Nord Stream begins pipelaying

JULIAN LEE | AUGUST 2010 | SOURCE: FSU Pipeline Advisory

The Nord Stream consortium has begun laying the first of its two parallel gas pipelines beneath the Baltic Sea, with a formal ceremony at Portovaya Bay on the 9th of March. The first phase of the line will carry up to 27.5 bcm/yr of gas directly from Russia to Germany by the end of 2011, with a second string due to double capacity a year later.

The project is billed as necessary to meet rising European gas demand, but in the first years of its existence it will provide an alternative route for Russia to divert some its European gas exports away from transit countries such as Belarus, Ukraine and Poland.

• 
• LOGIN OR REGISTER TO SAVE ARTICLE AS A REFERENCE

In the longer term, it could provide important additional capacity to Russia’s traditional export routes, but it is likely that routes across Belarus and Ukraine will slip down the pecking order of priority routes for delivery of Russian gas to Europe.

Nord Stream will undermine the bargaining positions of Russia’s traditional transit countries, depriving them of one of their principal levers for securing discounted gas supplies from their eastern neighbour.

While Russia’s President Dmitry Medvedev, the EU’s Energy Commissioner Gűnther Oettinger, and shareholders in the Nord Stream consortium from Russia, Germany and the Netherlands attended the official ceremony at Portovaya Bay near Vyborg to launch the construction phase of the project, Saipem’s Castoro Sei pipelay vessel was commencing the real work off the coast of the Swedish island of Gotland.

While the dignitaries told the world how important the project was for EU energy security, and attached flags and messages to two symbolically welded pipe segments, the first of two subsea pipes began inching its way along the Baltic seabed at a rate of around 3 km per day.

When completed in late-2011, the first of the two 1,224-km parallel pipes that will make up Nord Stream will be capable of delivering 27.5 bcm of Russian gas directly to Germany, without  needing to cross any transit countries on the way. A second gas pipeline, due to be completed a year later, is to double to route’s capacity to 55 bcm/yr.

The $7.4-bn Nord Stream pipeline will run beneath the Baltic Sea from a point on Portovaya Bay, close to the Russian town of Vyborg, to its landing point in Germany near the town of Greifswald, whence it will be linked to existing European networks.

The planned OPAL pipeline running southwards from Greifswald to the border between Germany and the Czech Republic will be able to carry gas delivered via Nord Stream into the heart of Central Europe, creating an alternative supply route for some of the countries hit hardest by the disruption to Russian gas supplies at the beginning of 2009.

Although Nord Stream cannot avoid passing through the exclusive economic zones (EEZs) of Baltic littoral countries, the route has been carefully selected to avoid crossing the territorial waters of transit countries (see Figure 1). It has also been selected to avoid the EEZs of the Baltic countries (Estonia, Latvia and Lithuania) and Poland, all of whom have been hostile to the project. Denmark, the only country other than Russia and Germany through whose territorial waters the line passes, will also be a buyer of gas delivered through Nord Stream, giving it a strong vested interest in the line’s success.

The position of transit countries such as Belarus, Ukraine and Poland will undoubtedly be undermined by the construction of Nord Stream. Whatever the claims of its builders, part of the rationale for its construction was to allow Russia to diversify its export routes to Europe and break its total dependence on transit across Belarus and Ukraine.

Gazprom’s deputy chief executive Alexander Medvedev told reporters at the Portovaya ceremony that all of the gas to be delivered through Nord Stream had already been sold, with either contracts of binding obligations signed between Gazprom and buyers. However, reported new sales contracts for deliveries through the pipeline’s first phase total around 20.5 bcm/yr (see Table 2), while sales through the second phase stand at just 1 bcm/yr, to Denmark’s DONG.

Other volumes, if contracted, presumably relate to the recent extension of supply contracts to German and French customers for gas that is currently delivered through existing infrastructure.

How much of Nord Stream’s capacity is used to transport ‘new’ gas, rather than gas re-routed from Belarus, Ukraine and Poland will depend on the speed at which gas demand in Europe recovers from last-year’s recession related dip, the strength of the continent’s future gas demand growth and the persistence of the overhang of cheap, displaced LNG that was brought on stream with a view to sales into the US.

Gazprom remains optimistic about the future growth of its market in Europe, but others are less convinced, particularly while its export prices remain firmly linked to those for oil.

Europe’s energy security

At the official ceremony, Russia’s President Medvedey hailed Nord Stream as Russia’s ‘contribution to Europe’s energy security’. For some in Europe, this is indeed the case. Nord Stream will help to diversify the gas supply routes, if not the gas supply sources for northwestern Europe.

However, politicians in parts of Eastern Europe and some former Soviet countries view Nord Stream in a very different light. They see it as undermining, rather than strengthening, their energy security.

Nord Stream is seen in Poland, Belarus and Ukraine as an attack on their status as vital transit routes for supplies of Russian gas to the European export markets, depriving them of future transit revenues from Russian gas crossing their territories and leaving them vulnerable to price hikes and supply disruptions.

In the past, they have been able to leverage their status as Russia’s gateways to Europe for guaranteed supplies of Russian gas at very favourable prices, now they fear that Nord Stream will fatally weaken that position.

All of them fear that the development by Russia of alternative gas supply routes to Europe that bypass their territories will leave them vulnerable to Moscow using gas supplies as a political weapon, an accusation that has been leveled against Moscow in the past, particularly during its gas disputes with Ukraine in 2006 and again at the beginning of 2009.

Nord Stream is, perhaps, a good example of how enhancing the energy security of one part of Europe could undermine that of another part. In such an environment it becomes impossible for the EU to speak with a single voice on energy issues. The project undoubtedly enhances the energy security of Germany, but equally clearly it undermines that of Poland, Belarus and Ukraine.

It could be argued that all three countries are too dependent on Russian gas for their own good and that they, as much as anybody, need to diversify their sources of supply. Of course, the energy security of these countries would also be enhanced through diversification, but this would involve buying gas at international gas prices, rather than the heavily subsidised gas prices that they have enjoyed in the past and, in at least one case, continue to enjoy today.

Russia’s steady move towards the international pricing of its gas deliveries to transit countries is slowly undermining its dominance of these markets, as the rising price of Russian gas begins to make alternative gas supplies more competitive, although the transition period will remain extremely difficult for countries like Belarus and Ukraine.

To learn more about the Nord Steam, subscribe to our FSU Pipeline Advisory Service