Putin and Juncker Could Sketch Deal on Europe Gas Link

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  • Leaders may discuss Nord Stream 2 pipeline this week in Russia
  • Gazprom-led consortium says work on undersea link progressing

Russian President Vladimir Putin.

Photographer: Mikhail Svetlov/Getty Images

Jean-Claude Juncker and Vladimir Putin may offer clues about the way forward for a controversial project to expand Russia’s gas interconnections with Europe this week.

The European Commission president meets the Russian leader at a conference in St. Petersburg and may discuss ways a Gazprom PJSC-led consortium could be allowed to double the capacity of the Nord Stream pipeline which carries Russian natural gas to Germany. The project has divided EU governments concerned about the bloc’s dependence on Russian gas and Putin’s meddling in Ukraine.

Eastern EU member states like Poland and Slovakia have pressured Juncker and EU President Donald Tusk to block Nord Stream 2 and Italy objects too, irritated that the EU stopped a Russian pipeline to southern Europe in 2014. Officials are also concerned about causing further instability in Ukraine, roiled by a Russian-backed separatist movement since its 2014 revolution. About 40 percent of Russian gas exports to Europe are pumped through Ukraine and the cash-strapped government earns about $1.9 billion a year in transit fees.

“Nord Stream has become a poisonous political project,” said Judy Dempsey, a Berlin-based analyst at Carnegie Europe.

The Nord Stream 1 project with two parallel pipelines stretches 1,224 kilometers, connecting Russia and the EU.

Source: NordStream

Russia, though, wants to improve access to the stable western market amid falling energy prices while Germany, the EU’s most powerful member, has a long-standing policy of cultivating ties with Moscow and would benefit from a more direct energy supply route with greater capacity.

“It is a very powerful project,” said Pal Sagvari, thet envoy for energy security at Hungary’s Foreign Ministry.

The struggle is being played out as an argument about regulation.

Regulatory Barriers

Since the deal to construct the first Nord Stream pipeline was signed in 2005, the European Commission has introduced a new set of rules to promote competition, which mean that a gas provider is not allowed to control the pipelines. Applying those rules strictly to all of Nord Stream 2 would be so complicated that it would probably kill the project.

Russia and Germany argue that those rules shouldn’t apply to the offshore part of the new 1,200-kilometer (750-mile) long pipeline, which would cross the exclusive economic zones of four member states and Russia before reaching land in Chancellor Angela Merkel’s constituency of Greifswald on Germany’s Baltic coast. The European Commission has yet to decide on its position.

EU Climate and Energy Commissioner Miguel Arias Canete argued last week at a meeting with the German government that Nord Stream 2 should fully comply with applicable European law, including the offshore sections of the link. German Economy and Energy Minister Sigmar Gabriel said the law shouldn’t apply and set his own conditions instead: it has to be compatible with the regulations, mustn’t hurt gas transit via Ukraine and can’t crimp supplies to eastern Europe.

“Juncker would not go to Russia without putting something on the table,” Dempsey said. “It’s my impression that he will present a certain proposal that if Russia wants to go ahead with Nord Stream it will have to meet certain conditions.”

Those conditions may include elements of the new rules combined with guarantees Russia will respect EU energy policy, Dempsey said. Putin and Junker may discuss the pipeline plan when they meet in St. Petersburg, Kremlin spokesman Dmitry Peskov said on Thursday.

Starting Work

Despite the legal uncertainties, the Nord Stream 2 consortium, which includes Germany’s biggest utility EON SE, French energy company Engie SA, Royal Dutch Shell Plc, OMV AG and BASF SE as well as Gazprom, is plowing ahead with its preparations.

In March it picked suppliers for more than 2 million tons of large-diameter pipes and in the coming weeks expects bids for a contract to lay them. The project is also moving on with design engineering, surveys, environmental assessments and procurement of supply and construction packages, said spokesman Jens Mueller.

Ukraine has already seen its share of Russia-EU gas shipments plummet since the first Nord Stream pipeline opened five years ago. While Vladimir Chizhov, the Russian ambassador to the EU, last week insisted his country’s goal is not to replace the Ukraine route, with its expanded capacity the pipeline would, in theory at least, allow Gazprom to bypass Ukraine altogether.

Sources of EU Natural Gas Imports in 2014

The Nord Stream 2 consortium argues that its plan will make European energy supplies more secure as demand for gas picks up in the coming decades, though the International Energy Agency predicts that Gazprom will in fact need to offer more competitive prices to maintain its market share. Russian gas is facing oversupply in Europe amid fierce competition from liquefied natural gas producers such as the U.S. and Qatar.

In Germany, there is growing concern among opponents of the pipeline that the political momentum behind the project is becoming too great for it to be stopped, despite the fact that EU sanctions against Russia are still in place over the annexation of Crimea.

“The Nord Stream 2 project is humming away quietly below the radar, willed on by the German government,” Greens lawmaker Annalena Baerbock said in an interview. “I fear that at some point it may be too late to block it.”