17 Giugno 2019

The EU and Nord Stream 2: the comeback of energy security

 Scenari internazionali


Over the past few years, energy security, which had once dominated the EU agenda on energy policy, seems to have been gradually losing ground to climate and decarbonisation policies. However, two significant events in 2019 could reverse the pattern and bring energy security back on top of European policymakers’ agenda.


Starting in 2006, when the first gas spats between Russia and Ukraine happened, energy security has come to the fore as a fundamental issue in European Union (EU) energy policy. Two sets of policies were consequently promoted to improve the security of gas supply: market liberalisation, specifically the unbundling of traditional vertically-integrated monopolies; and integration of EU Member States in a common energy market. There exists a rather strong consensus that these two sets of measures have led to improved energy security. During the past ten years, a buyers’ market has emerged in the European continent, so that gas supplies are abundant and affordable. Thanks to this condition, EU countries have been able to renegotiate contractual terms previously deemed unfavourable, such as long contract periods and take-or-pay clauses. Consequently, energy security has been progressively disregarded by mainstream academic and policy debates.


The only significant exception is the so-called Nord Stream 2, a new export gas pipeline running alongside the existing Nord Stream from Russia to Europe across the Baltic Sea. Since the final decision on the project was taken, the Russian government and the European companies involved have been claiming that Nord Stream 2 is a purely economic project; on the other hand, its critics argue that it is a Russian Trojan horse that will endanger the bloc’s security by increasing its dependency on the Euro-Asian giant. The German government had initially supported the pipeline, but the positions of the coalition partners, the SDP and CDU, have progressively diverged. Among its opponents, the United States (US) President Donald Trump has threatened to impose sanctions on European countries supporting Nord Stream 2. Moreover, several Eastern European countries, including Poland, strongly oppose the pipeline, both because they feel their political independence would be weakened by dependency on Russian gas and because the path of the pipeline would threaten the income from current transit fees.


Over the years, the EU Commission has tried to ensure that the project does not endanger EU energy security and competition in the internal market. However, it has so far failed to impose EU-level regulation of the project. In 2016, it had to amend a previous decision concerning the OPAL pipeline[1] and allow Gazprom to access the whole capacity of the pipelines. In 2017, the Commission also failed to obtain a mandate from EU Member States to negotiate on Nord Stream 2, which would have allowed it to retain greater control on the deal. In February 2019, however, the European Parliament agreed to amend a Gas Directive that extends EU regulation to pipelines coming from third countries. The amendment is aimed at blocking the Nord Stream 2 project. Its potential impact, though, has been greatly reduced by a hastily Franco-German compromise, according to which the applicability of the Directive is restricted to the territory and territorial sea of the member state where the pipeline lands.


Another crucial element for energy security is the issue of Ukrainian transit after 2019. After facing contractual disputes with Ukraine ended in supply interruptions in 2006, 2009 and 2014, Gazprom declared it intended to dramatically reduce transit through Ukraine by 2010. This was arguably the main reason behind the construction of new pipeline that would not rely on transit countries. This is precisely the case of Nord Stream, that circumvents Ukraine, or the Turkish Stream.


Negotiations over a new transit contract are managed at a trilateral level with the EU as a third party and are planned to resume imminently, whereas the current contract expires on 31 December 2019. After that date, if no agreement on the terms for a new contract is reached, Gazprom could stop supplying gas to the Ukrainian network. However, neither of the alternative routes will be operational by then. Nord Stream 2 is already late on the planned date for the beginning of operations, which were expected to start at the end of 2019. Moreover, the necessity to comply with the amended Gas Directive could cause further delays: since the Directive is expected to be transposed into German law in April 2020, Nord Stream 2 will have to start operations without a certification of compliance, which it might not be allowed to do. Concerning Turk Stream, the second string of the pipeline to Bulgaria, Serbia and Hungary is yet to be commissioned. 


A supply interruption to Ukraine would reopen the question of gas supply for the entire bloc, highlighting that the issue of energy security has been examined thoroughly, but not yet solved. This is true, for example, for the European strategy of diversification of supply routes.


