Final technical, legal hurdles for Nord Stream 2 resolvable

LONDON (ICIS)–Experts believe legal and technical challenges to the start of Nord Stream 2 flows can be resolved.

Once completed, Nord Stream 2 will double Russia’s direct export capacity to Germany as a first entry point to the EU to 110 billion cubic meters (bcm)/year.

DEROGATION FROM EU GAS DIRECTIVE

Earlier in January, German regulator BNetzA launched the derogation procedure for the controversial pipeline upon its operators’ request.

“BNetzA could – but it is not a given – potentially stipulate some bespoke regime for Nord Stream 2, which would impose certain requirements on the way it is operated but perhaps short of a full-fledged derogation,” Oxford Energy Institute researcher Katja Yafimava told ICIS. “If it does so it this could be seen as Germany finding a way for Nord Stream 2 to operate, as Germany has always said that the pipeline would proceed if post-2019 Ukraine transit is guaranteed – which is the case with the new five-year transit contract,” she added.

“I cannot exclude that BNetzA would support Nord Stream 2’s arguments, i.e. the whole pipeline is finished as it is finished in German territorial waters and the final investment decision has already been made,” according to Mateusz Kubiak, senior analyst at Esperis Consulting, a Warsaw-based consultancy firm operating in energy and insurance markets.

“But it would be very hard to prove that such decision is in line with the directive. And for sure it would be challenged by some of the European countries,” he added.

CONSTRUCTION DELAY

US sanctions hit the main pipelaying vessels building the last stretch of Nord Stream 2 in late December, forcing their Swiss owner to call them back to port and leaving Russia to finish works alone.

One of the potential Russian pipelayers that could be used is the Akademik Chersky. The vessel was initially intended to work on Sakhalin projects and is now undergoing modernisation work in the Nakhodka harbour in the Russian far east.

“Finishing the pipeline in the first quarter of 2021 could be realistic if Russia is able to restart construction works in the first half of 2020. But it will probably take up to twelve months to modernise the ship and this modernisation is intended to allow the ship to work on Sakhalin fields, actually not related to Nord Stream 2,” Kubiak said.

“In recent years, the Russian gas industry (not only Gazprom, but also Novatek in LNG) has had a good track record in delivering mega-projects on schedule, if not ahead of schedule,” according to Luca Franza, researcher at the Clingendael International Energy Programme. “On the other hand, there are still uncertainties, particularly in case Nord Stream 2 fails to obtain a derogation from BnetzA. There could be delays if creative schemes need to be crafted. By this I mean alternative arrangements related to ownership or delivery points – the latter option being somewhat off the radar, but worth considering,” he added.

SECURITY OF SUPPLY

Russian volumes via Ukraine will drop to 40bcm from 2021 under the new transit deal, from over 60bcm/year during the past four years. This means the EU could face a shortfall of over 20bcm of Russian gas supply in 2021 from 2020’s levels if Nord Stream 2 is delayed beyond 2020 and European demand remains stable.

“Regarding security of supply issues (from Europe’s perspective) or risks of losing market share (from Russia’s perspective), Gazprom could probably decide to temporarily use more Ukraine transit than agreed (i.e. until Nord Stream 2 is completed),” Franza said. “Russia wants to minimise Ukraine transit, but will not do it at any cost,” he added. The cost would be losing market share in the EU and casting doubts on its reliability as a supplier.

“The regulatory and sanction-induced delays will have an effect on the project’s cost, but Gazprom has always priced its gas to be competitive and to gain market share. Thus, Nord Stream 2 and Nord Stream are part of the strategy to maintain market share and circumvent Ukraine, rather than lower the cost of its gas,” according to Michael Grossmann, managing partner at Tumbleweed Partners, a Paris-based energy consultancy.

Nord Stream is Nord Stream 2’s twin pipeline and transported over 58bcm in 2019, according to the operator. BNetzA opened the derogation procedure for Nord Stream on 23 December.

EU UNBUNDLING AND THIRD PARTY RULES TO APPLY TO EXPORT LINKS

In April, the operators requested the European Commission to consider the pipeline finished and eligible for a derogation from the directive. Having failed to obtain such guarantees, they launched two court actions in July and September , arguing the new directive is discriminatory against the project and in breach of the Energy Charter Treaty.

According to the EU Gas Directive, the owner of a pipeline and the owner of the gas flowing in it must be separate entities. The directive also mandates third party access to pipelines capacity. From 23 February, these rules will apply to all export pipelines connecting the EU with third countries. But this only concerns the section of the pipeline located in the territorial waters of the member state where it first connects with the EU network.

In the case of Nord Stream 2, Gazprom owns both the pipeline and the gas that will flow in it. The pipeline will directly connect Russia and Germany and Gazprom has a monopoly on Russian export pipelines, meaning only Gazprom will send gas on the pipeline. Only the section in the German territorial waters is impacted by EU rules.