September 30, 2020

On May 15, 2020, the German Federal Network Agency (BNetzA) decided to reject request of Nord Stream 2 AG consortium to receive derogation from the EU’s gas directive, the modified provisions of which were strictly implemented by Germany in December 2019 by amending the federal law on electricity and gas supply (EnWG). After the amendments the EU gas market rules were also extended to offshore gas pipelines that enter the territory or the territorial waters of ​​an EU member state and finished after 23 May 2019.

Thus, Gazprom was hit by its most devoted ally in the EU – Germany – that is struggling to complete its Energiewende (transition to low carbon economy) that requires large volumes of cheap Russian pipeline gas until 2050. However, persistent Brussels and independent German regulatory institution demonstrated quite unambiguously that competitive market weighs more for Europe than the commercial interest of few (though large) European energy majors and ruling German politicians. Hence, the hopes of Russian Gazprom that German BNetzA may be intervened politically for granting the ‘right’ decision in favor of Nord Stream 2 failed.

Consequences for Nord Stream 2 project

As it has been stated by Nord Stream 2 AG the company will appeal the BNetzA decision in German courts with one month and will continue to fight Brussels in attempts to annul the amendments to Gas Directive at all. For this purpose, Nord Stream 2 company earlier filed a lawsuit in the General Court of the European Union and is conducting arbitration proceedings in the framework of the Energy Charter.

As a result, Gazprom may face completely another reality within the following few months in which some strategic decision on Nord Stream 2 project will have been taken. It seems to be a really difficult choice for Russian gas state monster even after Nord Stream 2’s construction is finished: to accept the EU’s rules and lose its gas grip on European elites and significantly reducing its financial returns or suspend Nord Stream 2 project at all.

Moreover, if the EU authorities will resist hard, Moscow would even may try to adopt to the situation and change its domestic regulation for trading Russian gas with European customers, e.g. by selling the gas at the starting point of the Nord Stream 2 gas pipeline, i.e. while still on Russian territory. The most unfavorable option for Gazprom may be lifting a ban for other gas companies to export pipeline gas to Europe that could potentially destabilize the balance of power in Russia’s energy sector and vast use of energy in Kremlin geopolitical interests.

Political Russian ‘game of gas’ in Europe: next round

Apart from purely economic reasons, maintaining the EU’s restrictions would also hardly hit one of the Russia’s core foreign energy policy goal – which is to become independent of transit routes passing through third countries, like Ukraine. The BNetzA decision, from another prospective, may be considered as a step forward towards Gazprom as it gives a chance to Russian state gas monopolist to save the face and exit the game with minimum geopolitical losses. Gazprom now can state that Germany reject to support finalization of the pipeline and suspend its commissioning until better times. Thus, Russia will be able to maintain the reputation of a reliable trading and business partner in front of European project investors and justify the construction stoppage by the lack of economic feasibility in using the pipe, due to the incomplete loading of existing routes. Gazprom may even say that construction has been postponed until better times in the EU economy, which suffers from quarantine restrictions due to the pandemic of coronavirus, and gas consumption will be revived again.

The most likely, the attempts of Gazprom to finalize Nord Stream 2 construction by its own fleet would also face the next round pf geopolitical tenses with the U.S. administration. The German rejection will give Gazprom, from one prospective, the save heaven for retreat omitting the fact the U.S. sanctions became the real reason of the construction postponement. It also would be convenient for the Kremlin public messages in Europe and at home that only the lack of desire of Germany itself to complete the project was the real reason for the suspension of construction. European partners have long considered that it is more important for Putin not to lose face in front of his population and not look like a beaten cat who lost the geopolitical game against the United States.

From another prospective one can expect that the recent German decision and possible next U.S. sanctions may prepare the ground for the following Russian attempts to destabilize the public opinion in Germany, e.g. by disseminating information on additional costs for German gas consumers incurred by rigorous EU law. It is also likely that the Nord Stream 2 promoters will further stoke anti-American sentiment in Germany, especially if continuing the construction work with the own Gazprom fleet leads to the US sanctions being extended.

Therefore, in the decision of the German regulator, there is a clear signal that Germany has found the balance that allows them to receive the resource they need and to protect themselves from Putin’s political blackmail. Formally, Putin can even blame Europe for the lost investments, which, taking into account Nord Stream 1, Nord Stream 2 and the two strings of Turkish Stream, amounted to more than $100 billion. These funds, in fact, fell into the pockets of Putin and his entourage, because it was the ‘Putin-friends’ contractors who earned the bulk of the cost of these pipeline projects. Additionally, it gives a pleasant political argument for Putin before wide Russian audience to justify the losses of Gazprom, the Russian ‘National Treasure’. At the next address to the nation, Putin will simply give out some kind of his beloved ‘thieves’ phrases, implying that ‘Europeans keep their tail turned all the time in front of the U.S.’, but we ‘wanted all our best for Europe’.

New realities of European gas market for Gazprom: tough times for Russian streams ahead

For Gazprom, the completion of the Nord Stream 2 construction and its further operation will suffer even greater losses due to extremely unfavorable situation on European gas market. Although, according to Bloomberg forecasts, the liquidity gap in Gazprom’s budget by the end of the year, apart from Nord Stream 2 dubious investments, will be at least $10 billion. Gazprom’s capital expenditures, including gas transportation infrastructure, are only growing, but related revenues are falling year by year. But in 2020, it will become disastrously small, and amount to less than 50%, comparing to previous years, with a loss of more than 20% of the gas supply to the European market.

Now, demand in Europe hit the lowest level since 2009 crisis, consumption during the quarantine period has fallen and now Russia, as the ‘energy appendage of Europe’, is forced to cut prices in order to sell its natural gas. By the end of summer, gas storages in Europe will be almost 100% full, and then prices for Russian natural gas can repeat the history of American WTI oil and pique deep into a red zone. Indeed, even after coronavirus pandemic ends, demand will continue recovering for a quite long time, as the leading economies of Europe will lose from 7 to 12 percent of their GDP.

The construction of all Russian streams means at least $100 billion actually buried (or sunk if to be precise), since now Gazprom does not fully utilize the available gas transit capacities. By signing a contract with the Ukrainian GTS operator for pumping of 60 billion cubic meters of gas in 2020, Gazprom does not use even half of the paid capacity. The Gazprom-owned Blue Stream that pumps gas to Turkey, after the launch of the Turkish Stream, almost immediately began to regularly underutilized for ‘maintenance works’, which most of all looks like Turkey’s reluctance to receive the contracted gas volumes. Now the question ‘Why was all this?’ should sound to Putin more often.


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