Nord Stream 2 dispute goes into final round

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Nord Stream 2 dispute goes into final round

Connecting Pipe Sections Above Water (copyright by Nord Stream 2)
Connecting Pipe Sections Above Water (copyright by Nord Stream 2)

The German Federal Network Agency must decide by the end of May whether Nord Stream 2 will be subject to European regulation. A new expert opinion is now to refute the arguments of the opponents.

From the point of view of the opponents of the Nord Stream 2 gas pipeline, the matter is clear: in their opinion, the pipeline impairs competition on the European gas market and at the same time weakens security of supply. The opponents want the EU directive for the internal gas market, which was amended last year, to apply to Nord Stream 2.

Until now, the principles of network regulation have only applied to pipelines that have their starting and end points within the EU. Nord Stream 2 is an import pipeline that will transport natural gas from Russia across the Baltic Sea to Germany. Construction of the pipeline is not yet completed.

If the principles of European network regulation were to apply, the operators of Nord Stream 2 in the German Baltic Sea territory would also have to grant third parties non-discriminatory access to the pipeline.

In addition, the fees for the use of this 54-kilometre section of the pipeline would be controlled by the regulatory authority. The unbundling would be even more serious: gas producer and operator of the pipeline section on German territory would not be identical.

Nord Stream 2 AG, which is wholly owned by Gazprom, applied to the German Federal Network Agency weeks ago to be exempted from EU regulation. In principle, the EU Gas Directive provides for an exemption from regulation.

An expert opinion by Frontier Economics, a consultancy specialising in energy issues and commissioned by Nord Stream 2 AG, now attempts to refute all the arguments of the pipeline opponents.

Excerpts of the report are available to Handelsblatt. The experts are taking the project, which is being driven forward by the EU Commission in particular, to subject Nord Stream 2 to European gas network regulation to a hard core.

From the experts point of view, there is nothing in favour of regulation

From the point of view of the experts, there is nothing in favour of regulation. They argue that the Russian gas company Gazprom is the export monopolist for Russian natural gas under Russian law anyway, and thus - with or without exemption from European regulation - the only transport customer with access to the entry point of the pipeline and thus the only user of the pipeline: "Regardless of whether the German pipeline section is regulated or not, only Gazprom gas is transported via Nord Stream 2," the experts write.

The claim that the regulation would allow non-discriminatory access to the pipeline for third parties would therefore be in vain. "An exemption therefore has no influence on which producers can supply the market via Nord Stream 2," they conclude. It is therefore "only logical that the exemption cannot have any negative effects on competition".

Accordingly, "no economic benefit can be seen from regulating the German section of the Nord Stream 2 pipeline". Even without regulation, 100 per cent of the gas volumes transported via Nord Stream 2 would be fed into the German gas network from the landing point in Lubmin on the German Baltic Sea coast, which in turn would be subject to regulation under the Energy Industry Act.

Nord Stream 2 AG has also commissioned the auditing firm PwC to examine the cost side of including the pipeline in the European network regulation. The result: the costs for the German gas market would increase significantly. According to PwC, this would result in costs of around 600 million euros by 2030. Extrapolated to the maximum 50-year operating life of the pipeline, this would amount to up to 2.5 billion euros according to PwC's calculations.

"The decision for or against regulation makes a tangible difference in the wallets of German citizens," says Henry Otto, Head of Energy Consulting at PwC. Without regulation, Gazprom would pay for the entire use of the pipeline, "The gas is then fed into the German network at Greifswald and sold to traders and suppliers at market price," he explains.

In the event of regulation, however, the 54 km long German section in the Baltic Sea would become part of the German network fee system. "These costs will be socialised to German consumers through the grid charges. In contrast to the costs of non-regulation, they lead to an increase in gas bills of an average of 50 million euros per year," says Otto.

The gas importer would be relieved by the same amount, as the German market area would not start at the coast, but 54 kilometres away at sea. "All in all, it can be said that, if regulation were to take place, Gazprom would save an average of 50 million euros per year, and German gas customers would pay just that amount more each year," Otto said.

Expert: Pipeline increases supply security

The report by Frontier Economics also emphasises that Nord Stream 2 will improve security of supply by creating additional transport infrastructure when the pipeline comes on stream. "This will increase the diversification of transport routes and the reliability of the natural gas system in the event of, for example, technically induced failure of individual infrastructures," the experts write.

This contribution to security of supply is reinforced by the fact that the pipeline connects Russia directly with Germany and thus the EU and thus "does not depend on transits through third countries, which means that risks due to technical failures in the transit countries can be avoided".

Nord Stream 2 also makes a positive contribution to security of gas supply by creating the possibility for additional gas import volumes to compensate for declining gas production in the EU.

The experts from Frontier Economics thus point to a growing problem, especially for Germany. Domestic production is falling continuously. In 2005, 19 percent of the natural gas consumed in Germany still came from German sources. By 2019, this figure will have fallen to just seven percent.

In addition, the Dutch government announced last year that it would stop producing gas completely by mid 2022. The Netherlands is Germany's third most important gas supplier - after Russia and Norway - with a share of around one fifth.

At the same time, Germany has decided to phase out coal-fired power generation and to replace some of the coal-fired power stations that are no longer in operation with gas-fired power stations. Germany's demand for natural gas is likely to rise as a result.

The evaluators focus on climate protection aspects

The German government therefore takes a fundamentally positive view of the Nord Stream 2 project. At the same time, it supports efforts to open up additional import opportunities by building terminals for the landing of liquefied natural gas (LNG). US companies in particular are very interested in selling LNG to Europe. The U.S. government is massively supporting these efforts and at the same time is using very rude methods to prevent Nord Stream 2.

The experts from Frontier Economics are convinced that importing Russian gas via pipelines has a cost advantage over importing gas via LNG. Moreover, LNG trade takes place in a global market, and with high demand and correspondingly high prices in markets outside the EU, especially in Asia, the costs of LNG imports to Europe would rise accordingly. "An increase in transport capacity from Russia to the EU via the Nord Stream 2 pipeline would therefore help to increase the supply of low-cost gas in the EU," the experts concluded.

The experts pay particular attention to the climate protection aspects of the pipeline. The gas pipeline would make it possible to reduce greenhouse gas emissions by increasing the switch from CO2-intensive fuels such as oil and coal, which still account for around 50 percent of primary energy consumption in the EU.

In addition, Nord Stream 2's greenhouse gas emissions are significantly lower than those of alternative pipeline routes because the transport distance is much shorter than the traditional route through Ukraine.

The experts refer to calculations according to which the specific greenhouse gas emissions from transport via Ukraine are more than 60 percent higher than on the Nord Stream 2 route.

Nord Stream 2 also has significantly better values than the alternative import by LNG. The authors point out the high energy consumption of LNG due to the processing and liquefaction of natural gas.

With the expert opinions of Frontier Economics and PwC, Nord Stream 2 AG has bundled its arguments for the requested exemption from regulation to refute the arguments of the opponents.

According to the German Federal Network Agency, eleven EU member states alone have participated in the consultation process, which is part of the procedure. The Eastern European states in particular have been vehemently opposing the project for years. According to the network agency, various companies have also been invited.


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