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Nord Stream 2 15 February, 2018 10:00 am   

Nord Stream 2 without EUGAL will be a pipe to nowhere

The company responsible for the construction of the Nord Stream 2 gas pipeline wants to start a controversial project in the summer. Meanwhile, even if the Russians manage to finish work on time, it is possible that they will not be able to use the new pipeline yet, and thus leave transit through Ukraine – writes Piotr Stępiński, editor of BiznesAlert.pl.

The Russian monopolist is determined to have its flagship project completed in 2019. Gazprom wants the next volumes of gas to flow into Europe, bypassing Ukraine as a transit state, which may lose this status as a result of the construction of Nord Stream 2.

The problem with Nord Stream 2

The optimism of the Russians can be dispelled mainly by the European Commission, who insists on the maintenance of gas transit through Ukraine. It also intends to talk with the Russians about the subordination of Nord Stream 2 to EU regulations. To this end, Brussels intends to obtain a mandate from the member states to conduct negotiations on their behalf. Moscow argues that the Commission’s actions are dictated by the desire to block the project, despite the fact that the Russians are trying to prove its economic nature. Meanwhile, the Commission wants to ensure that this project is implemented in accordance with its law. According to Gazprom, this means “sabotaging the project” because it feels good only in a situation in which it itself sets the playing field and does not have to adapt to anyone. That, on the other hand, may change at the moment when the gas directive can be revised and the definition of the interconnector can be reformulated. Then the whole pipeline will have to be subject to EU regulations, which will affect the interests of Gazprom itself.

The Russians are also trying to avoid the impact of Denmark on the construction of Nord Stream 2. By the end of November 2017, the parliament adopted a bill that gives the Danish government a green light to reject pipeline projects due to security or foreign policy concerns. The gas pipeline that Russia has been pushing through from the beginning of the year may be subject to regulations that will force Gazprom to revise its route. Even though the company argues that Danish legislation will not affect the implementation of the project, Allseas (a company hired for building the gas pipeline) claims that it will increase construction costs by 5 per cent. Eventually, this would mean that, instead of the assumed 9.5 billion euros, the Russians would have to pay almost 0,5 billion euros more. Increasing expenditures on Nord Stream 2 could be a problem for Gazprom. The more so because the company is involved in several major infrastructure projects (Turkish Stream pipelines and the Strength of Siberia – ed.), And moreover, the sword of Damocles is hanging over Nord Stream 2 in the form of a threat of imposing sanctions by the United States. Some of the existing partners of the Russian monopoly in the construction of the gas pipeline acknowledged that if sanctions were imposed, they could withdraw from financing the project. In this situation, Gazprom could not bear additional costs.

The problem with EUGAL

The problems with the implementation of Nord Stream 2 do not end here. Gazprom may encounter more. The construction of the gas pipeline will be meaningless unless a land infrastructure is built to enable collection of the raw material that is to be transmitted via this gas pipeline. As in the case of Nord Stream 1, the starting point on the German coast is to be in the same place, so far from the existing distribution network and potential recipients of Russian fuel. In the case of the first two strands of the Nord Stream gas pipeline, it was necessary to develop the transmission infrastructure in Germany, which is why the OPAL and NEL gas pipelines were built. However, as far as Nord Stream 2 is concerned, it will be the EUGAL gas pipeline, whose capacity is to amount to 51 billion cubic meters annually.

The company Gascade Gastransport GmbH is to be responsible for the construction of 485 km of the pipeline, whose shareholders are German BASF and Gazprom, who hold 50,02 and 49,98 per cent of shares. Fluxys Deutschland GmbH, Gasunie Deutschland Transport Services GmbH and Ontras Gastransport GmbH will help in the implementation of the project. Each company received 16.5 percent of shares. Gascade retained the controlling stake from 50,5 per cent of shares. According to Gascade’s estimates, the whole project is expected to cost about 3 billion euros.

However, time remains the problem. According to the assumptions, in 2019 Nord Stream 2 is to be launched. Until then, the EUGAL gas pipeline will be ready only in half. At the same time, this is not the effect of delays, but a pre-set schedule.

Thus, it will probably turn out that in 2019, despite the construction of Nord Stream 2, Gazprom will not be able to pump additional gas volume on the bottom of the Baltic Sea. What’s more, it seems unlikely that the Russians will carry out the announced second branch of the Turkish Stream gas pipeline, through which Russian gas would go to the Old Continent from the south. Moscow expects the European Union to offer iron guarantees on the route that Brussels did not provide. Therefore, the plan to deprive Ukraine of the role of a transit state in 2019 with the help of Nord Stream 2 and Turkish Stream seems difficult to achieve. Theoretically, any delay in the construction of the Baltic bus will, paradoxically, be beneficial for Gazprom, because it will enable it to complete the land infrastructure that would allow the receipt of gas from Nord Stream 2.

Nord Stream 2 delay? EUGAL delay?

The German association of FNB Gas operators also encourages the construction of the overland branch of Nord Stream 2. In the statement released on Tuesday, it announced the start of a discussion on the network development plan for 2018-2028. It provides for 7 billion euro for investments that are to contribute to ensure the security of gas supplies to Germany in the future. In the document attached to the 195-page communique, EUGAL was mentioned among the proposed projects. In this context, it should be recalled that in July last year the Federal Network Agency (Bundesnetagentur) announced a revision of the gas infrastructure development plan until 2026. As reported by BiznesAlert.pl, the changes suggested that the implementation of five investments related to the construction of Nord Stream 2 should be stopped until the final permission for the mentioned gas pipeline has been issued, which Nord Stream 2 AG has still not received. At that time, representatives of the Agency pointed out that the transmission infrastructure in Germany should be developed only when it is necessary and safe and will not involve additional costs for the recipients.

Nevertheless, the potential delays of Nord Stream 2 may affect EUGAL implementers. Last year, in a letter to the President of the European Commission Jean-Claude Juncker, Gascade together with several other transmission network operators stressed that the delay in the implementation of Nord Stream 2 would have negative consequences. According to them, if the new pipeline through the bottom of the Baltic Sea “is treated differently than other infrastructure projects”, it may create legal uncertainties in the case of projects implemented in the future. In this context, it was emphasized that operators were investing approximately 3-4 billion euros in infrastructure development in terms of the construction of EUGAL.

What matters most to Gazprom is the ability to sell gas, preferably based on long-term contracts that will ensure a permanent market for it. In the new market reality, the Russians will have to be more flexible in approaching their contractors in Europe. Although the companies from the Odra river (E.ON and Uniper) are involved in the implementation of Nord Stream 2 and argue about the profitability of this venture, it is possible to delay it. If it does not happen, the project may be adversely affected by the subsequent implementation of EUGAL.



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