade between Germany 
Commission putting an end on market barriers such as 
and the Czech Republic started to net out, and in 2014 
destination clauses, that facilitated these structural shifts in 
effectively reversed. In 2015, the Czech Republic effectively 
gas trade. However, additional Nord Stream gas arguably 
ceased to source gas from Ukraine (through Slovakia), the 
benefited these developments, as it brought additional 
traditional transit country for Russian gas imports. Instead, 
volumes to the Czech border through OPAL and further 
its gas deliveries started to come from Germany as of 2013. 
into Slovakia and to Austria’s Baumgarten hub. That way, 
This follows on Czech distributor RWE Transgas winning 
these regional markets were not only connected physically, 
a landmark court ruling against Gazprom over unused 
but arguably also linked to more liquid market areas in 
LTC take-or-pay volumes that year. East-West gas trade 
North-Western Europe.
between Slovakia and Czech Republic effectively ceased 
The impact of additional interconnector capacity and 
to exist by 2015. As Sharples (2015) suggests, the gas the 
the resulting access to additional volumes of gas can be 
Czech republic now sources from Germany might well also 
demonstrated also in terms of prices. Arguably, Czech 
be Russian gas delivered through Nord Stream. In other 
companies would not source gas from Germany – albeit 
words, the ‘unintended consequence’ of Nord Stream and 
possibly Russian gas by origin – if it was not cheaper than 
its southward onshore infrastructure OPAL may have been 
Gazprom gas coming from Ukraine. But in addition to 
Gazprom gas resold to Czech distribution companies, thus 
physical choice between low priced and high priced gas, the 
effectively squeezing out Gazprom LTC gas (Sharples 
sheer existence of alternatives may exert downward pricing 
2015), 14).10 Patterns in Polish-German gas trade, by 
pressure on already contracted gas – particularly in regions 
contrast, did not change fundamentally, despite reverse 
with relatively few sources of gas, such as CEE. As ACER 
flow capacity of Yamal being place since 2013. (IEA (2016) 
analysis suggests, this effect can indeed be observed in CEE, 
data indeed suggest gas flows from Germany to Poland 
where gas prices started to align with German prices (see 
decreased slightly from 1bcm in 2013 to 0.6 bcm in 2015 
Figure 7). In fact, compared to the ‘traditional’ situation in 
while gas volumes reaching Germany from Poland remain 
which prices of gas tended to be higher in Eastern Europe 
stable at 24 bcm). The reasons for this may be manifold and 
than in Western Europe, a function of rigid LTC structures 
cannot be analyzed in detail here. Part of the story might 
and a lack of optionality, this amounts to a qualitative shift 
be, however, that a combination of regulatory hurdles and 
in CEE gas prices.
strong incumbents in the Polish market, notably PGNiG, 
keep on preventing gas-on-gas competition from fully 
This ties into the more general finding that competitive, 
unfolding (EFET 2016).
integrated and hub based markets tend to have the 
lowest gas sourcing prices in the EU, notably the UK, the 
Third, Ukrainian deliveries into EU gas markets went  
Netherlands, Belgium and Germany. By contrast, countries 
down significantly since 2011. Arguably, the reason for 
lacking the physical interconnection and lagging behind 
this is a combination of decreased demand in Europe and 
in implementing pertinent EU regulation, tend to have 
Gazprom’s generally lower export rates in the past years, 
persistently high import prices in the EU, notably in South 
and an effective rerouting of gas through Nord Stream. 
Eastern Europe and in the past also the Baltics (ACER 
At the same time, Ukraine started to source gas from 
2015), 238). Price spreads between highly integrated and 
Slovakia, with West-East gas trade picking up in 2013. As 
liquid markets and ‘laggard’ markets remain significant 
a corollary, gas trade from the Czech Republic to Slovakia 
and, as ACER argues, bear great opportunity for consumer 
increased by roughly similar volumes, which suggests that 
surplus if withering away.
this effectively is again ‘German’ gas transiting the Czech 
Republic eastward. In fact, as Sharples (2015) notes, 
Impact on Central European gas markets
increasing Czech-Slovak gas flows coincide with Ukraine’s 
Against this backdrop, several conclusions can be made 
Naftogaz starting gas purchases from Europe and the launch 
regarding the impact of Nord Stream 2 on Central European 
of Vojany-Uzhgorod interconnector between Slovakia and 
gas markets. First, Nord Stream 2 stands the chance of 
Ukraine. Indeed, the pipeline emerged a key supply route 
enhancing the liquidity of regional hubs in which the 
for Ukraine in the wake of Gazprom stopping its exports  
additional volumes of 55 bcm will be primarily absorbed. 
to the country in November 2015, and its capacity of 14.6 
This includes GASPOOL (GPL) and by extension the 
bcm is reported as fully booked for 2016 (NGE 2015a).
