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Energy Post Debate: Nord Stream 2 and the Future of the European Gas Market [VIDEO]

Video: On March 8th, Energy Post held a conference in Brussels, sponsored by Nord Stream 2, moderated by our EU correspondent Sonja van Renssen, where Gazprom’s pipeline project was debated in the context of the future of the European gas market. The panellists are: Tim Boersma (Columbia University), Paul Corcoran (Nord Stream 2), Jean-Arnold Vinois (Jacques Delors Institute) and Katja Yafimava (Oxford Institute for Energy Studies). 

Nord Stream 2, Gazprom’s pipeline across the Baltic Sea, planned to be built alongside the existing Nord Stream 1 pipeline, is a hotly contested project, especially in Brussels. On Energy Post, we have published half a dozen articles with various perspectives. See for example Agata Loskot-Strachota’s article “The case against Nord Stream 2”, for a critical view, and Karel Beckman’s article “Who’s afraid of Nord Stream 2?, which argues that there is no good reason to want to stop the project.

At the conference we held in Brussels, four types of arguments were discussed: economic, climate, legal and political. You can click on the video to see the highlights.

Below we discuss some of the arguments that were exchanged.

The economic angle

The economic rationale for the project, said Paul Corcoran, CFO of Nord Stream 2, is first of all the growing “gas import gap” Europe is confronted with. This can be simply visualised in the following graph, based on EU data:

The projected demand in 2035 is of course speculative (see below under “climate angle”), but Corcoran’s projection is not overly optimistic from an industry perspective, as it shows no growthl, and is in line with independent estimates from the European Commission. The decline in domestic EU gas production is virtually a certainty, unless EU countries were suddenly to massively embrace shale gas, which is highly unlikely.

The import gap can be met in various ways, but the main contenders are additional Russian supply and new LNG supplies from the US, with some supplies coming from the Caspian region through the Southern Gas Corridor. Corcoran argued that “the market will decide” which gas it wants to buy.

According to Corcoran, Nord Stream 2 will also increase both security of supply and competition in the EU gas market. The main reasons:

  • It provides the most direct access to some of the world’s biggest and cheapest-to-produce gas reserves.
  • Offers an additional transport system to Europe.
  • Adds more liquidity to the market, which may stimulate new connections.

These arguments are based on effects of the pipeline on the EU as a whole. Nord Stream 2 does have different effects on different parts of Europe, though. For North West Europe, and Germany in particular, it is a boost. For Eastern Europe, especially Ukraine (not an EU member) and Poland, access to Russian gas and gas transit will be diminished.

In addition, critics of Nord Stream 2 would argue that bringing more Russian gas to Europe will not increase security of supply, but only make Europe more dependent on Russia. Then again, as Katja Yafimava, Senior Research Fellow at the Oxford Institute for Energy Studies (OIES), said in Brussels, in the end it is Europe’s own choice whether or not to buy the gas: “No one is forced to buy Russian gas.”

The climate angle

Nord Stream 2 will bring more Russian gas to Europe – but does Europe need more gas in the first place, given its ambitions in climate policy?

Jean-Arnold Vinois, energy policy advisor at the Jacques Delors Institute and former Director-General Energy at the European Commission (at the time when Nord Stream 1 was built), argued in Brussels that EU climate and energy policy implies that Europe should reduce gas consumption and imports from external gas suppliers and invest in renewable energy instead.

Paul Corcoran (left) and Jean-Arnold Vinois

“I don’t believe one minute that we will have a consumption of 473 bcm in 2035”, said Vinois, “because that means a complete failure of all the EU energy policy and energy union objectives.”

Vinois pointed out that “In economic terms, the EU has much more interest to develop its renewables capacity than to import gas from Russia or from any other external supplier. Why would you pay an external supplier, when you have the opportunity to use local employment and domestic resources? … And you are reducing your CO2 footprint and improving your security of supply at the same time.”

“These are economic impacts which should be looked at”, said Vinois. “Sometimes it is said renewables are a luxury, but if you see that the reduction of the import bill has been about €40 billion a year and subsidies for renewables around €70 billion, it is still a good investment.” He concluded that “Nord Stream 2 is just an expression of the past”.

Vinois acknowledged, however, that Nord Stream 2 is a private investment that receives no public subsidies. “So if Nord Stream 2 is willing to take that risk, then they should do so.”

