Thursday, March 4, 2021

Crisis in Eastern Europe Named Nord Stream-2

Installation of PIG traps at the construction site in Lubmin

Ukraine is the gateway of Russian gas exports to Europe. Even after commissioning NordStream (the first one) a good quantity of Russian gas to Europe passed through Ukraine and other Baltic states. In 2017, Russia transported 93bcm gas via Ukraine. This is more than 48% of the total Russian gas supply to Europe. Remember, Russia supplies around 40% of Europe’s gas demand.

This created a set of circumstances that maintained balance in eastern Europe. Russia can’t cut off supply to Ukraine without cutting off its supply to Western Europe as well. Since Europe is a huge customer, its economically disastrous for Russia to cut supplies to the EU. If that happens, probably shale gas from other side of the Atlantic might fill that gap; which eventually creates more problems for Russia in the long term. After all, no one wants an unreliable supplier. Note that, Russia did cut off supply twice in this line (in 2006 and 2009). World was a bit different then.

This arrangement ensured Ukraine’s energy security. As per the deal signed at the end of 2019, Russia will pay 7bn USD over 5 years to Ukraine for gas transit rights. Ukraine’s GDP is 142bn USD (2020 estimates). Hence, transit fees are important for Ukraine. Since Ukraine controls the supply to EU, they will also get their supply.

As long as Ukraine holds the key to gas supply for Europe; Russia can’t simply turn off the gas to punish Ukraine and force them to agree on any deal which Russia wanted. It is here Nordstream 2 comes into the picture. This pipeline starts from the Russian mainland, passthrough seabed, and falls on Germany - bypassing Ukraine and other Baltic states. Once Nord Stream 2 is completed, Russian dependency on Eastern European countries will reduce considerably. After all, once the gas reached Germany it can be supplied to any western European country.

Original Nordstream (owned by Russian supergiant Gazprom) from Vyborg in Russia to Greifswald in Germany also passes through the Baltic Sea. This 1222 km long pipeline, has a maximum discharge capacity of 55 billion m3/a. The first line of this pipeline was commissioned in 2011 and the second line in 2012. Following this NordStream II project was started in 2018-19 before US sanctions on Russia kicked in.

Connecting pipe sections above water
Connecting pipe sections above water


From Germany's side, she needs a lot of gas. After the Fukushima disaster, Germany accelerated the shutdown of nuclear power plants. However, renewable energy is not able to replace fossil fuels completely. Germany wants to go ahead with the project. 

United States

At Washington, the previous administration under Trump and the current administration under Biden are not in favour of it. The threat of sanctions is in the air on companies that are working on the project. This already forced some companies to back out from NordStream 2. US stands to gain if Germany dropped the project. In that case US shale gas will get a larger market and Europe will invest in building LNG terminals across its shores.

Eastern Europe and Ukraine 

Eastern European countries fear that the pipeline will increase European dependency on Russia for energy. 

At this point, looks like that project might go through

Commissioning equipment at the Russian landfall

What this means to Eastern Europe and Ukraine?

1, they will be under the mercy of Russia for energy security. These countries can switch to US shale or gas from the middle east. Both are costlier and require additional investments in infrastructure.
2, Loss of huge transit fees for Ukraine.
3, Ukraine will also lose its leverage in Brussels, and the EU may not care much about Russian advances in old soviet states or how the Russian state deals with protesters.
4, Russia will gain more leverage over the EU.
5, Europe’s dependency on cheap Russian gas will increase and any further sanctions on Russia by the US (which blocks the sale of oil/gas) may not go down well in Brussels. 
6, US shale may never be able to beat Russian gas in terms of price. Once the pipeline is available, then western Europe might not invest more in building LNG terminals and other infrastructure required for shale gas import.


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