Central European Gas Hub (CEGH) via EUGAL and the 
This is not to suggest that Nord Stream and OPAL were 
Czech and Slovak grids, but also NetConnect Germany 
causal for the partial reversal of gas flows in Central Europe. 
(NCG). Onshore infrastructure developments as triggered 
Rather, it is enhanced reverse flow infrastructure capacity 
by Nord Stream 2, including EUGAL, additional capacity 
between Germany and Austria, and its Eastern neighbors, 
from GASPOOL particularly to Poland, the Czech 
in combination with contractual changes such as the above 
Republic and to the Dutch market, stand to significantly 
enhance the interconnectivity between these markets 
(see Gascade’s market survery (GASCADE Gastransport 
10  IEA data on incremental East-West gas flows seem to correlate with 
GmbH 2015). This will help consolidating regional 
Central Eastern European cross-border capacity expansions as reported 
by ENTSO-G.
trading hubs through EU-induced structural reforms (in 


28 
Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK
Figure 7: Selected Central European hub and cross-border import prices, 2012–2014 (EUR/MWh)
40
35
30
25
20
15
01/12
02/12
03/12
04/12
05/12
06/12
07/12
08/12
09/12
10/12
11/12
12/12
01/13
02/13
03/13
04/13
05/15
06/13
07/13
08/13
09/13
10/13
11/13
12/13
01/12
02/14
03/14
04/14
05/14
06/14
07/14
08/14
09/14
10/14
11/14
12/14
01/15
02/15
03/15
Czech Republic from Russia 
Hungary from Russia 
Slovakia from Russia
Germany average border imports 
Source: ACER 2015
which the criterion of liquidity plays an important role). 
serving as the pricing reference for much of Eastern Europe, 
Supporting this process, all EU countries are obliged to 
including Poland, Slovakia, Slovenia, the Czech Republic, 
introduce Network Codes in order to facilitate market 
Hungary, and possibly even South Eastern Europe in case 
harmonization as part of the TEP requirements. By the end 
the ‘Vertical Corridor’ (see below) eventually links the SEE 
of 2016, 14 EU states will have implemented new codes, 
region to Baumgarten. 
including most Western countries but also Central and East 
Third, as a consequence of Central Eastern gas markets 
European countries such as Hungary or the Czech Republic. 
becoming more interconnected with North Western hubs, 
Remaining countries are reported to finalize implementation 
the above discussed price effect may be reinforced. To the 
by 2019 (IHS Energy 2016).
extent that gas is sourced cheaper from, say, the GASPOOL 
Second, this will strengthen the role of regional Central 
area, Polish traders might prefer contracting volumes from 
European gas hubs in EU gas trading and pricing. Current 
Germany rather than from Russia through the Yamal-
‘transit hubs’ such as CEGH will be upgraded to become 
Europe pipeline. This puts pricing pressure on Gazprom gas 
what Heather (2012) refers to as full-fledged ‘trading hubs’ 
along similar lines as already observed over the past years 
such as TTF and NBP. ‘Transition hubs’ GASPOOL or 
in parts of Central Europe (see Figure 7). This aspect goes 
NCG will likely grow more mature, too. As observers have 
back to Sharples ‘law of unintended consequences’: Nord 
suggested, in the long run GASPOOL, NCG and CEGH 
Stream 2 might in fact end up making Russian gas compete 
may even stand a chance to become more important than 
with Russian gas. The overall net effect might therefore be 
TTF and NBP (Chyong and Reiner 2015). While this 
consumer benefit. To be sure, as the example of the UK 
is debatable – UK and Dutch hubs dominate gas trade 
demonstrates, the development of an integrated (regional) 
in Europe by a large margin and make up for almost 90 
market and a functioning and liquid hub is a matter of 
percent of traded volumes – it is likely that regional Central 
decades rather than years. Moreover, its precondition 
European hubs will exert price effects for currently separate 
is physical infrastructure, transparency and political 
national markets. This, clearly, is in line with the Gas Target 
willingness (Heather 2015), which clearly is not present 
Model and is the stated intention of EU regulators. In fact, 
among some CEE countries and their political leadership. 
Heather (2015) in his detailed assessment of European gas 
But the main point is that contrary to the prevalent debate 
hub developments expects that between one and three more 
about Nord Stream 2 putting in question CEE energy 
hubs will develop into European marker hubs, in addition 
security, chances are that it might have the opposite effect 
to NBP and TTF. He identifies Southern Europe, North 
(see 6.5).
