Europe Stands Divided On Gazprom’s Nord Stream 2 Pipeline

Nord Stream 2—Gazprom’s pipeline project to twin the existing Nord Stream pipeline between Russia and Germany via the Baltic Sea, is dividing European nations and European Union (EU) institutions—with one group cheering on the resultant cheap gas, and the other group fearing Russia’s increased grip on the region.

Proponents and supporters of the project argue that Germany and neighboring countries will get cheap, reliable gas from Russia that will complement—not replace—gas from existing supply routes.

Opponents of the project argue that Russia’s Gazprom will increase its share of the European gas market, which would boost its already dominant position in Central and Eastern Europe, and therefore undermine the efforts of some European countries to diversify their gas supplies away from Russia.

Opponents also see Nord Stream 2 as Moscow gaining political leverage over the EU.

Nord Stream 2—currently planned for completion by the end of 2019—faces stiff opposition from Poland, the Baltic countries, and several other EU countries.

Germany, on the other hand, which will be the main beneficiary of the new gas supplies, says that the project is just business, and should not be made political. Denmark is now looking to amend a legislation that would block pipelines in its waters, citing security and foreign policy concerns along with environmental concerns.

The EU’s executive arm, the European Commission, wants a mandate from EU member states to negotiate on Nord Stream 2 with Russia. However, legal experts of the Council of the European Union—the EU’s main decision-making body together with the European Parliament—have recently said that there were no legal grounds for the EU to take over negotiations on behalf of member states, because its request for mandate contains “mere political arguments.”

The EU countries are expected to vote on the European Commission’s request for a mandate this fall.

In early June, the European Commission sought a mandate to negotiate with Russia the key principles for the operation of Nord Stream 2, “to ensure that, if built, Nord Stream 2 operates in a transparent and non-discriminatory way with an appropriate degree of regulatory oversight, in line with key principles of international and EU energy law.”

“There is existing, well-functioning gas transportation infrastructure in place to ensure Europe’s energy supply. Building Nord Stream 2, would, at the same time, endanger existing transport routes, notably via Ukraine,” the EC said.

At the end of September, an opinion of the legal service of the Council of the European Union, leaked by Politico, said, referring to the Commission’s request for a mandate to negotiate: “In this respect, the Legal Service recalls in the first place that the notions of ‘legal void’ and ‘conflict of laws’ advanced by the Commission in support of the need for the envisaged agreement do not imply any legal need to negotiate it but contain mere political arguments.”

As early as in June, right after the EC requested a mandate, German Chancellor Angela Merkel said that she saw no need for the EC to have an extra mandate to negotiate with Russia. On the other hand, a total of 13 out of the EU’s 28 member states support such a mandate. According to EU diplomats who spoke to Reuters at the end of June, Germany, Austria, and France—all of which have firms partnering with Gazprom in the Nord Stream 2 project, some offering financial support as well—declined to take the floor in the debate.

In April this year, Nord Stream 2 AG—whose sole shareholder is and will remain Gazprom—signed financing agreements for the pipeline project with ENGIE, OMV, Shell, Uniper, and Wintershall. The five European companies have committed to provide long-term financing for 50 percent of the total cost of the project, which is currently estimated at US$11.18 billion (9.5 billion euro), with each European company funding up to US$1.118 billion (950 million euro).

But between the EC request to negotiate on Nord Stream 2 and the expected EU countries’ vote, the U.S. stepped up sanctions against Russia, which could make financing of the project more difficult than initially expected since Western banks may be spooked by the possible implications of providing financing for a Russian energy project.

A week after the U.S. beefed up sanctions, OMV chief executive Rainer Seele told CNBC that Europe “should not risk security of supply because of sanctions” and that “sanctions are used to misbalance the market principles.” He called upon politicians to seek clarifications on the sanction implications because “uncertainty on the market is really not helpful.”

Last month, Seele was quoted as saying that the new sanctions make it “almost impossible” to finance large-scale Russian projects.

Nord Stream 2 Chief Technical Officer Sergey Serdyukov said last week that sanctions would not delay construction, and that Russia had an alternative route should Denmark block construction in its waters.

Nevertheless, disagreements within the EU, sanctions implications, and the countries who oppose the construction could still delay, or even kill, the project.

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