Nord Stream 2 doesn’t matter

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Nord Stream 2 will not determine the future of Europe. It would be better to focus more energy on the functioning of the EU's energy market. [Pres Panayotov/Shutterstock]

Nord Stream 2 continues to divide Europe. That’s a pity. For all the noise, Nord Stream 2 is just a distraction – it doesn’t really matter. Here’s why, writes Nikos Tsafos.

Nikos Tsafos is president of enalytica, an energy consulting firm, and an adjunct lecturer at the Johns Hopkins School of Advanced International Studies (SAIS).

The critics allege that Nord Stream 2 is a political project. So what? When the Obama Administration authorised liquefied natural gas (LNG) exports from the United States, did it have politics in mind? Sure. When the Lithuanians turned to LNG to lessen their reliance on Russia, were they pursuing a political project? Well, the importing vessel is called “Independence.” Saying that Nord Stream 2 is a political project does not get you very far.

Is Nord Stream 2 necessary? Maybe. There are different projections, of course, but we don’t know. Fifteen years ago companies rushed to build facilities to import gas into the United States. Was that a good idea? It certainly seemed so at the time. (It was not.) We cannot predict the future – that’s why we let companies do their thing.

But doesn’t Europe have enough import capacity already? Fair enough. Maybe this pipeline is unnecessary. But again, judge not. Why does Poland want to import gas from Norway through Denmark rather than Germany? It’s certainly easier – but no, Norway it is. Why does Greece need a second import terminal and a second pipeline to Bulgaria? These projects are almost certainly redundant. Is there outcry? Nope. In fact, Europe is handing out cash to accelerate them.

Will Nord Stream 2 increase Europe’s dependence on Russian gas? Maybe. But remember: Nord Stream 2 cannot be, at the same time, a political enterprise without commercial merit and a project that will entrench Russia’s dominant position in Europe. Nord Stream 2 can either be commercially viable or not – but not both. That said, do not confuse pipeline capacity with flows. Algeria’s pipeline exports to Europe declined by almost a third within three years even though export capacity rose (they then rebounded); Europe’s LNG imports were halved between 2011 and 2014 despite an increase in import capacity. Infrastructure does not determine flows.

Nor does dependence itself matter. A country can be 95% dependent on a single source, but it may have alternatives – and those options prevent the dominant supplier from acting as a monopolist (think Lithuania, which secured lower gas prices from Russia after introducing competition). And sometimes, more is better: Europe is taking in more Russian gas because it is cheaper. As long as markets have options, dependence doesn’t matter.

Won’t Nord Stream 2 undermine Europe’s energy security? It depends. If energy security means reliance on Russia, then maybe or maybe not (see above). But in a more general sense, no: more infrastructure is almost always better. Nord Stream 1 was similarly feared: the pipeline was built and we’re all still here. Sure, some companies now receive their Russian gas from the West rather than the East. Hardly the end of the world.

But if Russia cut off gas to Central and Eastern Europe, would Germany come to their aid – by making, for instance, its own gas available? Unknown. But that’s a risk in any interdependent system. Will NATO defend Turkey or Estonia in case of an attack? Who knows. Is that a reason to not be in NATO? Probably not. Either way, the answer is simple: build a better integrated system for gas within Europe. That’s good advice no matter what Russia does.

Will Nord Stream 2 deprive Ukraine of transit revenue? Probably. Now, is this rentier income from transiting gas healthy for the Ukrainian economy? Probably not – but perish the thought. The real question is whether the loss of income is enough to prompt Europe to block the project? Doubtful. Also: the transit through Ukraine is threatened anyway by the proposal to build a new link between Russia and Turkey. Plus, if Russia does not feel compelled to use Ukraine as a transit country, it might use it more.

But is Nord Stream 2 legal? I am no lawyer, although lawyers disagree about this anyway. Understand, however, that we’re not talking about the Ten Commandments. European energy law boils down to this: “there are rules, unless we say otherwise.” For instance: in 2013, the Azerbaijani national oil company, SOCAR, bid to acquire a majority stake in DESFA, the Greek pipeline company. Exactly what Europe did not want – a supplier controlling infrastructure. The European Commission should have said no. It didn’t. Why? Well, because Azerbaijan is not Russia. So there were countless legal gymnastics to preserve a deal that plainly violated the spirit of the law.

And sometimes the rules are silly. For years, the European Commission has prevented Gazprom from fully utilising a pipeline in Germany (OPAL); no one else used the half-empty pipeline, but the rules were the rules. Until they weren’t, and the Commission considered an exemption. But then Russia invaded Ukraine, so no exemption. And a few years hence, it was okay to use OPAL – until some countries objected and it wasn’t. This isn’t rule-making – it’s a soap opera. So yes, I would respect the law if that law were clear and applied equally – it isn’t, so I don’t.

Will Nord Stream 2 weaken Europe politically? Doubtful – energy matters far less for geopolitics than the pundits assume. Can Russia control countries through gas? If it could, it wouldn’t need to invade Ukraine. Does Russia bully its neighbours? Sometimes – big countries do that. But of the weapons Russia is using against Europe, gas is the least worrisome. In part because it’s a lousy weapon (see Ukraine). In part because unreliability drives away customers quickly (see Ukraine, but also Turkmenistan, which turned to China to offset its reliance on Russia). And in part, because Europe can easily defend itself through a better internal market.

In short, Nord Stream is not the grand battlefield that will determine the future of Europe. It’s just a gas pipeline – steel and methane. One of many. Let’s treat it as such and focus on what really matters: a better functioning internal market for energy in Europe.