September 15, 2015
Russia has confirmed the primacy of Nord Stream—a natural gas pipeline through the Baltic Sea—in its efforts to replace Ukrainian transit routes for gas exports to Europe, diminishing the likely role to be played by its southern counterpart, Turkish Stream.

The agreement, signed September 4 in Vladivostok, sets out the shareholding arrangements for the project to build a new 55 billion cubic meters (bcm) per year system across the Baltic. It not only emphasizes Russian determination to bypass Ukraine, but also almost certainly ensures that, for the foreseeable future, implementation of the Turkish Stream project will be not only delayed, but stunted.

The shareholders’ agreement is significant because of the quality of the parties involved. The new company—imaginatively called the New European Pipeline AG—will be majority owned by Gazprom, Russia’s state-owned gas behemoth, with a 51 percent stake. But four key European companies—Royal Dutch Shell, Germany’s E.ON, and Austria’s OMV —will each have a 10 percent stake while France’s ENGIE (formerly GDF Suez) will take 9 percent. These are serious investors who expect tangible commercial returns on the initially estimated $11 billion cost of laying a pair of 1,220 km-long pipelines and, in many cases, regard this as part of a portfolio of Russian-related energy assets or opportunities.

This striking declaration of commercial faith in Russia’s ability to deliver a profit-making partnership with European companies stands in sharp contrast to the political tensions between Russia and many European governments stemming from its annexation of Crimea and ongoing support for separatists in eastern Ukraine.

Russia is currently subject to considerable international sanctions, while the European Union is host to a major political endeavor to reduce European dependence on Russian gas by developing infrastructure that would enable member states to import gas from new suppliers, either by pipeline or in the form of liquefied natural gas.

Gazprom Neft, Gazprom’s oil unit, is subject to EU sanctions, while Gazprom itself is the target of US sanctions. Russia’s gas giant is also in trouble with the European Commission, the European Union’s executive body, and with several individual EU member states over its alleged abuse of dominance on Central and Eastern European gas supply markets. In theory, the Commission’s anti-trust case could result in Gazprom being fined up to 10 percent of its annual turnover, which would total around $17 billion. However, one analyst (and Atlantic Council Nonresident Senior Fellow), Alan Riley, believes the Commission is more likely to seek to fine Gazprom between $560 million and $3 billion.

The strong European corporate support for Nord Stream 2 is one reason why this project is likely to go ahead, despite objections from senior US officials. Another is that Gazprom appears to have reconciled itself to the fact that, under EU regulations, it will not be able to control the resale of gas once it reaches Germany.

Moreover, with some 90 percent of throughput expected to be dispatched to the major Austrian trading hub at Baumgarten, Gazprom will be able to argue that this gas will enable it to continue to supply customers in Central Europe, notably Slovakia, the Czech Republic, and Hungary, which currently rely on deliveries transiting Ukraine.

This considerably reduces the importance of Turkish Stream, announced by Russian President Vladimir Putin in December 2014, and subsequently declared by Gazprom to be a means to supply some 16 bcm per year of gas to Turkey and 47 bcm per year of gas to European customers currently served via Ukraine. Gazprom has said that it will cease transit through Ukraine at the end of 2019.

However, the weakness of Turkish Stream is that it only allows for perhaps 10 or 12 bcm per year to be delivered to Gazprom’s European customers—apart from Turkey—unless extensive and expensive new pipelines are built to carry the gas to them. And even the 10 or 12 bcm per year that it could deliver would have to rely on the Russian giant managing to secure access to the Trans Adriatic Pipeline, currently under development as a means of transporting non-Russian gas from Azerbaijan to Southern Europe, notably Italy. It thus looks likely that if Gazprom does proceed with Turkish Stream—and the cancellation of the initial pipe-laying contract on July 8 means the project is at least being delayed, if not scrapped—it is only likely to be developed as a 15.75 bcm per year or 31.5 bcm per year system and not, as Putin announced, as a 63 bcm per year four-pipe project.

But perhaps the most significant aspect of the Nord Stream 2 shareholders’ agreement is its timing. The formal ceremony was held September 4, one day after Putin visited Beijing for the giant parade marking the end of World War II in the Pacific.

In the energy world, all eyes were on Putin to see whether he and his Chinese hosts would announce just how they planned to implement either the giant $55 billion program concluded in May 2014 to bring Russian gas to China by the eastern route from Skovorodino to northwest China or—Russia’s preference—a pipeline through the Altai pass into eastern China, provisionally costing $18.5 billion.  

The silence surrounding these projects almost certainly indicates that Russia and China have not only still to reach an agreement on which line should be developed first, but on such basic issues—assumed to have been settled sixteen months ago—as the price of the gas, the timing of the project implementation and, above all, whether China should have a role in Russian upstream development as a quid pro quo for lending Russia some $25 billion for project development.

It’s quite possible, therefore, that although it is four years since Russia informed the International Energy Agency that it was giving China priority over the European market, in practice, Gazprom remains unable do without Europe, and, by developing a major project with major European companies, hopes to assuage the European Commission in its giant anti-trust case.

John M. Roberts is a Nonresident Senior Fellow in the Atlantic Council’s Dinu Patriciu Eurasia Center.

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