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Expert Survey Poll: What does the inauguration of the Nord Stream Gas Pipeline mean for the energy security of Europe?[Over]

February 28, 2012 04:15AM

by Marat Terterov,
EGF Director

1. What does Nord Stream mean for the energy security of the European Union?

There seems to be a strong debate about the impact of Nord Stream on EU energy security. On the one hand, we have the “side of the house” which feels that the project will make European gas consumers even more dependent on Russian gas supplies than they already are and that it will further strengthen Russian’s “grip” on the European gas imports market. On the other hand, we have those forces arguing that the project will strengthen Europe’s energy security, since Russia itself has – for the most part- proven to be a reliable supply partner and the project will allow Gazprom the option of bypassing Ukraine, hence reducing the likelihood for Europe to be negatively impacted by gas disputes between Kiev and Moscow. Both sides of the house have a point in this context, and much depends on whether one trusts Russia in its intentions or not. While we do not as yet have a clear answer as to who will come out victorious in this debate, what the inauguration of Nord Stream clearly demonstrates is how politicised the question of Russian gas supplies to the EU has become. The jury will be out as to whether Nord Stream is a political project or a commercial project for the foreseeable future. Despite the fact that I personally feel that this is “real business, with real investments”, the project was politicised by various affected parties right from the outset and this is likely to remain the case for some time yet. But then again the gas-energy business has never been purely business in the commercial sense as most of the stakeholders involved are not purely businessmen. Just have a look as to who was appointed the Chairman of Nord Stream AG several years back.

2. Is the inauguration of Nord Stream likely to have an impact (for example, reduction) on the status of Ukraine as a gas transit state?

Yes, I think it will, but this will be mostly psychological and political at first. Many experts claimed (particularly the “Russia bashers” amongst them) that Nord Stream was a kind of smoke screen developed by the Kremlin in order to extract concessions out of Ukraine, as well as Poland and the Baltic States (and possibly the EU as well). This is not surprising, since Gazprom top management proposed a Poland bypass gas pipeline project at around the time of the collapse of the USSR (ie, about 20 years ago) as a means of extracting better prices from Polish gas consumers. Back then the Poles managed to come to terms with the Russians on a gas supply deal and Moscow did not push forward with the bypass project. Moscow’s smokescreen worked. In more recent years, particularly after the Jan 09 gas crisis, Gazprom has justified the Nord Stream by pass project by arguing that a transit dispute with Ukraine cost it into the billions of Euros in lost revenue per each day (of the dispute). Whether this argument is genuine or not is debatable. However, the fact that the project is now coming on stream will surely give Gazprom more options in dealing both with Ukraine and with the Europeans. We see this to some degree with the Blue Stream pipeline project across the Black Sea to Turkey, which gives Gazprom options to ship gas to Turkey via two diverse routes (and in this case Gazprom does not have a transit problem with Bulgaria). All of this will put Russia into a stronger bargaining position with Ukraine and help it extract the concessions it desires from Kiev.

3. Will the launch of the Nord Stream have an impact on gas relations between Ukraine and Russia, and between the European Union and Russia?

We are already seeing an impact. In November 2011 Russia and Ukraine are in the midst of re-negotiating their January 2009 gas supply agreement. The price which Ukraine currently pays Russia for its gas is not sustainable for the Ukrainian economy in the longer run. Kiev understands this. Kiev also understands that it will start to lose substantial transit revenue in the event that Russia starts to re-route Siberian gas to Europe via Nord Stream. It also understands that South Stream, which many viewed to be a similar charade to Nord Stream several years back, may yet be a reality. All of this puts Kiev into the same weakened bargaining position to which I have alluded above. In practical terms, we are now seeing this through the fact that Kiev is apparently showing signs of making larger concessions to Moscow than it would have in the past. Such concessions include (potentially) entering into a gas consortium arrangement to manage Ukraine’s gas transportation assets, paying for Russian gas supplies in roubles and employing much more positive language in its negotiations with Moscow than would have been the case in the past (ie, agreeing to honor all of its price commitments to Moscow). Russia seems to be getting the upper hand on Ukraine in terms of their gas negotiations, which, given Ukraine’s “between a rock and a hard place” like relationship vis a vis Moscow and the West, is not surprising. We also must take into account Ukraine’s structurally weak government finances and a state captured by powerful business clans. None of this bodes well for Kiev in the mid-term. However, Ukraine does have one ace up its sleeve which Moscow will continue to acknowledge in the longer run. The Ukrainian corridor will remain the strategic/logical route for Russian gas supplies for Russian gas to Europe for as long as the EU will be Russia’s top gas export market. Thus despite Moscow’s stronger bargaining position after the inauguration of Nord Stream, Kiev will remain a tough nut to crack in terms of the type of concessions Moscow really wants and I am not sure that Moscow will have everything its own way.

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