by Vladimir Socor

The Nord Stream project rests on a number of assumptions dating back to 2005 and earlier, and invalidated since then. It also fails to reflect more recent developments that are now revolutionizing the gas trade.

When Vladimir Putin and Gerhard Schroeder (Russian President and German Chancellor respectively at the time) concluded the Nord Stream agreement in October 2005, German business and political leaders were not overestimating Russia’s export potential for the years ahead. On the contrary, they were becoming apprehensive that Russian gas production and exports (even adding Turkmen gas) would not keep pace with the rapidly growing demand in continental Europe. Such worries were mostly being expressed privately, although covered publicly by business and government with declarations of confidence in Russia. The undeclared concern about Russian supply limitations inspired a rush for access to Russian gas fields in western Siberia, with a dedicated pipeline directly to Germany, presumably guaranteeing supplies to the Nord Stream consortium partners for decades ahead.

While the premise was well-grounded, it led to a Russo-German special deal, instead of a solution within a European framework; and it promised to increase German overdependence on Russian gas, instead of diversification of suppliers. Moreover, the Nord Stream project as such rested on questionable expectations that have not borne out.

The first assumption, as then declared, was Russia’s political “reliability” as an energy supplier to Europe for the long term. This thesis is no longer tenable even in Germany. Instead, the same interested parties now invoke the “unreliability” of transit countries, meaning or implying Ukraine, to justify Nord Stream. However, this project is specifically designed to bypass the Baltic States and Poland, not Ukraine.

The second assumption was that Russia could fill the Nord Stream pipeline’s two stages, to the declared capacity and in the promised time-frame55 billion cubic meters (bcm) per year from 2015 onward, for 25 years–from fields already in operation or earmarked to be soon developed. This was invalidated by the realization, in 2008, that Russia faced a gas shortfall (of internal production versus supply commitments) in the ensuing decade. Thus, Nord Stream’s second stage has no designated or at least prospective source of gas.

Thirdly, Nord Stream partners had expected that Gazprom would continue absorbing Turkmen gas volumes into Russia’s Unified Gas Supply System for internal use, so as to free up Siberian gas volumes for delivery to Europe. However, Russian imports of Turkmen gas have since 2009 entered a downward curve, apparently long-term.

A fourth, disproved assumption behind Nord Stream relates to the dynamics of gas demand in Germany and Europe. The European Union’s emphasis on renewable energy sources, as well as the new German government’s policy to keep nuclear power plants in operation, is slowing down the growth in demand for natural gas.

The fifth invalidated expectation concerns demand for pipeline-delivered gas, compared with other modes of delivery and purchase. Spot markets for both natural gas and liquefied gas (LNG) are rapidly developing in Western Europe, with lower prices substantially than those charged by Gazprom. Thus, European importers can avoid the long-term, fixed-price, take-or-pay arrangements for Russian pipeline-delivered gas. Nord Stream co-founder E.ON Ruhrgas is also trying to reduce its dependency on Russian gas, meanwhile facing compensation claims from Gazprom over take-or-pay contract issues.

Sixth, surging development of unconventional gas in the United States in 2009 (with Europe potentially following suit), coupled with an increasingly globalized LNG trade, are rapidly diversifying European supply options. Whether Gazprom’s Nord Stream gas can be competitively priced seems unlikely in these new circumstances. Nord Stream could only be profitable if the seabed pipeline’s inordinately high costs were passed on to end consumers. This presupposed a locked-in market and semi-captive consumers with restricted options. However, this expectation no longer holds.

Finally (and reflecting the LNG and unconventional gas developments), Gazprom and partners have suspended Russia’s largest gas extraction project, Shtokman, before it had even started (see EDM, February 9). Shtokman gas had been expected to feed the second stage of the Nord Stream pipeline, although it was not officially earmarked. Instead, Shtokman is now officially decoupled from Nord Stream’s second stage, which is not backed by any supply agreement.

Thus, Nord Stream seems based on a set of disproved assumptions; and is also confronted with developments that could hardly have been forecast in 2005 or even thereafter.

The project appears to proceed largely on political momentum, including Berlin’s apparent willingness to increase German overdependence on Russian gas. By contrast the Dutch, Danish, or British purchases of Nord Stream gas are planned on a small scale and constitute diversification steps for those countries, which enjoy multiple supply options. German imports, however, are planned on a large scale, frustrating  diversification goals. Political momentum seems to drive the German government’s decision to risk 2.7 billion Euros in credit guarantees, for a project behind the times.

–Vladimir Socor

Wednesday, February 17, 2010—Volume 7, Issue 32


by Vladimir Socor

Nord Stream, the gas pipeline project on the Baltic seabed from Russia to Germany, has cleared the final legal requirement, obtaining the construction permit from the state administration agency of the Southern Finland region (Financial Times Deutschland, February 15).