The EU is the arrival point for three pipelines from North Africa: the Transmed, the Maghreb-Europe, and the Medgaz pipelines, which originate in Algeria, and the Greenstream, which originate in Libya. However, gas supplies from the region are continuously endangered by political instability. The civil war in Libya has severely impacted the activity of Oil&Gas companies in the country; in Algeria, the ongoing mass protests that led to the resignation of President Bouteflika are also a source of uncertainty for energy companies. Moreover, supplies from North Africa are limited by an infrastructural bottleneck: out of the three Algerian pipelines, two land in Spain, and gas network interconnections between Spain and the rest of Europe are the main impediment to estabish a truly functioning internal market.


Creating a new gas import route from Central Asia and the Caucasus region has long been on the EU agenda. After abandoning the Nabucco scheme in 2010, the project is back on track with the construction of the Southern Gas Corridor, composed of three different segments: the South Caucasus Pipeline Extension (SCPX) running from Azerbaijan to Turkey through Georgia; the Trans Anatolian Pipeline (TANAP) from Turkey to Greece; and the Trans Adriatic Pipeline (TAP) from Greece to Italy. While the SCPX and the TANAP branches have already been completed, the construction of TAP is facing delays. Moreover, the planned expansion of gas volumes, involving Turkmenistan and Kazakhstan, would run on the same route. Its realisation depends on the possibility of building an undersea pipeline crossing the Caspian Sea, a project that has historically been hampered by the disputed legal status of the sea. In August 2018, a new convention was adopted on the issue, which explicitly provides for the possibility of laying submarine pipelines. However, the project is still subject to the agreement of the countries crossed by the pipelines.


In recent years, new perspectives for EU gas import diversification were opened by a number of new fields discovered in the Eastern Mediterranean: the Tamar and Leviathan fields in Israel; Aphrodite and Glaucus in Cyprus; and Zohr and Noor in Egypt. The proximity of these fields allows for the creation of a competitive regional gas export infrastructure, taking into account that Egypt already possesses gas liquefaction facilities. However, mutual distrust between the three regional players makes a short-term solution unlikely. A solution to the puzzle seemed briefly at hand in 2018, when the parties signed an agreement to build a pipeline towards Italy. However, the Italian government has opposed plans for the final trait of the “Poseidon” pipeline to land in Apulia.


The shale oil revolution has transformed the US into a new major player of the global gas market, fuelling hopes that a part of the new added volumes could arrive to the European market. However, there are still important limitations that prevent US Liquefied Natural Gas (LNG) from becoming an diversification option. The first is cost-competitiveness with other gas sources, especially cheap gas from Russia. The second is related to the missing links in gas network interconnections, especially from Spain, where the majority of European LNG regasification terminals are located. Finally, it must not be taken for granted that significant volumes of US LNG will make it to Europe. So far, unusually low prices in the Asian markets have helped. However, Asia has traditionally been the premium market for US LNG, and it will be even more so in the near future, as Chinese gas demand soars and Japan continues the phase-out nuclear power plants.


A further sticking point for EU energy security is the failure to promote the restructuring of Ukrainian energy system. In this respect, considerable progress has already been made. This was the case with the removal of subsidies on some categories of consumers and the new legislation on energy efficiency. However, there are still pending steps to be taken in order to improve transparency and market efficiency in the Ukrainian gas sector, starting from the reform (including unbundling) of Naftogaz. Considerable problems also emerge from the electricity sector: huge investments are needed for the decommissioning or upgrading of aging power plants and for the adaptation to EU environmental standards. A failure to negotiate a new transit contract, together with the loss of its transit role resulting from the start of operations of Nord Stream 2 and Turk Stream, would dramatically undermine Ukraine’s energy security position, and reduce EU’s incentives for closer integration.


Immagine: Garzweiler, Germany (1 Novembre 2016). Crediti: @CEphoto, Uwe Aranas (CC BY-SA 4.0)


[1] The Ostsee-Pipeline-Anbindungsleitung (OPAL) is the existing inland branch of Nord Stream connecting the pipeline to the German gas network.

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