Ukraine is key to unlocking Nord Stream 2

Europe’s desire for cheap, stable energy clashes with the political need to maintain cordial US relations and support Ukraine

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Political consensus in Europe appears to be shifting on just how to soften the impact of Nord Stream 2 on Ukraine as a transit country, amid continued wrangling over the Russian pipeline.

East European and Baltic states fear that the Gazprom project, which would double the existing Nord Stream pipeline's annual capacity of 55bn cubic meters, could increase Europe's reliance on Russian gas and make a serious dent in Ukraine's strained federal coffers.

However, Western European powers like Germany and France argue that the additional pipeline is necessary because natural gas is as much as 25% cheaper than liquefied natural gas.

The pipeline, which is due to be completed by the end of 2019 or early 2020, has received permits from four of the five European countries it needs, with Denmark being the only hold out.

But even if the Scandinavian country does not give permission, the Nord Stream 2 company insists the route can be altered without significantly affecting the timing and the cost of the project.

In Greifswald bay in north-eastern Germany, workers are already welding pipes together ahead of plans to start laying them beneath the Baltic Sea this month.

"Probably, there will be no delay," Nord Stream 2 chief financial officer Paul Corcoran tells Petroleum Economist. "It [Denmark's section] is 10% of the route. We can start building on time and we can finish this 10% after we get permission."

US President Donald Trump has repeatedly criticised Germany for its energy dependence on Russia, saying the country is "totally controlled" by Moscow because of its gas supplies. During the US-EU July summit in Brussels, US Energy Secretary Rick Perry said the US was still mulling sanctions against Nord Stream2, but added, "this is the last place we'd like to land".

A clearer path

Rather than directly hit Nord Stream 2, US officials said in May that the US may impose sanctions on the European companies involved in the project, as Foreign Policy magazine reported in June. Gazprom's partners in the consortium, which include Shell, Uniper, Wintershall, OMV and Engie are footing half of the overall required €9.5bn ($11.1bn) capex financing.

Gazprom officials have said it would be able to finance the gas pipeline project even if US sanctions are imposed on its European partners. "The project will definitely be financed," said Corcoran. "It is important for Gazprom and Russia currently has a high liquidity in euros."

Other obstacles to the completion of the controversial pipeline may also be falling away.

The EU has opted to postpone a discussion on amendments to gas market rules that would apply to all pipelines entering or leaving the EU, following negotiations with Russia and Ukraine. The directive implied that the supplier and transporter of gas must be different entities and demands that third parties have access.

"Although the chance that the amendments will be accepted is still high, the decision to postpone the discussion reflects the EU's interest in a strong gas supply and is positive for both Nord Stream 2 and Russia's position in negotiations with Ukraine's Naftogaz," said Kirill Tachennikov, senior energy analyst at BCS Financial.

Competing interests

In April this year, Chancellor Angela Merkel quietly made a tectonic shift in Germany's position when she indicated that the project could not go ahead without transit guarantees for Ukraine.

Merkel, who has faced brickbats from within her own party for supporting the pipeline, had previously portrayed Nord Stream 2 as solely an "economic project".

But she has since recognised its political importance and subsequently told Russian President Vladimir Putin that Ukraine's status as a transit route for gas cannot be extinguished by Nord Stream 2.

During the recent Helsinki summit with Trump, Putin announced that Gazprom may renew its transit deal with Ukraine beyond the end of 2019 - as long as the Stockholm arbitrage rulings in a long-running dispute over gas contracts with Ukraine's Naftogaz are to Russia's satisfaction.

Sweden's Appeal Court has already granted Gazprom's petition to suspend the collection of $2.6bn from the company in its long-running competition dispute with Naftogaz.

Opponents of Nord Stream 2 had hoped that the final ruling could be used to block the pipeline, but this seems increasingly unlikely as pressure builds in Berlin to instead focus on softening its impact on Ukraine's transit role.

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