NORD STREAM 2: What is it and why is it important?

One option in the West's toolbox has been the threat to cut Nord Stream 2 from operations. Germany isn't delighted with this idea. Cutting gas acquirement from Russia means that Europe is left in an energy crisis. With finances decimated from pandemic restrictions, surging energy and life costs affect the bottom dollar of every European household. So, lets see what Nord Stream 2 is and why is it so hotly debated in the fight to prevent a European war.

WHAT IS NORD STREAM 2?

Nord Stream 2 is the sister project to the already functioning gas line, Nord Stream 1, that has been operational since 2011. It is an offshore project running from region of St Petersburg to Lubim, North-eastern Germany. It runs through the Baltic Sea, under the water.

The pipeline was estimated at around 9.5 billion euros, but costs have run up to 11 billion euros. Its main shareholder is Gazprom. The project was started in 2018, and was due to be completed in 2019, but was finished in September 2021. Now, it is just awaiting regulatory approval, from Germany and European Union, to be allowed to be turned on. It has a capacity of 55 bcms of natural gas per year. The total joint capacity of both pipes is therefore 110bcms per year.

It is a whooping 1,230 kilometres in length!

Map of Nord Stream 1 and 2, source: Gazprom

WHY IS NORD STREAM 2 IMPORTANT TO GERMANY?

For Germany, which is EU's industrial powerhouse, it means that this pipeline will supply enough natural gas to power 26 million household per year. It would drive gas prices down, thereby making energy costs lower for the average consumer.

This project will help to ''compensate for the growing import gap in the EU''. It's a direct connection between the European Union and the world's largest gas reserves, which can be found in Russia.

The European Union does not support the Nord Stream 2 project as it does not see it in line with the goals of the Energy Union. They are also concerned that it could lead to one supplier concentrating the supply route, thereby killing competition. It would also affect other established gas routes that are already in place, for example in Ukraine.

Although no one wants to admit it, Europe needs Nord Stream 2 because Europe is becoming increasingly in need of energy. By 2035, Europe must import 120bcms more gas per year .

HOW MUCH DOES EUROPE RELY ON RUSSIAN GAS?

About 40% of Europe's gas needs comes from Russia. This will create a huge vacuum of supply if Russia decides to turn off the taps. So, Europe has started to shop around at alternative gas suppliers.

Some other possibilities have been considered like bumping up supplies from Azerbaijan and getting more natural gas from Qatar. Other places are Norway and North Africa. However, while there is the infrastructure that is capable to import more gas, there is not enough gas supplies to fill the quotas. 

Norwegian Prime Minister, Jonas Gahr Stoere, said that his country is already supplying Europe at maximum ability, and it is not enough to replace the hole left by the Russian gas, if that is shut off. And the other countries are in quite the same boat, either they are supplying as much as they can or the supply is tied up with contracts to other customers, like Asia.

Russian President, Mr Vladimir Putin, has repeatedly said that he will continue to honour long-term contracts, which would mean that a complete shut down of Russia's gas supply would not be on the cards. But Europe is increasingly preparing to slap the bully neighbour to the East with heavy sanctions if they invade Ukraine. That means that contingency plans must be made for countersanctions.

One of the gas rigs on the Nord Stream 2 piplien, source: Gazprom

Russia is already supplying less gas to Europe. They are fulfilling their minimal contractual obligations, but nothing more. It hasn't been enough to fill the storage containers, and it has driven up the natural gas prices considerably in Europe. Compared to one year ago, the price of electricity and heating has surged dramatically, which has hit the pockets of low-income earners throughout Europe. Some countries have already rolled out financial cuts and subsidies to help ease the burden on their citizens.

HOW WILL CUTTING NORD STREAM 2 AFFECT RUSSIA?

Oil and gas account for 60% of Russia's exports and generate more than 30% of the gross domestic product (GDP). Therefore, if Russia loses Europe as a customer for its products, their already stale economy would suffer even more. It was already obvious in 2014, when the price of oil fell, and the ruble lost over 50% of its value compared to the US dollar. Russia earns 60% of its import income from the deals with Europe.

While the shut down of the pipe itself wouldn't cause too much financial impact to Russia, it would be a political failure. The country has other routes to transport gas into Europe, but there was a lot of effort poured into Nord Stream 2, that it would be embarrassing for Putin if the project was cancelled.

The other point is that by using the pipeline, Russia would save on transport fees paid to Ukraine.

WHAT ABOUT QATAR?

