These agreements’ ramifications, however, extend far beyond the Russo-German bilateral gas trade.
Both agreements presuppose special derogations for Germany from the European Union’s energy market legislation (Third Package) and EU competition policies. Underlying both agreements are two assumptions: that the European Commission’s unfinished anti-monopoly investigation would ultimately not penalize Gazprom for its practices, and that the EU’s economic sanctions on Russia would not affect the energy sector, irrespective of Russia’s behavior in Ukraine.
The Nord Stream Two agreement means that Gazprom will bypass Ukraine’s gas transit and storage systems by 2019, drastically reducing the transit flow through Ukraine, and potentially through several Central European countries as well. Conversely, Nord Stream Two will turn Germany into Russia’s gas transit and distribution center for a large part of Western Europe’s natural gas market. Politically, both agreements indicate that Western Europe’s energy companies generally, and the German government in particular, are eager to return to business as usual with Russia, after a short-lived nuisance in Ukraine.
Russia’s military intervention in Ukraine in the spring of 2014 had made it politically difficult for the German government and Wintershall to execute the agreement already concluded with Gazprom. Approved by Germany’s regulatory agencies in December 2013, and signed by Gazprom with Wintershall that same month, the agreement was mothballed until further notice as a result of Russia’s actions in Ukraine. Its validity remained intact, and the document signed in Vladivostok, on September 4, 2015, sets in motion the agreement’s execution.
The agreement is based on a swap of assets purportedly of “equivalent value.” For Wintershall, it looks almost like the end of an era as the company is “exiting the gas trading and gas storage business,” in Germany and nearby. Gazprom takes over, turning what had been Wintershall-Gazprom 50-50 joint ventures into fully-owned Gazprom entities.
These include:
WINGAS, the gas trading company, with a market share of more than 20 percent in Germany, and market niches in Belgium, the Netherlands, Austria and the Czech Republic.
Wintershall Erdgas, natural gas trading companies in Berlin and in Zug, Switzerland, respectively (WIEH and WIEE, respectively; the latter, active in Eastern and Southeastern Europe).
Rehden and Jemgum underground storage sites (Rehden being the largest gas storage in Western Europe), both in Germany’s northwest, dedicated to receiving Russian gas from the Nord Stream pipeline and its continuation NEL toward the Netherlands.
Haidach gas storage site near Salzburg, Austria, serving the German and Austrian gas markets, and grouped—with Rehden and Jemgum—under the management of Astora, operated by Gazprom.
Wintershall Noordzee, a Netherlands-registered oil and gas exploration company active in the North Sea (with low profitability—Kommersant, September 7).
According to BASF (Wintershall’s parent company) board chairman, Kurt Bock, the Gazprom-Wintershall “partnership in gas transportation activities will continue,” apparently meaning that gas pipelines jointly owned and operated by Wintershall and Gazprom in Germany would not be handed over into Gazprom’s full ownership (BASF, Wintershall, and Gazprom press releases, September 4).
Wintershall had, in the last two decades, mainly existed by procuring and reselling Russian gas. With meager gas resources of its own, Wintershall became the object of a gradual takeover of its fixed assets and market share in its home country by Gazprom.
For handing over all those assets and its market share in the highly lucrative home market (“in return” would seem an exaggeration), Wintershall receives 25 percent plus one of the shares in two blocs of Achimov, a gas field within the Urengoy area, where Gazprom is in control as the license-holder. The two blocs are highly challenging in terms of geological profiles and gas composition. They are estimated to hold a combined 274 billion cubic meters (bcm) of gas and 74 million tons of condensate, “according to the development plan confirmed by Rosnedra” (a slight hedge there). Production is expected to start by 2018, eventually reaching a plateau of 8 bcm per year. Wintershall’s stake seems to be that of a financial investor, rather than a production-sharing agreement (Wintershall press release, September 4).
Wintershall president since 2009, Rainer Seele, became president of Austrian OMV in July of this year. OMV expects to acquire stakes in two blocs of the same Achimovsk field. Wintershall has acted as one of Gazprom’s closest allies in Europe, and Seele was a vocal critic of the EU’s economic sanctions on Russia following the war against Ukraine. The new president, Mario Mehren, until recently headed Wintershall’s business with Russia, and has evidently been appointed president to continue that orientation.
Gazprom’s full takeover of Wintershall’s downstream assets would seem to be irreconcilable with the European Union’s Third Package of energy market legislation. It looks like a clear case of a vertically integrated monopoly arrangement. Nevertheless, German regulators have authorized it; and Germany will probably use its political clout in the EU to protect this arrangement.
Part Two
The agreement to build the Nord Stream Two gas pipeline marks a return to business as usual with the Kremlin in a political sense—that is, accepting Russia’s war against Ukraine as a given and moving past it.
