Nord Stream pipeline feeds Europe’s natural gas dependence

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The geopolitical impact of the Nord Stream project has prompted Russia to accelerate its strategy of sidelining what it sees as problematic transit states through expensive direct pipelines to its consumer markets, writes Stratfor.

Stratfor is a Texas-based global intelligence company.

"Vladimir Putin inaugurated the second line of the Nord Stream natural gas pipeline Monday, nearly doubling the direct natural gas transit capacity between Russia and Germany to 55 billion cubic metres per year.

The Nord Stream pipeline allows Moscow to bypass continental transit states through an underwater route. Running under the Baltic Sea, the pipeline specifically circumvents Ukraine, an important transit state for Europe-bound natural gas, that frequently is problematic for Russia when it tries to leave Moscow's sphere of influence and run closer to the West.

The geopolitical impact of the Nord Stream project has prompted Russia to accelerate its strategy of sidelining what it sees as problematic transit states through expensive direct pipelines to its consumer markets.

However, challenges are growing in Russia's Western destination markets. Indeed, Europe is continuing its efforts in becoming an integrated liberalised market by expanding alternative sources, challenging Russia's decade-long dominance of the continent's energy sector.

The first branch of the Nord Stream pipeline became operational in May 2011. To a large degree, the pipeline was constructed in response to the European energy crises of 2006, 2008 and 2009, when Russia cut off supplies to Ukraine to counter rising opposition to Moscow's influence.

The supply cuts affected downstream European customers who relied on Ukraine to transit Russian natural gas. To ensure stable supplies amid potential future disputes with Ukraine or Belarus, Russia financed and constructed Nord Stream, creating a direct export avenue into Germany.

Russia is slated to begin construction next month on the South Stream pipeline project, a tactic meant to further circumvent transit countries. The South Stream pipeline will run under the Black Sea and through the Balkans to deliver natural gas to southwestern Europe.

While constructing underwater pipelines is incredibly expensive, such pipelines give Moscow significant geopolitical advantages.

Not only does it allow Russia to engage more freely in energy wars with Ukraine, it also allows Russia to funnel higher volumes of natural gas into non-Ukrainian pipelines. As a result, Kiev loses one of its major leverages against Russia, particularly in the face of the Kremlin's push to grab ownership of Ukraine's valuable natural gas storage network.

Russia's efforts to ensure consistently high volumes of natural gas to key European markets goes beyond its attempts to bring back some of its former Soviet states within its influence.

Natural gas revenues are one of the key pillars of the Russian economy, and those revenues have begun to be threatened by changes in the market dynamics in the European continent.

The natural gas crises of 2006, 2008 and 2009 compelled Europe – particularly the European Union – to form a framework that would insulate the continent from similar shocks in the future.

To lessen their dependence on Russian natural gas, European nations are pursuing three strategies on national and transnational levels.

First, the European Union enacted a set of policies to address the monopoly of large companies, particularly Gazprom, in the continent's natural gas market.

The bloc's Third Energy Package mandates the unbundling of production, transport and distribution operations for natural gas. This legal framework increasingly is being used by Central European nations, especially the Baltics, seeking to ease Gazprom's dominance over all branches of their energy supplies.

The European Commission's upcoming probe into Gazprom's monopolistic practices is a clear example of the growing pressures on Russia from the regulatory side of Europe.

Second, European nations have made technological and political investments in developing alternative sources of natural gas.

The accelerated construction of liquefied natural gas import terminals theoretically is allowing countries with sea access to become more energy independent, giving them greater pricing and unbundling negotiation leverage over Russia.

Third, Europe's natural gas market is becoming increasingly integrated through physical interconnectors among countries.

This aspect of Europe's liberalisation decreases Moscow's ability to create tailored energy strategies for different countries. For example, it is offering gas discounts to Bulgaria to accelerate the construction of the South Stream pipeline but keeping prices high in the Baltics as a way of maintaining political pressure.

A unified regional market in Central Europe already is helping nations insulate themselves from minor pricing and supply differentials.

These changes in the European natural gas market pose several challenges for Russia. Moscow is attempting to maintain vital revenue streams from natural gas exports while preserving the political advantage of being the major supplier of a strategic commodity to the continent.

In this new environment, Moscow must ensure that it continues to cultivate good relations with its major customers.

For example, it may have to become relatively accommodating to smaller EU members. However, as long as the main heavyweights of the European Union – such as Germany – continue to receive direct, uninterrupted and cheap supplies from Russia, the incentive to throw their support behind expensive integration and diversification efforts in Central Europe will remain limited.

Rather than only serving additional natural gas demand in Europe, the expansion of Nord Stream and the construction of South Stream are key tactics in Gazprom's response to increasing diversification and liberalisation efforts on the continent."