Eastern Europe, Central Europe or South Eastern Europe 
as possible regions in which such markers could emerge. It 
As a more general observation, the development of strong 
can be argued that because of their enhanced liquidity and 
and liquid regional gas hubs will also cement the liberal 
their improved physical connection to neighboring markets, 
market model as the dominant regime in continental 
GASPOOL and CEGH stand a good chance of eventually 
European gas governance, and particularly in the CEE 

Discussing Nord Stream 2 impact on EU gas markets and energy security 
29 
region in parts of which it remains contested still. To be 
political leadership and regional rivalry. Adding to this, 
sure, the basis of this enhanced liquidity and the growing 
within-country natural gas infrastructure and transmission 
maturity of regional continental gas hubs will still be 
systems tend to be poor as well. This bears the risk of SEE 
Russian gas. But the likely effect of this gas being traded 
developing into an ‘energy island’, similarly to what the 
and (partially) priced on hubs represents a push for the 
Baltic States have been in the past.
liberal paradigm – arguably and primarily a change in 
Third, energy sector governance in SEE remains 
market structure.
poor. Regulatory uncertainty is high, transparency in 
policy making remains low, and so is capacity in public 
An eye on South Eastern Europe
administration (European Commission 2016c; European 
The main energy security challenge for South Eastern 
Commission 2016d; European Commission 2016e). Various 
Europe (SEE) consists in its slow progress in energy sector 
infringement procedures in SEE EU-member states drive 
reform coupled with lagging infrastructure development. 
home the point that European policy frameworks are not 
This is, per se, not a problem linked to Nord Stream 2, nor 
properly implemented, if at all. Incumbent monopoly 
caused by Nord Stream 2. Yet without determined action, 
companies – again, a case in point being Bulgaria’s 
SEE’s energy woes might aggravate short of additional 
Bulgargaz – tend to defend the status quo and prevent 
supply options and enhanced interconnector capacity to an 
competition from emerging, while regulated prices prevent 
integrating Central European market.
market signals from exerting effects. In some instances, 
market reforms are even rolled back, such as in Hungary 
More to the point, and first, pipeline projects intended 
where the energy sector was recently re-nationalized.
to supply the region did not come through, including 
Nabucco and Russian-sponsored South Stream and Turkish 
In all, the development of South Eastern Europe as a gas 
Stream. Indigenous production in the region is small, 
region lags behind, and risks cementing the current trend 
with Romania being the only significant gas producer and 
toward a ‘two speed Europe’: a North-West European gas 
the bulk of the region’s demand is imported from Russia. 
market characterized by high liquidity and hub pricing, 
Judged against standard accounts such as the N-1 index 
partially integrating Central Eastern European gas markets; 
or the supplier concentration index (SCI), most of SEE 
and a South East European gas market which remains 
countries therefore score poorly. In the – presently unlikely 
characterized by low competition, a lack of investment and 
– event that the Trans-Balkan pipeline seizes to bring gas 
a significant and persisting supply risk. This assessment 
through Ukraine, this will present a problem particularly 
is supported by Henderson and Mitrova (2015) hinting 
for Bulgaria, and by extension adjacent countries. To be 
at Gazprom aiming for a two-tier pricing strategy going 
sure, SEE is a comparably small gas market that features 
forward – hub pricing in North-Western Europe and 
low gas penetration rates particularly in households. In 
traditional oil indexation in SEE.
turn, however, this points to a significant upward potential 
Reacting to this, the Commission in 2015 launched the 
in SEE gas markets when household grid access is brought 
Central East South Europe Gas Connectivity group 
to the EU average. Bulgaria, for instance, a presently 3 bcm 
(CESEC) representing 15 EU SEE member states and 
market, has set the goal of a 30 percent gas grid access rate 
non-EU Energy Community Treaty (EnCT) countries. 
(Ministry of Economics 2011), up from less than 2 percent 
The group is tasked to identify critical energy infrastructure 
in 2013. Estimates differ, but in the medium term, overall 
projects in the region, in order to enhance its connectivity 
SEE gas demand may stand around 45 bcm by 2025. By 
and resilience. Arguably, LNG will play an important role 
then, the World Bank estimates a supply gap of 8 bcm 
in the SEE gas conundrum going forward. This includes 
(World Bank 2010).
