Analyses

 

Nord Stream: the current status and possible consequences of the project's implementation

The decisions taken in November concerning the Nord Stream project (the construction of a direct trans-Baltic pipeline from Russia to Germany), have sent contradictory signals concerning the prospects for the implementation of this priority project for Russia. On the one hand, the fact that the Dutch Gasunie has joined the project has given it a strong political impulse. On the other, however, Sweden and Finland have maintained their reservations concerning the planned routing of the pipeline, and consequently a vitally important issue for Nord Stream remains unsolved.
The information that initial work on the project has been gaining momentum gives the impression that the construction of the submarine section of the gas pipeline from Russia to Germany is about to start. However other, contradictory signals concerning the project's implementation call into doubt the possibility that the work will be carried out as scheduled. In spite of the difficulties, the Nord Stream shareholders do not seem willing to give up the plans to build the trans-Baltic route.
If the pipeline is built, this will increase Europe's dependence on Russian gas supplies.

Signals that the project is progressing

The image of the Nord Stream project improved with the agreement signed on 6 November with Gasunie. The Dutch gas company is to become the fourth member of the Nord Stream consortium by the end of this year (the consortium's new composition will be as follows: 51% Gazprom, 20% E.ON, 20% BASF and 9% Gasunie). The Netherlands has thus joined the group of countries that had previously backed Nord Stream, including Germany, France and Denmark. Companies that have also expressed interest in gas supplies from the new route include Britain's Centrika, Belgium's Distrigas and Spain's Repsol. Another fact which might indicate that the project is advancing is that contracts for the supplies of pipes for the gas pipeline's submarine section have been concluded with Russia's United Metallurgical Company (on 6 November) and with Germany's Europipe (on 8 November). The contract with Saipem, a subsidiary of Italy's ENI which is to build the submarine section, is expected to be signed in early 2008. Contracts have been signed for a greater part of the volume of gas (20.5 billion m3) to be supplied by the first branch of the pipeline, whose total projected throughput is 27.5 billion m3 (see Appendix). Other signals that also seem to demonstrate that the project's implementation is progressing include reports on the fast progress of the construction of the gas pipeline's land section in Russia, and on preparations to put the Yuzhno-Russkoye field (with a planned annual output of 25 billion m3) into operation; gas for the first branch of Nord Stream is to be sourced from there in the initial period.

Factors impeding the project's implementation

However, there are many signals suggesting that the implementation of the project in the currently envisaged shape and according to the current schedule (by 2010) is not certain. The greatest challenge seems to come from the fact that Sweden has refused to accept, and Finland has reservations about, the routing of the pipeline through their exclusive economic zones. Both states reasserted their positions at the meeting of the Nordic Council in Oslo on 7 November. Helsinki and Stockholm called on the consortium to prepare and present environmental impact assessments for alternative variants for routing the pipeline, which would pose less of a threat for the natural environment of the Baltic basin. Bypassing the Finnish and Swedish economic zones does not seem feasible either, because the other Baltic states, especially Poland, Lithuania and Estonia, do not approve the project.
Finally, EU legislation may pose a problem for the project members. So far, they have been unable to obtain an exemption from the principle of third-party access to gas infrastructure (TPA), which is in force on the EU internal market, for the NEL and OPAL gas pipelines that will be built in Germany as links between the European network and Nord Stream (see the Appendix).

Doubts

While striving to implement the project as soon as is practicable, the Nord Stream consortium has still not succeeded in solving several issues that are quite important for the achievement of its objective. For example, the question of the resource base for Nord Stream has not been fully resolved (see Appendix). Initially, the Yuzhno-Russkoye field was to provide such a base, even though its reserves are insufficient to fill the gas pipeline. The Shtokman field on the Barents Sea has for some time been mentioned as a source of gas for the new route, but it will not be put into operation before 2015. By the time production is launched in the Shtokman field, Nord Stream would probably be fed with gas from the currently operated fields in Western Siberia, possibly at the expense of other export routes. Another uncertain issue concerns Gazprom's co-operation with E.ON, one of the German partners of the trans-Baltic project (the agreement with the other partner, BASF, was finalised in October). It is still unclear whether E.ON will be granted access to the Russian fields and on what terms, whereas such access has been one of the principal conditions of its participation in the costly Nord Stream project. The terms of the project's financing (such as the amount of the loan and who will grant it) have not yet been defined. Some progress in this respect was achieved on 6 November when the consortium selected the Societe General?, ABN Amro and Dresdner Kleinwort banks as finance consultants for the project. In their opinion, the loan should be awarded in the second quarter of 2008.

Nord Stream's current status and prospects

There are more and more signals suggesting that preparatory work on the project is accelerating, although the construction of the gas pipeline's maritime section has not yet started. The problems faced by Nord Stream, in particular those concerning the definition and approval of the pipeline's final route, have already forced the consortium to postpone the start date of construction works by six months, from February to July 2009.

