Russia claims that gas flows from its proposed pipeline project Nord Stream 2 can step into the breach to replace falling EU domestic gas production. This EU supply vulnerability is underlined by the recent decision of the Dutch government in April 2018 to begin the process of closing its huge Groningen gas field. On closer examination, however, this Russian claim looks like another disinformation operation seeking to use the EU’s supply vulnerability as a cover for a pipeline project which has objectives far removed from that of supplying Europe with additional gas.
The development of the Groningen gas field in the Netherlands in the late 1950s marked the beginning of a golden age of natural gas production in Western Europe. The Groningen field was followed by offshore fields, in Dutch, Danish, British and Norwegian waters, resulting in northwestern Europe itself becoming a major global energy player. In 2013, it was still producing over 80bcm annually (54bcm directly from the Groningen field). Almost half of that production was for export to neighbors in Germany, France, and Belgium, providing substantial additional tax revenue and exports for the Netherlands.
However, in April 2018, the Dutch government sounded the death knell of the Groningen field. Production, which had already been capped in 2015 at 21.6bcm, would be cut to 12bcm by 2022. The gas field will be closed in 2030. This decision was forced on the government by overwhelming evidence of increased seismic activity being tied to the project. Although there had been small tremors since the early 1990s, the decision to close down the field stems from a 3.6 magnitude earthquake in Huizinge in August 2012. This led to the Hague imposing the first of several production caps. But despite these caps, there has been no letting up in the pace of the tremors in the region. As recently as January 2018, another major quake of 3.4 magnitude was felt across the Groningen field. The Groningen gas producer NAM and the government are on the hook to pay damages for approximately 90,000 households affected by the tremors.
It is not surprising therefore that given these circumstances and hostile public reaction to any further production, the Hague has taken such radical action to close one of Europe’s principal gas fields. This blow to EU domestic gas production comes on top of the decline in gas production in much of the North Sea. For example, British North Sea gas production has fallen almost continuously from 110bcm in 2000 to just under 40bcm in 2017. Overall EU production had fallen from 341bcm in 2004 at its peak to 257bcm in 2016. Production projections suggest that by 2030, EU producers may be only producing 146bcm. Only Norway is still able to add production, but will not on its own be able to replace all the lost Dutch, British and Danish production.
Gazprom argues that it is about to come to the rescue with Nord Stream 2. This pipeline project is supposed to bring natural gas in two 27.5bcm undersea pipelines from the Russian Baltic coast to Greifswald (in Angela Merkel’s parliamentary district) on the German Baltic coast. It argues that as EU gas production is in rapid decline its project can provide the key additional gas supply that the EU needs.
However, on closer examination, the “Nord Stream 2 to the rescue” story does not quite add up. When the previous Gazprom-led pipeline project Nord Stream 1, which is largely on the same route as Nord Stream 2, was proposed in 2006, the same argument was deployed: great promises of additional supplies of gas to the EU. In fact, once Nord Stream 1 came into operation, Russian gas flows through the Ukrainian transit “Brotherhood” pipeline network fell, and instead that gas was now being dispatched through Nord Stream 1. In other words, Nord Stream 1 was emphatically not a pipeline that involved delivering additional supplies of natural gas; it was merely a project aimed at diverting gas flows from one pipeline to another-in order to achieve Russian strategic objectives—principally undermining Ukraine and the states of Central and Eastern Europe.
There are compelling reasons for believing that Nord Stream 2 is also just another diversionary pipeline built in the same spirit. In June 2015, just before the announcement of the Nord Stream 2 project, the Deputy CEO of Gazprom, Alexander Medvedev, in trenchant and colorful form said that “under no circumstances,” even “if the sun replaced the moon” would Gazprom enter into another gas transit contract with Naftogaz (the Ukrainian state-owned energy company) when the current contract expires in 2019. The negative reaction of the EU to that statement, plus the practical reality that it was unlikely that the Nord Stream 2 pipeline would be in place by 2019, meant that Gazprom backtracked on its absolutist position of no new contract with Ukraine.
However, the underlying intent revealed by Medvedev’s remarks remains. The intent is to seek to minimize or shut down the Ukrainian Brotherhood transit route as soon as possible and switch the gas that would have transited via the Ukrainian network via Nord Stream 2 instead.
Evidence for the target primarily being Ukraine is twofold.
