Russia Says It May Abandon Nord Stream Pipeline – Part II

Publication: Eurasia Daily Monitor Volume: 5 Issue: 223

The Kremlin has warned that it might abandon the Nord Stream gas pipeline project on the Baltic seabed from Russia to Germany (see EDM, November 19). The warnings seem designed to line up wider European support for the project as well as to distract attention from the project’s intrinsic flaws. At present, Nord Stream faces at least four hurdles that may, individually or in combination, prove insuperable.

1) Riparian countries’ objections and procrastination:

Estonia, in geographical order the first country to be asked for a seabed exploration permit, turned down the consortium’s poorly substantiated request in 2008 and demanded that the pipeline route be shifted toward Finland. The Finnish government had earlier asked that the route be shifted toward Estonia. At present, Finland says that it will conduct a review of the project’s environmental impact during 2009, according to Prime Minister Matti Taneli Vanhanen in Moscow (EUObserver, November 13). During that visit, Putin accepted postponing by one year the imposition of prohibitive taxes on Russian timber exports, which could ruin Finland’s critically important wood-processing industry. Moscow may use this issue to pressure Finland on Nord Stream next year. The Nord Stream consortium had applied to Sweden in December 2007, but Swedish authorities returned the application as inadequate and the consortium took until October to resubmit it (Itar-Tass, October 27). The Swedish review seems certain to stretch well into 2009 amid public concern for Gotland Island’s environment. Further along the proposed pipeline route, Lithuania and Poland oppose the project because of the risks it poses to their energy security and overall strategic security, on top of environmental considerations. Estonia, Finland, and Sweden may share those strategic considerations but are formulating their objections and reservations mainly in environmental terms. Further along the proposed route, Denmark has not yet been asked officially for a permit but looks amenable. Denmark as well as elements in the Latvian government hope to import and store Nord Stream gas through links to the shore from the main pipeline. Meanwhile last July, the European Parliament adopted a resolution urging additional evaluation of this project in the Baltic Sea and consultations with all the riparian countries in the process (Ryan Miller, “Germany’s Baltic Betrayal,” Center for European Policy Analysis [Washington], July 15).

2) Project Cost Overruns Without Investment in Sight:

The Nord Stream consortium is supposed to cover 30 percent of the project costs from shareholders’ funds and the other 70 percent from banks and lending institutions. The consortium seemed earlier this year to have accepted a cost estimate of €7.4 billion (some $9.3 billion) for the Nord Stream project, including €3.5 billion (some $4.4 billion) for the first stage (BNS November 17; Financial Times, November 18). These estimates tend almost to double the cost estimate declared in 2005 at the political launching of this Russo-German project. The real costs are difficult to estimate at present, but it is widely assumed that the €7.4 billion estimate has already been overtaken by the escalating costs of steel and other materials as well as the costs of credit. The project’s exorbitant price tag reduces its attractiveness to European consumer markets and its acceptability to the citizenry, even if the national-champion German and Dutch companies in the consortium may be comfortable with passing on the inordinate costs to the consumers. The consortium would in any case not go to the financial markets until after obtaining environmental permits from Baltic riparian countries, which it hopes to receive by the end of 2009. It would then start construction work in 2010 (Die Welt, November 3). For that to happen, however, Putin and Gazprom hope to goad the Europeans into covering the costs. Moscow’s threats to abandon Nord Stream and switch to LNG seem designed with that purpose in mind.

3) Volatile oil and gas price dynamics:

With the gas price linked to the price of a basket of oil products, Gazprom cannot reliably forecast the profitability of its gas exports in the years ahead. The company and the Russian government are beginning to consider the possibility of decoupling the gas price from the oil price and consulting with other gas-exporting countries on this issue. The Forum of Gas-Exporting Countries, which Moscow hopes to transform into a Russian-led cartel, will probably discuss this issue. Meanwhile, uncertainty prevails and is even deepening. This is a further reason behind Putin’s and Aleksandr Medvedev’s statements about a possible abandonment of Nord Stream. Apparently, Moscow needs a pause for thought, as well as an excuse for the delays and cost overruns. It is packaging this message in its customary threatening style, which can almost certainly be assessed as bluff. Russia does not possess gas liquefaction technology and export capacity for LNG at present. Gazprom will take years to assimilate it from Western companies and is attempting to lure several of them into such technology transfers in return for “access” to Russian gas fields.

4) Production Shortfalls in Russia:

Quite apart from Western observers, Gazprom itself anticipates a gas production shortfall in Russia beginning in 2010 at the latest and continuing past the middle of the next decade. Chronic underinvestment in new Russian fields is the main cause of the anticipated shortfall. German business interests are tacitly apprehensive at this prospect and are trying to head off the consequences for Germany by securing access to Russian gas, possibly ahead of other Europeans. This is one major, if not publicly declared, reason behind the early decisions by Ruhrgas and Wintershall to join Nord Stream. Although the pipeline is supposed to become operational by 2011, its designated source, the super-giant Shtokman field, is now generally expected to start commercial production after 2015, possibly nearer 2020, instead of 2013 as initially declared. Meanwhile, production from the West Siberian, medium-size Yuzhno-Russkoye field, where Wintershall and Ruhrgas are minority shareholders, would be far from sufficient for filling the Nord Stream pipeline to its design capacity for the declared duration of the project.

Russian President Vladimir Putin’s latest threat to export Shtokman gas as LNG by tankers to overseas markets, rather than to Germany and other European countries through the Nord Stream pipeline, is not the first such threat and almost certainly not the last. The Kremlin and Gazprom have shifted signals in this regard several times, alternately holding up the prospect of Shtokman gas to European and North American companies and markets. Meanwhile, the financing is not lined up for the Shtokman project either. Moscow’s shifting signals on Nord Stream and Shtokman form part of its tactics of playing off potential consumers against each other, inducing them to compete for limited amounts of Russian gas.