Why Nord Stream 2 will go ahead despite opposition

Why Nord Stream 2 will go ahead despite opposition

The European Commission has put up new obstacles to the Nord Stream 2 pipeline, led by Russia’s Gazprom. The project has enemies in Eastern Europe too. But there are strong reasons to expect construction to stay on track for completion in 2019, or soon after. These include prior investments, socio-economic benefits, and strong support from key European governments.

Opposition to Nord Stream 2

The European Commission recently stated that its revisions to the Third Energy Package are not aimed at NS2 but rather the diversification of European energy providers.  However, careful analysis of the new legislation reveals the obstacles it creates to the pipeline.

Currently, NS1 does not travel over EU territory and enters Germany from the sea. Under the current Third Energy Package, the offshore pipeline is not subject to onshore EU regulations.  NS2 would reap similar benefits, but the EC’s new law would require “all major gas pipelines entering EU territory… to comply with the 28-member bloc’s rules on transparency, accessibility, and efficiency” this could “render the… project unprofitable.”  The law’s coincidental timing and regulations are a political stance in opposition to Russo-Euro economic relationships.

Just as they battled Nord Stream 1 (NS1), Ukraine, Poland, and the Baltics stand against NS2. This Eastern bloc fears NS2 would strengthen Russia’s geopolitical position given increased EU dependence on Russian natural gas.  Additionally, NS2 would streamline Russian gas distribution to Europe, limit the Ukrainian-Polish role as middlemen, and reduce the transit fees Eastern Europe enjoys.

Financial and socio-economic factors favour the pipeline

Even though Eastern Europe and the EC disapprove of NS2, entrenched financial interests contribute to the probability of its construction.  Many large Western European companies have already invested significant funds into laying the pipe.  Engie (France), OMV (Austria), Uniper and Wintershall (Germany), and Shell (English-Dutch) provided Gazprom 1.43 billion euros in 2017 and promised 950 million euros each in the total project finance.

The pipeline is also logical from a socio-economic standpoint.  German-based thinktank, ewi Energy Research & Scenarios, has shown that NS2’s natural gas distribution “has a price decreasing and welfare enhancing effect in the EU-28” up to 24.4 billion euros in 2020 alone depending on supply of liquid natural gas (LNG).  NS2 is likely to reach such welfare enhancing estimates – although the International Energy Agency predicts long-term LNG supply increases, such changes in capacity are not likely to affect the market until the mid-2020s.  Extrapolating on these numbers, NS2 could enhance EU welfare by over 100 billion euros after just five years of operation.

Support remains strong overall in Europe

Support for NS2 extends beyond the private sector.  The governments of financing companies – Germany, the UK, France, Netherlands, and Austria – support the pipeline’s creation and can “form a blocking minority” of the EC’s proposed new regulations.

The most notable backing comes from Germany due to its hegemonic ability to lead and influence European decisions.  Germany would benefit from the transit fees Eastern Europe currently receives and, as Europe’s top consumer, satisfy its country’s thirst for natural gas.

The Social Democrats, NS2’s strongest supporter within Germany, suffered losses in the most recent Bundestag elections which increased hostility to NS2 in domestic politics.  However, we cannot underestimate the influence of former German Chancellor Schröder in lobbying continued domestic and European support for NS2.  Schröder was an instrumental proponent for NS1 and as the current chairman of NS2,  he will be a strong advocate for the project.

From a broader European view, Gazprom is expected to receive permits for construction from Sweden, Finland, and Denmark in early 2018.  Legal opposition has recently arisen within Danish parliament, but the law proposed would simply prolong development and increase costs of the pipeline – not prevent its creation.  Taken collectively, the support of key EU member states and their ability to block EC regulation against NS2, coupled with expected German leadership and Scandinavian approvals create an environment favourable to the pipeline’s construction.

Lessons from Europe’s inaction on the Ukraine conflict

Perhaps the most controversial reason for the increased likelihood of NS2’s completion is apparent Western European acquiescence to Eastern European strife.  German support for NS2 has come under fire for contradicting the EU’s position on the crisis in Ukraine.  Yet realistically, EU members have done little to deter escalation in tangible forms. Summits and sanctions have proven ineffective attempts at resolution.

This reflects the fact that Europe is weakened by divisions on a number of fronts, manifested not least in reactions to Brexit and Catalonia. The countries of the EU have demonstrated their inability to unify on the Ukraine issue, and the same will likely hold for Nord Stream. Any opposition to the project will be outweighed by the existing major financial investments, the economic benefits of its construction, and the backing of major European decision-makers.

Categories: Economics, Europe

About Author

Michael Loginoff

Michael Loginoff is studying for his Masters of Science at the University of Oxford in Russian and East European Studies and received a Bachelor cum laude from Colby College with two degrees in Russian Language & Culture and History. His current research seeks to understand how Russia's economy is shifting vis-a-vis Eurasia and China with a special focus on the Eurasian Economic Union, China's New Silk Road, and special economic zones.