Russia's Nord Stream 2 natural gas link to Germany is set to have to reveal data on its costs and tariffs under a draft accord to apply EU market rules to it. This could help Ukraine price its alternative transit route to Europe low enough to compete, but Ukraine is also hoping the rules will force wider change, including an end to Russian Gazprom's pipeline gas export monopoly. That would enable other Russian gas producers, as well as potentially Central Asian producers, to send gas via Ukraine to Europe.
S&P Global Platts editors Siobhan Hall and Stuart Elliott analyze the main drivers and likely outcomes of this change in EU gas policy.
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SH: Hello and welcome to this Brussels to Beijing policy podcast from S&P Global Platts on March 7. I'm Siobhan Hall, Platts' expert on EU energy policy based in Brussels, and I'm joined from London by our senior writer for European gas, Stuart Elliott. Today we're talking about one of our most popular topics – Russia's planned Nord Stream 2 gas pipeline to Germany, and the EU's efforts to regulate it. The potential ramifications of EU ministers' recent agreement to go ahead with this range from nearly business as usual to ending Gazprom's export monopoly for pipeline gas to Europe, opening up access to rival gas suppliers via Ukraine. Now I've been talking and listening to a lot of people in Brussels on this topic, so I'm going to hand over now to Stuart to lead this conversation. Over to you Stuart.
SE: Thank you Siobhan. Well, the first question has to be: how will these changes to the EU's gas directive impact Nord Stream 2?
SH: I think it's going to result in Germany regulating Nord Stream 2's tariffs just for the EU section of the pipeline – so that's the last 22 kilometers of the full 1,200 kilometer pipeline. That's just under 2% of the total – so it's very small, but it is significant.
SE: Why is that? What difference will it make?
SH: Well even this small toehold will force the project company, which is owned by Gazprom, to reveal information about Nord Stream 2's costs and tariffs. And that could be enough to allow Ukraine, which operates a rival transit route, to lower its tariffs enough to compete on price.
SE: But Gazprom has a pipeline export monopoly, so it's the only potential customer for the Ukrainian route – and it's clear that it prefers to use Nord Stream 2.
SH: Well, what might be interesting here – and certainly what Ukraine is hoping for – is that Gazprom's customers, the European gas companies, could ask for gas routed via Ukraine if Ukraine can make it cheaper or as cheap as gas via Nord Stream 2.
SE: Do we have a chicken and egg problem here though for Ukraine? Because it can only offer cheap tariffs if Gazprom is transiting large volumes, and that doesn't seem likely after the end of this year, when the transit contract expires.
SH: Yes, and in fact Naftogaz, Ukraine's gas company, is saying it thinks Russian gas transit via Ukraine will drop to zero from January 1, even if Nord Stream 2 is delayed slightly and doesn't come online by the end of the year as planned. It thinks Russia can cover its supply commitments with gas in European storage and other options – at least in the short term.
SE: Well, we know Russia sent 87 Bcm via Ukraine in 2018, so that's a lot to cover without Nord Stream 2, which will be able to flow 55 Bcm/year.
SH: Yes, I think Naftogaz is pushing this idea that Ukraine is going to lose out completely to pressure Germany to help it. Because one of the alternatives to Germany simply regulating the last part of the Nord Stream 2 is for it to agree an intergovernmental agreement with Russia for the whole pipeline.
SE: And what difference would that make?
SH: Well, Naftogaz has a big wish list of what it wants included in such an agreement, with the emphasis on wish. So it wants Germany to get Russia to agree to end Gazprom's pipeline export monopoly, and allow independent Russian gas producers – so for example Rosneft and Novatek – to export. They would be potential new customers for the Ukrainian route.
SE: OK, I'm not sure why Russia would agree to that, but go on.
SH: Yes there's more. Naftogaz also wants Russia to allow Central Asian countries to export gas via Russia to Europe, who again could be potential customers for the Ukrainian route. And then there's its long-standing wish for Gazprom to sell to European companies at Ukraine's eastern border, so Ukraine would get its transit fees directly from European buyers.
SE: Again, I can't see why Russia would agree to any of this. It would go against its national economic interests to have Gazprom competing with other Russian companies for the same European buyers.
SH: Exactly, it would come down to how much pressure Germany feels under to show support for Ukraine. And based on recent comments, Germany has no plans to negotiate an intergovernmental agreement. That's what makes me think Russia will submit to the regulation for the EU section – it's the least intrusive and most predictable option.
SE: So you don't think Russia will ask for an exemption from these new rules? SH: I don't think so, no. The problem is the process for getting an exemption can only start formally once Germany applies the new rules, and it has until around April 2020 to do that, which would be after Nord Stream 2 has started flowing gas, if it stays on track. So then Nord Stream 2 would have to stop flowing gas and wait for the exemption process to be completed, which usually takes about 6 months. And the exemption is not guaranteed – it has to be approved by the European Commission, and any positive decision could face a legal challenge from Nord Stream 2's opponents, like Poland, for example.
SE: So you're saying submitting to regulation for the EU section looks like Russia's best option. Does it mean Gazprom will have to unbundle? How can you have an entry point that's not at the start of a pipeline? And how does third-party access work if there's only one party– ie Gazprom?
SH: These are very good questions! So, it means the pipeline operator company in charge of the EU section will have to be certified as independent from Gazprom. That's not a big deal – it would qualify for the lightest regulation option as an existing vertically integrated company. Incidentally that option exists because Germany, which will be doing the certifying, fought hard for it in the EU's third energy package for its own national gas companies.
SE: What about the entry point issue and third-party access?
SH: Well, industry sources say that this could be sorted with a virtual balancing point, so that anyone could buy gas and capacity to transport it from that notional point. Effectively you'd just be shifting the starting point for EU rules a few miles offshore.
SE: So what happens next? What should we look out for?
SH: Well, on the legal side, these changes are on track to be formally approved and enter into force – which means they are fixed in law – around July. And then EU governments will have to apply them within nine months, so that would be around April 2020.
SE: And what about on Nord Stream 2?
SH: The big unresolved question there is when it will get the final permit it needs from Denmark. That's going to determine if it will be able to start by the end of this year as planned or not. If it gets beyond August with no permit, then that start date could slip.
SE: And what about a new transit deal between Russia and Ukraine for after 2019?
SH: Well, we know that there is another round of high level talks on that planned in May, but it's not looking very hopeful for a deal before the end of the year at this point.
SE: Yes, we could fill another podcast talking just about Russia and Ukraine's transit relations, but that's all we have time for today. We'll be following all of this closely here at S&P Global Platts. Thank you for listening, and join us again for more Platts' perspectives on policy.