February 2018, Vol. 245, No. 2


Big Politics at Work Behind Nordstream 2

By Nicholas Newman, Contributing Editor

The supply of Russian natural gas across the Baltic Sea to Germany and onward to central and western Europe could be doubled by the proposed $10.6 billion (€9.5 billion) Nordstream 2 (NS2) pipeline.

The 759-mile (1,200 km) pipeline, running parallel to Nordstream 1, will add 55 Bcm delivery capacity, establishing Germany as a center in Europe’s gas market and replacing the declining output from the North Sea.

NS2, led by Gazprom in a joint venture  with some of Europe’s largest energy companies including Germany’s Eon and BASF/Wintershall, France’s Engie, Austria’s OMV and Dutch Shell, could be completed in late 2019.

It will deliver gas from the Nadym-Pur-Taz region of Siberia by overland pipeline to the Baltic Sea port of Ust-Luga near St. Petersburg, where it will enter the proposed NS2 subsea pipeline. At the other end of NS2, the gas will enter the German gas pipeline network at the German Baltic port of Greifswald.

Fig 1 Nordstream 2 Feb 18

Figure 1: Nordstream 2 pipeline
Source: Gazprom

The developers stress multiple mutual benefits from NS2, including  a ($6.05 billion (€5.15 billion) multiplier effect from this investment alongside 31,000 full-time equivalent jobs and increased competition, leading to reduced gas prices for European consumers. Gas supplies would be reliable, increasing Europe’s energy security, supporting climate goals and improving the EU’s internal energy market.

However, in 2016, Nordstream 1 ran at just 80% capacity, delivering 43.8 Bcm, or enough for 20 million households. While Europe’s domestic gas output is declining, demand is also falling, down 12.5% across Europe over the last decade, according to the BP Statistical Review. Russia currently has a 34% market share of Europe’s gas market. A second pipeline such as NS2 could increase Russia’s share to as much as 40% and destroy the EU’s goal of diversifying gas supply.

Project Delivery

The completion of the pipeline includes a variety of stages, including design, construction, pipe laying, and quality control.

The walls of the steel pipes will be 41 mm thick and covered with an external coating to prevent corrosion. The pipes will have a constant internal diameter of 1,153 mm and a high-gloss lining to reduce friction to the gas flowing through the system.

The development consists of a twin pipeline made up of 200,000 pipe sections, each about 39 feet (12 meters) long. Already, Wasco Coatings Europe B.V., at its base in Kotka, Finland, has begun the process of applying concrete jackets to sections of pipeline. The concrete coating increases the weight of the pipeline sections and protects them from potential damage during delivery and installation on the seabed.

The main supplier of the pipeline is German pipe manufacturer, Europipe GmbH, contracted, which will provide 90,000 of the pipes needed for the project by the middle of 2018. The remaining pipes will be supplied by the Russian companies, United Metallurgical Company JSC/OMK (31%) and Chelyabinsk Pipe-Rolling Plant JSC/ChelPipe (25%).

In December 2017, Nord Stream 2 AG said  it had contracted Swiss-based  Allseas Group S.A and its three pipe-laying vessels Pioneering Spirit, Solitaire and Audacia to lay pipes on the seabed during 2018-19. Allseas Group’s 985-foot (300-meter), 96,000 ton Solitaire laid parts of the original Nordstream pipeline in the Gulf of Finland.

Once a pipe section is placed on the seabed, it will undergo further inspection, and testing by Norwegian-based independent certification body DNV GL,  which will examine key steps in the construction process, as well as the completed pipeline. This is to ensure verification of its technical integrity and to oversee safety and sustainability.

Once the pipes are produced, coated, and tested, they will be shipped to a pipe-laying vessel, on which, individual pipe sections will be welded together and scanned to ensure that there are no signs of weakness. Subsequently, the pipes will be gradually lowered into the sea in a continuous string at the rate of 1.8 miles (3 km) of pipe a day.

Is It Necessary?

The case for building extra gas import capacity for Europe is not straightforward. Although European gas production has fallen, long-term demand has also declined (Figure 2). In the near future, technology and economies of scale could boost renewables and thereby reduce demand for gas further.

Should Europe’s demand for gas revive, a global glut of LNG and its low price could put Europe’s existing under-used LNG import terminals to work. Currently, there are 22 LNG regasification facilities in European ports, with a total capacity of 216 Bcm, which are running at just 20% capacity.

In addition, there are alternative sources of natural gas, including from Central Asia, when the Trans Adriatic Pipeline opens in 2019, as well as new sources of supply being developed in the offshore gas fields of  Egypt, Israel and Cyprus. Also, further investment in the onshore and offshore gas fields of Algeria and Libya could boost existing output from 50 Bcm (which is a 15% of total E.U. demand) and perhaps stem the flow of migrants to Europe.

The geopolitical case for NS2 is strong. Europe is one of the world’s largest energy importers and neighboring Russia has some of the world’s largest gas reserves and plenty of energy to export. Indeed, in the first quarter of 2017, Gazprom sales to Europe were 15% higher than in the same quarter in 2016 (Figure 2).

Figure 2 Nord Stream 2 Pipeline Feb 18

Figure 2: Gross inland consumption of natural gas in EU-28, in thousand TJ
Source: Europa

The anticipated rise of renewables alongside electric cars will increase the need for gas fuelled peaking plants to balance supply and demand. Russia is well placed to meet this demand. Overall, for Germany, the key benefits are lower energy prices, security of supply and ability to close polluting coalmines and power stations to boost its green credentials. For Russia, there are also key benefits.

Currently, half of Russia’ gas exports to Europe go through Ukraine. NS2 allows Russia to divert gas away from Ukraine, reducing the country’s income from transit fees and, in any future gas dispute with Kiev, Moscow could direct supplies to NS2 to meet its contractual commitments, cement its reputation for reliability and at the same time earn considerable revenues.

Political Opposition

There are 13 EU countries, largely former Soviet-aligned countries, which are opposed to construction of NS2, which they fear will reduce their access to cheap Russian gas and, for some at least, reduce valuable transit fees.

The Nordic nations and Baltic States also have security and environmental concerns should NS2 go-ahead. Germany, with potentially the most to gain from NS2, is in limbo following September’s mixed election results. Public support for NS2 has fallen; there could be another election or a coalition, in which the Greens and the SPD could demand the cancellation of NS2 in exchange for their support.

Alternatively, when Germany has a government, Berlin could push NS2 through or perhaps pass the matter over to the European Commission, which could cancel the project. Across the Atlantic, U.S. opposition, in the form of threatened sanctions on the companies involved in funding Russia’s NS2, joins fears that NS2 could jeopardize U.S. LNG exports to Europe.

Clearly, NS2 is a big project, offering both economic and environmental benefits to not only Russia but also Europe. NS2 could reduce gas prices for consumers, reduce the need for coal-powered generation and provide a secure, affordable source of fuel.

However, these benefits could also accrue from importing LNG from around the world, and take more natural gas from the Mediterranean and North Africa, thus diversifying supplies, which has been a stated objective of the E.U. P&GJ

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