September 12, 2016
In late August, media outlets across Europe were electrified with news that Gazprom, along with five European companies, withdrew its merger application for a joint venture to build the controversial Nord Stream II (NS2) pipeline. The reason for that surprising move was the objection of Poland’s competition authority (UOKiK) that raised the issue of Gazprom holding a dominant position over the Polish market. Subsequently, questions were asked whether this is the end of the project. However, it’s clear that the merger application withdrawal is only a tactical move with a new strategy for the divisive project expected to be unveiled by December this year.
Gazprom tested the waters with the joint-venture application and is now forced to seek alternative options. Due to UOKiK’s decision and the termination of Gazprom’s joint-venture with European companies, the project cannot apply for EU funds to finance the NS2 project. The alternative will therefore be more costly, but still feasible. And Gazprom seems determined to deliver.
Putting it simply, the project is merely delayed, not cancelled – for now.
The pipeline is supposed to link the Russian Baltic coast with an exit point near Greifswald in Germany, with no physical link to the Polish territory or territorial water. The political, economic and legal facets of the project are intensely debated in Poland and in Brussels. Should the new pipeline be developed and become operational in 2020, Gazprom would be able to deliver gas to Western Europe without having to transport it through the current Yamal-Europe pipeline running through Polish territory. NS2 may be used by Russia as a political tool in upcoming gas contract negotiations, which expire in 2022.
Poland’s energy mix is heavily reliant on fossil fuels with most gas supplies coming from Russia and Gazprom directly. In the past years, Poland has worked hard to strengthen its energy security and diversify gas supplies. Thanks to recent investments identified as EU Project of Common Interest (PCIs), additional gas volumes are increasingly supplied through Ukraine, Germany and the Czech Republic. Most lately, the Commission awarded another tranche of financial support from the European Regional Development Fund (ERDF) to further strengthen energy interconnectors between Germany and Poland. Furthermore, the newly inaugurated LNG terminal in Świnoujście provides another opportunity to diversify the country’s gas supplies. LNG tankers arriving from Qatar and in the future from the US and Norway are the main options, adding to the existing domestic gas production nearing 30% of total demand.
Poland is not the only Member State that fears the consequences of NS2. Other Central, Southern and Eastern European countries share Warsaw’s anxiety about the project becoming a threat which could increase Russia’s market dominance to the detriment of member states’ and EU energy security objectives.
With the construction of NS2 and given Germany’s large storage capacity for gas, the country would become a formidable European gas hub. Gas would flow to Germany directly from Russia’s Baltic coast, marginalising already existing transit pipelines. With NS2 operational, Germany could export Russian gas to other Western European countries, benefitting from lower gas prices for domestic purposes and being able to put a mark-up on further exports down the line. Furthermore, gas could be diverted to southeast Europe through the Austrian Baumgarten hub, thus threating EU efforts for diversification (e.g. Southern Gas Corridor) and integration of regional markets which are also heavily dependent on Russian gas. NS2 would strengthen Germany’s ties with Russia, increasing fears in a number of EU capitals and contributing to the exacerbation of tensions at the EU level, where the Union already faces numerous challenges.
Europe will continue to rely on fossil fuels for a significant share of its energy supply for the foreseeable future. Domestic gas has been on the decline for years, but the demand for energy is still growing. Even with the adoption of the Paris Agreement at the United Nation’s COP21 conference in December 2015, and the global determination to mitigate greenhouse gases emissions from 2020 onwards, Europe will be increasingly dependent on its second most important fuel – natural gas.
Should NS2 become operational in 2020, the continent’s dependence on Russia will increase, going against the objectives of the EU Energy Union. The options of LNG, the Southern Gas Corridor and the Trans Adriatic Pipeline (TAP) project, which will supply Europe with Caspian gas are crucial for the EU’s diversification of supplies and routes, and for Europe’s long-term energy security. Diversity in gas supplies will create more flexibility of choice and competitive pricing for European industry and consumers.