Russia defies pipeline threats over gas for Europe

Russia defies pipeline threats over gas for Europe

In the extreme conditions of Russia’s far northern Yamal peninsula, 500km from the nearest town, thousands of workers are drilling 1.7km through permafrost for a contentious resource. The natural gas from Yamal’s Bovanenkovo field is intended to reach Europe via the Nord Stream 2 gas pipeline — a 1,230km project linking Russia to Germany under the Baltic Sea that has split Europe and sparked threats of sanctions from the US.

Financial Times reports in its article Russia defies pipeline threats over gas for Europe that critics of the project, due to enter service this year, contend that it will keep Europe hooked on Russian gas and deprive Ukraine of billions of dollars earned from allowing gas across its territory. While the pipeline is more than half-built — with European companies’ financing half of the €9.5bn cost — it still faces pressure with Denmark delaying a permit to build in its waters. The European Commission has tightened its oversight.

But from Yamal, the companies behind the project — led by Russia’s Gazprom — have a simple message: the abundant gas here will be coming to Europe whatever the obstacles thrown up by Brussels or Washington.

“We will still produce and submit our gas into Russia’s Unified Gas System, which will then distribute it,” said Igor Melnikov, managing director at Gazprom Nadym Dobycha, the unit developing Bovanenkovo, 2,200km north of Moscow.

“We see no option of halting production,” he said of a field that is costing Gazprom Rbs500bn ($7.6bn) to develop.

Oleg Andreev, deputy head of the production department at Gazprom, said the company would seek other routes for the gas if NS2 were not ready in December — perhaps even via Ukraine. “Turning off the tap is not an issue,” he said. “In principle, there is demand for gas in Europe, and the demand is high, and all corridors can take the gas.”

Gazprom is building Nord Stream 2 with five European partners: Germany’s Uniper and Wintershall, Engie of France, Anglo-Dutch Shell and Austria’s OMV. Some 670 companies from 25 countries are involved in the construction.

Gazprom and Germany, the project’s main EU supporter, maintain that Nord Stream 2 is needed to replace Europe’s declining gas supplies. European gas demand is expected to reach 564bn cubic metres in 2020 and 618bn cu m in 2030, according to the Oxford Institute for Energy Studies.

Russia, which supplies one-third of EU needs, has gas to spare. The Bovanenkovo field alone is expected to produce 95bn cubic metres this year, up 9 per cent on the year, before stabilising output at 115bn cu m per year as of 2020, according to Mr Melnikov.

The US has threatened to impose undefined sanctions on companies involved in the project. “Russia wants Nord Stream 2 to use energy as a leverage over Europe. We shouldn’t allow it to proceed,” Mike Pompeo, US secretary of state, said in May.

Moscow contends that US hostility is motivated by a desire to hurt Russian business interests and stimulate American LNG exports into Europe.

“If it wasn’t in line with their interests, we would never see European partners in it. Who could force them into it? They entered because they are interested in implementing this project,” Russia’s president Vladimir Putin said of Nord Stream 2 this month. “But it does not follow the logic and interests of those who within the existing universal model got used to exclusiveness and lawlessness, and to others paying their bills. That is why the project is constantly being torpedoed.”

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Henning Kothe, chief project officer of Nord Stream 2, told the FT that no contractor had quit because of sanctions risk. “We do not expect that any sanctions will be imposed,” he said.

Another risk arises from the permits needed to finish construction. The project has yet to obtain a key approval from Denmark. The Danish Energy Agency, which has to process the application, said it “cannot say when a permit can be granted”.

Further delays could create more scope for legislative risks, said Mitch Jennings, Moscow-based analyst at Sova research.

“A limitation on capacity for Nord Stream 2 upon its launch is not out of the realm of possibility, given the recent changes to the gas directive by the EU,” he said.

The proposed EU gas directive, expected to go into effect next month, foresees that at least 10 per cent of the German part of the pipeline capacity should be available for third-party access, as well as setting tariff and ownership rules.

Dmitry Khandoga, deputy head at Gazprom’s macroeconomics department, said the company was not yet concerned by the delay in Denmark. The required 140km of pipeline could take under a month to build at current rates of 8km per day, he said.

If Nord Stream 2 is finished this year, it could carry some of the gas now running via a longer route through Ukraine. The country’s gas transit contract with Russia expires on December 31 and will have to be renewed.

But if the new Baltic link does not open on time, Mr Kothe said Europe might need to import more LNG. That would cost between €8bn and €24bn more depending on the LNG price, he said.

Annette Berkhahn Blyhammar, a Stockholm-based energy and utilities adviser at Arthur D Little, a consultancy, said: “Nord Stream 2 is significant from the market perspective in that it brings another opportunity to transport gas from Russia to Europe. If you take that away, costs will rise.”

The abundance of gas in Yamal — which has fields with combined production prospects of 360bn cu m per year — and Europe’s growing demand, is already raising questions over potential need for a “Nord Stream 3”.

“Gazprom is ready to develop even further infrastructure if needed, if the demand is there,” Mr Khandoga said. “Of course with this project we see some reluctance from the European policymakers. Therefore if any Nord Stream 3 is needed, I think Gazprom will find partners to build it. We definitely have the resources to utilise it.”

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