Thread by @profalanriley1

1. My latest (somewhat longish) paper on Nord Stream 2 from @hjs looks at the myths, (German) illusions and then some of the realties surrounding the pipeline. In this first of three threads I will focus on the myths surrounding NS2.
henryjacksonsociety.org/wp-content/upl…

2.Throughout the six years of controversy and debate over NS2 Russia has successfully run a number of myths about the pipeline these include. (a) NS2 will provide additional gas for Europe (b) NS2 will provide gas for Germany

3.And (c) There are no energy security issues because of the single market, (d) Europe is also safe with NS2 because of the availability of LNG (e) Ukraine will benefit from NS2 !!! (f) NS2 will reduce C02 emissions

4. So lets start will the proposition that NS2 will provide additional gas for Europe. To contest that proposition we have the historic pattern of behavior of Gazprom. So when Nord Stream 1 comes online and gas flows through NS1, gas flows through the Ukrainian pipeline fall.

5. This takes us to the key point for both NS1 (and NS2) they do not bring additional gas to Europe. The pipelines are merely diversionary pipeline re-routing gas flows from Ukraine to Germany via the Baltic Sea.

6.NS1 provides more examples of its ‘diversionary tendencies’ In 2016 when Gazprom was temporarily permitted to make greater use of NS1’s connecting pipeline OPAL, gas flows increased through NS1 and into OPAL and flows fell via the Ukrainian transit route.

7. Even more recently with the underdiscussed Turk Stream 2 pipeline gas flows into the Balkans led to a decrease in gas flows into the Ukrainian transit route and through the connecting Balkan pipelines into Balkan states.

8.The historic & current practice of the Russian state and its creature Gazprom is to wherever possible undermine transit flows via Ukraine. All of these pipelines from Yamal in 1997 to NS1 to NS2 and Turk Stream 2 were armed and engine as diversionary pipelines to avoid Ukraine

9.None of these diversionary pipelines were developed to bring new gas to Europe, the aim was always to undermine the Ukrainian transit route. NS2 is no different.

10.Unfortunately for Gazprom US sanctions were imposed in Dec 2019 which stopped the construction of the pipeline in its tracks. As a consequence Gazprom had no choice but to do a new transit deal with Ukraine and keep the gas flowing (for now) across the Ukrainian transit route

11. US sanctions have been criticized for their ineffectiveness. However, they did stop NS2 in its tracks and it has taken some time for Gazprom to marshal the resources to restart construction which is only likely to be completed by the end of the summer or early autumn.

12. Given the historic and current pattern of Russian behaviour it is not unreasonable to assume that once the pipeline is physically completed and even before regulatory clearances are in place, Gazprom will seek to terminate the Ukrainian transit agreement.

13. ‘If you want gas Europe there is a shiny new undersea pipeline that is available to deliver it…you just have to provide the necessary clearances’ will be the message…

14. But amidst all the rhetoric and menace it should always be remembered that this shiny new undersea pipeline in no way adds to Europe’s gas supply.

15. Secondly despite all the political battles that Berlin has undertaken for NS2 over the last six years and the damage to its reputation in EU capitals and DC, the pipeline does not much gas (if any) to Germany.

16. As explained above it provides no new gas at all to Europe or even Germany. It is a diversionary pipeline.

17. In addition, most if not all of the NS2 gas is intended for Central and Eastern Europe and not for Germany. One can see that clearly if one looks at NS2’s connecting pipeline EUGAL. It has 55bcm capacity-in other words it can take the whole of NS2’s capacity.

18.But EUGAL does not deliver gas for Germans. It travels across Germany to the Czech border to deliver gas then into Central and Eastern European market.

19. One of the mysteries of the NS2 saga is why the Berlin political establishment are so ferocious in defence of a pipeline which is in no way adding to Germany’s own supply.

20.Third major myth revolves around the Single Market. The argument runs that NS2 does not raise any significant energy security issues because gas is always available across the SM. Gazprom’s market (and political) power is limited by the SMs liquidity & diversity of supply.

21. It is of course correct that in North-Western Europe there is a diversified and liquid gas supply focused. There are multiple sources of pipeline and LNG sourced gas as well as some domestic production and very high levels of interconnection.

25. However, Central and Eastern Europe is not as interconnected nor does it have the diversity of pipeline routes and sources of supply that exist in North-Western Europe.

26.Although there are more interconnections in place than was the case in the early 2000s before accession of the CEE states to the EU, Gazprom’s market dominance in the region remains largely intact.

27. This market dominance is underpinned by the network of east to west pipelines, long term supply contracts and corporate holdings which give Gazprom significant market influence across the region.

