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
2
Assessing Nord Stream 2: regulation, geopolitics & energy security in the EU, Central Eastern Europe & the UK
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About the Publication
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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
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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
5
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
6
6
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
7
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
1
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
2
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.
8
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
9
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
5
0
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
0
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
3
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
5
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
5
0
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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