Lingering political solo on a gas pipeline


Recently, the question of the possibility and feasibility of finishing the construction of Nord Stream-2 gas pipeline has become a dominant topic for discussion. It is a rather threadbare theme, which nonetheless remains relevant and arouses interest among major geopolitical players such as the United States and the European Union. The US construes it as a tool in the fight against Russia for economic and political influence in the region, while the EU sees it is a kind of opportunity to “diversify” and complement existing energy supply options. Given the role and place of each player in this project, we tried to provide more insight on the issue regarding the effectiveness of the imposed sanctions, the rationality of the economic aspect of this project, as well as consider realistic time-frames for its implementation.

A bill to clarify and expand sanctions applicable with respect to the construction of the Nord Stream 2 pipeline project was introduced in the US Senate. According to one of the cosponsors of the bill, Republican Senator John Barrasso, the document is to clarify and expand previously enacted sanctions applicable with Nord Stream 2 pipeline project. The bill was backed by a mere five senators from both parties, including influential Texas Senator Ted Cruz, who had said earlier that there was agreement between the parties and both houses of the Congress that the pipeline poses “a critical threat to America’s national security and must not be completed.” The senator emphasized in his statement that the bill will state that anyone involved in the project in any capacity will “face crippling and immediate American sanctions”. Previously enacted sanctions apply to all pipe-laying activities and insurance. New bill expands sanctions to companies that provide “underwriting services or insurance or reinsurance” for vessels working on the pipeline. The bill would extend sanctions to anyone who provides services for the testing, inspection, or certification necessary for, or associated with the operation. It also expands sanctions to companies that provide related works, such as  site preparation and surveying, placing rocks, welding, as well as buying, selling or providing vessels for such work. Sanctions will also be applied to the ports and companies involved in the retrofitting of the vessels used in the construction of Nord Stream 2. According to Ted Cruz, Nord Stream 2 will threaten Ukraine and Europe’s energy independence and give Russia an opening to exploit American allies and that “Congress must once again take decisive action and stand in this pipeline’s path.” Senator Jeanne Shaheen explained that the bill is drafted to ensure that “Russia does not surreptitiously extend its malign influence throughout Europe.”

The main problem for Russia and Gazprom at the moment is the delays in the construction of the gas pipeline, the work on Nord Stream 2 had to be completed by the end of 2019 according to the initial plan. It is becoming clear that Gazprom will not be able to resume construction works this summer for many reasons. The island of Bornholm is a cod spawning site in July and August, therefore any works are prohibited at this time in this region. Given the fact that the gas pipeline works will take at least 3 months (160 km, at lay rate of 1.5-2 km per day), Gazprom will not make it by that time. Theoretically, construction can resume no earlier than autumn. However, the construction of the BalticPipe gas pipeline is expected to begin at that time. It is expected to supply natural gas from Norway to Poland. In view of the fact that the pipes for BalticPipe are already being manufactured, laying work can begin in the fall of 2020 right after the spawning season is over. Given the length of the pipeline of 275 kilometers, project contractors (most likely it will be either Swiss Allseas or Italian Saipem, who have more than enough experience in the region) will be able to complete work in less than 2 months. Most likely, the Danish regulatory authority will not allow the implementation of two cross-cutting projects at the same time, taking into account technogenic safety. Preference is likely to be given to a trouble-free BalticPipe, rather than a troublesome Nord Stream 2, that goes all to rack and ruin. The conclusion is self-evident: having fought through all the troubles Gazprom will be able to resume construction no sooner that December, which is a stormy season with severe weather conditions for the Baltic Sea region. As likely as not, they will have to wait until next March. By then sanctions will have been expanded against Nord Stream 2, which will make its completion totally unfeasible under present-day conditions. Nonetheless, Russia says that Nord Stream 2 will be completed by the end of 2020 or in the first quarter of 2021.

