What is Nord Stream 2? Examining a Controversial Project

The Nord Stream 2 project is an under-construction gas pipeline that would go from Russia to Germany which has been the subject of a lot of controversy recently. So let’s look a bit deeper into it.

Nord Stream 2 is an expansion of the original Nord Stream gas line, creating two additional pipelines along the same path as the original from Russia to Germany through the Baltic sea. This would double Nord Stream’s capacity, though it doesn’t usually run to full capacity anyway. So, environmental concerns aside, what’s so controversial about this? Critics say it will help make Europe dependent on Russia and among other things risks plunging Ukraine’s recovering economy back into crisis. Many of Germany’s neighbours are critical of the project, as they are actively trying to reduce the Russian dominance in the gas market, and many of them have very tense relationships with Russia. On the other hand, supporters say it will add necessary security and size to Europe’s gas market, and claim that the Nord Stream 2 project has no geopolitical ambitions.

Nord Stream 2’s main arguments are listed in their Project Background document. They claim that the EU will need the pipeline for long term gas supplies to help compensate for falling domestic production as well as a projected increase in demand for imported gas, and that direct access to Russia’s enormous gas reserves will make Europe’s gas supply more robust and secure. They also say it will provide a competitive and safe alternative to existing gas pipelines and will help reduce CO₂ emissions as gas is supposedly a “low-carbon source” (there is a lot of debate surrounding that). Their main selling points are summarised at the bottom of their document:

“Nord Stream 2 will increase security of supply by offering an additional transport

system for the new volumes needed to compensate the decline in EU production and

to better enable the market to mitigate supply risks.

Nord Stream 2 will contribute to ensuring that gas stays affordable, to the benefit

of the industry and of consumers alike.

Nord Stream 2, the route with the least environmental impact, will provide access

to the quickest and most cost-effective way to reduce emissions – additional natural gas to replace coal.”

There are a few other assertions to note in this document too. First of all there are many references to LNG (Liquified Natural Gas), usually with the assertion that Nord Stream 2 gas is better. They also mention that the market share between LNG and Nord Stream 2 will be set by the market. These are kind of interesting as one of the accusations Russia has been throwing at the U.S. whenever it tries to stop the project has been that they want to support American LNG. They also talk about potential emissions savings, particularly the fact that this pipeline would be less carbon intensive to run than others and less carbon intensive than LNG. There are also a few mentions of boosting domestic industry thanks to cheap gas.

Nord Stream 2 is correct about Europe’s projected need for imported gas. Europe’s domestic production is falling rapidly, and all that gas needs to be replaced. Luckily most forecasts predict a slow short-term rise in demand for gas with a gradual fall in demand later on. So Europe will need to import more gas, at least for now (though there was talk of bio-gas and similar technologies in their recent EU-Japan Green Alliance). 

So far so good, but experience has shown that things are rarely purely commercial with Russia. Particularly since its annexation of the Crimea from Ukraine in 2014, Russia has been trying to bypass Ukraine when transporting gas to Europe, first going through Turkey, and now intending to use Nord Stream 2 to bypass Ukraine entirely instead. According to Ukraine’s Prime Minister, Nord Stream 2 alone would cost Ukraine €1.8 billion a year in lost revenue from transit fees. The lack of relevance could mean that Ukraine’s gas system never ends up integrated with the EU’s, which has been one of the long-term goals of both sides, with the Ukrainian gas system effectively left to Russia’s whim. This further detaches Ukraine from the EU and pulls it back towards dependency on Russia, thus undermining what could have been a key EU political and security partner in Eastern Europe.

Poland wants the EU to ban Nord Stream 2 for a number of reasons, notably Russia’s already near-monopoly over European gas. Poland isn’t the only one to bring up the EU’s competition rules in this regard, and Gazprom (the Russian state monopoly which is the main company behind Nord Stream 2) is already involved in several antitrust disputes. Part of the problem with Nord Stream 2 is that it also hinders the diversification of gas sources. Nord Stream 2 tries to counter this claim on their website: “The EU gas market is already well diversified, and Nord Stream 2 will help further increase competition and diversification”. This is deceptive because they’re talking about the number of pipelines (with a brief mention of LNG terminals later on) rather than number of suppliers, whereas the criticism of Nord Stream is that the EU is already too reliant on Russian gas, at 42% of extra EU imports. 

What about the rest of the EU? Well, Nord Stream 2 is hard to reconcile with several of the EU’s goals, though it doesn’t directly break EU law. For example, the EU wants each central and eastern European member to have at least 3 independent sources of gas, whereas it is clear that flooding the gas market with Russian gas will not help attain this objective. It also hinders the EU’s stated objectives vis-a-vis Ukraine, which namely include integration of gas infrastructure. 

The American position on Nord Stream 2 has been remarkably consistent. The U.S. has been one of the many, many countries to vocally oppose the project. The Trump administration even put sanctions on the project in an attempt to stop it, though those have since been removed by the Biden administration. It is worth noting however that current Secretary of State Antony Blinken has said that Nord Stream 2 AG was engaging in sanctionable activity. Despite that, the sanctions are currently waived as the U.S. seeks to rebuild ties with Europe.

To summarise, Nord stream 2 could endanger EU energy security; it goes against EU energy policy objectives left right and center, to the clear advantage of Russia; and it has the potential to make Ukrainian gas infrastructure redundant. It is only questionably in-line with competition rules, and only benefits a select few. Given all this, surely the project shouldn’t have been given the green light by the EU, right? Well, as it happens, it wasn’t. Germany didn’t ask any of its EU partners, nor its fellow states, nor EU institutions, nor the companies whose businesses will be greatly affected by Nord Stream 2. Germany just went ahead and signed the deal.  

Why would Germany do this? Well, to start with, Nord Stream 2 will greatly boost the importance of German (and to a lesser extent Austrian and Dutch) gas hubs, while undercutting Polish and Slovakian gas hubs (which benefits Russia). The board of Nord Stream 2 AG (the company in charge of Nord Stream 2) contains representatives of Russian, German, Austrian and Dutch gas firms (as well as a few other major gas companies from western Europe).

Merkel has something of a history of obliging behaviour towards dictatorships to help out German companies. For example, instead of denouncing the genocide going on in Xinjiang, she wanted to make sure the EU-China investment agreement got through (which it luckily hasn’t, yet). She also went to China in 2019, accompanied by business leaders, and lobbied for Wirecard (a company which has since collapsed due to dubious accounting practices). During that trip she was being actively called upon to bring up human rights abuses in Xinjiang and elsewhere, which she didn’t do.

One of Russia’s most common geopolitical tools is to divide its opponents, just as Nord Stream 2 has done. Given Merkel’s previous prioritising of business interests over issues of principle, it’s entirely plausible that Russia saw an opportunity to kill two birds with one stone: to improve Gazprom’s declining exports to Europe, and to increase European dependency on Russia. Dividing and weakening Russia’s opponents can only be an extra advantage (from their perspective).

Analysts say the pipeline should be finished by the end of this year or sooner (it’s ~95% done already), so it’s probably too late to stop the project. This means living with the geopolitical consequences of its realisation. In the best case scenario it goes unused unless truly needed. However it seems more likely that we will see it being used to inflict damage on Ukraine and the EU, while under the guise of an innocent and purely commercial venture. It could end up as as an example of how not to deal with authoritarian regimes, but could in any case hopefully help us avoid similar traps (e.g. China’s Belt and Road Initiative). 

Whether Europe, and the world will need gas in its future or not will be covered in a future article, stay tuned!