Prospects and Risks for Investors

 

An important factor influencing interests of Ukraine and the EU in the context of Moscow's expansion in Europe is the development of the situation around the Russian project “Nord Stream 2”. According to Russia's plans, the project provides for the second section of the gas pipeline from the coast of the RF to Germany with a capacity of 55 billion cubic meters of gas per year. At this, Moscow has purely political goals, associated with the strategic consequences of the project with its actual economic inexpediency for Russia.

For example, today, the transit of Russian gas to Europe is fully provided by Ukraine's gas transportation system (GTS). As a result, a new complex of gas pipelines along the bottom of the Baltic Sea will actually duplicate it. In theory, this will allow Russia to nearly double the volume of gas supplies to Europe. However, that will significantly exceed the EU's needs even in the long run. Nevertheless, Russia is still implementing the “Nord Stream 2” project, the cost of which is set at 10 billion US dollars, and with taking into account the need for another gas pipeline from the Bovanenkovo gas field on the Yamal to the Baltic Sea — it is estimated at 44 billion US dollars.

The commissioning of the “Nord Stream 2” virtually eliminates Russia's transit dependence on Ukraine

But from the point of view of Moscow's political interests, such costs are absolutely justified. The commissioning of the “Nord Stream 2” gas pipeline virtually eliminates Russia's transit dependence on Ukraine and, at the same time, creates an alternative way of supplying gas to Europe. In turn, it will allow Moscow to deprive Ukraine of the revenues from the transit of Russian gas (in the amount of 3 billion US dollars per year), and will provide it with far greater opportunities for expanding the scope of the armed aggression against our state. In fact, at the moment, it is the threat of critical interruptions in the supply of gas to Europe through the Ukrainian GTS that is one of the main factors hindering Russia from a full-scale offensive operation against Ukraine.

At the same time, by expanding the capacity of the “Nord Stream” gas transportation system, Russia is actually monopolizing gas supplies to the EU countries from the eastern direction, which will increase its influence on the European Union. And under the pretext of protecting the safety of the “Nord Stream”, Moscow will be able to strengthen its military presence in the Baltic region, which is one of the main centers of intersection of interests of Russia and NATO.

In addition, the different attitude of European countries to the “Nord Stream 2” project leads to increased disagreements within NATO and the EU and undermines the unity of their positions with regard to Russia.

The different attitude of European countries to the “Nord Stream 2” leads to increased disagreements within NATO and the EU

All these issues are of particular importance to Russia because of its growing confrontation with the United States and Europe, which puts it in acute need for additional opportunities to strengthen its positions. In this situation, the Russian leadership is making every possible effort to implement the “Nord Stream 2” project in the near future. At this, Moscow relies on representatives of political and business circles in the EU countries interested in receiving revenues from participation in the construction of the gas pipeline, as well as further trade in the gas supplied through it.

 

Taking into consideration the above-mentioned circumstances, the Russian project “Nord Stream 2” causes a rather ambiguous reaction in the European Union.

Thus, the most active lobbyists of the project are partners of the Russian corporation Gazprom in the “Nord Stream” consortium, including German energy companies Wintershall (BASF group) and Uniper (PEGI/E.ON group); British-Dutch oil and gas company Royal Dutch Shell; French energy company Engie; Austrian oil company OMV.

The interests of the above-mentioned companies, and therefore the whole of the “Nord Stream 2” project, and through it — Russia, are promoted by a wide range of political figures, including among the governing bodies of the EU and some European countries, which have all sorts of financial and material benefits. Among them, the most well-known and influential lobbyist of the “Nord Stream-2” and Russia's interests is the chairman of the board of the “Nord Stream 2 AG” consortium, former German Federal Chancellor G. Schroder.

Lobbying the project, they put forward a number of arguments in its favor, which include assertions regarding: greater reliability of gas supplies to Europe than through the Ukrainian GTS; relatively low cost of construction of the gas pipeline due to the shorter route than of other gas transportation systems; the possibility of diversifying gas supply routes to European countries, as well as addressing their growing energy needs. At this, emphasis is placed on the “purely commercial nature of the project and non-existence of any political goals in it”.

The most well-known lobbyist of the “Nord Stream-2” and Russia's interests is the former German Federal Chancellor G. Schroder

Due to the work done to date by lobbyists, the project has already been supported by most of the countries directly influencing its implementation, including the FRG as the main recipient and consumer of gas, as well as Finland and Sweden, as owners of shelf areas through which the pipeline route goes. Besides, the project has been approved by a number of other European countries that are interested in obtaining additional volumes of gas or are involved in its implementation, in particular the Netherlands, Belgium and Austria.

Proceeding from here, members of the “Nord Stream” consortium have already begun practical steps to build the pipeline's infrastructure in the EU, even before Denmark's permit for its passage through its offshore zone. In particular, in Germany, in the Lubmin area (Mecklenburg – Western Pomerania), works are underway to construct a gas receiving station.

 

At the same time, the leadership of the EU, which sees it as a serious security threat to the European Union and its partners, especially Ukraine, is against the implementation of the “Nord Stream 2” project. In view of this, measures are being taken to counter Russia's plans. Thus, the European Commission refused to include the “Nord Stream 2” project in the list of EU priority programs funded from European funds. Besides, they are considering adopting amendments to the European legislation, which would complicate the construction of the gas pipeline in the territory of the European Union.