Nord Stream Two, however, goes far beyond business as usual. Adding Nord Stream Two to the already operating Nord Stream One pipeline, would result in a staggering total capacity of 110 billion cubic meters (bcm) annually. Whether used at full capacity (unlikely) or below it, Germany is, in any case, the single first destination, turning into a privileged distribution center for Russian gas in Western Europe.
If implemented as designed, this project could reconfigure the natural gas trade in Europe and the political alignments that are often associated with energy business interests. The go-ahead for Nord Stream Two is basically a Russo-German strategic policy decision, cementing a special bilateral relationship. Nord Stream’s non-German stakeholders are piggybacking on this.
This project threatens to kill Ukraine’s gas transit system (traditionally the main delivery route for Russian gas to Europe) by re-directing the flow into Nord Stream Two. Stunned, Ukrainian officials speak of a “stab in the back” and “betrayal” by those European decision makers who gave Nord Stream Two the go-ahead (Ukrinform, UNIAN, Ukraiynska Pravda, September 9–11). But Kyiv might also demonstrate how European consumers would be short-changed. Higher transportation costs would raise the end price of Russian gas delivered through Nord Stream, compared with that delivered through Ukrainian pipelines to Europe.
On September 4, at the Vladivostok economic forum, with Russian President Vladimir Putin in attendance, the heads of Nord Stream Two shareholder companies signed the binding agreement to build and operate this pipeline (Gazprom, BASF/Wintershall, OMV press releases, September 4).
Most of these companies had already signed agreements of intent on Nord Stream Two during the St. Petersburg Economic Forum, hosted by Putin in June. That signing indicated that the German government had already given its political encouragement at that time, regardless of Russia’s war in Ukraine. It also indicated that Nord Stream would remain immune to the economic sanctions that are otherwise affecting Russia. It further indicates that, already by June, the German government anticipated a re-opening of Russia’s access to Western financial markets. Building Nord Stream Two presupposes such access for Gazprom.
Led by Gazprom with 51 percent of the shares, the consortium, formed on September 4, includes the German companies BASF/Wintershall and E.ON Ruhrgas, Austrian OMV, and Royal Dutch Shell, each with 10 percent, as well as the French ENGIE (the new name of Gaz de France Suez), with 9 percent. They are creating the project company New European Pipeline AG to build and operate the Nord Stream Two pipeline.
Under the agreement, the consortium as such does not sell natural gas to European importer companies. Gazprom alone owns the gas; and it is Gazprom that sells it directly to European companies, including the Nord Stream consortium’s partners. Selecting the customers in Europe is Gazprom’s prerogative.
The consortium, as such, would build and operate the transportation system. Any new entrants into the consortium would acquire shares from the existing, minority shareholders, while Gazprom’s majority stake remains intangible.
Gazprom holds the exclusive right to transport gas through the Nord Stream pipeline. Thus, in effect, Gazprom books the full capacity in advance. Gazprom compensates the consortium’s other partners, in proportion to their respective stakes, for the service of transporting Gazprom-owned gas. That compensation is based on the ship-or-pay principle—that is, Gazprom would pay for the service as if it had used the booked capacity fully, even if it used it only partially. These arrangements basically replicate those of Nord Stream One.
Mirroring Nord Stream One’s metrics, and planned as a parallel to it in the same corridor, Nord Stream Two would run 1,220 kilometers on the Baltic seabed, from Vyborg (Leningrad oblast) to Lubmin (near Greifswald), there to connect with Germany’s gas transportation grid. Nord Stream One and Nord Stream Two consist, each, of two parallel loops, with annual capacities of 27.5 bcm per loop, for a grand total of 110 bcm as the system’s ultimate target.
The first gas flow through the first loop of Nord Stream Two is planned for the end of 2019. Judging from Nord Stream One’s experience, the second loop should be completed within one year after the first. Gazprom President Aleksei Miller anticipates the construction costs for both loops of Nord Stream Two at €9.9 billion ($11.2 billion).
Nord Stream One had cost €7.4 billion ($8.4 billion) to build, on the exact same route, from April 2010 until November 2011 (first loop) and November 2012 (second loop). Thus, the construction timeframe for Nord Stream Two looks realistic. The shareholdings of Nord Stream One and Nord Stream Two overlap rather closely; the exceptions being that Nord Stream Two has replaced Nederlandse Gasunie with Royal Dutch Shell, and has added OMV.
The European Commission has a strong legal and regulatory case for stopping Nord Stream Two—not by blocking the offshore construction, but rather by enforcing the European Union’s laws and regulations on those overland pipelines and storage sites in Germany that operate with gas from Nord Stream. It will be an uphill battle for the European Commission against Berlin’s political influence and the Nord Stream consortium’s lobbying power.