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FT: Nord Stream 2 marks a failure for EU energy policy

14 February 2019
Exploration & production
energynomics

The EU has agreed to tighten its rules on natural gas pipelines — in a way that may force a restructuring of the Nord Stream 2 pipeline project to bring Russian gas under the Baltic Sea direct to Germany. Regrettably, however, it is unlikely to scupper the $9.5bn project. Washington has raised repeated concerns about the scheme; the European Parliament two months ago passed a motion condemning it as a “political project that poses a threat to European energy security”. A robust and coherent European energy policy would have found a way to block it, according to Financial Times.

The regulatory revamp brings pipelines starting outside the EU under the same rules as those inside the bloc. At least 10 per cent of capacity must be made available to third parties, under non-discriminatory tariffs. Pipelines cannot be directly owned by suppliers. That means Gazprom, the Russian gas monopoly, may have to rejig ownership of Nord Stream 2. Since it has five European partners in constructing the pipeline — Germany’s Uniper and Wintershall, Engie of France, Anglo-Dutch Shell, and Austria’s OMV — that may not be too challenging.

Under a significant Franco-German compromise, moreover, the EU country where a transit pipeline lands — in this case, Germany — will be responsible for applying the rules, and granting any exemptions, albeit under European Commission oversight.

Even restructured, Nord Stream 2 is a pipeline with no commercial rationale. As Moscow confirmed last week, it will not carry new gas to Europe. The existing transit pipeline across Ukraine is in good order. Instead, the new route, running alongside the first, seven-year-old, Nord Stream line, will enable Gazprom largely to bypass Ukraine, depriving Kiev — and other transit states such as Poland — of billions of dollars of transit revenues.

Germany, meanwhile, will become the European “hub” for Russian gas to Europe, a role Ukraine aspired to play. German business may pay less for energy. Yet Berlin’s DIW economic research institute concluded last summer Nord Stream 2 was “not needed to secure natural gas supplies in Germany and Europe”, was based on outdated demand assumptions, and was “not a profitable investment project”.

Some supporters of the project invoke the 1970s and 1980s, when construction of a new transit network — the one across Ukraine — aimed to foster energy interdependence and hence trust between the west and the then Soviet Union. But today’s context is different. Russian supplies to Europe are established. This new route enables Moscow to play European countries off against each other.

Brussels, and Berlin, hope the pipeline rule change will fend off threatened US sanctions against European companies involved in Nord Stream 2. Washington should indeed hold back from such measures. That is not because of the new regulations, however, but because a US sanctions regime that started out in 2014 as a set of carefully-calibrated measures co-ordinated with the EU has become increasingly incoherent and heavy-handed. There are justifiable suspicions, too, that US complaints over Nord Stream are motivated more by ambitions to sell tankerfuls of liquefied natural gas to Europe than by concerns about the continent’s energy security.

It is for Europe, not the US, to manage its own energy policy. That makes it all the more unfortunate that the EU has not been able to act in a more united and muscular way. Ukraine, as well as Poland and some other smaller and eastern EU countries, will be justified in feeling their interests have been sacrificed to those of Paris and Berlin.

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