Europe Doubles Down on Russian Gas

BY KEITH JOHNSON

SEPTEMBER 11, 2015

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Europe Doubles Down on Russian Gas

After years of talking the talk of reducing reliance on Russian energy, why is Europe now seemingly poised to cement its dependence with a huge new pipeline across the Baltic?

Europe Doubles Down on Russian Gas

Europe has spent years trying to wriggle free from its dependence on Russian energy and the whims of its mercurial president, Vladimir Putin. So why is the continent signing up for a new gas pipeline that will keep Europe hostage to Russian energy shenanigans and outright blackmail for decades to come?

Russia’s multibillion-dollar plans to expand the capacity of the existing Nord Stream pipeline across the Baltic Sea to Germany, announced earlier this year, are taking shape faster than most observers expected — and stand in stark contrast to the bevy of other stillborn energy projects Russia keeps announcing.

Top-flight Western firms such as Shell, E.On, BASF, and Engie (formerly GDF Suez) have banded together with Russia’s Gazprom to double the capacity of Nord Stream, with hopes it will be operational by late 2019. If completed, the 10 billion euro project would enable Russia to finally bypass Ukraine as a transit country. That might be good for Russia, which hates Ukraine being in a position to meddle with its gas exports, but would increase Kiev’s vulnerability to heavy-handed Russian tactics. It could also leave other Eastern European countries in the lurch because they’ve been getting gas shipped directly west from Russia through Kiev.

The new and improved Nord Stream makes two things clear. First, for all of Russia’s talk of a pivot to Asia, including huge amounts of energy exports, Europe is and will remain the overwhelming priority for Gazprom. Second, for all of Europe’s talk about the need to find new suppliers and reduce reliance on Russia, especially in the wake of the invasion of Ukraine, much of the continent’s energy policy is ultimately in the hands of companies, not countries. That complicates efforts by the European Union and its member states, all constantly prodded by U.S. officials, to find alternatives to further reliance on Russian energy.

“What Nord Stream does is confirm the centrality of Europe in Russian gas thinking. The whole pivot to the East, the idea of the East being built up as an alternative to Europe, it’s going down the tubes,” said John Roberts, a pipeline expert at Methinks Ltd., an energy consultancy, and a nonresident fellow at the Atlantic Council.

The fact that big Western firms are rushing to ink deals with Gazprom to bring additional amounts of Russian gas into the heart of Europe also underscores the way commercial considerations — not grand strategy — underpin Europe’s approach to meeting its energy needs despite years of hand-wringing in Brussels over Europe’s huge and growing dependence on imported fuels.

“You have to separate companies from governments. The whole European diversification effort has largely been a matter for governments,” Roberts said. In contrast, he said, “the only companies who even mention diversification in terms of energy security are those for whom it is naturally good because they have a resource that they want to exploit.” The companies piling into Nord Stream see it as a “purely commercial decision,” Roberts said, divorced from any wider considerations of Europe’s energy security.

The decision to double Nord Stream’s capacity, announced in June, came as somewhat of a shock. The notion had been on the table practically since the original pipeline, which can carry 55 billion cubic meters of gas a year, came online in 2011. In 2012 and 2013, Gazprom talked up the option of doubling Nord Stream and serving countries as far away as Britain. But then, as tensions between Europe and Russia peaked early this year, Nord Stream’s expansion seemed to become a casualty of diplomatic and economic sparring.

“There are no plans to expand Nord Stream for now,” a Gazprom spokesman told Bloomberg in January.

Those plans reappeared in a hurry. In June, the Russian energy giant and its Western partners announced they would be doubling Nord Stream after all. But coming amidst a flurry of failed and flailing Russian pipeline projects — two in China, one in Turkey, and one scrapped project in the Black Sea — most observers viewed the Nord Stream announcement skeptically. The existing Nord Stream isn’t even fully utilized. And Europe doesn’t need additional volumes of natural gas right now. What it does need, it can still get from Russia via Ukraine. All that seemed to make the notion of an expanded Nord Stream another of Putin’s pipe dreams.

