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Discussing Nord Stream

If you want to prevent the Nord Stream 2 construction you should know the theory

Building of the Nord Stream 2 (NS2) gas pipeline is an obvious threat for the safety of Ukraine. And not only in the energy sphere. Of course, losing money from transit of Russian gas to European clients is a big problem, which is discussed by the experts for quite a long time now. But NS2 won’t be just the economic leverage for the Kremlin. Gas pipeline, which is supported strongly by a part of German political establishment, might just be a strong symbol that despite the provocatively arrogant way the Putin and his clique acts, still countries of the world and their leaders are not only ready to continue to work with Putin, but are willing to create a large scale projects of geopolitical significance.

If Ukraine wants to obstruct this, we must clearly understand the reasons behind those political and management process which happen in Germany and European Union, we must understand who and how makes the decisions and gives green light to the building of the pipeline.

Discussion regarding the building of Nord Stream 2 pipeline is not only politicized, heavily, but also is emotionally colored, a lot. That’s why some arguments provided by those who are against the building of the pipeline sometimes are more harm than good to those who had a say against project and was armed with reasonable arguments. At the same time, that doesn’t change the arguments for the pipeline in any way.

NATO Center of Excellence in Vilnius, Lithuania, and some other organizations and think tanks came up with the surveys of economical justifications of the pipeline project.

The main thesis of such surveys is that NS2 is nothing but a business project of Russia, which just aims for expanding of the market. In reality, the suggested needs are greatly exaggerated by the advocates of NS2. Say, all the current needs of Germany in gas can be secured via the existing pipelines, and all needs in the near future — while any forecasts which aim to predict the needs up to year 2050 based on the existing technologies and consumption patterns is nothing but staring in the crystal ball, because of lack of predictability of technological progress in the energy sphere.

By the end of 2030 gas production in Russia will decrease, and because China is already bought out the confirmed reserves of gas in Central Asia, any attempts to estimate the unproven reserves in some Farawaystan is nothing but a guessing game.

Gazprom will not be able to sell gas to Germany directly because of anti-monopoly regulations, while further expansion through the distribution networks will make the process extremely expensive. It would be possible of course to invest even more billions of euros in the distribution pipelines, which would make all this project even less viable from economy standpoint.

That’s why the true significance of Gazprom pipeline for a European gas market is comparable to a significance of the opening of kebab stand in Berlin. But of course, on the other hand a project such as this one might just fill the pockets of Putin’s closest friends, just as it happens with Putins hockey teammate, Gennady Timchenko. A good way to sweeten up the bitter pill of western sanctions.

In the discussions regarding NS2 the big problem is the lack of understanding of the process happening in the German internal politics, the lack of understanding of the regulations of the European energy market, etc. One of the reasons is, those who can speak in this professional slang, they often manipulate to their own benefit, while the others simply lack professional knowledge. That’s why this discussion is often diminished to simple bickering, on both sides.

Anyone who would like to really act against the building of Nord Stream 2, and not resort to conspiracy theories, might want to read this good study of the lack of economic reasons for the building pipeline: https://www.diw.de/documents/publikationen/73/diw_01.c.593658.de/dwr-18-27.pdf

It is not a secret that some employees of former minister of foreign affairs and vice chancellor Sigmar Gabriel worked with the gas market data provided by the expert organizations which were close to the lobbyists of Nord Stream 2 project. This impacted the agenda in a big way. Especially when and if the counter arguments by those opposed to Gabriel’s position were not elaborated enough.

Another miscalculation in the first rounds of discussion regarding the pipeline was the lack of good analytics in English, and those few existing was not well known neither between politicians nor even between the experts. The surveys clearly showing the economic pointless of the project were either in German (https://www.swp-berlin.org/fileadmin/contents/products/studien/2016S21_lng_wep.pdf), or in Russian, or in Ukrainian.

The very project of the pipeline buildings exploits some loopholes of laws and regulations in energy sphere both in EU and Germany. Aside from the foreign relations policy of Germany and political corruption, this is the greatest vulnerability of NS2. The project itself will hurt a lot to the so-called European Union's Third Energy Package and the very authority of Energy Commission[VZ1] .

This will give a perfect case for Gazprom to repeat the same actions later in other countries, which will be more vulnerable than Germany to the Russian blackmail, corruption and subversive activities.

It would be wrong to think that Europeans did not act against the Russian lobbyists. Energy Commission came out with the position and a mandatory market regulations regarding the Exclusive economic zone: https://www.politico.eu/wp-content/uploads/2018/03/NS2-Gas-Legal-Opinion-March-2018.pdf

If the efforts of the Commission will be successful regarding the regulations and the adoption of corresponding provisions, the probability of building of the pipeline will if not vanish than perhaps eventually will go to zero. And for the government of the Germany that would be a moment of truth, which will hold the answer to the question, whose side you’re on.

International experts consider the Commission position as strong enough. Because the pipeline project does not have any strategic value as an infrastructure project, which might have had saved NS2 with government guarantees as it was with OPAL pipeline — back when Gerhard Schröder was a chancellor this distribution pipeline was given a status of strategic object, effectively saving it from EU regulations.

