Progress of Nord Stream 2 and Its Role for Russian Gas Exports to the EU

Opponents trying to prevent Nord Stream2, especially from Poland, often claim that the project has no economic rationale and it is mainly a politically motivated project; they try to portray Ukrainian transit as the better economic solution, writes Ralf Dickel, Senior visiting research fellow at the Oxford Institute of Energy Studies, former Director of Transit and Trade at the Energy Charter (2004 – 2010).  

Permitting procedures hold no obstacles to constructing Nord Stream 2

Nord Stream was exemplary in meeting all the environmental and safety standards required by the rules of the countries, whose EEZ (Exclusive Economic Zone) or territorial waters it crosses. Nord Stream will follow the same route and will not raise substantially new environmental and safety issues. It is therefore reasonable to assume that any permits based on environmental and safety standards will be issued or confirmed in the near future.

The discretionary decision by the Danish Foreign Minister whether to follow the recommendation by the Danish permitting authorities might force Nord Stream 2 into a route using only the Danish EEZ (instead of also using the territorial waters of the Danish island of Bornholm, like Nord Stream). While this would increase the costs and delay the project, it would not stop it. It is completely unclear how Denmark could possibly benefit from the discretionary decision of its Foreign Minister not to allow using its territorial waters.

Nord Stream 2 brings increased security of supply and lower market prices for all EU countries

The EU’s infrastructure and market regulation have progressed to the point where the EU internal market is fully functional (with some remaining issues in its north-eastern and south-eastern periphery, likely to be solved by 2020). As shown in the EWI study “Impacts of Nord Stream 2 on the EU Natural Gas Market” [1], Nord Stream 2 will increase competition with LNG, resulting in lower competitive prices for all of the EU and for each EU country, including the littoral countries of the Baltic Sea. The Ukrainian transit system has an old design with a high Green House Gas footprint, and it continues to deteriorate due to the lack of maintenance. Continuing to rely on it in the future risks curtailing the import of competitive Russian gas and thereby making the EU dependent on more imports of more expensive LNG. The major beneficiary would be LNG producers, mainly from the US. Nord Stream 2 will reduce substantially such risks.

There is no economic or environmental rationale for the Polish opposition to Nord Stream 2. Efforts by Poland to prevent Nord Stream 2 in favour of maintaining present transit volumes through Ukraine can only be explained by political motives.

The transit position of Ukraine as a result of the dissolution of the Soviet Union

Today’s transit pipelines of Ukraine were originally built as export pipelines in the 1970s (Soyus) and 1980s (UPU, Progress, Black Sea line) for Soviet gas committed under long-term contracts (LTCs) with customers in in the EU and Turkey. They all crossed Ukraine as the westernmost Soviet republic and, except for the Black Sea line, all headed to Uzhgorod as the westernmost point of it (also in view of the large storage capacity close to it). The option of offshore pipelines though the Black and Baltic Sea was not available at that time for technical and economic reasons.

Nord Stream 2: Catch-22 for Germany Nora Topor Kalinskij
Cancelling Nord Stream 2 would be a colossal blow to Russian-German cooperation in energy supplies and to German credibility in any future negotiations with Russia, both on the state and the business levels.

The dissolution of the Soviet Union and, in parallel, the split of the former Unified Gas Transport System resulted in an exclusive gas transit position of Ukraine, with Russia dependent on Ukrainian transit to fulfil its delivery obligations inherited under LTCs.

Already in the beginning of the 2000s, the World Bank warned Ukraine not to overplay its exclusive transit position, or to risk alternative routes being built.[2]

The Ukrainian system was not modernised nor well maintained and until 2006 a quasibarter system was in place, where Ukraine provided transit services against the delivery of gas at low prices. As a result, Ukraine became used to a transit rent without investing into the reliability of the system and without offering competitive transport conditions and tariffs. Meanwhile, offshore pipelines made technical and economic progress, offering the option of Russian gas exports with own investment and avoiding troublesome transit countries. The Ukrainian transit system continued to be ill maintained and kept on eroding, but retained a transit position, necessary for the fulfilment of the obligations under Russian LTCs.

Future role for Ukraine as a provider of flexible and competitive transit services

The current total exports of Russian gas to the EU already exceed the total capacity of Nord Stream 1 and 2, Yamal Europe and Turk Stream 2. Therefore, there is a role for Ukraine to provide swing transit for higher EU gas import demand (e.g., due to the fast decreasing domestic EU production). This would allow Russian gas to compete with LNG, but would also provide backup for the northern and southern pipeline corridors for Russian gas, so long as such transit is provided as a competitive and reliable service. For Ukrainian transit to carry on in the long run, any solution must be based on an economic rationale and not on a transit rent seeking position or on political trade-offs.

From an economic point of view, the opposition by Poland and Baltic states to Nord Stream 2 supports the continuation of the rent-seeking position of Ukraine trying to exploit its special transit position. This goes against the principles of GATT Article V and against providing a competitive and reliable transit service in line with EU rules (which Ukraine is obliged to follow as a member of the Energy Community Treaty).

It would make economic sense to ensure the reliable operation of at least one large transit line, e.g., the Progress pipeline or the Urengoy-Pomaru-Uzhgorod pipeline. Each has a capacity of ca 30 bcm/a, able to replace one of the northern pipelines or Turk Stream 2 and / or to provide extra export capacity to satisfy extra EU import demand. That is in the economic interest of all parties involved: Russia would be able to deliver extra volumes to the EU beyond the base load of the new pipelines; the EU would be able to benefit from Russian gas competing with LNG; and last but not least, Ukraine would earn income from providing a competitive service and would prove its trustworthiness to the international investors’ community.

[1] available at:

[2] Ukraine: Challenges Facing the Gas Sector , Word Bank report September 2003, item 102 ff…

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