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Bloomberg: "Nord Stream - 2" will soon suit all

Bloomberg: "Nord Stream - 2" will soon suit all

20.07.2018
Tags:Nord Stream, Economics, Gas, Russia, Europe, Ukraine, EU, Analytics, Germany, Energy

The policy of the German coalition and the EU proposal can make it so that the project "Nord Stream - 2" will suit (almost) everyone.

The truth is not so far away when the project "Nord Stream - 2" will double the export of Russian natural gas to Europe via the main pipeline in the Baltic Sea. This key element of the energy strategy of Vladimir Putin is now being subjected to double pressure: from the side of Germany, where complex coalition talks are conducted, and by the European Commission. These factors have much more chances to fundamentally change the project than the US and Eastern European countries that previously tried to disrupt it.

The project "Nord Stream - 2" worth 9,5 billion euros (11 billion dollars), according to the plan should follow the path of the "Nord Stream - 1" - a pipeline stretching from Vyborg near St. Petersburg to Greifswald in northeast Germany and completed in 2011 year. The throughput capacity of the pipeline will be 55 billion cubic meters of gas per year, which will allow Gazprom, now the only shareholder of the project, to supply more fuel to Europe and not pay transit fees to Ukraine. A little less than half of the 178,3 billion cubic meters of gas supplied by Russia to Europe last year passed through Ukraine, which required transit payments of 3,1 billion dollars. This income is of vital importance for Ukraine. State-owned oil and gas company Naftogaz earlier this month reported that in the first nine months of the year taxes paid by the company for gas transit exceeded public spending on health care.

Solidarity with Ukraine is an important issue for Europe, which officially supports the desire of Ukrainians to join the EU. However, European countries have other reasons to boycott the "Nord Stream - 2". Poland is struggling with the project, which, with a view to security, wants to diversify its energy supply. Slovakia also has enough reasons for discontent: it is about to lose transit revenues and profits from the resale of Russian gas to Ukraine, which refused to directly buy it from Gazprom. The US, which hopes to increase the supply of liquefied natural gas to Europe, but can not yet compete with Russia in price, unambiguously pointed to the promotion of exports as the reason for its opposition to the "North Stream - 2" in the current law on sanctions against Russia.

Meanwhile, the latter argues that the infrastructure of the Ukrainian pipeline suffers from chronic underfunding (which is true) and requires about the same amount of money to repair as necessary for the construction of the "Nord Stream - 2" (which is doubtful: according to the World Bank, these costs should not be exceed 5,5 billion dollars). The Russian proposal looks quite simple: German consumers, who today pay for energy almost the most in Europe after the country has decided to shut down its nuclear facilities, will receive cheap gas. The previous German government adamantly defended the "Nord Stream - 2" as a purely commercial project and remained deaf to political arguments. However, everything can change with the formation of the new coalition of Chancellor Angela Merkel, negotiations on which are currently conducted with the liberal Free Democratic Party and the Greens.

The "Greens" strongly oppose the "Northern Stream - 2" primarily for environmental reasons. They argue that the pipeline poses a danger to the Baltic Sea and wild beaches in northeastern Germany, which are a popular holiday destination. They also insist that the government more rapidly introduce renewable energy sources, rather than use Russian gas as an unreliable support while Germany gradually abandons nuclear energy. Solidarity with the eastern neighbors - which is not a priority for the center-right party of Merkel and the liberals - is also important for the "green" loyal to the left. Thus, they made the issue of the "Nord Stream - 2" one of the most sensitive topics in the coalition negotiations. Merkel may be tempted to compromise on the Northern Stream - 2, in order to bring partners closer together to resolve more controversial issues, such as refugee rights for family reunification - because of which the FDP and the Greens are ready to cling to each other into the throat.

A compromise may be based on a proposal that the European Commission put forward on Wednesday. In accordance with this "Nord Stream - 2", until now considered an offshore project, will fall under the EU regulations on natural gas. This law requires that pipeline projects ensure equal access for gas producers, adopt European tariff regulation and "share" ownership and production. If this proposal, which requires the approval of Member States and the European Parliament, will come into force, Gazprom, apparently, will have to sell the shares to the current financial investors of the Nord Stream - 2: German Uniper and Wintershall, Austrian OMV, French Engie and Dutch-British Shell.

The Commission, which is extremely concerned about the issue of European cohesion, calls for negotiations with Russia to find out whether it will follow the proposed rules. If Germany accepts this proposal, it will be a serious setback for Gazprom, which prefers to control the transmission infrastructure and fears that EU tariffs may make the new pipeline unprofitable even compared to the Ukrainian route. When Europe insisted on similar rules for the "South Stream", which they intended to launch through the Black Sea to southern Europe, Russia preferred to turn the pipeline towards Turkey.

However, this time there is no such alternative. If Germany agrees with the Commission and the proposed change in the rules becomes lawful, Russia will either need to completely abandon the project, or accept new conditions. The last scenario would be optimal for all, with the possible exception of Ukraine and liquefied gas producers in the United States.

Production of its own natural gas in Europe is falling, and North African producers such as Algeria and Morocco can not significantly increase supplies. Meanwhile, despite tremendous progress in renewable energy, the European Union still uses too much solid fossil fuels, such as coal. In 2015, the source of 24% of electricity generated in Europe was solid fuel.

The use of more natural gas is a quick way to phase out the most "dirty" energy. Given the extent to which the European energy structure is diversified, the EU does not risk becoming totally dependent on Russia, especially when LNG producers are waiting for their hour and are working to reduce costs. In addition, the facilities for obtaining energy by burning coal will be relatively easy to return to operating mode if there are any disruptions in supplies. In any case, Russia, more than ever dependent on energy exports, is hardly ready to shut gas to Europe and thereby lose its confidence, even if the current cold war with the West is becoming increasingly bitter. If Russia does not want to lose an extremely important European market, it is in its strategic interests to comply with European rules. She proved this by her cooperation with the European Commission when she presented antitrust requirements to Gazprom, and most likely will prove it again if the gas directive is distributed to the "Nord Stream - 2".

As for Ukraine, its recent proposal to reduce tariffs since 2019, when its current contract with Gazprom is ending, indicates a possible continuation, albeit less, of a flow of income from the transit of Russian gas, especially if Europe increases consumption. Who knows: perhaps, competition will finally give impetus to reforms that will attract investment in a country where too long relied on easy money from transit fees.

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