First, in order to minimize any extended Ukrainian gas transit contract period, the two Nord Stream 2 pipelines, unlike the two Nord Stream 1 pipelines, are being built simultaneously and not consecutively. By contrast, in almost all other aspects Nord Stream 2 follows the practices and procedures of Nord Stream 1. This is strongly indicative that the aim is to get the project completed as quickly as possible so that the Ukraine transit route can be eliminated, or to at least significantly reduce the gas flows from that route.
Secondly, Gazprom’s Turk Stream pipeline project is geared similarly. Like Nord Stream 1 and 2, it consists of two sets of pipelines, their carrying capacity at 16bcm each. One pipeline, now already constructed, will provide gas to Turkey. The other pipeline aims to provide gas into South-Eastern Europe, replacing the gas that currently transits across Ukraine and down the Balkan pipeline network toward Greece.
Beyond the geopolitics surrounding Ukraine, it’s clear that Gazprom does not plan to provide any additional gas supplies to Europe via Nord Stream 2. For evidence of this, look no further than Nord Stream 2’s connecting pipeline, EUGAL—another project being built out by Gazprom and its European partners. Nord Stream 2 itself terminates on the German Baltic shore. But EUGAL, which will have sufficient carrying capacity to take all Nord Stream 2’s annual gas flows, points eastward, toward Polish and Czech borders, not towards Western Europe. It connects via the EU’s west-to-east gas interconnectors with the CEE states pipeline networks. The clear aim of the EUGAL pipeline is to flood those west-to-east interconnectors with Gazprom-controlled gas. By flooding the interconnectors, it will be difficult for any other none Gazprom controlled gas to enter the CEE market.
What Gazprom is clearly aiming at is to split the EU’s single market for gas in two. Western Europe will remain a liberalized open gas market able to access multiple sources of gas supply, while central and Eastern Europe will once again become fully subject to Gazprom’s market dominance and Russian influence. The Ukrainian Brotherhood pipeline network and the application of so-called reverse gas flows or swaps through the Ukrainian network is a major roadblock to this strategy. Gas liquidity stemming from flows through the Brotherhood network has already caused Gazprom to lose most of its market influence in Ukraine. Once gas has transited through Brotherhood and on to its customers in Slovakia, Hungary and Poland, legal title passes to those customers, and CEE states have then been reselling that gas back to Ukraine. The danger for Russian strategy when deploying Nord Stream 2 gas in Central and Eastern Europe is that if gas still flows through the Brotherhood pipeline, that gas will generate competition for the gas flowing through Nord Stream, as Gazprom has no legal title to it and control to whom it is sold and at what price. Russia’s pipelines are best thought therefore as a play to restore one-on-one relations between Gazprom and its customers, and to thus restore the coercive power of energy price-setting all across a region over which the Russians feel they must hold sway.
Popular and even policymaker opinion at first glance will assume that if there is a new pipeline, there must be additional gas in the offing—an erroneous conclusion that only helps Russia perpetuate its disinformation campaign. The first step is realizing the mistake. The second is figuring out how to address the real issue: the emerging supply gap for the Netherlands and the rest of the EU. The real solution is not more politically-motivated pipelines, but rather developing a credible replacement energy mix of renewables and alternative natural gas sources. This is now much easier to execute for two reasons.
First, as the International Energy Agency pointed out in its November 2017 renewables study, the cost of renewables in respect of both wind and solar is falling dramatically. Already the IEA estimates that 1000GW of renewables will be added to global power generation capacity between 2017 and 2022. This equals half the total global capacity of the coal power sector which took 80 years to put in place. Europe in particular has considerable scope for deploying much more renewables to improve its supply security.
Second, there are a growing number of sources of non-Russian natural gas open to Western Europe, including from traditional suppliers like include Norway and Algeria. Algeria in particular has underused supply pipelines to the EU, and huge natural gas resources which could be brought online. Another major source of supply is liquid natural gas (LNG). Both the United States and Australia are ramping up LNG production. By 2024, the US will have as much LNG export capacity as Gazprom’s exports to the EU. These additional gas resources can be deployed in tandem with the rolling out of much greater renewable capacity, dealing with the “intermittency problem” while also driving down power costs.
Nord Stream 2 is an object lesson for Europeans that when Russia proposes to build yet another pipeline it does not mean that it is going to provide you with any more gas.