Global Corporations and Economy
Nord Stream 2 Could Provide Europe With Cheaper and Greener Energy; What Stands in the Way?

The politicisation of energy often prevents decisions from being made based on facts rather than incorrect perceptions. Instead of blaming external actors, regulators should start to address the factors they are able to fix within a relatively quick period of time, for example, by softening their attitude toward the administration of energy markets and re-building the confidence of investors in a stable and predictable regulatory environment, writes Valdai Club expert Danila Bochkarev. 

The recently-completed Nord Stream 2 pipeline has again found itself in the centre of media attention. In October, the German Federal Network Agency suspended the certification process on the pretext of the project not being compatible with the energy legislation in place. Swiss-based Nord Stream 2 AG is planning to open a subsidiary in Germany to comply with the EU and German energy regulations. While it is too early to speculate whether this move could further stall the start of Nord Stream 2, it has given rise to numerous statements on the project’s (negative) impact on the European gas market and the future of natural gas transit via Ukraine. The polarisation of public opinion regarding the pipeline’s impact has fundamentally altered purely technical discussions regarding the project. This had led to a misunderstanding of the key commercial reasons for starting the project and the future impact of the pipeline on European consumers. 

Saving costs and optimising natural gas transportation 

Nord Stream 2 offers the shortest route between Russia’s gas-rich Yamal Peninsula and the main gas consumption centres in northern Europe. It is 2,000 km shorter than the transit route through Ukraine. The transportation of gas via shorter and newer infrastructure is faster and cheaper than via Ukraine. Gazprom does not disclose exact transportation tariffs for the infrastructure it owns and operates. However, the company’s financial reports allow us to assess approximate gas shipment costs. The data for transport via third parties’ networks is published by the gas network operators – in this case by Ukraine’s GTSOU and Slovakia’s Eustream. The cost of delivering 1 billion cubic meters (bcm) from Gazprom’s gas fields in western Siberia via Ukraine and Slovakia to the Baumgarten gas hub in Austria reaches $41-$42 million, while the cost of transporting 1 bcm from Yamal Peninsula to Germany via Nord Stream 1 barely reaches $23 million, thus making it over 60 % cheaper. The Nord Stream 2 costs are likely to be of the same magnitude. 

Nord Stream-2 Gas Pipeline
The total design capacity of Nord Stream and Nord Stream-2 is 110 billion cubic meters of gas per year

Environmental issues 

The introduction of the EU Carbon Border Adjustment Mechanism (CBAM) might in the future lead to the direct and indirect taxation of carbon emissions, including from gas transportation activities. Therefore, a decrease in the carbon footprint from energy transportation is an issue of paramount importance for Gazprom. New pipeline infrastructure will help reduce the company’s carbon footprint. According to Frontier Economics’ models, carbon footprint of gas transported via Ukraine is over 60% higher than along the Nord Stream route. Nord Stream 2 also has a role to play in the EU’s energy transition. Europe will remain dependent on imported hydrogen and other low-carbon gases in order to achieve its climate policy objectives. The supply of hydrogen via the pipeline network is not science fiction. The CEO of Nord Stream 2, Matthias Warnig, has anticipated that the pipeline would be ready to transport hydrogen in 10 years. Earlier, Andreas Schierenbeck, then CEO of the German energy company Uniper, confirmed that potentially, the share of hydrogen in the blend transported via Nord Stream 2 could reach 80% (with methane making up the remaining 20%). There is also a direct link between Nord Stream 2 and Europe’s energy transition, a link recently recognised by top EU diplomats. In an opinion piece published by RBC, the German and French Ambassadors to Russia portrayed a future “green” Russia supplying hydrogen to Europe via the Nord Stream 2 pipeline.

Russian Industry and the EU Carbon Border Management Mechanism
Danila Bochkarev
There is no need for Russia to copy the EU green policies regardless of whether these are economically feasible, efficient and fit for the domestic market and the country’s national goals. Massive subsidies for solar and wind might be less efficient both from the climate and economy point of view than simply improving energy efficiency and increasing usage of gas and hydrogen in power generation. Russian companies should not just “import” the EU approaches to carbon management – instead they should use diplomatic and public relation tools to get their concerns heard by the regulators in Beijing, Brussels and Washington, writes Valdai Club expert Danila Bochkarev.

The project is not set to derail the EU energy market and will benefit consumers

There is a lot of misunderstanding in the media and political circles about the function of the EU energy markets and the ability of external players to derail existing market mechanisms. The expansion of the EU’s LNG plays an important role in mitigating any potential security of supply risks, while existing regulations guarantee (with rare exceptions that prove the rule) safe, secure and affordable energy supplies to the customers and to shape the energy companies’ behaviour. In this regulatory context, the energy companies have an interest to play by the rules as those who do not want to comply are simply losing their market share and clients. Every official metric used by the European regulator (ACER reports) and the relevant infrastructure association (ENTSOG Security of Supply Simulation) has shown that market integration, supply security and resilience are substantially improving, even as Russian gas imports have inched up. Additionally, a study by the Oxford Institute of Energy Studies also mentioned that new Russian gas arriving in Germany might be the best option to offset any possible shortfall of supply from alternative sources. Last but not least: a study by Frontier Economics/Institute of Energy Economics stressed that gas prices in Europe, in the case of Nord Stream 2, are 0.77 EUR/MWh lower than when the pipeline isn’t used.

Gas transit via Ukraine is not over

Pipelines are not just about annual flows – daily capacity is of equal, if not greater importance. Demand on the coldest day of the year can be over three times higher than demand on the warmest day. Therefore, with a full utilisation of non-Ukrainian routes during peak periods, Ukraine will remain “the only transit route with spare capacity in times of peak winter demand”. Energy transition in Europe and the shutdown of nuclear might increase the mid-term demand for gas in Europe. For example, Germany’s Chancellor Olaf Scholz said that Germany needs to build new gas power stations to guarantee energy security as it is planning to phase out nuclear and coal power plants. This trend will intensify the utilisation of multiple routes, including both Nord Stream pipelines and the Ukrainian network. However, the utilisation rate of the Ukraine route will depend on the demand for gas in Europe and transportation conditioned offered by Ukraine’s network operator. Currently, Ukraine’s transit fee (US$2.66/100 km/1,000 cm) is 60 % higher than Nord Stream 1 costs (US$1.67/100 km/1,000 cm). 

The pipeline also got unjustified negative publicity amid high energy prices in Europe. Numerous EU and US politicians accused Gazprom of market manipulation, suggesting that it was a move linked to Russia’s push to proceed with Nord Stream 2. Objectively, the price surge was due to a whole spectrum of market and regulatory factors that have coalesced to form this perfect storm, but the politicisation of energy often precludes the making of decisions based on facts rather than incorrect perceptions. Instead of blaming external actors, regulators should start to address the factors they are able to fix within a relatively quick period of time, for example, by softening their attitude toward the administration of energy markets and re-building the confidence of investors in a stable and predictable regulatory environment.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.