It is expected that both parties and both houses of Congress will back the legislation, however summer recess may delay the process. If Trump refuses to sign the bill, it may be included in the 2021 NDAA (National Defence Authorization Act), just as it was done in 2019. That being the case, the president will have time to sign the law by the end of September. It is important to note that the legislation is retroactive and becomes effective upon entry into force of December 2019 law on sanctions. This means that if the company was involved in the construction of Nord Stream 2 and did not know that such a law may be enacted in the future, it will still be slapped with US sanctions, which could be supported by European countries as well. According to Ted Cruz, one of the co-sponsors of the bill, in addition to legislative pressure, political pressure may be exerted as well, which might alienate potential partners of Nord Stream 2. The idea was expressed after the bill was enacted in December 2019.

Undoubtedly, Russia’s ability to confront Congress by political means is very limited, therefore the fact that Americans have begun work on a new law poses a serious problem for Russia. It may take several months for the new law to be enacted, but even the introduction of the bill itself will make it more difficlut to complete Nord Stream 2. The Russian company has already faced problems in finding a guarantor of construction (the permit issued by the Danish Energy Agency includes such provision).

Sergey Pikin, Director of the Energy Development Fund, predicted that the gas pipeline will be completed in any circumstance, however, its entry into full operation may take a few years. He also added that new lawsuits should be expected, particularly from Poland.

It is necessary to take into account the fact that earlier Germany’s Federal Network Agency rejected the Nord Stream 2 company’s request to grant the Nord Stream 2 pipeline derogations from the EU’s gas directive. As a result, the pipeline operator will have to reserve at least half of its infrastructure capacity for alternative suppliers; however there is no such thing as an alternative supplier in Russia, since Gazprom is a monopolist in pipeline gas supplies from Russia to foreign countries. Under present circumstances, Moscow will be able to export only 27.5 billion cubic meters of raw materials a year instead of 55 billion. Berlin has made it clear that in order to use the possibility to derogate from the EU’s gas directive, the project had to be completed by May 2019.

From financial perspective, the completion of Nord Stream 2 and its further operation will be even more damaging for Gazprom. Although, according to Bloomberg projections, cash flow gap in Gazprom budget, leaving out these costs, will be at least $ 10 billion by the end of the year. Gazprom capital costs, which include the gas transportation infrastructure, keep growing, while the revenue keeps declining every year. It is projected that in 2020 it will be all time low – less than 50% of the previous years’ figures, while the supply rate to the European market will drop by more than 20%.

Moreover, demand for natural gas in Europe has reached its minimum value, consumption during the quarantine period has dropped dramatically, forcing Russia that has always been “energy-resource base of Europe”, to bring down prices for natural gas. By the end of the summer, gas storage facilities in Europe will be almost 100% full, which will scale down the prices for Russian natural gas and and make the business go into the red. The situation is very similar to the case of American WTI oil. It will take a while for the demand to rise again even after the end of the quarantine, given the fact that Europe’s leading economies are going to lose between 7 and 12 percent of their GDP.

From what has been said the conclusion follows: US sanctions will remain effective, which will lead to Gazprom together with all other companies involved in the construction of Nord Stream-2, including foreign ones, losing the ability to borrow money to reduce the debt burden amassed during construction. Gas prices will inevitably continue to fall. Gazprom’s default will therefore lead to the collapse of Russian power sector.

Formally Russia has lost self-proclaimed war in power sector. Energy superpower plan, announced in 2007, turned out to be an epic failure. Despite the fact that at the beginning everything seemed smooth: Russia blackmailed Ukraine, Belarus and even Poland, making them sign lucrative long-term contracts for gas supply and transit, forcing Ukraine to extend the lease of the Russian naval base in Sevastopol, which later became the basis for the occupation of the peninsula, as well as to form the basis for military expansion into Georgia, Ukraine, Syria and Libya. Now it begs the question: What was the point in all this? – that should be addressed to Putin more often than not.

Liya Serhiyenko