Bets are off: Future of Nord Stream 2 and consequences for Ukraine

Author : Olexandr Yaroshchuk

Source :

Kyiv and its EU partners are trying to stop the construction of the Nord Stream 2 gas pipeline, which will increase the share of Russian gas in Europe to 80%. Will they be able to convince Germany and Austria - the main lobbyists of the project?
22:47, 9 August 2017

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Russia continues to resort to frank manipulations to implement its Nord Stream 2 strategic project. This country does this despite the resistance of some European countries, American sanctions and economic losses, which the Russian Federation itself is facing now.

The day before, it became known that the EU is seeking to obtain the mandate from the member states to negotiate with Russia on the project.

In such a situation, Ukraine and its partners should make more efforts to counter this project, uniting partners from Europe. Otherwise, situation will end in a way as it was with a referendum in the Netherlands. There are currently two options regarding the issue.

The first is to work with the European Commission and the governments of the EU member states and to prove why the project threatens the energy security of Europe. The second one is to find a better option that will take into account the capabilities of the Ukrainian GTS and underground gas storage facilities. To reach thus, Ukraine needs to overcome corruption and implement reforms.

Nord Stream 2 after Stockholm and sanctions

Among the latest developments in the Ukrainian and European gas markets, the most important to understand the current state of Nord Stream 2's implementation is to consider arbitration decision in Stockholm and a sanctions package approved by the US Senate.

The first factor is a separate arbitration decision in Stockholm. As you know, the arbitration considers two disputes between Naftogaz and Gazprom. One of them concerns the gas purchase contract signed by Ukraine during the gas crisis of 2009, the other - a transit contract between Ukraine and Russia.

In an unveiled on May 30 decision, the arbitration satisfied the main requirements of Naftogaz. The court found invalid the principle of "take or pay", according to which Ukraine should pay Russia a penalty for not buying contracted volumes of gas.

Exactly with these funds Gazprom wanted to cover its losses from the North Stream and Turkish Stream projects (by 2014 - South Stream).

Decisions on the second case promise to be published in the fall. If Ukraine wins, this will mean a change in approach to the mandatory use of EU regulatory acts to North Stream 2 projects and contracts.

The second factor is the US sanctions. They expand existing restrictions and impose additional ones, in particular on the companies involved in the implementation of the Nord Stream 2.

Mike Crapo, a republican senator and co-author of the law, recognized the need to impose additional sanctions on Russia: "The law imposes sanctions on those who invest or support the construction of Russian energy export gas pipelines."

Donald Trump signed the law on August 2. Having almost unanimously voted for the law, what is an extremely rare situation, the Congress left him little room for maneuver.

The consistent support of the project is natural, since it will be able to solve several strategic problems of Republicans and Democrats.

US Ambassador to Ukraine Marie Yovanovitch told about at the Verkhovna Rada that the United States will continue to defend the interests of the free market and energy security in Europe shared by Ukraine.

"The United States continues to actively talk about our concern about the North Stream 2, since no country can dominate in the supply of natural gas to Europe," the Washington ambassador said.

As a result of the adoption of the law, the chances of a project will decrease substantially, because European companies will not be burnt by desire to get sanctions and pay multimillion fines. Nevertheless, the German and Austrian gas giants are actively working to ensure that the North Stream 2 project is implemented.

Europe in two parts

In the assessment of the gas pipeline issue Europe divided into two camps: supporters and opponents of the project. Bulgaria, the Czech Republic, Greece, Hungary, Estonia, Latvia, Lithuania, Poland and Romania took the hardest position.

The leaders of these countries believe that the preservation of gas transit through Ukraine is important not only from the point of view of energy security, but also in terms of ensuring stability in the Eastern European region.

"Most EU member states are opposed to this project, not because they are interested in Ukraine's interests, they realize: the project is destroying the European Union from the inside," said Mykhailo Honchar, president of the Center for Global Studies, "Strategy XXI".

US also actively criticizes the project. First, the United States has repeatedly applied sanctions against companies involved in this project. Secondly, Trump expressed his thesis on the inadmissibility of the project during his visit to Warsaw. He noted that no country can conduct energy blackmail.

The policy of the Senate is to prevent the construction of the North Stream 2, which will negatively affect the energy security of Europe and hamper the development of the gas market in Central and Eastern Europe.

On the other hand, the American administration is interested in a competitive European market, in particular in the export of American hydrocarbons, especially liquefied gas, first parties of which were already supplied to Europe.