28. NS2 will reinforce Gazprom’s existing dominance across the region.
In particular one consequence of the NS2 pipeline coming on stream is as explained above is that the Ukrainian transit route will be terminated or so significantly reduced it will have minimal market impact

29. However, the greatest positive impact of EU liberalization in the region has been the utilization of EU energy rules to resell gas along the Ukrainian transit route within and outwith the single market, most noticeably to Ukraine.

30. In particular this ‘reverse flow’ gas, originally Russian gas transited across Ukraine to Slovakia, Poland and Hungary and then resold back to Ukraine has underpinned Ukrainian supply security over the last seven years.

31. With the advent of NS2 and the prospect of the termination of the Ukrainian transit route, this gas resellers market will be significantly reduced, and along with it one of the means of ensuring Ukrainian supply security.

32. Gazprom will have effectively terminated an open trading market of gas, leaving it in a much stronger position in the region.

33. The European gas market will be much more severely demarcated between the open and diverse trading market in North-Western Europe and the one in Central and Eastern Europe where Gazprom will have enhanced its market dominance.

34.The fourth myth is the liquid natural gas (LNG) myth. This is the idea that NS2 is not an energy security problem because there is a lot of LNG available worldwide and the EU and the UK have approximately 210bcm of LNG capacity.

35.This myth overlooks 2 realities. First the critical figure is not the total LNG capacity but the potential exit cp'cty out of any particular European state. For instance, Spain has the largest LNG European cp'cty at over 60bcm however its exit pipeline has only 7bcm of cp'cty

36. As a consequence the overwhelming majority of Spain’s cp'cty apx. 53bcm cannot support EU supply security. This exit analysis also applies to other states (though in not so dramatic terms). The UK has the second largest cp'cty of 50bcm with an exit cp'cty of appx 20bcm

37. The total exit capacity available therefore to support other European states is substantially below the 210bcm headline figure.

38. Worst still the second reality is that there is very little LNG capacity in CE Europe. For instance there is only Swinoujscie on the Polish Baltic coast (5bcm to 7.5bcm) and Klaipeda on the Lithuanian Baltic coast (4bcm) that are currently operating in northern CE Europe.

39. Compounded with the limited level of interconnection across CE Europe, and one can see that LNG as the situation now stands, is not a solution to NS2.

40.The fifth myth is that Ukraine will benefit from NS2! The argument here is that Ukraine so benefits from its gas transit revenues they act as a distortive rent on the functioning of the economy.

41.The comparison here is with the impact of gas revenues on the Netherlands in the 1970s in undermining the development of other sectors of the economy with this ‘Dutch disease’ due to the high gas rents.

42. The problem with this proposition is simply that the numbers do not add up. Current gas transit fee revenues are approx. $1 bill. Ukrainian total GDP is $140 bill. It is difficult to see how one can detect a rent distortive effect from fees amounting to less than 1% of GDP.

43.The actual Dutch disease was triggered at the height of the 1970s when the Netherlands found that 20% of annual government revenues were coming from income drawn from Dutch gas production-rather a contrast to less than 1% of just GDP from transit fees.

44. Finally, the sixth myth. That NS2 will be a greener pipeline than the Ukrainian transit pipeline network. It is correct that a newer pipeline will have newer technologies which are greener and more efficient

45.Newer pipelines should more effectively suppress C02 emissions. However, the Ukrainian transmission system operator GTSOU can equally respond by refurbishing its own pipeline network to significantly reduce any efficiency gap.

46.A much more serious environmental consequence however flows from the fact that NS2 has limited surge capacity. It cannot significantly increase gas flows in winter. As a consequence, European power grids will be forced to turn to use more coal to meet demand at peak times.

47. This is a direct result of the Russian intentions behind NS2. It is (a) a diversionary pipeline with no new gas being actually supplied to the European market-and (b) the aim is to terminate or reduce to marginal levels the operation of the Ukrainian pipeline network.

48.However, without significant gas flow through Ukraine it will be impossible to sustain the massive Ukrainian pipeline network with its 146bcm capacity and its huge storage capacity of 32bcm.

49.These huge capacities are vital in cold winters as gas can be surged through the pipelines and from storage into the European market. This is a level of additional security that NS2 cannot deliver. At times of peak demand, NS2 will force European generators to use more coal.

50.That prospect is compounded by the roll out of more renewables across the continent and particularly in CE Europe. This will require gas play the key role as the balancing fuel. As more renewables come onto the grid, gas will play this critical balancing role.

51.However, without the pipeline and storage capacities of the Ukrainian network, European generators will find themselves, when faced with peak demand and increasing demands for balancing renewables turning to coal.

52. There is clearly an irony in ‘Green Germany’ supporting a pipeline that will forcing greater use of coal, while also negating the positive impact of renewables, but this irony does appear to be lost on the Berlin political establishment.

53. Next week the second thread will discuss the largely Germanic illusions of Nord Stream 2, ends.