Nord Stream 2 will be finished – what’s ahead?

By Jelle Baartmans

The construction of the Nord Stream 2 natural gas pipeline, which will link Russia directly with Germany through the Baltic Sea, will be finished soon. Germany and the United States have reached an agreement on the issue that had divided the two countries both under the Trump and Biden administrations. The German position on Nord Stream 2 has always been that the pipeline is a commercial project. The position of the U.S., on the other hand, is that Nord Stream 2 is “a Russian geopolitical project intended to divide Europe and weaken European energy security.” Accordingly, the U.S. government put pressure on entities involved in the construction of the pipeline by threatening them with sanctions. The agreement between Germany and the U.S. includes a commitment to sanctions against Russia should the latter use Nord Stream 2 as a geopolitical instrument. What does the German-U.S. deal mean for various stakeholders?

For Germany, not much has changed. Both the Trump and Biden administrations, as well as the U.S. Congress, were opposed to Nord Stream 2 and did what they could to prevent the pipeline from being completed. However, construction has been close to completion for a while. Therefore, resistance from Washington was too little too late. It was unrealistic to expect that such an expensive project with so many stakeholders could be blown up from the other side of the Atlantic. It is often claimed that Nord Stream 2 is a political rather than a commercial project. This is true for the simple fact that in Russia, business and politics are intertwined as a rule, but that does not mean that it is not also a commercial project. Almost €10 billion have been invested in Nord Stream 2—not only by Gazprom, but also by Western commercial parties such as Engie, Royal Dutch Shell, and Uniper. For Gazprom, Nord Stream 2—like Nord Stream 1—is simply a more attractive way of transporting natural gas than through the existing pipelines through Eastern Europe: it is faster, money can be saved on transit fees, there is no dependency on third parties, and it is more reliable than the old continental pipelines (e.g. less methane leaks).

Is Nord Stream 2 a threat to European energy security then, as the U.S. has claimed? Not necessarily. In 2019, over 40% of EU natural gas imports came from Russia. It has always been our biggest natural gas supplier and always will be. Besides, supply-side developments such as the closing of the Netherlands’ large gas fields do more to increase Europe’s dependency on Russia than the construction of a new pipeline. If anything, Europe’s energy dependency on Russia will probably decrease over time. A maturing liquefied natural gas (LNG) market will turn the gas market global, allowing for more suppliers and therefore forcing Gazprom to compete on the spot market. This will make it impossible for Gazprom to politicize prices. (As a matter of fact, the U.S. has invested a lot in LNG, which is probably their real argument for opposing Nord Stream 2.) Lithuania is a good example: it built an LNG import terminal in 2014, after which natural gas dependency on Russia decreased from 100% to approximately 10%. Lithuania also claims it managed to negotiate lower prices with Gazprom after 2014.

Ukraine is hit hardest by Nord Stream 2. It is likely that Russia will eventually divert its Europe-bound natural gas flows through Ukraine to the new pipeline through the Baltic Sea. This would deprive Ukraine of at least €1 billion in transit fees annually. Gas supplies to Ukraine are not necessarily jeopardized. The country currently does not formally import gas from Russia. Rather, it imports from Hungary, Poland, and Slovakia via reverse flows of Russian gas transported through Ukraine. These countries can continue supplying Russian gas to Ukraine should Russia politicize its own supplies to that country. In 2019 Ukraine and Russia signed a new 5-year gas transit deal, securing at least 40 billion cubic meters of transit per year for Ukraine until 2024. In the meantime, it is important that Ukraine stops complaining about Nord Stream 2—which will not yield any result—and shifts its focus to reforming its energy market. The country can invest in the diversification of supplies (like Lithuania), exploration of its own gas reserves, and reducing energy consumption by removing perverse price incentives. For Ukraine, perhaps the most worrying aspect of losing its gas transit is that this could remove the country’s most important leverage over Russia deterring more military aggression from the east. Whether in an EU or NATO setting, Germany would do well to take the lead in establishing new ways of deterrence on Ukrainian soil.