On 31st January 2022, US President Biden bestowed Qatar with the tile of major non-NATO ally (MNNA). This means that they join Bahrain and Kuwait to receive this honour. The designation comes with quite good rewards for the Gulf country:

• preferential access to USA advanced weapons which will give them economical advantage in maintaining and repairing US defence weapons,
• they can keep US military equipment and weapons on their territory,
• they will receive US$ 3 million in funds for counterterrorism research with a focus on surveillance technology,
• they can also buy depleted uranium ammunition, and they will get loan equipment and supplies from American firms for collaborative development.

This will bring Doha and Washington as closer trading partners and strengthen bilateral securities.

On top of that NATO change of status, Qatar is set to receive help from an expanding gas market to Europe, if the Russian pipeline goes askew and is halted. As we said, they can't unilaterally fill the gap that Russia would leave for Europe, but Qatar is the leading liquified natural gas exporters in the world. They produce an estimated more than 1.5 million barrels per day.

WHY IS USA PUSHING WHILE GERMANY IS NOT KEEN?

This is not the first time that United States of America is pushing Nord Stream 2 as leverage. In 2020, constructions were delayed for one year due to sanctions. US also suspects that gas could be used as a geopolitical weapon by Russia.

From America's point of view, they would much rather have Europe as consumer of their liquefied gas. They see this as a suitable alternative to Russia ''cutting off gas supplies in winter'' if the situation gets bad.

EU Imports of Natural Gas by country, source: EUROSAT

Ukraine is also opposed to this project because they would lose out on over 1.8 billion euros in yearly fees if the Nord Stream 2 project goes ahead. The main gas routes to Europe are through their country right now, so bypassing that would be economical death for them.

On January 12,2022 USA Congress rejected a bill proposed by Senator Ted Cruz to impose sanctions on Nord Stream 2. Interestingly, Ukraine's Volodymyr Zelensky asked the USA government to go ahead with the sanctions, while Germany's newest Chancellor, Olaf Scholz, asked that they don't impose anything yet.

HOW IS FINLAND INVOLVED?

Finland has been featured a lot in the press recently as a neutral country between its eastern neighbour, Russia, and Europe. As it is a European Union member, if sanctions were put in place to Nord Stream 2, Finland by default would have to accept them.

Mr Markus Rauramo, President and CEO of Fortum, source: Fortum

Funnily enough, one major Finnish energy company is a major stakeholder in this project. Fortum, which has the Finnish government as a major stakeholder, has a controlling share (76.1%) in German energy company, Uniper. This was one of the 5 major investors that coughed up 50% of the funds, in conjunction with Gazprom, to fund the Nord Stream 2 construction. The amount of money that Uniper loaned to Gazprom for this project is a massive €950 million.

In 2020, the company was worried that it might have to write this loan off due to the US sanctions on the gas pipeline. And, now I guess they have to be worried even more if the project, that the government has a stake in, will be stopped completely from functioning.

CONCLUSIONS

This is a long and complicated project that has been hit by sanctions in 2020, and now has the potential to be fully stopped. Both the European Union and United States of America both have a negative attitude towards this pipeline. Ukraine, understandably, does not want this to succeed at all because they will lose vital profit as a transit country.

However, on the other side, Russia would be profiting from this pipeline very much. They can sell more gas to Europe, while reducing their transport costs. For them, we can say, this project is a win/win situation. Putting sanctions on this project would be a good kick in the ribs for the Russian Federation from the West.

What we need to also consider, in this fight of preventing war in Europe, is the cost/benefits against these actions. Cutting off Russian gas in Europe means a price hike to the average European consumer, who has already been hit financially from the constant pandemic lockdowns.

I can see both sides of the coin, but I also can't help but notice that by cutting off this pipeline USA would benefit enormously financially. As well as US's allies, like Qatar. This could be seen as questionable, but maybe if Europe is dependant on allies, it is more predictable than to be dependant on hostile countries?

References

• Nord Stream 2: Fact Sheet
• Reuters: Putin says Nord Stream 2 link ready to calm gas prices
• Bruegel Org: Can Europe survive painlessly without Russian gas?
• Politico: 5 questions for the EU if Russia turns off the gas 
• Reuters: Norwegian supply step-up not enough to replace missing Russian gas, PM says
• Investopedia: How does the price of oil affect Russia's economy?
• Euronews: What is Nord Stream 2 and how does it link to the Russia-Ukraine crisis?
• Gazprom: Projects - Nord Stream 2
• EEAS: Europe’s energy security and EU-US cooperation 
• Associated Press: EXPLAINER: What happens to Europe’s energy if Russia acts?
• ISPI: The Future of Qatar as Major Non-NATO Ally to the US
• CEPA Org: Finland’s Hushed Energy Dealings with Russia