Croatia’s 6 bcm Krk terminal and the floating LNG 
Second, current capacity and infrastructure planning 
terminal in Alexandroupoli, Greece (6 bcm). Both projects 
pertaining to the Southern Gas Corridor will not primarily 
were granted PCI status and as strategic infrastructure 
serve the SEE region. TAP sends most of TANAP’s gas 
projects they receive EU support. Owing to their current 
further into Italy, and pipelines potentially connecting the 
status as planned projects gas price estimates are difficult. 
Balkans with TAP, such as the Ionic Adriatic Pipeline, 
But it is fair to assume that the LNG, potentially sourced 
which could connect TAP with the grids of Bosnia and 
from Cherniere, the US company, will come with a 
Herzegovina, Serbia, Kosovo, Montenegro and Croatia, 
premium. That said, as the case of Lithuania’s floating 
remain on the drawing board. This situation would warrant 
‘Independence’ LNG terminal demonstrates, optionality 
additional interconnectors. In this context, the planned 
indeed plays a role in determining the terms and conditions 
‘Vertical Corridor’, consisting of the Interconnector Greece-
under which gas is sourced. Lithuania is reported to having 
Bulgaria (IGB) and the Romania-Bulgaria Interconnector 
renegotiated the price for Russian gas, downward, around 
(IBR) could not only bring TAP gas into SEE but also link 
the time the new terminal got green light (WSJ 2014).
up to the Baumgarten hub, potentially enhancing gas-on-
gas competition between the Southern Corridor and North-
In case the necessary North-South links are established, 
Western and/or Central European markets. Yet cross-border 
Nord Stream 2 may add to the region’s energy security 
infrastructure development has notoriously been hampered 
by way of ensuring additional volumes feeding a growing 
by national policies, erratic maneuvers among the SEE 
market, but also, possibly, by making consumers profit 

30 
Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK
Figure 8: UK-continental European gas trade, bcm
25 
20 
15 
10 


11 
11 
11 
11 
Jul 
Oct 08 
Jan 09 
Oct 
Apr 09 
Jul 09 
Oct 09 
Jan 10 
Apr 10 
Jul 10 
Oct 10 
Jan 
Apr 
Jan 12 
Apr 12 
Jul 12 
Oct 12 
Jan 13 
Apr 13 
Jul 13 
Oct 13 
Jan 14 
Apr 14 
Jul 14 
Oct 14 
Jan 15 
Ap 15 
Jul 15 
Oct 15 
Jan 16 
NL-UK 
UK-B 
B-UK 
Source: IEA 2016
from price competition. Indeed, the ‘Vertical Corridor’ 
a net importer of gas sometime between 2020 and 2025. By 
ranks high in priority, including its extension to Austria, 
2035, the IEA projects Dutch production to fall to below 20 
and pocketed the bulk of the EUR 217 million EU PCI 
bcm a year (IEA 2012). This implies growing import needs 
investment announced in January 2016 (INEA 2016). Still, 
in the North-Western continental market region, which 
for price competition to emerge in the SEE region from 
come against the backdrop of equally growing import needs 
sources as different as Krk LNG, Azeri gas or Nord Stream 
in the UK.
2, the ‘software’ – EU energy regulation and liberal market 
As integrated and liquid markets, the UK and the broader 
regime – needs to be properly installed and put to work, 
North-Western market region (essentially the Netherlands 
which arguably is a task as tedious as the establishment of 
and Belgium) should be well positioned to source 
the necessary physical infrastructure.
incremental gas needs in the shape of LNG or additional 
pipeline gas. Also, its mature and competitive market 
Impact on the UK
structure shields the UK from the types of veritable  
The UK’s gas production peaked in 2000, and since 2004 
supply risks facing Central or South Eastern European 
the country is a net importer of gas. The UK will see a slow 
countries.11 In light of this, Nord Stream 2 gas will likely 
but inevitable decline of North Sea production which, by 
exert structural or pricing effects only, if at all. Its most 
2035, is projected to decrease to 12 bcm per year, down from 
important contribution to UK energy security might indeed 
today’s 36 bcm (UK Oil & Gas Authority 2016). Demand is 
lie in keeping the continental North-Western markets liquid. 
projected to largely remain flat (for an assessment of various 
Nord Stream 2 gas might replace some of the declining 
scenarios see UKERC’s McGlade et al. (2016)). This 
production in the Netherlands, which ensures choice for 
implies additional import requirements and may push UK 
traders. This will put the UK in the position to continue 
import dependence up to 80 percent. Incremental demand 
sourcing from international LNG markets and continental 
might be sourced in the shape of LNG or from Norway (to 
Europe, which maintains gas-on-gas competition and 
the extent the country is capable of maintaining current 
arguably helps capping or reducing price spikes. In order to 
production levels or increase them) but also come from 
properly assess the impact of Nord Stream 2 on the UK, a 
continental Europe, through the existing Interconnector 
detailed supply chain approach may however be warranted, 
to Belgium’s Zeebrugge (25.5 bcm annual bi-directional 
as conducted by Bradshaw et al’s (2014) exemplary study.
