Russian PM Threatens to Scrap Nord Stream Pipeline Project Without More EU Support

Take It or Leave It

Amid continued environmental opposition and increased political resistance from countries bordering the Baltic Sea, progress on pushing forward the Russian-German Nord Stream gas pipeline project has slowed considerably. The project, which would link Russia to Germany via a 1,200-km, 55-bcm-per-year-capacity subsea pipeline via the Baltic Sea, has figuratively run aground amidst strident environmental opposition from several Scandinavian states, as well as firm political resistance from Poland, Estonia, Latvia, and Lithuania. These countries object to being bypassed with the direct sea route and fear the potential energy security implications of Russia being able to supply gas to Germany without first having to transit their states.

In July, the European Parliament endorsed a non-binding report calling for a new investigation into the US$9.3-billion pipeline's environmental impact. The European Commission said at the time that Environmental Impact Assessments (EIAs) were already underway in each affected member state. The Nord Stream consortium effectively dismissed the Parliament's vote, although Nord Stream insist that the pipeline will start-up in 2011. Given the opposition, Global Insight estimates that it will be 2013 before deliveries are made. Russian Prime Minister Vladimir Putin yesterday sought to change the dynamic of the emerging stalemate between pipeline supporters (mainly Germany) and the project's detractors, telling Finnish Prime Minister Matti Vanhanen in a meeting in Moscow that Europe needs to get off the fence and make up its mind. "Europe must decide whether it needs this pipeline or not," Putin said.

Just in case there was any uncertainty, Putin made sure that Vanhanen and other EU leaders understand what a decision to block the pipeline would mean. "If you don't [want the pipeline], we will build liquefaction plants and send gas to world markets, including to European markets. But it will be simply more expensive for you. You are free to make the calculations yourself," he added. Russia is unlikely to be able to quickly build, let alone finance, LNG plants on its Baltic Sea coast as an alternative to Nord Stream, so Putin's threat may be a bluff. However, the Russian Prime Minister’s comments represent a call to the EU for action on Nord Stream and a request to step-up political support for a project which the EU itself identified as key to ensure secure gas supplies to Europe.

Still on the Fence?

Nord Stream is carrying out a number of EIAs at the behest of Baltic littoral states. Namely Sweden, Estonia, and Finland have requested the pipeline offer an alternative route. These EIAs are all due to be submitted next year. The process for the assessment is not likely to be sped up as a reaction to the rhetoric of the Russian PM, as the process has been under way for months with the deadline fast approaching. Putin gives the impression that Russia is becoming impatient with the process, yet 2011 was always an unrealistic launch date for the pipeline. Even if Nord Stream is delayed until 2013 or 2015, not all planned pan-European import pipelines are required to meet expected European gas-demand growth, especially if demand reduction occurs as a result of high gas prices.

The comments by Putin come after a summer of political mutterings from Germany about diversifying the country's supply sources. Chancellor Angela Merkel has made it clear that her aim is to seek gas from countries other than Russia, and to that end, she held talks with Algerian officials in July pertaining to the formation of a commission involving the two governments and businessmen from the two countries. Supplies of LNG shipped by tanker from Algeria could help Germany reduce its dependence on piped gas from Russia. Following the Georgian conflict, the German Economy Minister suggested the country create a national gas reserve, akin to Germany's oil reserve, to ensure supply security. However, Germany's main weakness in implementing this proposal is that it has no operational LNG facilities.

Outlook and Implications

There have been calls from Nord Stream consortium officials for increased political support in the past. Although these calls have been levied at European Union officials, Putin’s contribution adds extra weight. His threat to scrap Nord Stream comes just ahead of talks scheduled for tomorrow in France between EU leaders and Russian President Dmitri Medvedev, as the two sides seek to fix the strained relations that prevail in the aftermath of the Russian-Georgian conflict in August.

As such, the Russian Prime Minister’s comments will once again put the question of energy security—and Russia's role as an oil and gas supplier—squarely in front of EU leaders. Whereas some European governments see Nord Stream as a threat to their energy security, increasing Europe's reliance on Russian gas and potentially encircling the Baltic states and Poland, others see the subsea pipeline as enhancing Europe's energy security by providing more stable supplies and opening a new supply route.

Indeed, while Putin clearly would prefer to see Europe drop opposition to Nord Stream, his comments will force the leaders of EU member states to re-examine the consequences of actually blocking the pipeline. Although building liquefaction plans and exporting gas to Europe and other markets is not a viable alternative to Nord Stream for Russia in the short term, it is a possible long-term option. In the interim, a decision to block Nord Stream would consign Europe to continued reliance on Ukraine and Belarus for the transit of Russian gas, an outcome that could put supplies in peril due to the deteriorating state of the Ukrainian gas transportation system, in particular.