Due to the tight schedule of construction work, it seems unrealistic that the first branch of the pipeline would be completed as planned, namely by 2010. This is due to both formal obstacles and the fact that construction of a pipeline on the bottom of the Baltic Sea needs to comply with certain environmental requirements (such as protective periods for Baltic fauna).

The Nord Stream consortium has committed itself to presenting detailed plans and analyses of possible alternative routes of the submarine pipeline. Despite the serious difficulties in getting the states concerned to approve the successive variants proposed by the consortium, giving up the plans to build the pipeline is not an option for Gazprom at the moment. The trans-Baltic gas pipeline is of too great strategic importance for Russia; furthermore, getting it implemented is a matter of prestige for the Kremlin. Replacing the maritime route with a land gas pipeline (such as Yamal 2 or Amber) does not currently seem to be a realistic option. The Russian PM Viktor Zubkov's statement in Minsk, that the project to build a second branch of the Yamal-Europe pipeline might be revisited, should now be treated as nothing more than an element of Russia's tactics in its negotiations with Belarus, Poland and the EU.

The consequences of a possible launch of a new gas transport route from Russia

Launching the Nord Stream gas pipeline would have important consequences for most European countries.
For Russia, the project would be a way to diversify gas transport routes to Europe and reduce Gazprom's dependence on exports via transit countries. As a result of the investment, Gazprom would strengthen and expand its presence in Europe.
The transit countries (Ukraine, Belarus and Poland) would lose an opportunity to strengthen their importance for Russia as transit countries and earn more transit revenue, should the new pipeline be fed with gas from new fields. If it proved necessary to feed the new route with gas from currently-operated fields, the transit countries would not only lose transit revenue as a result of a reduced volume of gas transmitted via their territory, but would also be deprived of an important instrument in their relations with Russia.
For the European Union as a whole, the new pipeline would improve the energy security by increasing the diversification of supplies routes. On the other hand, however, by accepting a Russian project that runs counter to the interests of some European states, the EU would become more susceptible to pressure from the Kremlin. Moreover, launching Nord Stream would widen the current disparities in terms of energy security among the EU member states, which vary in the degrees to which they depend on gas supplies from Russia.

Ewa Paszyc, Agata Łoskot-Strachota, co-operation: Łukasz Antas


Appendix

Selected information on the Nord Stream project

Capacity: 55 billion m3 a year in the variant with two branches. Each branch would have a capacity of 27.5 billion m3.
Implementation date: The start date of construction work on the submarine section (originally 2008) has been postponed until July 2009. The first branch of the pipeline is to be put into operation in November 2010, and the second on 1 October 2012.
Resource base: Originally, the Yuzhno-Russkoye field (estimated at 700 billion m3) was to provide a resource base for the new route. However, its output has proved to be insufficient to fill the first branch. For this reason, gas for the Nord Stream will probably come in the initial phase from other Western Siberian fields as well. In the longer term, the Shtokman field on the Barents Sea (estimated at 3.7 trillion m3) is intended to provide the resource base for the Nord Stream.
Project financing: The shareholders' own funds will account for 30 percent of all expenses. Only non-Russian shareholders are expected to pay their contributions in cash, while Gazprom has the option to select a different form of financing (such as assets). The remaining 70 percent of expenses will be financed from loans granted by a consortium of banks to be established before autumn 2008. The credits and loans, which should be repaid by 2032, may be secured with assets and shares in Nord Stream itself, as well as rights to export agreements. According to preliminary estimates, the construction will cost around US$8 billion.
Auxiliary infrastructure: Two gas pipelines, NEL and OPAL, will have to be built in Germany to transmit the Russian gas supplied by Nord Stream across German territory. According to preliminary plans, the NEL pipeline transmitting gas to western Germany and the Netherlands will be built by 2012, and the OPAL pipeline supplying gas to Bavaria and the Czech Republic will be completed by 2010. NEL is planned to have a capacity of 20 billion m3, and OPAL's is planned at 36 billion m3. The NEL pipeline will be owned by a company of Wingas (75%) and E.ON (25%). OPAL will have a similar shareholding, with 80 percent of shares held by Wingas and 20 percent by E.ON.
The manner in which NEL and OPAL will be financed has not yet been agreed. Both projects are currently in the authorisation phase.
Concluded contracts for supplies of gas from the Nord Stream as of 2011: with Denmark's DONG Energy for 1 billion m3 a year with an option to increase the volume of supplies; with E.ON Ruhrgas for 4 billion m3; with Gaz de France for 2.5 billion m3; with Gazprom Marketing & Trading (a British subsidiary of Gazprom) for 4 billion m3; with Wingas (a Russian-German company in which Gazprom holds 50 percent of shares) for around 9 billion m3 a year.

Łukasz Antas

 

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