capacity) or the Balgzand Bacton Line to the Netherlands 
It is important to note in this context that a clear factor 
(BBL, currently 14 bcm).
of uncertainty is the UK having voted to leave the EU on 
IEA gas flow data don’t suggest significant changes in trade 
June 23 2016. It is unlikely that the UK’s ‘Brexit’ will put 
patterns between the UK and the Netherlands or Belgium 
an end to the physical flow of gas or overall gas trade across 
over the past years (IEA 2016). However, given that gas 
production from the Groningen field is capped while overall 
11  Gazprom is active on the UK market already, and in 2015 reports 
Dutch production set to decrease substantially throughout 
11 bcm of gas exports to the country Gazprom Export 2016 which, 
the coming decades, the Netherlands is expected to become 
however, is traded gas not necessarily ‘Russian’ molecules.

Discussing Nord Stream 2 impact on EU gas markets and energy security 
31 
the channel. NBP and with it ICE also enjoy a competitive 
argument is that while Nord Stream 2 enlarges Gazprom’s 
edge in European gas pricing, which they will profit from in 
export options, cements Russia’s ‘grip’ on Europe and puts 
a post-Brexit age. And yet, the UK leaving the EU would 
Germany in a strategically more advantageous position, it 
imply that they are no longer part of the joint energy policy 
at the same time deprives some Eastern European countries 
regime, that future EU regulation will not be implemented 
of their ‘transit monopoly’ over Russian gas and hence an 
domestically and that, most importantly, access to the 
important insurance policy against politically motivated 
European market is contingent on trade agreements whose 
supply cuts. 
shape and outcome are yet to be determined. The latter 
However, all else equal, Nord Stream 2 itself arguably does 
remain contested and range from a Norway style EEA 
not fundamentally alter European import or dependency 
agreement to operating UK-EU trade relations on the 
ratios on Russian gas. On the one hand, Nord Stream 2 
basis of the WTO regime. It is not inconceivable that the 
will indeed partially re-route already contracted supplies, 
transition period toward a new trade regime – and a UK-
whose effect on import rates should be rather neutral. On 
EU arrangement more broadly – will take years. What this 
the other hand, the new pipeline will provide for additional 
means, at the very least, is that the transition period toward 
capacity to serve a European market whose import rates are 
such a new agreement will be characterized by uncertainty. 
projected to increase – which arguably does not necessarily 
Arguably, this will impact on the risk appetite of gas traders 
raise overall import rates either. Moreover, in conjunction 
and other market actors to clinch major deals in the UK, 
with effective regulation, smart market design and stringent 
and is susceptible to impact on the leading role as presently 
enforcement of EU market and competition rules, additional 
enjoyed by NBP and the UK as an LNG trading hub, and it 
Russian gas brought into the common market pool is set to 
may also influence gas cargoes across the channel.
enhance overall market competition rather than enhancing 
bilateral contractual dependencies of old. Combined with 
Does Nord Stream 2 present a security of supply 
properly connected markets – the crucial precondition – the 
threat for Europe?
Central European region should therefore be well positioned 
to buffer supply shocks, whether caused by technical 
Finally, it is worth recapping the above findings against 
failure or political purpose. Moreover, market integration 
concerns over Nord Stream 2 increasing Europe’s 
represents a physical insurance against price spikes and 
dependence on Russian gas and impacting on the energy 
supply shortages in case of arbitrary ‘re-routing’. Therefore, 
security of Central Eastern Europe. As noted, the main 
even in the case that Article 11 were to apply – which is 
backdrop of the region playing a prominent role in the 
doubtful because EUGAL will arguably not require the 
discussion on Nord Stream 2 is that it is highly dependent 
certification of a TSO – neither Germany’s energy security 
on Russian gas in overall gas imports (Eurostat 2014). 
