Pipelines, for a long time, were the most important method of transportation for natural gas. This fixed form of infrastructure has the advantage of lower transportation costs in the long-term. The disadvantage, however, is the dependence of producers on a limited number of buyers and for consumers a limited number of suppliers. With this in mind, few pipeline projects are as contentious as Nord Stream 2, a project that will increase the dependence of the EU on Russian gas in a tense geopolitical environment. Despite opposition, the project looks to be progressing according to plan.
Gazprom, the owner of the pipeline, and its Western investors, notably Shell, OMV, Wintershall, and Engie supported by the German and Russian governments, are facing a barrage of criticism from Eastern Europe, the U.S. and the European Commission. Despite pressure to cancel the project, recent developments have increased the likeliness of the pipeline being completed.
When completed, Nord Stream 2 will have a capacity of 55 bcm and run parallel to the original Nord Stream 1 pipeline. Dwindling reserves in the North Sea region increase the necessity for imported natural gas. Furthermore, the rising importance of environmentalism and the phasing out of coal has increased reliance on natural gas as a relatively clean fuel to supplement renewables.
However, fear of Moscow using gas as a weapon prompted the European Commission to attempt to obstruct Nord Stream 2 using legal and political tools. But so-far efforts have failed due to a lack of jurisdiction and opposition from Germany. Despite pressure from a unified Eastern European group supported by the Commission, Berlin is holding its ground. Germany’s position is overtly economic with some political considerations regarding the U.S.
The German economy has a strong manufacturing industry. Cheap energy is necessary to keep costs low and German products competitive. Berlin has been adamant that the pipeline is a commercial and not a political project. Despite unequivocal opposition from Washington, support for Nord Stream 2 remains solid within the German establishment. Politically, Chancellor Merkel cannot afford to look weak in the eyes of her constituency and her European partners by giving in to President Trump. However, the Germans will make a decision concerning the location of their first LNG terminal by the end of 2018 in what Peter Altmaier called “a gesture to our American friends”.Related: $100 Oil Is A Distinct Possibility
Gazprom’s position on the European market is solid as it has proven to be a swing producer with significant spare capacity to balance the market. During the winter season of 2017/2018 Europe was hit by extreme weather during which Gazprom provided additional supplies to keep homes warm and factories in business.
Nord Stream 2 fits with the company’s strategy to replace depleting European reserves while at the same time serving the Russian state’s interests. The latter, however, has negatively impacted the market value of the Russian giant. Right before the economic crisis of 2008, CEO Alexei Miller was sure the company would reach a market capitalization of one trillion from $340 billion. Since then the value of Gazprom has plummeted while that of Novatek’s has risen significantly. Now, both companies are valued at around $50 billion. This is all the more interesting as the latter’s production and proven reserves are just a fraction of Gazprom’s.
Despite Gazprom’s considerable capacity, the company is valued at much less than it was ten years ago due to the Kremlin’s influence. This adds to the fear some Westerners have concerning Nord Stream 2. The most vocal states of this group, Poland, Ukraine, and the U.S., have been accused of secondary motives: U.S. companies are looking for additional LNG buyers, and Poland and Ukraine stand to lose billions in transit fees.
Construction of Nord Stream 2 has already started. Until recently most activities had been limited to onshore construction and work in the territorial waters at the Russian departure point near St. Petersburg and the German area near Greifswald. However, on September 5th the ship Solitaire with its 420-member crew started welding 12-meter, 24-ton pipes on-board. Working around the clock, seven days a week, the ship is able to lay 3 kilometers of pipeline a day and finish the 1200 kilometers project in 400 days.
The chances of stopping Nord Stream Two decrease with every pipe that is laid on the seabed. All legal and political options within the European Union have been spent and potential American sanctions would further strengthen the resolve of the German government not to look weak. Either way, Gazprom seems to have won this round.