Nord Stream 2 is being finished

Nord Stream 2 may have become one of the most geopolitically charged energy projects in history, but its completion was inevitable since before construction even begun.

Europe is quickly becoming one of the most important export destinations for gas exporters. Production is decreasing quickly due to political and technical developments. The next few decades are promising for exporters. Nord Stream 2 is arguably one of the most contentious projects currently under development. Denmark recently granted the last necessary permit to start construction activities in its EEZ and analysts now agree that the project’s completion is only a matter of time. In reality, the pipeline’s future was decided long before construction even started due to external factors such as Poland’s decision to diversify away from Russian gas and Western Europe’s determination to turn away from nuclear and fossil fuel production.

Safe but expensive, risky but cheap

The availability and transportation of natural gas are determined by the relative distance between consumers and the production area. A general rule of thumb is that for a distance smaller than 4,000 km or 2,500 miles pipelines are more economic while LNG is more economic for distances larger than that. Political factors, however, trump financial and technical logic. The safety of supply is valued more by countries such as Poland who opt for more expensive alternatives such as the Baltic pipeline.

Historically, the European energy market is dominated by Russia due to its proximity and massive energy reserves. Siberian gas is the most obvious choice from an economic point of view. Politics, however, are what currently dominates the natural gas industry. With that in mind, the persistent support for Nord Stream 2, NS2, by Western European countries and companies, most notably Germany, may appear strange. But a more in-depth look at energy politics in the region and domestic developments, in general, provide somewhat of an answer.

European production is decreasing dramatically, primarily due to the depletion of old gas fields. Also, political motives hamper production such as in the Netherlands where tremors, allegedly due to gas extraction, have reduced political support for the industry. Europe’s biggest single gas deposit, the Groningen field in the Netherlands, will cease operations in 2022. The closure of this gas giant was another reason to support the construction of NS2.

Poland’s push for diversification

Poland is one of the staunchest opponents of NS2. The Eastern European country argues that Moscow is trying to divide Europe by circumventing traditional transit countries in the east and increasing dependency of the wealthier west, primarily Germany. Warsaw though has financial motives to oppose the project because Gazprom is aiming to export its gas directly to Germany instead of through what it considers more “unreliable” countries such as Ukraine and Poland. This measure will cost Eastern Europe billions in lost transit fees every year.

Poland is diversifying suppliers by constructing a subsea pipeline from Norway through the Baltic sea. Denmark recently granted a permit to construct the infrastructure in its EEZ. The pipeline is planned to come online before 2022 when Poland’s import contract with Gazprom ends.  

The import of Norwegian gas will have unintended consequences for other countries’ energy security. The Baltic pipeline is designed to export 10 bcm of natural gas annually. Norway produced 121.7 bcm in 2018, down from 124.2 bcm in 2017. Although production is expected to increase slightly, the pipeline will reduce the availability of natural gas to traditional customers in Western Europe.

Especially Germany, which intends to shut down its nuclear and coal power plants by 2022 and 2038 respectively, requires a steady supply of cheap natural gas to fill the gap and supplement intermittent renewables. Although there is sufficient LNG import capacity available across Europe, cheap piped gas remains the most sensible economic choice for businesses. 

Not so gloomy after all

The discussion concerning NS2 is unavoidably connected to Ukraine because the pipeline's necessity was born due to Moscow and Kiev's conflict over pricing and supply. Ukraine earns approximately €3 billion each year from the transit of Russian gas. Also, Kiev argues that its bargaining position with Gazprom for the extension of long-term gas contracts will be weakened if it loses its strategic transit function.

Despite Moscow’s policy to circumvent Ukraine’s gas infrastructure, the country will retain its importance for European energy security. Kiev will remain important after NS2 begins transporting crude however, with the country having the same export capacity as NS2 and Turstream combined. The country exported 86.8 bcm of gas in 2017 while NS2 and Turkstream have capacities of 55 bcm and 31.5 bcm of respectively.

Almost 150 bcm of natural gas is required to fill Europe’s demand gap until 2025 (see figure 1) and Russia is the only producer with the necessary capacity to become a swing producer. Ukraine’s infrastructure remains vital for Moscow’s strategy to increase exports to the continent and strengthen its position as a strategic and vital energy supplier. The construction of NS2 may have been a blow for Kiev, but the European market is poised to change significantly over the next couple of years and Ukraine still holds plenty of power in this game.

Reference:

https://www.rt.com/business/473294-nord-stream-2-pipeline/