Andreas Goldthau

Assessing Nord Stream 2: regulation, geopolitics and energy security in the EU, Central Eastern Europe and the UK

Strategy Paper (10-2016) King’s Russia Institute & Department of War Studies, King’s College London. 2016

Abstract

This study assesses the geopolitical, regulatory and energy security aspects as discussed in the context of Nord Stream 2. Against the backdrop of heated public debates surrounding the study particularly aims at disentangling the complex dynamics and multi-faceted aspects pertaining to Nord Stream 2. The study makes the following main points:

  • The EU will remain an import market in gas going forward, and its import gap will widen. Significant changes in market structure will force Gazprom to take choices regarding its market strategy. In case Gazprom opts for optimizing market share, this will put pressure on revenues.
  • Gazprom faces severe challenges related to a complex political economy on its home market and the imperative to diversify its export portfolio beyond Europe. Nord Stream 2 is part of Gazprom’s strategy to minimize transit risk to its prime export market, the EU, for which the company is ready to put down significant investment. On a marginal costs basis, Nord Stream 2 might emerge an important hedging strategy against competitively priced US LNG imports.
  • Nord Stream 2 will enhance the liquidity of Central European gas hubs in EU gas trading and pricing, and strengthen their role as continental price markers. As a corollary, Central European gas markets are set to integrate further, which may give consumers choice and increase gas-on-gas competition in the region. Russian gas might end up competing with Russian gas but also with gas from other sources.
  • While Nord Stream 2 does not exert significant impact on South Eastern Europe, the situation of SEE nonetheless merits attention. Of primary importance are interconnectors to North-Western markets, notably in the shape of the ‘Vertical Corridor’ linking Greece to Austria.
  • With regard to the UK, Nord Stream 2 gas will likely exert structural or pricing effects only, if at all. Its most important contribution to UK energy security might lie in keeping the continental North-Western markets liquid, so that the UK can continue sourcing from international LNG markets and continental Europe, which maintains gas-on-gas competition.
  • Energy security concerns over Nord Stream 2 as expressed by East European leaders seem to define energy security exclusively in terms of diversified routes and suppliers. Market logic, however, suggests that energy security is primarily enhanced through competition policy and structural market changes. Integrated markets help keeping players that some see as keeping a too dominant market position, such as Gazprom, in check and foster price competition.
  • The future of Ukraine will not hinge on it remaining a transit country for Russian gas. Whilst the country will indeed lose transit fees should the bulk of Russian gas exports to Western Europe no longer flow through the country, it stands to gain in terms of lower gas prices.
  • Nord Stream 2 will be built and operated in a contested geopolitical environment. It is important to acknowledge this environment in order to appreciate the complex political dynamics possibly informing regulatory decisions as taken by EU authorities.
  • The Commission already experimented with using its regulatory tools in the foreign policy domain and vis-à-vis external actors, including Gazprom. This suggests that it is not the legalistic reading of EU energy law which will determine the viability of Nord Stream 2, but the degree to which Commission will interpret its mission as a political or regulatory one.
  • Nord Stream 2 demonstrates that Europe needs to take choices on whether the Commission emerges a political actor in its own right or whether it remains defined as power watchdog; and whether EU rules are applicable across the board or be applied so that they follow political objectives.

Download the report here.