It is now extremely unlikely that Gazprom owned Nord Stream 2 will ever be operational in the way Moscow envisaged. US sanctions have stopped pipeline construction in its tracks. More US sanctions will be adopted before the end of the year creating further problems for the pipeline.
In addition, even if Nord Stream 2 is actually completed it faces a thicket of EU law requirements which will at least undermine the project and may well stop it. What should however be more worrying for Gazprom than the failure of Nord Stream 2 is the arrival of the Biden Administration. It has the capacity to take a much more strategic approach to EU energy security. The danger for Gazprom is that the new Administration will work with the EU and the Member States to develop an effective common energy security policy. That policy would seek to complete the energy transition, integrate non-EU Europe into the EU energy market, and isolate Gazprom . In such a scenario Gazprom could end up the gas supplier of last resort, a marginalised price taker, progressively losing market share to a deeply connected all European electricity and gas network and subsequently to the next generation renewable energy market.
The prospects of the Nord Stream 2 pipeline being able to flow gas into the EU as Gazprom intended now look extremely perilous. US sanctions legislation adopted in December 2019 stopped the construction of the pipeline by extending sanctions to pipelaying vessels. Nord Stream 2’s expert contractor All Seas immediately stopped its vessels from laying pipes. Today approximately 160km of the route remains unlaid. Nord Stream 2 has sought to find alternative pipelaying vessels and hopes to begin pipelaying shortly with the much slower and less technically advanced Akademik Cherskiy pipelaying vessel. However, on the 20th October the State Department issued a clarification on the scope of the existing sanctions creating further difficulties for suppliers to the project. And at the beginning of November the House and Senate came to an agreement on a further round of sanctions which hit the pipeline’s insurers and undermine the capacity of the pipeline to obtain technical certification. These additional sanctions will be enacted by the end of the year as part of the annual National Defence Authorisation Act.
Overlooked as a result of the controversy over US sanctions, the European Union itself has also taken measures which will undermine the operation of Nord Stream 2. In May 2019 the EU enacted an extension to the Gas Directive 2009 which formally extended the pipeline to import pipelines such as Nord Stream 2. The full application of the Gas Directive creates a number of problems for the pipeline, notably Article 11. It provides that with any non-EU owner the Member State regulatory agency must assess whether such an owner will pose a risk to the supply security of the Member State or the European Union. Given the extensive catalogue of Gazprom’s threats and actual cut off of supplies over the last two decades surviving any such regulatory assessment would be problematic. And any attempt by a Member State agency which sought to grant clearance to Nord Stream 2 by arguing that there was no risk to supply security would face a barrage of litigation in national and EU courts.
Nord Stream 2 is therefore faced with a formidable barrier of existing and incoming US sanctions and a thicket of almost impenetrable EU law requirements which make it extremely unlikely that the pipeline will survive-at least in the form of and for the purpose that Gazprom intended.
Nevertheless even if Nord Stream 2 is stopped dead in its tracks, Gazprom’s commercial and political influence across the EU states in Central and Eastern EU Europe, the Balkans and Ukraine and Belarus remains significant. In addition, the battles over Nord Stream 2 between particularly Germany and the CE EU states led by Poland have scarred relationships and caused division. This is where particularly there is an opportunity for the Biden Administration to heal divisions promote the energy transition and secure European energy security.
It is worth remembering that most of EU Central and Eastern Europe, Ukraine, Belarus and the Balkans depends upon fossil fuels, principally coal and gas (and some nuclear). And in those states most of the natural gas is bought from Gazprom. Furthermore, there is not a free and open market for energy across the region. It is true that great strides have been made in developing an interconnected European energy market. There is now much more electricity and gas interconnection that there was 10 years ago. However there is still limited interconnection between national markets for electricity and gas even within the EU’s Western and Eastern members. This is even more so in respect of non-EU states and the EU. This lack of interconnection and supply alternatives permits Gazprom to maintain a significant commercial and political influence across Central and Eastern Europe.
The Biden Administration could seek to build support for a common energy transition, integration and energy security programme between the EU and non-EU Europe. In so doing the Administration would also help binding wounds within the EU over Nord Stream 2 as such a programme could obtain support from all the EU parties involved in the battles over Nord Stream 2. The programme would include an infrastructure and regulatory programme to ensure full integration in the EU market which would be extended to Ukraine and other non-EU European states. The programme would seek to ensure the full integration and upgrade of the electricity and gas markets completing the interconnection and integration process across the continent. At the same time it would support the rolling out of greater use of solar and wind power. This would have once been a very difficult objective to deliver because of the cost of renewable power and the subsidies required to roll out capacity. However, over the last decade the cost of solar power has fallen 80% and onshore wind by approximately 40%. The International Energy Agency in its latest World Energy Outlook Report underlines the staggering falls in the cost of Solar PV power by pointing out that such power is now the cheapest electric power ever produced.
The initial aim of such a programme would be to maximise the of electricity. Integrate the networks across the continent and enhance their capacity to take renewable power. Then to roll more solar and wind power to run on those networks. Natural gas would still have a role to play as the backup fuel for renewables until further technological developments can replace natural gas. At this stage it is unclear whether such developments will include carbon capture and storage; large scale battery storage capacity or hydrogen or a mix of all three. However, the geostrategic effect of strengthened and integrating the electricity networks and increasing renewable power capacity will diminish the role for natural gas. If at the same time the gas market is fully integrated in EU and with non-EU Europe this will force greater competition in that market. Gazprom will face the prospect of continuing competition from reverse gas flows, and greater competition from the Baltic Pipeline (which will bring Norwegian case into the CEE market from 2022) and LNG.
In addition to supporting an infrastructure programme, the United States could support the work of the Energy Community which applies EU energy law in Ukraine, Georgia and Moldova and the non-EU Balkan States. The Energy Community provides a legal platform for the integration of Eastern European energy markets with those of the EU, creating a single and open green energy market across the continent. This can be reinforced. The Energy Community’s powers could be extended to enforcing common antitrust and environmental rules across the ECT states, as well as granting the Community anti-corruption powers. Such additional powers would assist in levering in the foreign investment to ensure that the transition could be effectively executed.
For the Biden administration to move in this direction with the aim of creating a full energy transition in CE Europe, Ukraine and the non-EU Balkans would be a way of healing divisions across the continent over Nord Stream 2-as well as advancing the energy transition. Such a programme would also undermine Gazprom’s commercial and political power. Greater infrastructure interconnection would weaken its hold on national markets, a greater use of renewable power would weaken market demand for gas. This sort of win-win strategic play could assist in unifying the EU and the US with the EU, bringing non-EU Europe closer to the EU, and undermine Russian attempts to destabilise Central and Eastern Europe.