Paul Corcoran took the view that gas “can support the transition to a renewable economy”, because it is flexible and the least CO2-intensive of the fossil fuels.

He said gas demand had been affected in recent years by the economic slowdown and the failure of CO2 pricing which has led to gas-to-coal switching (“hardly a success for EU policy”), but was confident that gas demand would be stable going forward. He also said he was “personally skeptical of the potential of biogas”.

The legal angle

A very different discussion took place around the legal aspects of Nord Stream 2.

Yafimava, a specialist in EU gas regulatory affairs, pointed out that there were two issues at stake here. First to what extent Nord Stream 2 should be subject to the Third Energy Package, which requires ownership unbundling and third party access of pipelines, among other things. Second whether Nord Stream 2 conforms to the principles of the Energy Union.

With regard to the Third Energy Package, some such as City Law School professor Alan Riley (see here), have argued that Nord Stream 2, although it is an offshore, import pipeline, should be subject to the Third Energy Package, which would mean severe restrictions on the ways in which it could be used by its owner, Gazprom.

The Nord Stream 2 company rejects this notion and argues that all offshore pipelines that have thus far been built to supply the EU, including Nord Stream 1 and pipelines in the Mediterranean Sea are not subject to the Third Energy Package. To make an exception for Nord Stream 2 would be discriminatory, says the company.

Yafimava said that “there is a strong legal argument that the Third Energy Package does not apply to Nord Stream 2”, but “discussions continue”, she added. “The EU and Member States are hardly able to stop construction of Nord Stream 2 on the basis of the existing acquis [EU law]”, she pointed out.

As Yafimava noted, the European Commission has yet to make any official pronouncement on this issue. Vinois ascribed the silence of the Commission on this crucial matter to “internal differences”.

As to Nord Stream 2’s compliance with Energy Union objectives, Yafimava noted that the Energy Union is not part of the EU acquis and so cannot be used to evaluate the project.

Critics of the project have repeatedly argued that Nord Stream 2 violates the objectives of the Energy Union, such as increased security of supply. President of the European Council Donald Tusk for example has written that “… any new infrastructure should be fully in line with the Energy Union objectives.” But according to Yafimava, these objectives are open to different interpretations and as long as they are not part of the EU law cannot be used as legal arguments against the project: “Any attempt to stop Nord Stream 2 on this basis would effectively amount towards the EU making a political decision.”

Some critics have said that Nord Stream 2 is currently being built in a “legal void”, but Corcoran rejected this notion. He noted that the company submitted a construction permit application in Sweden last year and is expecting to file permit applications in Russia, Finland, Denmark and Germany in the coming months under the respective environmental laws of these countries. Further, the pipeline is subject to UNCLOS (United Nations Convention on the Law of the Sea) inasfar as it traverses international waters, said  Corcoran.

The political angle

Whether or not the EU could or should make a political decision to block Nord Stream 2, or to limit its use, is another bone of contention.

Vinois said that the building of any new major gas pipeline always has a political dimension to it, but he stopped short of arguing that the EU should prevent the pipeline from being built.

The problem of making Nord Stream 2 subject to political decision-making is that the EU’s energy policy has always been aimed at creating a liberalised gas market free from political interference. As Tim Boersma, Senior Research Scholar at the Center on Global Energy Policy at Columbia University in New York pointed out, the EU has been quite successful in creating a competitive gas market structure that allows any supplier to deliver gas to the European market on the basis of the same rules, including Gazprom.  “If the European Commission now does not like the outcomes of [its] liberalised gas market, then we may need a debate about market structure instead”, he said.

Critics of Nord Stream 2 say that the Russian invasion of the Crimea and the war going on in Ukraine have changed the political context fundamentally. The EU, in this view, should support Ukraine against Russian interference. To allow a pipeline to be built that would deprive the Ukraine of an important source of income and leverage towards Russia, would mean to cave in to Russian pressure, so this argument goes.

Boersma wondered whether the EU is really doing Ukraine a favour by helping it to maintain its transit monopoly. The status quo has not really worked for Ukraine, so should we try to maintain it, he asked? Instead he made a plea for economic reform in the country: “A lot of the answers lie in the Ukraine itself. There is a lot of potential there, which could be developed, with the help of European partners.”

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