nor the energy security of ‘the Community’ more generally 
Whilst a high dependency ratio is not necessarily indicative 
(Article 11/3 b) seems to be at stake. In fact, the more 
for these countries’ overall level of ‘energy security’, due 
pressing question arising in this context might in fact be 
to the often dominant role coal plays in the power sector, 
related to the just distribution of the accrued consumer 
it still points to a significant vulnerability of the CEE and 
surplus in a more competitive market environment, which 
SEE region regarding gas. As the October 2014 stress tests 
in essence is a matter of political economy, and warrants a 
revealed, East European countries such as Poland would be 
separate discussion.12 
hit hard in case of a lasting supply disruption (and Slovakia 
under certain circumstances), as would South Eastern EU 
It is understood, however, that East European leaders – 
member states Hungary, Bulgaria and Romania, the latter 
judging from their March 07 2016 letter on Nord Stream 
of which could face shortfalls of up to 40 percent. Non-EU 
2 sent to Commission President Juncker – think about 
SEE countries Serbia, FYRM and Bosnia and Herzegovina 
energy security primarily in terms of diversified routes 
would see similar impact on the supply side (European 
and suppliers. This implies that gas sourced from Russia 
Commission 2014b).
(even via Germany, for that matter) is considered insecure 
whereas Gulf LNG or Norwegian gas is regarded as 
Against this backdrop, various observers have noted that 
secure. Yet, if market logic is applied, which is exactly 
the expansion of Nord Stream to an overall 110 bcm would 
what the EU energy market project is all about, then 
strengthen Gazprom’s role in the European gas balance 
energy security is primarily enhanced through competition 
and give Russia the opportunity to flexibly handle gas 
policy and structural market changes as they help keeping 
shipment to Europe through a variety of export routes, 
dominant market players such as Gazprom in check 
effectively handing Moscow an opportunity to cut some 
and foster price competition. In this case, the primary 
East European countries off supplies without hurting major 
policy objective becomes harmonizing market rules and 
West European customers such as Germany (Loskot-
functioning, liberalizing and connecting so far still scattered 
Strachota 2015; Natural Gas Europe 2016; Riley 2015). 
national markets, in addition to fostering diversification 
Some East European countries also represent transit states 
of sources to enhance choice. Yet, it is particularly East 
for Russian gas and, as it is frequently argued in the context 
European member states that have been most reluctant to 
of Nord Stream 2, stand to lose revenue in the shape of 
transit fees, should Nord Stream 2 take the gas currently 
shipped through Ukraine (or Yamal Europe). In short, the 
12  I owe this point to Georg Zachmann of Bruegel.

32 
Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK
embrace cross-country gas market integration as a means 
should the bulk of Russian gas exports to Western Europe 
to enhance European supply security and overall market 
no longer flow through the country, it stands to gain in terms 
resilience against supply shocks. While some countries 
of lower gas prices. The reason for more competitive prices 
such as Poland carefully safeguard the prerogatives of 
lies in the gas Ukraine now sources from Western markets, 
state-owned corporations, others such as Hungary recently 
which is gas that is priced on hubs and either comes cheaper 
re-nationalized the gas sector altogether. This ties into 
or puts pricing pressure on Russian imports. Put simply, 
material interests of some incumbent East European (state) 
Ukraine might essentially trade a situation in which it 
companies to keep the status quo, and the revenue streams 
accrues high transit fees but pays high prices for Russian 
from existing LTCs – in addition to Slovak or Polish 
gas for a situation in which transit revenues are small but 
governments remaining naturally interested in additional 
coupled with lower expenses for gas imports.13 Because 
state revenue in the shape of transit fees. The result is an 
the trade-off primarily benefits households and industry, 
incentive to keep the status quo, i.e. Yamal Europe and the 
financial benefits are in the long run shifted to consumers. 
Ukrainian transmission system in operation.
A back on the envelop calculation suggests that while 
the net effect for Ukraine might not be neutral it still 
Further, concerns have been expressed over Nord Stream 2 
looks far better than what the commonly cited figure of 
allowing Gazprom to leverage its position as the incumbent 
as loss of USD 2 billion a year suggests. In fact, based on 
on Continental and East European gas markets even as 
2015 numbers, the country might have already saved up 
this market changes in terms of structure. Thanks to Nord 
to roughly USD 1.15 billion due to competitive pricing 
Stream 2, the company will have more optionality regarding 
pressures. As a function of enhanced interconnectors to 
export routes without having to change delivery points, 
neighboring EU countries, Ukraine in 2015 sourced 10.3 
which would be contractually difficult, at least into the 
bcm of is import needs from Europe, and the remaining 
late 2020s. At the same time, Gazprom will be the pivotal 
6.1 bcm from Russia (Naftogaz Europe 2016). Reacting 
supplier on CEE regional gas hubs, which – depending on 
to European gas pricing dynamics exerting effects on 
the strategy Gazprom adopts – may translate into market 
Ukrainian imports, Gazprom in 2015 started to grant 
power. The concern here is if Gazprom decides to play 
discounts, a policy which continued in 2016 and which 
the market game, this could give the company market 
comes with the intention of bringing Russian gas prices 
leverage in the shape of volume management (Skalamera 
closer to import prices from Europe (RFERL 2016). As 
and Goldthau 2016). Indeed, its market share of presently 
a result, the price for Ukrainian gas imports exhibits a 
a good third of European gas demand – which in Central 
significant downward trajectory, as Figure 9 suggests.
