Ukraines positionspapir af Nord Stream 2

NORD STREAM 2 February 2018
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Position paper
Divisive project of the Russian government
NS2 remains fully controlled by the Russian government, co trar to its supporters’ arrati e
about it ei g a Europea proje t.
Gazprom owns 100% of Nord Stream 2 AG. Its partners on the project are to provide loans to
fund it. For this financing, Gazprom offers rates way above the market level. The arrangement
therefore incentivizes lobbying and politi al support fro Gazpro ’s part ers.
The partners on the project are gas suppliers, not gas transmission system operators. If the
project falls under the EU legislative regime, such arrangements are illegal unless specific
exemptions are granted.
No commercial or operational sense for Gazprom
NS2 makes no commercial sense for Gazprom. It requires dozens of billions of investment in
Russia, the Baltic Sea and the EU. After NS2 completion, the transmission costs for Gazprom via
NS2 are going to be several times higher than via the UA system.
NS2 increases risks for Gazprom. NS2 will divert transit gas flows from the Ukrainian system and
eventually eliminate it. Therefore, Gazprom risks losing a versatile and reliable route, which has
excessive back up capacities, for the fragile underwater NS2.
Unlike with the Ukrainian system, in the case of NS2, Gazprom will carry the full responsibility for
any emergencies (incl. potential terror attacks and accidents with WWII munitions buried in the
Baltic Sea).
Gazpro ’s arket apitalizatio reflects the view that NS2 and other recent pipeline investments
pursued by the company are o er iall u reaso a le. I , Gazpro ’s shares ere alued
at US$150bn, whereas by the end of 2017 its market capitalization dropped to US$50bn.
The o ly purpose justifyi g Gazpro ’s active e gage e t i redundant pipeline projects aimed
at circumventing the traditional gas transmission routes across Ukraine, Slovakia, Poland and
Hungary is the geopolitical agenda of the Russian government.
OSCEs Parlamentariske Forsamling 2017-18
OSCE Alm.del Bilag 19
Offentligt
NORD STREAM 2 February 2018
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Energy security, national security and environmental concerns
NS2 will affect European energy security. In 2016, Germany, most countries of CEE (except Czech
Republic, Romania and Ukraine), Southern Europe and Turkey were reliant on Gazprom for more
than 40% of their gas imports. A number of CEE and Balkan countries depend on Gazprom for
100% of their gas supplies.
Lau hi g NS ill rei for e Gazpro ’s do i a t positio i these ou tries. The dependent
countries, already susceptive to the Russian influence in their political agenda, will face much
higher risks of coercion.
The project creates national security risks for countries in Northern Europe. By concentrating
nearly 80% of Russian gas supplies to the EU, the Nord Stream 1 and Nord Stream 2 pipelines will
become infrastructure of strategic importance.
With both the pipelines and the gas they carry owned by the Russian state-owned company, one
can expect that Russia will propose rei for i g its ilitar prese e i the Balti Sea to prote t
the fragile infrastructure.
The prospect of the additional Russian military deployment in the EEZ of a number of EU member
states and NATO members will lead to undesired tensions within these alliances.
WWF, NABU and other influential organizations emphasize environmental risks of NS2. In the
same time, the European Commission has repeatedly stated that NS2 serves no public interest and
is not essential for the EU energy security. Given this position, there is no justification to set aside
the threats of the project to the Baltic Sea wildlife and Natura 2000 sites.
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Threat to a free and competitive gas market in Europe
Gazprom remains a major single supplier of gas to Europe. In 2016, the Russian state-owned
monopoly has supplied nearly 50% of gas consumed in the region.
With the falli g produ tio i Nor a a d EU e er states, Gazpro ’s positio is a le to
strengthen its position even relying on existing pipeline infrastructure.
NS2 will concentrate Russian gas delivery routes to Europe under control of Gazprom. This will
provide Russia with an exceptional ability to fluctuate between price dumping to discourage LNG
supplies and halting supplies to enforce its political agenda.
The NS2 supporters often say that the US opposes the project because it wants to win the
European market for the US LNG suppliers. In reality, LNG accounted for less than 9% of gas
consumption in Europe in 2016, and US LNG has covered less than a negligible 0.1% of the total
demand.
Given the decrease of gas production in Europe, diversification of gas supplies falls fully in line
with the energy security interests and agenda of the European allies of the US.