Ukraine and the US are also actively cooperating in the gas sector, stated Yovanovitch: "We in the USA are working very closely with Ukrainian partners to supply liquefied gas through the United States to Ukraine through Poland."

The President of the European Council, Donald Tusk, also spoke in support of Ukraine. According to him, the project is contrary to EU’s legislation and does not correspond to the strategic interests of the European Union and Ukraine.

European politician said that according to the European Commission, the construction of North Stream 2 will increase the share of Russian gas in Europe to 80%, and Gazprom will control 60% of the German gas market.

According to Johannes Bauer, Deputy Head of the Energy Support Group of Ukraine, Russia is dominant in the European natural gas market. "In 2014, the Russian Federation supplied 38% of gas, while Norway supplied 32%," he said.

Dependence on Russian gas decreases from east to west of Europe: Slovakia - 84%, Austria - 70%, Poland - 64%, Germany and Hungary - 62%, Czech Republic - 58%, Denmark - 55%, Italy - 40%, France - 25%.

In favor of the North Stream-2 are the governments of Germany and Austria. Both countries have economic and political interests in it. Immediately after the adoption of the new sanctions package by the Senate, German Foreign Minister Sigmar Gabriel and Austrian Chancellor Christian Kern sharply condemned the decision. "Europe's energy supply is the business of Europe, not the United States!" wrote the politicians.

Naftogaz's head Andriy Kobolev explained that such a position was caused by the interests of the big business of both countries: "The offer of North Stream 2 is attractive for Germany and Austria, as it will provide local entrepreneurs with cheap gas."

In the case of realization of this project, Austria will be able to become the gas buffer of Central Europe and supply gas to the Balkans and Eastern Europe. With access to the OPAL pipeline, Austria can turn into a transit gas state and, together with Berlin, determine the rules of the game on the blue fuel market.

Obviously, situation was developed with some Russia's influence. German and Austrian companies have long been partners of Gazprom. Wintershall has assets in Russia, and Gazprom is an investor and owner of a significant part of the company's shares. The same can be said about ÖMV.

On the other hand, although both countries will increase the importance of gas hubs, the political influence on decision-making in Berlin and Vienna will increase symmetrically, and this is a direct threat to economic and political security for both governments.

So far, they do not see future strategic problems. Since North Stream 2 has exclusively geopolitical goals, it will further hurt the EU than help.

While several companies will be able to profit, the rest of European companies and countries will suffer great losses, which will undermine European energy security and create favorable conditions for blackmail by the Kremlin. Its tactics are the method of carrot and stick: in words - the carrot, in fact - the grip of Moscow politics.

"The construction of Nord Stream 2 is a factor aimed at destabilizing Europe. And ultimately it aims at weakening the energy security of the whole Europe," said Verkhovna Rada Chairman Andriy Parubiy.

Quick solutions needed

Ukraine and its partners in Europe are doing a lot to counter North Stream 2.

One of the latest victories is the European Council's decision to appoint talks between the European Commission and Nord Stream 2 AG to find a legal compromise. Although this group has no authority to stop the project from being implemented, the negotiations give time to build a clear strategy and take the necessary steps.

EU countries that oppose the project send a letter to the EU governing bodies and raise this issue at meetings of all levels.

The Polish government and the Polish company PGNiG are suing Gazprom in the European court and demand from the European Commission to recognize the violation of EU competition law by Russian monopoly. PGNiG also opposes granting Gazprom access to OPAL's capacity.

Ukraine should work more actively with international environmental organizations and farmers in the region, who opposed the construction of the gas pipeline. In particular, it is about the World Wildlife Fund, which counted the negative effects of the project on the Baltic Sea ecosystem.

Only in the exclusive maritime economic zone of Germany will be 239 tons of phosphorus, not to mention the damage to the flora and fauna. Also in the Baltic Sea there are thousands of tons of dangerous substances, chemical weapons, explosive devices. "Nord Stream 2" will run down the bottom in such areas.

Ukraine and its partners should focus Europeans’ attention on another aspect of the gas market: LNG infrastructure development and gas storage. "The European Union's priorities are liquefied petroleum gas and the creation of gas storage facilities, which will strengthen Europe's energy security," Johannes Bauer stressed.

We should also strengthen our efforts in the legal plane. People's deputy Natalia Katser-Buchkovska proposes to develop a law on energy security, writing down the threats to energy security and countermeasures, and set up a coordination centre. According to her, such a project may appear in the fall of 2017.

It is also worth noting September 19, when the summit of energy ministers of the European Union will be held. Thus, the fate of Nord Stream 2 will be solved as soon as possible.

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