The governments of Finland, Denmark, and Sweden had granted the construction permits last October and November for the Gazprom-led project (see EDM, November 10, 12, 2009). Their neighbors on the opposite Baltic shorethe EU members Estonia, Latvia, Lithuania, and Polandhad resisted this project. They continue objecting to Nord Stream on the basis of energy security and ecological risk considerations. Once Nord Stream is built, Russia could politically manipulate gas supplies to the Baltic States and Poland by overland pipelines, without affecting Germany, which would be supplied through the seabed pipeline. The EU’s risk-sharing and solidarity might be subjected to strain in such situations, or in the event of supply shortfalls in Russia itself.

The Gazprom-led project is now set for starting construction work this coming spring, despite rapidly changing fundamentals of the gas trade. Development of liquefied natural gas (LNG), spot markets, and unconventional gas raise new doubts about the economic sense of Nord Stream.

The consortium plans to lay the seabed pipeline’s first stage during two construction seasons, April to October 2010 and 2011, with a throughput capacity of 27.5 billion cubic meters (bcm) annually when fully operational. The first gas is planned to flow in fall 2011. The pipeline’s second stage, with the same capacity, is promised for completion by fall 2014, bringing Nord Stream’s total capacity to a staggering 55 bcm per year by 2015, for a declared 25 year period.

Construction work began in January at the compressor station Portovaya near Vyborg (Leningrad oblast), the pipeline’s starting point onshore. The compressor station will connect Russia’s Unified Gas Supply System with the Nord Stream pipeline, which should in turn connect near Greifswald with the German gas transmission network.

The western Siberian gas fields Yuzhno-Russkoye and Achimovskoye, with nearly 1 trillion bcm in combined reserves, are designated to supply Nord Stream’s first stage (,, This earmark dates back to 2005 when the Nord Stream project agreement was signed. However, there is no source earmarked for supplying the pipeline’s second stage.

The Shtokman project in the Russian Arctic had been regarded as a possible source for the second stage of the Nord Stream pipeline. The development time-frame for Shtokman was slipping, however, beyond 2015, the target year for commissioning Nord Stream’s second stage. And on February 5 Shtokman was officially postponed, before development had started (see EDM, February 9). Thus, Nord Stream’s construction schedule through 2015 is uncorrelated with available Russian gas resources.

Given Russia’s stagnant gas production, declining potential of its main fields currently in operation (except for Siberia’s east and far east), and failure to start major new field developments, the goal of filling Nord Stream by 2015 as planned seems beyond reach.

The Nord Stream consortium in its current configuration includes Russia’s Gazprom with 51 percent of the shares; German companies Ruhrgas and Wintershall (gas-trading subsidiaries of the E.ON energy conglomerate and BASF chemicals giant, respectively) with 20 percent each; and Nederlands Gasunie, 9 percent. The consortium uses a Switzerland-based registration. Electricite de France is a candidate to join the consortium by acquiring shares from minority stakeholders, leaving Gazprom’s majority stake intact. This was also the procedure when Nederlands Gasunie joined the consortium, reducing the two German companies’ stakes from 24.5 percent to 20 percent each.

The start of construction is made possible by 2.7 billion Euros in German government credit guarantees, covering more than one third of the pipeline’s cost of 7.4 billion Euros, in the consortium’s official estimate. This almost doubles the cost estimate of 4 billion Euros, declared in October 2005 when the Nord Stream agreement was signed (Die Welt, January 4; Frankfurter Allgemeine Zeitung, January 22). European analysts, however, suggest considerably higher cost estimates.

E.ON and BASF have predicated their corporate strategies on long-term over-reliance on Russian gas. Consecutive German governments have made this into national policy. Russian-delivered gas accounted for almost 40 percent of annual German consumption (with a similar percentage for Russian-delivered crude oil) prior to the 2009 economic recession. This dependency level is far higher than in any country of the “old” EU. The Nord Stream project, should it materialize as intended, would increase Germany’s dependence even further.

The European Union’s new Energy Commissioner, Guenther Oettinger, has stated in the European Parliament’s confirmation hearing that he would not act as an emissary of the German business or government. Yet he discouraged criticism of Nord Stream even as he called for avoiding overdependence on Russian gas (BNS, January 15). Meanwhile, a direct Russo-German pipeline on the seabed works to isolate the three Baltic States from the European transmission network, instead of connecting them to it. Nord Stream underscores the three Baltic States’ position as an “energy island,” relative to the EU. The new Commissioner has promised to address this situation as a matter of priority in the EU’s energy policy.

–Vladimir Socor


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