Eastern Europe is significantly higher – coupled with its 
control over gas storage facilities, might hand Gazprom 
an opportunity to tinker with supply volumes in order to 
Figure 9: Russian gas import prices to Ukraine and 
influence prices (Mitrova, Kulagin, and Galkina 2015), 
Russian gas discounts, 2015
7). The primary argument against such concerns is that 
Russian price (incl   Russian discount 
the idea of gas market integration is precisely to deprive 
discount (USD/tcm)
(USD/tcm)
dominant suppliers of their ability to leverage their 
position on consumers. Moreover, it is somewhat ironic to 
Q1
329
100
warn against Gazprom’s strategic positioning in a market 
Q2
247
100
environment as ‘playing by EU market rules’ is exactly 
Q3
247
40
what has been demanded of Gazprom for years. Finally, 
Q4
230
40
if market dominance indeed emerges a concern going 
forward, this primarily presents a calls on the establishment 
Sources: Reuters 2015b, Moscow Times 2015, RT 2015, ICIS 2015, 
of a strong competition watchdog. In other words, the 
authors own calculations
strategic imperative for EU leaders and authorities is to 
fully empower the Commission so that it can apply EU 
competition policies against all market participants – 
The discounts for Russian gas in 2015 as reported in various 
including domestic incumbents and external suppliers such 
news outlets amounted to USD 100 in Q1 (Moscow Times 
as Gazprom. 
2015), USD 100 in Q2 (RT 2015), USD 40 in Q3 (ICIS 
2015) and USD 40 in Q4 (Reuters 2015b). Russian price 
Finally, the question of Ukraine merits a brief discussion, 
discounts can be assumed to bring Russian gas in line 
a country whose status as a transit state is alleged to be 
with European import prices, and in the absence of the 
inextricably linked to the energy security of Central Eastern 
‘European effect’ all gas Ukraine imports from Russia can 
Europe according to the March 07 2016 letter. Indeed, the 
be assumed to come at undiscounted prices. For the sake 
future of Ukraine in Russian gas exports remains in question 
of simplicity, it is also assumed that Ukrainian gas imports 
and a number of scenarios emerge in the post-2019 period, 
are equally distributed across the year (i.e. roughly 4 bcm 
when Nord Stream 2 is set to start operation (Pirani and 
per quarter). Calculating the overall benefit generated 
Yafimava 2016). It can be argued, however, that the future 
of Ukraine will not hinge on it remaining a transit country 
13  I owe his point to a peer and would like to explicitly acknowledge his 
for Russian gas. Whilst Ukraine will indeed lose transit fees 
input here. 

Discussing Nord Stream 2 impact on EU gas markets and energy security 
33 
by the granted discounts against total imports, Ukrainian 
additional bi-directional pipeline capacity will link the 
savings therefore amount to some USD 1.15 billion for 2015. 
Ukrainian grid to CEE gas systems (including a planned 
With this, Ukrainian gas pricing displays similar effects as 
8 bcm interconnector to Poland), the country should be 
observed in Lithuania, where the availability of options – 
put in the position to source its gas independently from 
in the Lithuanian case the ‘Independence’ LNG terminal 
Russian supplies in the future, or put the latter under pricing 
coming online – set in motion competitive pricing dynamics 
pressure. Still, as observers note, despite significant progress 
on Russian gas imports.
energy sector reform in Ukraine is staggering and bears 
the risk of falling back into ‘bad old habits’ related to rent 
Arguably, therefore, rather than on transit fees, the 
redistribution, an inefficient energy system and indeed 
policy focus needs to be on deep energy sector reforms 
also ‘political corruption’ (Zachmann 2015). The call, 
in Ukraine, necessary energy efficiency gains and the 
therefore, is on supporting structural reforms, enhancing 
country’s successful integration into the European gas 
administrative capacity and enabling foreign investment in 
grid, as all of these measures foster competitive gas market 
the Ukrainian energy sector, both upstream and in domestic 
structures. Indeed, the country has embarked on ambitious 
transmission and distribution networks.