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Three combat arenas to stop the project: US sanctions, EU legislation revision,
Ukrainian unbundling
The upcoming 6 months are crucial for the NS2 fate. Should Gazprom fail to start physical
construction before the fall 2018, the project is not likely to be implemented in its current shape
and will be critically behind the schedule, if not cancelled.
The threat of US sanctions is one of the efficient ways to prevent the NS2. The bipartisan bill
adopted the US Co gress last su er has alread aused a iet a o g the proje t’s EU
partners. In particular, raising the necessary funding remains at risk.
In private discussions, some of Gazpro ’s closest allies oi e o er s of ei g o errelia t o
their cooperation with the Russian company and seek ways to diversify their partnerships.
The energy security, national security and geopolitical risks posed by NS2 to US allies in Europe
fully justify the introduction of the sanctions. While they are not in place, it is important to
preser e a redi le threat of su h a possi ilit to dis ourage the proje t’s part ers a d suppliers
from participation.
The initiative of the European Commission to expand the Gas Directive so that it covers export
pipelines like NS2 is another important counter measure. If the European Parliament and the
Europea Cou il support the i itiati e, the proje t’s i ple e tatio ha es are leak.
The lobby of NS2 in Germany, Austria, the Netherlands and Belgium actively opposes the adoption
of the proposed resolution by the European Parliament. Bulgarian and Austrian presidencies in
2018 are likely to use available formal instruments to delay the decision making on this issue.
It is therefore crucial to convey a unified public position in support of the Gas Directive expansion
by as many parties as possible in the US, EU and individual member states. The support is
necessary both on political and expert level.
Finally, the gas market reform process in Ukraine is an important dimension in preventing NS2.
In particular, the unbundling of the gas transmission function from Naftogaz and engaging a
reputable Western transmission system operator to co-manage the system will make European
gas shippers comfortable using the Ukrainian gas transmission system. It is therefore important to
actively monitor and support the gas market reform process in Ukraine.
Currently, the Ukrainian system is used exclusively by Gazprom. The Russian company illegally
blocks interconnectors between Ukraine and the EU. By doing so, it cuts European competition
from the markets of Turkey, CEE and the Balkans. If the Ukrainian system is unblocked and
managed by a reputable Western operator, the European suppliers will have a clear business case
to negotiate with Gazprom to move gas transfer points to the eastern border of Ukraine and
compete in the markets now fully dominated by the Russian company.
Contrary to the Russian narrative, the Ukrainian system does not need external investment and is
in a robust operating condition. It generates sufficient operating cash flow to finance necessary
repairs and maintenance. In 2017, the system has delivered a record high 93 bcm of Russian gas to
the EU, nearly ½ of total Russian gas exports, in full compliance with the contract.


Why the 7 Arguments Used to Justify Nord Stream II are Wrong
Advocates of Russia’s Nord Stream II pipeline rely on seven justifications to explain their support
for the project. Intentionally or inadvertently, the backers of Nord Stream II use justifications that
are based on incorrect assumptions or outright disinformation. In order to objectively evaluate the
need for Nord Stream II, these flawed justifications must be identified and corrected.
#1: Ukraine’s gas transit system is in good technical condition and does not require massive
external investment. Russia has run numerous stress tests to prove the reliability of
Ukraine’s route. Naftogaz meets all nominations made by Gazprom for transit across Ukraine
fully in line with the contract, and this is the best evidence of the system’s good technical shape.
For many years, Naftogaz updates this data online on a daily basis. In its turn, Gazprom has never
provided proofs of any alleged technical failures of gas transit across Ukraine.
In January 2009, Russia made a political decision to halt gas supplies to Europe aiming to force
favorable conditions for Gazprom’s business in Ukraine and to promote Nord Stream in the EU.
Ukraine provided some of its own gas to cover critical gas shortages in certain CEE countries when
Russia stopped gas flows completely.
In early March 2018, Gazprom attempted to create another gas crisis in Europe, by failing to supply
prepaid gas volumes to Naftogaz and reducing pressure on the Russian side of the gas transmission
system to 20% below the contractual norm – all in the middle of a severe cold spell in Europe.
Under these extreme conditions created by Russia to promote Nord Stream II, the Ukrainian gas
transit system has performed impeccably, and Naftogaz fulfilled all Gazprom’s nominations.
The Ukrainian system is extremely reliable, as its performance shows. It can benefit from some
modernization to boost efficiency but its maintenance and modernization needs are only $100-300
million per year to ensure the transit capacity of 110 bcm/y, booked by Gazprom. The best way to
secure this funding is through ensuring the system is used and generates revenues.
