Insight from Brussels: Europe's Nord Stream 2 opponents now looking to ‘plan B’

US President Donald Trump may not like it, but Russia still plans to bring its Nord Stream 2 natural gas pipeline to Germany online by the end of 2019.

Neither the threat of US sanctions nor legal efforts by the European Commission have succeeded so far in derailing the 55 Bcm/year project. At this stage it looks like only Russian President Vladimir Putin has the power to stop it being built, and it's difficult to see what would persuade him to do that.

The European Commission's complaints are that Nord Stream 2 will concentrate too much Russian gas into one import route to Europe, and significantly reduce Russian gas transit through Ukraine. Russia disagrees on the supply security point and is very clear that it wants to reduce transit through Ukraine.

Related podcast: Russia mulls sending extra EU natural gas demand from 2020 via Ukraine

Its state-owned gas company Gazprom plans to build Nord Stream 2 across the Baltic Sea along a similar route to its 55 Bcm/year Nord Stream pipeline, which came online in 2011. Adding Nord Stream 2 would allow Russia to send up to 110 Bcm/year to Europe through the Baltic Sea route – around the same volume that it was sending through Ukraine in the early 2000s.

Volumes via Ukraine dropped in 2009, partly because of the global recession that cut overall European gas demand, and also because of a local contractual dispute with Russia that halted flows to Europe for around two weeks. This was the most serious gas supply crisis Europe has ever experienced, particularly for several Central and Eastern European countries, which at that time were mostly or entirely reliant on Russian gas.

Ukraine and Russia both blamed each other, while the EU tried to mediate and also started work on boosting its resilience to supply shocks. That included supporting Russia's first Nord Stream pipeline, as it diversified import routes and reduced the EU's dependence on transit through Ukraine.

Nord Stream 2 will bring Europe back nearly to where it was 10 years ago – potentially taking 80% of its Russian gas through one route. It's no wonder the EC is frustrated at how things are turning out.

EU gas market more resilient

But the European gas market at the end of 2019 will not be anything like the market in 2009. It will be vastly more resilient to gas supply shocks from any direction, thanks to the EU's efforts to tackle the vulnerabilities exposed by the 2009 crisis.

These include binding EU gas supply security rules – something EU governments had rejected before 2009 as being unnecessary. The fallout from the 2009 crisis means that all EU governments now know where the vulnerabilities are, and have to work together on preventing or mitigating future supply shocks.

The security rules also promoted more two-way gas links in Central and Eastern Europe, allowing more gas to flow from other directions if there is a problem with Russian supplies – or indeed any supplies. Meanwhile, new LNG import terminals in Lithuania and Poland give these countries and their neighbors access to new supply sources, including – since early 2016 – the US.

Trump's criticisms of Nord Stream 2 should not be written off simply as pushing US commercial interests as an LNG exporter, however. The US has urged the EU for years to diversify its gas supplies, long before US LNG was an option. It was and remains a strong advocate for the Southern Gas Corridor, which is to bring first gas from the Caspian region to the EU in 2020.

Russia needs Ukraine after 2019

The other big difference compared with 2009 is that the Ukrainian route remains an option after 2019, if Ukraine and Russia can agree transit terms that make it viable. The EU knows it will have to import more gas in future as its own domestic output declines. Russian transit via Ukraine hit a six-year high in 2017, driven by strong European demand.

Gazprom has estimated that it will still need to send some gas – at least 10-15 Bcm/year – via Ukraine after 2019 to meet supply obligations to European customers, even with Nord Stream 2 online.

Ukraine is looking for a long-term transit commitment so that it can attract European partners to buy into and help manage its gas grid. It plans to follow EU transmission tariff rules, and hopes to offer tariffs that would make the Ukrainian route competitive with Nord Stream 2.

Opponents still hope that Nord Stream 2 will be blocked or at least delayed, but a ‘plan B’ focused on maintaining enough transit volumes via Ukraine to keep the route open is becoming the EC's political priority.