Poland plots downfall of Russia's Nord Stream pipeline with allies' help

By bne IntelliNews January 23, 2008

Nicholas Watson in Prague -

Finland's announcement on January 21 that it's insisting the Russo-German consortium building the Nord Stream gas pipeline conduct a thorough environmental impact study on an alternative route was music to the new Polish government's ears. With a little help from its friends, Poland hopes to derail the project and replace it with an alternative pipeline that would transport gas overland from Russia to Europe via Poland and the Baltic states.

The Finnish Environment Ministry, whose waters in the Baltic Sea the gas pipeline will run, told the Nord Stream consortium that it must conduct a thorough environmental impact study of an alternative, southern route under the Baltic Sea for the gas pipeline. Nord Stream apparently told Finland in December it didn't plan to carry out an environmental impact assessment for the southern route, which goes around the Russian island of Gogland, arguing the firm had examined the southern route but hadn't found a suitable passage for the pipeline.

A broader study of the alternatives "would ensure that sufficient material on the environmental impacts is available for decision-making and that the environment is taken into account," the ministry said in comments sent to authorities in Denmark, Germany, Russia and Sweden, Reuters reported.

Gazprom's €6bn (and counting) controversial project to build a gas pipeline under the Baltic Sea directly to Germany, which will eventually pipe 55bn cubic metres a year (cm/y) of gas directly into Western Europe, bypassing transit states such as Poland and Latvia, has already encountered problems. The consortium has had to change the route several times already. It's meeting particular resistance from Estonia and Sweden. Nord Stream submitted an application on December 21 to the Swedish government for the pipeline's route through Swedish waters, but a recent poll found that 70% of Swedish MPs oppose the project. In the same statement accompanying the application, Nord Stream admitted the date when the pipeline will start shipping gas from Russia to Germany has been pushed back to 2011, missing the original 2010 start date. Nord Stream still hopes to start building the 1,200-kilometre gas pipeline in mid-2009; with Finland's move, that date is almost certain now to be missed too.

The environmental aspect of the pipeline is just one of several fronts that the new Polish government led by the liberal Civic Platform party of Prime Minister Donald Tusk is fighting the pipeline.

Poland is worried that this pipeline - which the new foreign minister, Radek Sikorski, once compared to the hated Molotov-Ribbentrop pact between Russia and Germany before World War II - would mean its days as an oil and gas transit country are numbered. The previous Polish government, whose terrible relations with Moscow were only matched by those with Berlin, got nowhere in persuading other European nations that this project is a strategic disaster for the EU.

The new Polish government has made repairing ties with Germany and Russia a priority, and hopes to translate this into greater leverage over energy matters such as Nord Stream. The policy is already paying dividends in other areas: the thaw began with a deal in November to drop the previous Polish government's objection to Russia's bid to join the Organisation for Economic Co-operation and Development, or OECD, which in turn brought a deal in December for Russia to overturn its long-standing ban on Polish meat exports. Most importantly for its EU allies, Sikorski said January 22 that negotiations on a new partnership deal between Russia and the EU, which had been blocked by Poland, could start during the first half of this year.

There has certainly been a notable change in tone in recent discussions between Poland and Germany over the Nord Stream pipeline, though not necessarily any concrete shift in thinking, say analysts. Speaking in Berlin following his first meeting with German Chancellor Angela Merkel on December 12, Tusk said he was "satisfied" that Germany was ready to deal with his country's concerns about the pipeline. However, Tusk also reiterated his government's opposition to the project.

One option that Germany has already put on the table is an offer to divert some of the gas from the pipeline to Poland. In March 2007, the German-Russian gas joint venture Wingas said it plans to build two pipelines to distribute in Germany gas arriving via Nord Stream, one of which would be a 480-km line called Opal from the Nord Stream landing point near Greifswald to run along the Saxony state border, a spur from which could feed Poland. This was dismissed out of hand by the previous Polish government.

However, instead of spurning all energy relations with the Russians, Marek Matraszek, founding partner and managing director of the Warsaw-based public affairs agency CEC Government Relations, detects a subtle shift in thinking by the new government, or at least some parts of. "It's a little bit confused because the comments are not hugely coherent," notes Matraszek.

While the prime minister and foreign minister, both members of the leading coalition partner Civic Platform, maintain their opposition to Nord Stream and a desire to diversify the country's energy sources, slightly different statements have come out of the Ministry of the Economy, which is under the control of the junior coalition partner the Peasants' Party - the most keen to repair relations with Russia given the meat ban worked against its main constituency in the rural areas.

While sticking to the overall policy of opposition to Nord Stream, new Minister of the Economy Waldemar Pawlak says he's open to furthering energy relations with Russia, specifically calling for a proper evaluation of the so-called Amber project, an alternative to Nord Stream that would transport gas from Russia to Europe overland via the Baltic states. "That's a shift because the previous government was opposed to Nord Stream and wasn't that keen on the Amber project either, as it wanted to reduce its dependency on Russia not entrench it further," says Matraszek.

As well assuaging the environmental concerns, Poland is pushing the idea that the Amber pipeline would deal with the economic problems associated with Nord Stream.

EU consumers to pay

According to many experts, the cost of the building the Nord Stream pipeline under the Baltic Sea would be about three times more expensive than an overland pipeline like Amber, meaning the gas eventually sold to the European consumer would have to be more expensive than the current prices of around $260 per 1,000 cubic metres (cm) - though Moscow would counter that it would not longer have to pay transit feels for piping the gas to Europe.

However, experts like Alan Riley of the Centre for European Policy Studies in Brussels argue the cost of the pipeline will inevitably soar from the current estimates to €10bn and even as high as €15bn because the project was approved without basic issues like the condition of the seabed along which the pipe will run being examined. Experts say the Gulf of Finland is uneven and the costs of its levelling will be huge. "In order to earn back that €10bn-15bn, the gas will have to be sold very expensively. Then the next question: who will buy it?" Riley told the Polish daily Rzeczpospolita in an interview in December.

Highlighting the eventual cost of the gas, prices for which are already rising fast, from the pipeline to EU consumers offers a good basis for the new Polish government to begin leveraging its improving relationship with other EU states. "I would expect the new government to leverage its much better its relationship with Germany and other European countries and to try to persuade them that this project is bad for the environment and is uneconomic," says Piotr Olejniczak of KPMG Advisory in Warsaw.

His colleague at KPMG Advisory Michal Swol says an important aspect of this task will be to persuade Russia that Poland is a reliable transit country. Moscow has accused another transit country Ukraine of siphoning off some of its gas bound for the Europe. "This is a very important task because it's not true Poland is unreliable - there have never been any accidents in this area and we have never done anything toward the transit of Russian gas," says Swol. "Unfortunately, it seems some EU countries also started to share this view and a big task for the new government is to present ourselves as a reliable country and that Amber would be a really interesting alternative for all countries."

Whether Russia is prepared to be persuaded by Poland let alone even listen to it remains in doubt. Nord Stream is strategic project by Moscow to marginalise troublesome transit states like Poland, Ukraine and Belarus, regardless of the economics or the environment. Poland and its Baltic and Scandinavian allies still have a lot of fighting left to do.

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