More even, Russia and Germany do not have a bilateral government agreement. The existing contracts are issued between the companies. In turn, Gazprom tries to fight the Commission using the legal bureaucracy and the institutional weakness of European Union.

For example, representatives of Russian company submitted an application for so called “Bestandsschutz”, a kind of protective mandate which, if granted to Gazprom, would give a guarantee that the project is certified according to current rules and regulations, and even if the regulations will be changed, those would not impact the project.

In other words, Russians try to “froze” the current legal status quo, in case if German government will succeed in adopting the regulations which would let the Commission to stop the building of Nord Stream 2.

There are some discussions regarding the activities of Sigmar Gabriel as well, whether he could use his authority to endorse and support the pipeline project. Germany doesn’t even have the government energy company, as opposed, say, to Poland. All the companies on the market —Wintershall and Uniper (former EON) — act just as any other German company, and according to the norms of civil law. As long as they follow the regulations and adhere the criteria of the environment protection, safety and labor protection, they can act at their will. Just as it is with opening a kebab stand. You can sell hot dogs on the street as long as you act according to all the rules of food safety, consumer protection etc.

That’s why this is not even a question which government should interfere with. There are no political reasons to interfere into the actions of companies or regulators. And on the level of ministers, where the energy regulation happens mostly, the Russian influence is strong enough.

In the same time, the German Federal Network Agency (Bundesnetzagentur), the regulatory office for gas market, until some time was not even informed about the pipeline project. All the decisions of the competent authorities were based on the estimates provided by the German energy companies, there were no independent studies ordered by the regulatory office.

It is worth to note that all this happened completely in line with German laws and principles of free market, at least according to the standpoint of German officials. More even, there are additional obstacles to the independent investigation into the NS2 problem, which are a numerous decisions regarding Nord Stream 1 pipeline, many of which were set in stones of certifications for exploitation of pipelines and infrastructure.

We must understand that German society did not even have a thought that the discussion regarding NS2 is necessary. As much as it is hard to imagine not only to Ukraine, but to other Germany’s partners in EU. The main standpoint in Berlin regarding the NS2 looks like this, “This is a question of private companies. If they comply to German and European laws and they pay their taxes, they can build their pipeline. What is the problem?”

To quote the German expert Boris Reitschuster, Germans cannot immediately grasp why the actions of Russians can pose a threat. As he said, “Putin needs to list his plan on German society destabilization step by step, in writing, and notarized. Perhaps that will make Germans think about it.”

It is easy to blame the German establishment that Putin have bought them off, as he did with his friend Gerhard Schröder. But in reality, most of the German elite did not understand, and some of them do not understand at this very moment, that the pipeline may present a problem.

Germany is a rich country, with a heavily diversified energy sector, where a number of companies compete for their share of the energy market. Many of them do not understand that the work in the energy market may have a political agenda.

Another serious obstacle in the opposition to NS2 pipeline are the arguments that Germany may become too dependent from Russia in the economical or energy sense. You can simply look into the data on german foreign trade from 2016 (https://www.bmwi.de/Redaktion/DE/Publikationen/Aussenwirtschaft/fakten-zum-deuschen-aussenhandel.pdf), which lists Russia as #13 trade partner of the Germany. The gross amount of trade counts to 48 billion euros, or 2.22% of the whole German trade. That sounds impressive, but even a Hungary, listed as #14, has 47 billion euros, or 2.21% of German trade. You can hardly imagine the newspaper article saying that Angela Merkel should be wary Victor Orban’s influence on Berlin, or should not risk the relations between Germany and Hungary because of trade.

An import from Russia (that’s 26.4 billion USD, mostly gas and oil) dominates over export (which is 21.6 billion USD), just 4.9% of total German imports, or 1.3% of GDP. Germany, which happen to have a GDP almost three times the Russian, is not dependent from Russia, and will not be. Thus, an arguments about the dependency from Kremlin do nothing but cause annoyance, and make the job of NS2 lobbyists easier.

You need to account for another aspect. The companies of EON, Wintershall, OMV, Shell and Energie made the deal with Gazprom regarding the NS2 in September 2015, where the refugee crisis were on it’s high. The industry supported Angela Merkel in the question of refugees, stating to the press and society that refugees can be absorbed by the German job market. All according to Merkel’s motto “Wir schaffen das!”, which stands for “We’ll manage!”.

St that moment a confrontation with big business was not something Merkel could afford. Unofficial agreement was that companies can continue to do what’s good for business as long as they don’t clash with existing sanctions, while Berlin will keep its eyes averted.

Using the Energy market commission as a leverage Merkel could support its decisions or not, depending on the political situation.

So, at September 2017 Merkel had no reasons to interfere. And even if she had, still there’s a question, which law would be the reason for her to interfere.

