Nord Stream Project Faces Hard Slog Against the Tide

Nord Stream, the gas pipeline project on the Baltic seabed from Russia to Germany, has cleared the final legal requirement, obtaining the construction permit from the state administration agency of the Southern Finland region (Financial Times Deutschland, February 15).

The governments of Finland, Denmark, and Sweden had granted the construction permits last October and November for the Gazprom-led project (EDM, November 10, 12, 2009). Their neighbors on the opposite Baltic shore (the EU members Estonia, Latvia, Lithuania, and Poland) had resisted this project. They continue objecting to Nord Stream on the basis of energy security and ecological risk considerations. Once Nord Stream is built, Russia could politically manipulate gas supplies to the Baltic States and Poland by overland pipelines, without affecting Germany, which would be supplied through the seabed pipeline. The EU’s risk-sharing and solidarity might be subjected to strain in such situations, or in the event of supply shortfalls in Russia itself.

The Gazprom-led project is now set for starting construction work this coming spring, despite rapidly changing fundamentals of the gas trade. Development of liquefied natural gas (LNG) and unconventional gas raise new doubts about the economic sense of Nord Stream.

The consortium plans to lay the seabed pipeline’s first stage during two construction seasons, April to October 2010 and 2011, with a throughput capacity of 27.5 billion cubic meters (bcm) annually when fully operational. The first gas is planned to flow in fall 2011. The pipeline’s second stage, with the same capacity, is promised for completion by fall 2014, bringing Nord Stream’s total capacity to an enormous 55 bcm per year by 2015, for a declared 25 year period.

Construction work began in January at the compressor station Portovaya near Vyborg (Leningrad oblast), the pipeline’s starting point onshore. The compressor station will connect Russia’s Unified Gas Supply System with the Nord Stream pipeline, which should in turn connect near Greifswald with the German gas transmission network.

The Nord Stream consortium in its current configuration includes Russia’s Gazprom with 51 percent of the shares; German companies Ruhrgas and Wintershall (gas-trading subsidiaries of the E.ON energy conglomerate and BASF chemicals giant, respectively) hold 20 percent each; and Nederlands Gasunie, 9 percent. The consortium uses a Switzerland-based registration.

Electricite de France is a candidate to join the consortium by acquiring shares from minority stakeholders, leaving Gazprom’s majority stake intact. This was also the procedure when Nederlands Gasunie joined the consortium, reducing the two German companies’ stakes from 24.5 percent to 20 percent each.

The western Siberian gas fields Yuzhno-Russkoye and Achimovskoye, with almost 1 trillion bcm in combined reserves, are designated to supply Nord Stream’s first stage (www.wintershall.de, www.eon-ruhrgas.com.de, www.nord-stream.com.de). This earmark dates back to 2005 when the Nord Stream project agreement was signed. However, there is no source earmarked for supplying the pipeline’s second stage.

The Shtokman project in the Russian Arctic had been regarded as a possible source for the second stage of the Nord Stream pipeline. The development time-frame for Shtokman was slipping, however, far beyond 2015, the target year for commissioning Nord Stream’s second stage. And on February 5 Shtokman was officially postponed, before development had started (EDM, February 9). Thus, Nord Stream’s construction schedule through 2015 does not seem correlated with available Russian gas resources.

Given Russia’s stagnant gas production, declining potential of its main fields currently in operation (except for Siberia’s east and far east), and failure to start major new field developments, the goal of filling Nord Stream by 2015 as planned seems beyond reach.

The start of construction is made possible by 2.7 billion Euros in German government credit guarantees, covering more than one third of the pipeline’s cost of 7.4 billion Euros, in the consortium’s official estimate. This almost doubles the cost estimate of 4 billion Euros, declared in October 2005 when the Nord Stream agreement was signed (Die Welt, January 4; Frankfurter Allgemeine Zeitung, January 22). European analysts, however, suggest considerably higher cost estimates.

E.ON and BASF have predicated their corporate strategies on long-term over-reliance on Russian gas. Consecutive German governments have made this into national policy. Russian-delivered gas accounted for almost 40 percent of annual German consumption (with a similar percentage for Russian-delivered crude oil) prior to the 2009 economic recession. This dependency level is far higher than in any country of the “old” EU. The Nord Stream project, should it materialize as intended, would increase Germany’s dependence even further.

The European Union’s new Energy Commissioner, Guenther Oettinger, has stated in the European Parliament’s confirmation hearing that he would not act as an emissary of the German business or government. Yet he discouraged criticism of Nord Stream even as he called for avoiding overdependence on Russian gas (BNS, January 15). Meanwhile, a direct Russo-German pipeline on the seabed works to isolate the three Baltic States from the European transmission network, instead of connecting them to EU territory. Nord Stream underscores the three Baltic States’ position as an “energy island,” relative to the EU. The new Commissioner has promised to address this situation as a matter of priority in the EU’s energy policy.