#2: Nord Stream II’s only onshore extension is directed southward and will not provide
Western Europe with a replacement for falling gas deliveries from the Netherlands and
Norway. The Nord Stream II pipeline will only be continued to the south via the European Gas
Pipeline Link (EUGAL) and it will not generate additional capacity for Western Europe. Nord
Stream II is merely redirecting flows from existing routes in Central and Eastern Europe. It also
does not provide access to any new gas sources.
#3: Europe has available unused transit capacity of 55 billion cubic meters (bcm) and doesn’t
need Nord Stream II’s additional capacity. The Ukrainian gas transit system has a capacity of
146 bcm. In 2017, it transited 93.5 bcm, and there is nearly 55 bcm spare capacity in the system.
Nord Stream II costs billions to build but will merely replicate Ukraine’s existing capacity in order
to carry the same gas to the same clients in CEE and Southern Europe, but through a longer
route. There is no commercial logic to the project.
Moreover, advocates of Nord Stream II force the EU to sacrifice Ukraine’s 146 bcm flexible
onshore capacity in exchange for a risky, technically fragile offshore pipeline of 55 bcm. As a
result, if Europe’s gas demand increases by 2030, as Gazprom suggests, there will be no Ukrainian
gas transit system to help it meet this new demand.
OSCEs Parlamentariske Forsamling 2017-18
OSCE Alm.del Bilag 19
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#4: Fully controlled by Russia, Nord Stream II will eliminate Ukraine’s independent gas
transit system. Both systems cannot coexist. Europe will get even more dependent on Russia.
If built, Nord Stream II will strip Ukraine of another 55 bcm of transit flows, and Russia’s
Turkstream pipeline under the Black Sea will divert another 30-40 bcm. Gazprom will abandon
Ukraine’s gas transit system as soon as these diversionary pipelines are built. If the Ukrainian
system is not used, it will have to be severely downsized or scrapped entirely.
Currently, Gazprom enjoys the exceptional flexibility and spare capacity of the Ukrainian system
to enable its record high gas supplies to the EU. In the chart below, the blue and the light blue lines
are actual gas loads of the Nord Stream and Yamal pipelines, respectively. Both of these routes
are controlled by Gazprom. These pipelines are loaded near their maximum capacities, with stable
and predictable flows. The only significant swings are observed when Nord Stream is closed for
planned maintenance.
The orange line is the actual load of the Ukrainian system in the direction which Nord Stream II
is going to take over. The chart shows that, despite the wild swings never announced by Gazprom
in advance, the Ukrainian gas transit system flexibly covers all the residual demand from Europe.
#5: Ukraine’s gas transmission system is a sophisticated network of interconnected pipelines
with excess capacity and dozens of compressor stations to ensure reliability and flexibility of
transit. Two parallel offshore pipelines of Nord Stream II with just two compressor stations
are not a reasonable replacement for Ukraine’s system. Ukraine’s system is a highly flexible
and robust mesh of pipelines and compressors, backed by the largest European gas storages, which
serves to balance swings in European gas demand.
#6: Gas delivered via Nord Stream II will be priced at the level of competition or slightly
cheaper. Nord Stream II will not reduce gas prices in Germany. There is no reason for
Gazprom to sell at a rate much lower than what its competition offers. At present, Gazprom
delivers the same gas to Germany through Nord Stream, yet this gas the Russian company does
not sell this gas below the prevailing market price. If Nord Stream II is built, Gazprom’s dominance
would be further reinforced, and there would be no incentive to lower prices in Germany. Nord
Stream II is likely, however, to result in price increases in other EU countries. That would make
German companies more competitive compared to their EU counterparts but this is hardly a fair
way to compete.
#7: The Nord Stream II is a threat to European energy and national security. It is not just a
commercial deal between several companies and should be assessed in a wider context
commensurate with the project’s potential consequences. Nord Stream II threatens European
peace and stability, which is a vital interest for stakeholders on both sides of the Atlantics. With
Nord Stream II in place, lacking any need for the Ukrainian gas transit system, Russia will lose an
important incentive to avoid further escalation of the Kremlin’s military aggression against
Ukraine and its hybrid war against the rest of Europe and the USA. A joint and decisive policy of
all parties currently affected by the Kremlin’s hostile activities against the West is necessary to
thwart further destabilization of peace and order in Europe.