The regulatory office (influenced by the Sigmar Gabriel) allowed the creation of the NS2 consortium, thus raising the question, which legal field might help to stop the pipeline project. One of the main axioms of Germany is being the state of law. Noone could voluntarily make a political decision to ban the NS2 project, without having the legal rights to do so.

Lobbyists of NS2 acted within the legal grey zone, where laws and regulations of both Germany and EU left some formal loopholes to commission the pipeline on the administrative level, getting the green lights from ministries and regulatory offices, which had no rights to withhold.

If the pipeline building would be banned based on the current regulations and decisions, then perhaps the Russian side would take legal actions, would go to the court, and would have good chances to win in the European court, with no options for further appeals.

The only way out would be to change the legislation. But taking into account the serious business lobby in the Bundestag, and bearing in mind that only one political party backed up such decision, the German Green Party — well, a scenario like this doesn’t look realistic. And even if the consensus regarding NS2 was reached and majority of votes secured, that in turn would pose a threat to the coalition and the government.

Basically, the only conservative deputy, the member of Christian Democratic Union of Germany who tried to put a stop to NS2 project, was Norbert Röttgen. He was the head of the foreign affairs committee, and some of his colleagues shared his concerns regarding the national security in case of the successful buildinf of the pipeline.

Still, he often opposed to Angela Merkel, due to his own reasoning, so we cannot eliminate the possibility that he simply used this opportunity to hurt his political opponent, to make her deal with inconvenient problems which had no unequivocal decisions.

After some time the public statements by Röttgen regarding the foreign affairs context of the project were offset by economic counter arguments. Which, as we mentioned already, were provided by the companies and institutions affiliated with NS2, and backed up with support from German Federal Ministry of Economics and Technology.

According to those reports, the gas deposits in Northern German and Netherlands will deplete soon, while the demand of the gas in Germany will rise because of the nuclear plants closure.

Alternative routes of gas supply were described as more risky than NS2. Libyan gas was not to be counted on because of civil war, while the Mediterranean pipeline would be even more costly. Middle East conflicts would not leave much hope for shipments from that region, and the domestic policies of Erdoğan did not add to feel of security.

Thus, the alternative options of pipelines or liquefied natural gas terminal were assumed to be too expensive. And the Germany, as a country which economics are mostly high value-added, should avoid the expensive energy sources, especially considering the high cost of labor. Another argument for was a governmental support of the projects which would serve as alternative to nuclear energy.

All this lead to the situation where your everyday answer to the NS2 criticizing was “Yes, this is not too good, but this is economically justified”. And most Germans believed this.

German media and press did not give much attention to the project. They tried even harder not to cast doubt on already wide-spread opinions. That’s why Donald Trump saying that US will not pay for German security while Germany allows Russia to create more threats, well that came as quite a surprise.

As we mentioned before, most of the experts dismissed the possible threat of the economical or energy dependency from Russia. That just did not match the numbers.

But the suggestion of the sharp increase in gas demand in Germany doesn’t match the numbers just as well! It is unavoidable, but it is much less dramatic than supporters of the NS2 claimed it to be. According to experts the prices on the energy market will not grow as strongly, while the alternatives to NS2 claimed to be uncompetitive just 2 years ago, they start to look interesting enough, for example the LNG terminals.

The gas production in Russia is not developing as fast as it is said to be. Despite the huge investments from French Total into the Russian NOVATECH (owned by Gennady Timchenko), the sectoral sanctions prohibit Russia from using the technologies for deep underwater drilling, and do not allow for increase in gas production. And the proved deposits, they just prove that the “economic feasibility” of the NS2 project was nothing but a bluff.

While the political aspect of discussion reached the deadlock, the legal aspect which Energy Market Commission supported, is still on the agenda. For example, one of the premises which Commission advocates for is, to force the countries, the members of EU, to ask for permission before committing to projects like this. That is one of the reasons why some countries hesitate, whether to support the Commission in its fight with NS2, because they would like to preserve more independency for themselves.

The strategic goal of the Commission was to push through the European Union's Third Energy Package, including the parts about the pipelines in the exclusive economic zone. The biggest and loudest opponents of the Commission were Sigmar Gabriel and some members of Austrian political establishment. The governments of France and Netherlands kept the moderate stance.

In November 2017 Commission came out with the suggestions of changes to regulations of the energy market. Austria took the hard stance, and opposed the changes. It was a hard situation for Angela Merkel. Protecting the coalition with the colleagues of the party block called for compromises to be made. Including some questions of the business sphere.

It was suggested to Commission to work on some legal aspects, while waiting for formation of government in Berlin. Yet one must understand that German side is not a monolith where it comes to NS2, there are different actors in play. Gerhard Schröder knows well which leverages to use. Sigmar Gabriel could give a political support to the administrative decisions made on the middle level of Matthias Machnig, the secretary general of the Federal Ministry for Economic Affairs and Energy.

In fact, only Ukraine knows and believes that NS2 pipeline project is not just the competition on the energy market, but a geopolitical, information and even sense-bearing confrontation. Sadly, there is not enough professionals and funds for complex management and support in this sphere.

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