The leadership of the EU sees the “Nord Stream 2” project as a serious security threat to the European Union and its partners, especially Ukraine

It is proposed to extend European rules to all gas pipelines through which gas is supplied to the EU countries, including those at the bottom of the adjacent seas. Adoption of the aforementioned proposals will be a significant addition to the “Third Energy Package of the EU”, which does not allow for the monopolization of the European gas market, namely: the separation of companies' generation and sale operations from their transmission networks. The need for such changes to European legislation has already been supported by the 19 EU members.

The main opponents of the “Nord Stream 2” project are Poland and Lithuania, which are at the forefront of Russian expansion in Europe. In this regard, the Russian project is considered to be such that directly threatens their interests and security. At this, Warsaw and Vilnius consistently urge the EU countries to abandon the “Nord Stream 2”, actively support the position of the European Commission on the Russian project, and also take measures to improve their energy security.

The Czech Republic, Estonia, Latvia, Slovakia, Romania and Croatia are against strengthening Russia's position in the energy sector of the EU and halting gas supplies through Ukraine. Last year, the above-mentioned countries, together with Poland and Lithuania, sent an official appeal to the President of the European Commission J.-C. Juncker in which they expressed disagreement with the construction of the “Nord Stream 2” gas pipeline.

 

Against this background, additional challenges to Russia's achieving its political and energy objectives arise from increased competition in the European gas market as a result of new suppliers coming to it. Thus, in June 2018, the Trans-Anatolian gas pipeline (TANAP) with a capacity of 16 billion cubic meters per year was put into operation. It is intended for transportation of natural gas from Azerbaijan through Turkey to Southern Europe.

In addition, as a counterweight to the “Nord Stream 2”, Nordic countries are implementing their own project for the construction of the “Baltic Pipe” from the Norwegian Sea to Denmark, Sweden and Poland, which may supply gas to neighboring countries as well. The pipeline will have a capacity of 10 billion cubic meters of gas per year and planned lifetime of 50 years. The beginning of construction works is expected in 2020, and the completion — in 2022. The main implementers of the project are the Polish company Gaz-System and the Danish Energinet.

It is also planned to implement a number of other pipeline projects. In particular, France, Spain and Portugal are working on a strategy to create a common gas transit system from the Maghreb and Africa.

The active development of the LNG infrastructure in Europe continues

At the same time, the active development of the liquefied natural gas (LNG) infrastructure in Europe continues. To date, 24 LNG terminals are already operating in Europe, receiving gas from Qatar, Australia, Algeria and the United States. In particular, due to the growing threat from Russia over the last years, LNG terminals have been built in Poland (capacity 5 billion cubic meters per year with the possibility to increase it to 7.5 billion) and in Lithuania (capacity 4 billion cubic meters per year).

At the same time, the problem with the mass transfer of European countries to LNG is still its higher price than that of Russian gas. In the future, this problem will be resolved through both, a greater number of LNG terminals in Europe and an increase in the volume of LNG supplies to the European market.

Thus, they expect a significant increase in the volume of LNG supplies from the United States, which is taking active steps to expand its production and enter the European gas market. According to the results of the meeting of US President D. Trump and European Commission President J.-C. Juncker on 26th July 2018 in Washington, an agreement was reached to intensify the cooperation of the parties in the sphere. Under the agreement, within a few years, another 12 LNG terminals, oriented on the US LNG, will be constructed in the EU.

These USA's actions are accompanied by a demonstration of its sharply negative attitude to the “Nord Stream 2” project, and the threats to impose sanctions against its participants. According to Washington's official position, the commissioning of a new Russian gas pipeline will increase the threat to Europe's security and contribute to Russia's strengthening, which is unacceptable in the context of its aggressive foreign policy. At the same time, a separate reason for such US statements may be the intention to weaken Russia's competitiveness on the European gas market.

 

In general, these circumstances have a significant impact on the prospects for the “Nord Stream 2” project and future operation of the gas pipeline.

By expanding the “Nord Stream”, Russia is monopolizing gas supplies to the EU from the eastern direction

For example, despite the high level of Germany's interest in implementing the “Nord Stream 2” project, which will turn Germany into a powerful gas hub in Europe, it puts forward a number of conditions. First of all — transportation of Russian gas through the Ukrainian GTS to be continued. This position of Berlin has been repeatedly confirmed by Germany Chancellor A. Merkel, including during her meetings with Russian President V. Putin. Besides, in order to prevent Russia's monopolization of the German gas market, the FRG government plans to build two LNG terminals on the Baltic coast of Germany.

Along with this, there is a growing concern among foreign companies involved in the project, due to the threat of American sanctions against them. According to the statement by the management of the German energy concern Uniper, in view of this, it may refuse to invest into the project. In this regard, concerns are expressed regarding the risk of the exclusion of the concern from international payment transactions as a result of the loss of using US dollar in trading operations.

In the future, the competition in the European gas market will further grow, which will lead to a real drop in gas prices. In turn, this will reduce the profitability of the “Nord Stream” gas transportation system, which in general can be loss-making. Moreover, it has a purely political character, and its construction is not conditioned by any economic expediency.

 

All this makes the “Nord Stream 2” project rather risky for investors. Even in case of its implementation, they can not just never see the expected profits from their investments, but also lose their investments.

In contrast, attractive for investments are the projects for construction of LNG terminals in Europe and pipeline systems alternative to Russian ones. They are supported by the United States and the EU and are dynamically developing, which guarantees security and profits from investments.