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 What are the Ramifications of the Nordstream-2 Deal? Gazprom’s Latest Deal May Provide More Questions Than Answers

 Jerry Byers

 The deal recently reached by Gazprom and Western European majors to begin the Nordstream-2 pipeline has left a plethora of policy makers, analysts, and buyers with a wide array of reactions and questions.

According to the deal reached at the recent Eastern Economic Forum in Vladivostok, the proposed Nordstream-2 pipeline should be completed by the end of 2019. The stakeholders in the project include E.ON, BASF, Shell, OMV, and Engie. Gazprom will reportedly hold a 51% stake in the pipeline. The other shareholders will each take a 10% stake with exception of Engie (receiving only 9%). The routing of the pipeline will follow Nordstream-1 from St. Petersburg through the Baltic Sea to Germany, and could have the capacity to deliver 55 bcm of natural gas annually to European markets.

Additionally, Gazprom completed asset swaps with BASF that provides it with additional storage capacity in Europe, and OMV, receiving assets in the value chain.

What are the consequences for the key engaged players?

There are clear justifications for pursuing the deal for Gazprom, who will have more flexibility in meeting existing obligations for gas deliveries to Europe. Furthermore, an exclusion of the often volatile transit states in the process will provide more energy security for countries at the end of the value chain, with Germany seen as a much more stable and reliable transit partner. Moreover, additional supply capacity via Nordstream, the recent auction conducted by Gazprom earlier this month, and acquisition of assets through agreements with BASF and OMV may be a telling glimpse of Gazprom’s plans for adaptation to EU gas market liberalization.

For the Western partners, additional supply capacity will also reduce price risks in the event that European demand for gas rebounds in the next few years. Few alternative suppliers have been secured in Europe’s attempts at diversifying away from Russian gas. The additional pipeline also solves the problem of unreliability of transit.

There has been significant critical response to the deal from the Eastern European transit states, namely Ukraine, Poland and Slovakia, who could be subject to reduced transit revenues. Leaders from the transit states have publicly complained about betrayal by the EU and the lack of solidarity. Their arguments have some traction in the media as Western Europe once more benefits at the expense of its EU brothers in the East and South. The prevailing theme in EU policy coming from the Western members seems to be, “Do as we say, not as we do.”

On the cross-regional scale, the addition of Nordstrem-2 (which, combined with other supply options, surpasses current and foreseeable European demand) seems to successfully undermine the perspectives of Nabucco-like ideas, which began to be voiced again after the cancellation of the South Stream in December 2014.

Overall, despite critique from the Eastern European parties, there are high chances that the project will actually be implemented, since it falls within the strategic priorities of participating companies.

There are still some problematic issues, however.

There are two questions about the role of Nordstream-2 in Gazprom’s strategy. Firstly, what effect will Nordstream-2 have on other planned pipeline activities for Gazprom, namely in the south? The cancellation of South Stream was announced with the caveat of a Turkish Stream instead. The stated plan is to drop gas deliveries on Europe’s southern border via Turkey. Is that still the plan or can we attach “RIP” to yet another pipeline adventure in the south? Secondly, what about the two proposed pipelines to China? The Power of Siberia is isolated from these developments, because it relies on green fields in East Siberia, but the proposed Altai pipeline would rely on the same fields that have been earmarked for Europe. Can Gazprom secure enough volumes to meet both or does Altai make another return to the scrap heap?

One of the biggest remaining questions is to what extent the Third Energy Package (TEP) will be a problem for the Nordstream-2. According to the TEP provisions, pipeline operators on the EU territory have to reserve part of their capacity to be used by third parties, and this has created problems for OPAL – an onshore pipeline that connects to Nordstream in Griefswald (Germany) and runs to Poland. As a result, OPAL, and consequently Nordstream-1, have not been utilized at full capacity. If the TEP is effectively blocking the full use of existing lines, then how is a twin line going to circumvent this problem? How this will be resolved, again, remains to be seen, and will certainly be a topic for discussion over the next several months.

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