reforms, notably in the shape of the April 2015 law ‘On the 
Natural Gas Market’. Among other, reforms comprise a 
It is the declared intention of EU leaders to keep Ukraine 
restructuring (and eventual unbundling) of Naftogas, the 
a transit state for Russian gas, and to integrate the country 
state-owned incumbent; price liberalization for households, 
into the European energy network. This is an EU policy 
which in 2015 meant a three-time increase in tariffs, a 
goal whose primary motivation is stabilize the Ukrainian 
measure that should trigger significant energy savings; and 
leadership’s domestic and foreign policy position, and to 
a change in the regulatory regime for gas E&P, aimed at 
tie the country more closely to the EU through a strategic 
incentivizing foreign investment in the upstream sector. 
energy partnership. Achieving this policy goal, however, 
Indeed, Ukraine saw falling gas consumption over the 
also implies that it is politics, not regulation or EU 
past years, which is partly a function of contracting GDP 
infrastructure policy that needs to drive the process. In other 
– which itself is partially induced by the war in Eastern 
words, whilst enhanced Ukraine–CEE interconnectors and 
Ukraine’s industrial base – and partially the effect of 
TEP driven energy sector reforms are positive for their price 
reforms. This led to a drop in imports of gas from Russia 
effects and consumer benefit, they can hardly replace the 
to the above mentioned 6.1 bcm in 2015, a significant 
political impetus that is necessitated to influence the choice 
decrease compared to 40 bcm only five years ago. Since 
of Gazprom’s export routes.

34 
Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK
Conclusion: Nord Stream 2 and Europe’s choice
This study assessed the geopolitical, regulatory and 
Clearly, however, for it being so politically contested, Nord 
energy security aspects as discussed in the context of 
Stream 2 leaves the confines of commercial business cases, 
Nord Stream 2. Whether Nord Stream 2 makes economic 
EU energy law or gas market structure. Material member 
sense against current trends in the EU gas market is for 
state interests, EU energy security concerns and geopolitical 
investors to decide, who depending on their risk inclination 
considerations related to Russia’s increasingly assertive – and 
and perceived business prospects might be willing to sink 
in the case of Ukraine outright aggressive – foreign policy 
money to the bed of the Baltic Sea. The future will bring 
define the environment in which Nord Stream 2 becomes 
clarity on the risk assessment of the parties involved in Nord 
subject to political debates, not commercial ones. With this, 
Stream 2, and the commercial case behind the pipeline 
references to Nord Stream 2’s compatibility with EU energy 
project. As this study argued, Nord Stream 2 may reinforce 
frameworks essentially miss the point. The goal of law 
a pro-market push in EU gas markets by way of enhancing 
and regulation is to set frameworks, define the rules of the 
market liquidity and increasing the share of gas traded on 
game and level the playing field. Given the long lead times 
hubs. The precondition for this to work is fully integrating 
in energy investments and the significant capital needs, 
European gas markets, strong regulatory frameworks setting 
planning security is imperative for all market participants. 
pro-market incentives and the empowerment of the EU 
Legal and regulatory frameworks should provide for clarity 
Commission as the gas market’s competition watchdog.
and predictability. They should not be applied strategically, 
for principle reasons and because it may impact on the 
Much will depend on Gazprom’s export strategy and 
inclination of investors to get their checkbook out. Put 
whether the company is determined to defend market share 
in simple terms: the Commission’s job is not the choose 
on a more competitive European gas market. Provided this 
pipeline routes, but to ensure they are operated in a way that 
happens Gazprom – possibly in conjunction with other 
is compatible with market principles. Politics, by contrast, 
Russian gas companies going forward – may find its gas 
define policy preferences. If Nord Stream 2 is politically too 
well positioned to compete for share in European demand. 
contested or found as undesirable, then it also falls on the 
In turn, facing growing import needs, European companies 
political domain – the EU heads of states – to act.
and consumers will have to choose where to source their gas 
from, including LNG, and at what price. As the EU seeks 
As the case of Nord Stream 2 demonstrates, the EU 
to enlarge its options in the shape of additional regasification 
therefore needs to take choices on a central question: is 
capacity, more interconnectors and new pipelines in the 
the Commission a regulator (hence neutral) or a political 
Southern Corridor, additional supply routes and sources 
animal? By extension, should rules be applied so that they 
offer choice, and indeed also flexibility. In this context, 
follow political objectives, or are they applicable across the 
the question is not necessarily whether all additional 
board? Regardless of individual preferences regarding Nord 
infrastructure is indeed needed, but to what extent it allows 
Stream 2, it is important to find answers on these questions, 
European consumers to leverage on their status as the 
as they will determine the type and character of the EU as  
world’s largest, and arguably most attractive, import market.
a political actor going forward.

Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK 
35 
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