The Big Picture

Who Needs Nord Stream 2?

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  • US and German threats to block Nord Stream 2 if Russia invades Ukraine beg the question of who is most affected by the closure of the contested transit route.
  • Europe needs more gas — but there are no guarantees the pipe will not be used to just replace Ukrainian transit flows.
  • Russia also needs a greenlight to strengthen its hand in upcoming transit talks and as an outlet for gas from new Arctic fields.

The fate of the Nord Stream 2 natural gas pipeline has come into focus once again as the threat of a Russian invasion of Ukraine escalates. The €9.5 billion ($10.7 billion) pipeline is slated to transport Russian gas directly to Germany under the Baltic Sea. It has become a preferred target for the US and the EU as part of the toolbox to counter Russia’s geopolitical moves against Ukraine, in the years following Russia's 2014 annexation of Crimea and support for separatists in eastern Ukraine after the Maidan revolution tilted Ukraine's political orientation from east to west. Measures to stop or delay the start of Nord Stream 2 have focused on ensuring that Russian gas giant Gazprom continues flowing gas through Ukraine, a massive source of revenue for Kiev.

For Russia, a permanent block of Nord Stream 2, which the US and Germany have threatened if any Russian invasion goes ahead, would be a blow to its plans to use this new transport route to minimize transportation costs and reduce the transit and geopolitical risks associated with Ukraine. The 1,200-kilometer pipeline, completed in September, would also become an unused, stranded asset — although Russian experts say Gazprom’s windfall revenue from high gas export prices has already paid for the project’s cost.

On the surface, maximum capacity on the Ukraine transit route of 130 billion cubic meters per year means Nord Stream 2's 55 Bcm/yr of capacity doesn’t look critical to supplying Europe. But old pipes on the Ukraine route -- currently flowing 40 Bcm/yr, down from some 90 Bcm/yr in 2019 -- would likely need upgrading to continue to safely flow gas at higher rates.

A blocked Nord Stream 2 could leave the EU exposed to possibly higher energy costs associated with the Ukraine route's transit fees and needed upgrades, and to geopolitical disruptions. The EU has been reluctant to intervene directly to block the pipeline, a private commercial project built with no public funds. The bloc’s leadership is concerned that singling out the pipeline would undermine its long-held position that Moscow is the one politicizing energy flows.

Europe Needs Nord Stream 2 Supplies

Europe is in serious need of gas and is expected to require more imports to meet short- to medium-term consumption requirements to offset falling domestic gas output absent sufficient renewable power. Nord Stream 2 supporters argue it could be a conduit for extra volumes. Europe’s largest Russian gas importer, Germany, needs more gas to counter nuclear- and coal-power phaseouts this decade but is constrained as it lacks LNG import terminals to tap alternative supply sources globally. Absent a conflict, German regulatory approval could come in July at the earliest.

But there are no guarantees that Nord Stream 2 volumes will remain in Germany, or that the 55 Bcm/yr pipeline will offer incremental volumes rather than just replacing Ukrainian transit. Capacity auctions for the 55 Bcm/yr onshore Eugal pipeline that would take Nord Stream 2 gas inland from the Baltic Coast resulted in just 9.9 Bcm booked to head west, into Germany itself, and 45.1 Bcm booked to the Czech border to the southeast. From the Czech Republic, Gazprom could flow gas into Central and Eastern Europe and the key transport hub of Baumgarten in Austria, potentially reaching the markets traditionally supplied by the Ukrainian route — Slovakia, Austria and Italy.

The Nord Stream 1 and Turk Stream pipelines have already diverted volumes away from the Ukrainian and Polish (Yamal-Europe) routes. Ukraine transported over 80% of Europe’s Russian gas in 2009. In 2021, that number was closer to 30%, with transit flows down to 41.7 Bcm. (Under a 2019 transit deal for 2021-24, Gazprom agreed to prepay transit costs for 40 Bcm/yr over 2021-24.)

Commercially, Nord Stream 2’s European backers are bound to be hit if the pipeline is permanently blocked. Uniper and Wintershall Dea from Germany, France’s Engie, Austria’s OMV and the UK’s Shell were forced to become indirect financiers for half of the pipeline’s construction costs after competition requirements from the European Commission in 2017 blocked them from being equity investors. The companies have already paid Gazprom in order to avoid US sanctions, but it is uncertain whether they would be repaid their investment if the pipeline never comes online. They are also expected to offtake Nord Stream 2 gas but any deals to corroborate this have not been made public.

Long Term, Gazprom Needs the Pipe, Too

Gazprom does not need Nord Stream 2 in the short term and appears to be comfortable limiting supplies to meet specific European buyer requests. The exporter might be not interested in flowing more gas as the lower volumes serve a dual purpose: Russia benefits economically through higher gas prices and geopolitically by putting pressure on Europe and its gas needs at a time when wider tensions are spiraling.

Longer term, however, Gazprom urgently needs Nord Stream 2 to strengthen its hand in future transit talks with Ukraine, expected in 2024. The exporter wants to avoid a repeat of the 2019 transit deal, which it was strong-armed into signing after US sanctions delayed the construction of Nord Stream 2.

If forced to continue using the Ukrainian route for significant volumes post-2024, Gazprom would have to upgrade domestic pipes in its central corridor. Its current focus is on the northern corridor, which feeds the two Nord Stream pipelines and is the shortest route connecting Europe to the fields in the Yamal Peninsula, Gazprom’s new key production center. These fields are designed to gradually replace the legacy Nadym-Pur-Taz area of West Siberia, which is facing natural production declines.

With Ukrainian transit fees much higher than in Gazprom-controlled routes, this could inflate the cost of Russian gas supplies.

Gazprom also needs Nord Stream 2 to take around 20 Bcm/yr of dry gas from the planned 45 Bcm/yr Ust-Luga gas processing and LNG plant in northwestern Russia, close to the pipe’s starting point. The plant’s first train is expected to start in 2024. If Nord Stream 2 cannot be used, then Ust-Luga’s dry gas can only go back in reverse mode to the domestic grid; regulated domestic tariffs are normally much lower than export prices.

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