Foreign Policy Implications of the Nord Stream Pipeline
Fine-Kaper Consulting
For the German Government – December 5, 2006
Executive summary:
The Nord Stream pipeline between Russia and Germany (recently renamed from the North European Gas Pipeline) has caused a flurry of controversy in Europe. What initially seemed like a lucrative investment for German energy firms and a boost to German-Russian relations has turned into a near albatross, risking German relations with new EU countries and with Nordic countries whose environment may be impacted by the pipeline. Additionally, fears of Russian unreliability and recent human rights controversies have raised fears that Germany is dangerously risking dependence on Russia.
Although these concerns are all valid, our analysis indicates that canceling the pipeline project would be unwise. There are other mechanisms that can limit the potential damages, and the overall benefits to Germany of the pipeline should not be underestimated. Many of the negative consequences are also related to the precise reasons why Germany needs to secure its own natural gas supply. The various concerns should not be minimized and must be proactively addressed, but canceling the project would exacerbate the impact on German-Russian relations by destroying any trust or influence with the Russians.
Background:
The prospect for an undersea gas pipeline between Germany and Russia has long been discussed. However, on November 30, 2005, the final consortium between the Russian firm Gazprom and German firms BASF and E.ON was established. Almost immediately afterwards on December 9, 2005, construction of the Russian land portion of the pipeline began. Construction is scheduled to be complete in 2010, and other portions and extensions of the pipeline may be added in the future. The present plan is to use gas from the Yuzhno-Russkoye field in the Yamalo-Nenets Autonomous Okrug, which should be fully developed by the pipeline project’s completion. However, additional fields may be connected in the future.
The connections between the pipeline project and the German government are clear. Former Chancellor Gerhard Schroeder leads the shareholder committee for Nord Stream AG, the overall consortium body. The German government has specifically allocated funds to facilitate the project and has provided credits. Addressing many of the peripheral political concerns will certainly be the responsibility of the German foreign ministry.
Poland and the Baltic states have been particularly vocal about the pipeline. In some cases, prominent politicians have made comparisons to past German-Russia collusion which worked to these countries’ disadvantage, including the notorious Molotov-Ribbentrop pact. The issue simmered in the background at the recent EU-Russian summit in Finland and will certainly be an issue at the Weimar Triangle (France, Germany, Poland) summit on December 5. Nordic countries have increasingly expressed concerns that because the pipeline moves through their specific economic zones, they may be responsible for any environmental impacts. Sweden, in particular, has also expressed fears that the maintenance stations for the pipeline could be used by the Russians to spy against them.
Specific Interests Involved:
Energy Security:
The recently initiated Nord Stream pipeline between Russia and Germany will have an enormous impact on Germany's energy security. Natural gas demand is dramatically increasing in Germany and Europe generally, and finding secure and guaranteed new sources is paramount. Although the transit concerns have a political component that the German government cannot ignore, they also have economic implications. The risk of supply shocks was most visibly demonstrated with the Ukrainian energy crisis at the start of the year. The pipeline, although it may weaken other countries' ability to get subsidized gas, will certainly improve Germany’s own energy security. It will give German firms exclusive access to very large gas sources in Russia. Also, gas prices for Germany will no longer incorporate the myriad of “transit fees” which function as taxes on Germany’s energy supply. As decision-makers for Germany, these elements must given top priority.
The three major areas of political concern are the implications of bypassing states like Poland and the Baltic countries, dependency on Russia, and the environmental concerns as the route goes through the Exclusive Economic Zones of Finland, Sweden, and Denmark.
Poland and Baltic states:
Poland and the Baltic states have been most vocally opposed to the project. Although the Baltic states have been hedging their rhetoric somewhat because of fear, Poland has been widely denouncing the deal. In April, Polish Defense Minister Radek Sikorski compared the deal to the hated Molotov–Ribbentrop pact. Theoretically, the pipeline could be used to shut-off natural gas to Poland, some of which goes through the only recently completed Yamal-Europe pipeline. Under Nord Stream, German firms would not be required to supply Poland with gas at subsidized rates. However, the German government can put pressure on BASF, E.ON, and other potential suppliers to ensure guaranteed Polish access to some gas, and the Yamal-Europe pipeline should of course not be intentionally discarded or minimized. Poland’s political weight in the expanded EU is too great for them to be ignored altogether.
Additionally, the German government should promote the use of Liquid Natural Gas through EU bodies. Although an infrastructure would have to be created, this would create an alternative delivery mechanism for Poland and the Baltic states to receive gas supply regardless of how Russia behaves. It is a long-term project, but progress on these ideas may blunt Polish and Baltic concerns that they could ever be shut off completely.
Russian dependency:
There is no doubt that because of peaks in EU gas discovery and development, Germany and other EU states will have greater reliance on Russian gas in the future. This would be the case even without this pipeline. However, the undersea pipeline does represent a substantial investment and commitment to Russian sources. Yet there is no reason why the EU should be forced to look away from other sources of supply. Russia cannot halt these alternative projects altogether, and if German firms do not develop ties with new North African and Central Asian gas sources, other European countries certainly will. Germany should promote these projects through the EU, and it should also ensure that Germany would have access to other sources of gas in the case of substantial changes in the political orientation of Russia.
Isolating Russia is not an option. If Russia no longer trusts European buyers, it will simply shift its focus to Asia. This would only serve to destroy European political interests and to abandon a cheap source of gas. In the globalized world, shunning Russian gas will have no impact. However, there is certainly a danger of having the German political elite too invested in the Russian gas world. Germany should do more to prevent the appearance of collusion and disrespect for other EU states. Fortunately, the Merkel government has been somewhat more comforting in this respect.
Unfortunately, the EU also has limited options in forcing Russia to sell gas at below market rates to transit countries and other poorer European states. The current failures to stop Russia from canceling gas contracts with Bulgaria show this concern. While Germany should definitely encourage Russia to ratify and abide by the International Energy Charter and the principle of energy security for these weaker states, it cannot press Russia beyond reason. Ukraine’s stance from the January crisis is untenable in the long-term. The only true solution is for the European Union to encourage these states to develop their economies, improve energy efficiency, and become more open to other alternative sources like LNG.
Environmental concerns:
These concerns are legitimate, but state-of-the-art German construction technology means that the dangers are much less than perceived. Other modern undersea pipelines have shown a much less substantial environmental footprint. The more important element is the political aspect of pacifying Nordic nation concerns. Germany should make it clear and legally established that any environmental problems will be responsibility of the specific firms, the EU, and the German and Russian governments. Germany might consider establishing EU funds to assist these countries in the case of any leakage or breaks. Germany must be firm with Russia and Gazprom that cutting corners on the environmental aspects will not be tolerated within EU economic zones. The project must take care not to disrupt marine habitats or disturb possible toxic munitions dumps on the seabed.
Additionally, the Nordic countries should receive guaranteed access to some amounts of gas, and additional routes for the pipeline should also be contemplated. An example of such a contract was the June agreement with Danish company DONG Energy to supply gas to Denmark. Similar contracts should be negotiated with other countries with concerns that could potentially hinder the project.
Overall Recommendations:
Any consideration of canceling the project should be abandoned. The energy needs are real, and the project forwards Germany’s economic interests. All of the potential problems can be mitigated with alternative proposals, and, even if frustration still exists, it is unlikely to destabilize the EU beyond correction. However, Germany must be constantly aware of foreign frustration. It should ensure that other states have reasonably stable supply sources, and it should use EU programs and mechanisms to forward this aim.