Yet the expansion now seems very real. In early September, Gazprom and the Western firms signed the shareholder agreement that puts the project on solid footing. Gazprom boss Alexei Miller underscored that participation by Western energy titans burnishes the prospects of what otherwise could have been just another Russian dream.

Now that the project is apparently going ahead, many leaders across Europe are going ballistic. Polish President Andrzej Duda said Tuesday it raised questions about European unity. On Thursday, Slovakia’s prime minister called the pipeline a “betrayal,” while Ukrainian Prime Minister Arseniy Yatsenyuk described it as “an anti-European and anti-Ukrainian project.” He urged the European Union to block the project.

Maros Sefcovic, Europe’s point man for the Energy Union, meant to give the 28-nation bloc a common voice on energy issues, criticized the proposed pipeline Monday, saying that it could unhinge the whole energy balance in the region. After the new deal was announced, the European Commission, the EU’s executive body, pointedly reiterated that finding gas suppliers other than Russia remains a priority for Brussels and that Ukraine should remain part of the transit network to Europe. The commission vowed to “assess any such new pipeline rigorously against the application of EU law.”

The top U.S. energy diplomat, Amos Hochstein, also expressed concern about the impact of Nord Stream’s expansion, telling Reuters last week that the project could allow Russia to cut off Ukraine and jeopardize European security.

But if the project is so at odds with Europe’s strategic goals and seems to have unhinged leaders across the continent, why on earth are European firms supporting it?

One explanation, offered by the Nord Stream companies themselves, is that the additional capacity will be needed to bring in more Russian gas just as Europe’s own reserves start to run empty. Norway, for instance, a big supplier of natural gas to the rest of Europe, expects to see its exports start to dwindle right about the time Nord Stream would be expanded. Gas production in the Netherlands, too, is under pressure. And once tantalizing alternatives, whether natural gas from the United States or from the eastern Mediterranean, have yet to materialize.

But there’s one multibillion-dollar reason that European (and American) energy companies have continued to court Russian business even after a wave of Ukraine-related sanctions meant to kneecap Russia’s access to Western capital and technology: the size of the potential prize. It was no coincidence that on the same day the shareholders in Nord Stream inked their deal, the heads of Shell, BASF, and Austria’s OMV all met with Putin to discuss other juicy business opportunities. There are political tensions between Europe and Russia right now, in other words, but for an energy business that thinks in decade-long timescales, a narrow point of view can be self-defeating for corporate survival.

To be sure, the Nord Stream expansion, like all of Putin’s projects, still faces several hurdles. Any energy project landing in the EU, like the Nord Stream expansion, has to comply with a full suite of European Union regulation. Russia’s inability or unwillingness to comply with EU law ultimately scuttled one of Putin’s other grandiose ideas, the so-called “South Stream” pipeline that would have crossed the Black Sea and fed Europe via Bulgaria. And there are still questions about how much access Gazprom can get to smaller pipelines inside Europe needed to ultimately distribute that gas to all the different countries. Overshadowing all of Gazprom’s plans is the ongoing EU antitrust investigation into the firm’s alleged price gouging and anti-competitive behavior.

There’s also the question of just how much Russia and Gazprom will ultimately need a bigger and better Nord Stream. Russia has long sought to stop shipping gas through Ukraine, which it sees as a troublesome and unreliable neighbor. That quest for a bypass underpinned all sorts of projects, from the now-defunct South Stream, to the sputtering Turkish Stream line across the Black Sea to Turkey and on to Europe, to Nord Stream itself. But Gazprom hinted this summer that Russia may have given up on the idea of bypassing Ukraine altogether, which could make Nord Stream or Turkish Stream — or both — unnecessary.

Still, given the strong corporate backing for Nord Stream, a successful track record building the original pipeline, and the relatively modest price tag, the Baltic Sea pipe seems poised at this point to be Russia’s leading option for maintaining its hold over Europe’s energy supplies.

“In finding a successful way to deliver to Central Europe without using Ukraine, Nord Stream comes in as the best bet,” Roberts said.