Publication: Eurasia Daily Monitor Volume: 4 Issue: 79

Gazprom-led Nord Stream, the Russo-German project for a gas pipeline on the Baltic seabed, is running behind schedule on construction of the overland section in Russia and faces cost projection overruns on the seabed section. If actually carried out, the project might end up operating below capacity and not recouping the investment, if the Russian gas volumes initially earmarked for this pipeline turn out — as now seems likely — to have been assessed overoptimistically.

Pipeline construction on the seabed was planned to start in summer 2008, but it is now generally expected to be postponed to summer 2009 due to delays on the overland section in Russia, uncertainty about the supply of steel pipes, and likely delays on some of the financing. The first deliveries of gas to Germany, initially planned for 2010, will probably have to be delayed correspondingly.

In Russia, questions persist regarding the delivery of steel pipes for the project. The Kremlin is overseeing a non-transparent contest among Russian steel producers for contracts to supply pipes to the Nord Stream project. However, Russian producers do not possess the most advanced technology necessary for reliable undersea pipelines. International steel producers also vie for these contracts. Political reasons will almost certainly dictate awarding contracts to Russian producers, who will then have to partner with more advanced international companies. Given the worldwide high demand for steel and shortage of production capacities relative to demand, a significant time lag can be expected between the selection of steel pipe suppliers and the delivery of the product. This could mean further delays on the construction schedule and, correspondingly, further cost overruns.

The European Investment Bank seems increasingly unwilling or unable to finance the Nord Stream project. Gazprom had planned to seek EIB funding for this project. However, it cannot apply to the EIB because there is no consensus within the bank on this matter.

The upstream source of gas for Nord Stream seems also increasingly questionable. When Gazprom signed agreements with E.On Ruhrgas and the BASF subsidiary Wintershall in 2005, the Yuzhno-Russkoye gas fields from eastern Siberia were supposed to provide the main source of gas to the pipeline. Shortly afterward, however, Moscow designated the offshore Shtokman field in the Barents Sea as the main source of gas for Nord Stream. But, last October, the Kremlin announced that it would exclude any international companies from taking ownership stakes in Shtokman — a move that may postpone commercial production there until 2014. Moreover, the Kremlin is considering a range of commitments, beyond Germany and Europe, for the Shtokman field’s future output.

The Nord Stream project is designed to maintain unnecessarily high prices for gas to end consumers in Germany and introduce high-priced gas in countries where gas is moderately priced. Russian gas is far more expensive to extract and transport, compared to gas from other sources.

The planned Baltic seabed pipeline increases the unnecessary overhead costs even further.

If actually built, the Nord Stream pipeline would flood certain West European markets with artificially expensive gas. According to the prevailing view among German commentators, Gazprom and its German partners would earn excessive profit margins from those prices, passing the bill to consumers in Germany and other European countries. German consumer associations are now beginning to raise serious questions about the costs and pricing arrangements of the North Stream project.

An overland pipeline would have cost far less to build, but the Kremlin and its German partners rejected the overland options. Those partners simply echo Moscow’s political line that transit countries, not Russia, pose risks to the European Union’s supply security (a view that would seem in this case to imply that Estonia, Latvia, Lithuania, and Poland are somehow not in the EU); and that creating an additional route from one and the same source (Russia) would somehow signify “supply diversification.”

In recent weeks and days, the Gazprom-led consortium has redoubled its efforts to address the growing public concerns over the Nord Stream project. However, the consortium’s figurehead chairman, former German chancellor Gerhard Schroeder, has lost the respect of mainstream German media because of his questionable role in launching this project. The Gazprom-appointed general manager of the consortium, Matthias Warnig, could hardly improve the project’s overall credibility after German mainstream media reported his affiliation with the former Communist German state security services and contacts with then-KGB officer Vladimir Putin in Dresden.

The Nord Stream project poses known strategic risks to the European Union’s energy security: It would increase the EU’s overall dependence on unreliable Russian deliveries, extend Gazprom’s reach farther afield, entrench monopolistic and non-transparent practices in EU markets, defeat the EU’s supply-diversification and demonopolization goals, as well as isolate Estonia, Latvia, Lithuania, and Poland from the rest of the EU.

Apart from those risks, however, the indications are multiplying that Nord Stream may not be viable commercially — not even if German and other European consumers are cornered to subsidize this project through unnecessarily high gas bills.

(Roundup based on coverage by Frankfurter Allgemeine Zeitung, Handelsblatt, DPA, BNS, Interfax, April 2007)