Squaring the circle of Nord Stream 2

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The planned Nord Stream extension continues to generate vigorous debate, showing the difficulty of marrying aims of cost-effectiveness, social benefit and political acceptability.

A project of Russia’s Gazprom in partnership with a handful of Europe-based energy majors, Nord Stream 2 would double the existing gas supply pipeline’s capacity of 55bcm/year by 2019.

It would also divert transit away from Ukraine and eastern Europe, likely raising network transport tariffs and as a knock-on effect, wholesale gas costs. Countries that would be affected in this way – notably Ukraine and Slovakia – have been vocal opponents of an alternative supply route.

Germany has been supportive of the extension, however. There was tacit acceptance of the project in the country’s latest network development plan, which proposed grid developments based on the assumption Nord Stream 2 will come online.

At the St Petersburg Economic Forum earlier this month, Gazprom put forward its business case for the pipeline – a riposte to the frequent accusation that its aims are purely political. CEO Alexey Miller said that Nord Stream 2 would be more economically efficient than shipping gas via the Ukrainian grid. Gazprom’s production is moving further north, he said, while northwest European production is declining and will need replacement supply. Nord Stream 2 would provide a shorter route to link the two.

This brings us to a prior controversy – there is already unused capacity along the northern Russia-Europe route, on the OPAL string that provides onward transit from the existing Nord Stream. The European Commission has to date held a firm stance on third party access (TPA) to OPAL, thwarting Gazprom’s attempts to obtain 100% use of the pipe. Germany’s federal network agency BNetzA has now approved for a second time Gazprom’s request to use more than 50% of OPAL’s capacity and final say – once again – rests with the commission.

The European Federation of Energy Traders recently came out in favour of allowing the Russian producer full access to OPAL, for the sake of using existing infrastructure in an economic way. “The restriction on usage creates an economic incentive to build more pipelines that are not always necessary,” said Doug Wood, chairman of the federation’s gas committee.

In practical and economic terms, full OPAL access for Gazprom combined with some continued eastern European transit – albeit less than today – would look like a good compromise.

With the European Commission concerned about setting a legal precedent, and Gazprom’s statements about ending gas transit through Ukraine at the current contract’s expiry in 2019, there may not be much room to manoeuvre. Nevertheless, Ukraine’s agency in the matter should not be forgotten – there is still time for further negotiation before the current deal runs out.

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