Sefcovic warns Gazprom that Nord Stream 2 must abide by EU rules

Sefcovic warns Gazprom that Nord Stream 2 must abide by EU rules
Brothers divided: Nord Stream 2 could cost Slovakia and Ukraine billions of euros in transit fees.
By Robert Anderson in London May 15, 2016

Gazprom’s plan to build the Nord Stream 2 pipeline to carry gas under the Baltic Sea to Germany must abide by the European Union’s “core principles” and should not damage member states’ energy security, Maros Sefcovic, the EU energy commissioner, told a panel discussion at the EBRD Annual Meeting on May 12.

“We need to make sure that the core principles of EU energy policy are applied to this energy infrastructure,” Sefcovic said.

Russia argues that Nord Stream 2 is outside EU energy legislation, while the European Commission argues that it must follow EU rules on unbundling of ownership and third party access, as it will pass through the exclusive economic zones of Finland, Sweden, Denmark before reaching land in Germany. The commission is already investigating the state-owned gas giant for abusing its market position in Eastern Europe.

Sefcovic admitted the plan to double the size of the existing Nordstream route to 55bn cubic metres (bcm) by 2019 – which was signed last autumn between the Russian gas giant and Germany’s E.ON and BASF/Wintershall, Austria’s OMV, ENGIE of France and UK-Dutch Royal Dutch Shell – had been “politically polarising” inside the EU.

Many Western security analysts argue that polarisation is precisely Russia’s aim; through Nord Stream 2 Russia can use “divide and rule” tactics to split the bloc. On the one hand, energy giants in Western European countries stand to benefit from the project; on the other, several Central and Eastern European states face an increased  risk that they could lose supplies and transit revenues if Russia goes through with its threat to close down the mainline route that carries exports through Ukraine and on into the EU.

“We have to make sure that energy security improves for all European states, not just for some,” said Sefcovic, a former EU permanent representative for Slovakia, one of the most affected states. Slovak Prime Minister Robert Fico has branded the deal agreed by the European energy companies with Gazprom to build Nord Stream 2 a “betrayal” that will cost his country and Ukraine billions of euros in transit fees in years to come.

Moscow insists it needs to bypass Ukraine, through which it currently sends 40% of gas exports to Europe, because Kyiv has proved itself an unreliable partner by refusing to pay its bill and interfering with supplies westwards. Western security analysts argue the closure threat is part of the Kremlin’s pressure on Kyiv to return to its political orbit.

Sefcovic said Ukraine’s interests must also be taken into account. “We believe [gas] transport through Ukraine is very important for that country and for balanced distribution though Europe,” he said. “We want to avoid that on the one hand we help Ukraine, and on the other we throw them off the cliff.”

Riccardo Puliti, the EBRD’s director for energy and natural resources, said reducing Ukraine’s gas consumption was an important part of the picture and that Kyiv had made a lot of progress recently.  “We have achieved a lot of reforms in terms of energy efficiency, in terms of a realistic price of energy, in terms of the reform of corporate governance in Ukraine,” he said.

Further progress on energy efficiency, which the EBRD is helping to fund, offers the prospect of major savings. “If Ukraine reached the average energy efficiency of the EU it would save as much as Spain’s entire consumption and become a net energy exporter,” he said.

Sefcovic said the EU could have a role to bring Russia and Ukraine to an agreement over the existing "Brotherhood" pipeline, which was the most cost-effective way to transport gas from Russia to the EU. He said it would require investment of only $3.5bn-5.5bn to renovate; Nordstream 2’s offshore sections alone will cost €8.8bn.

“The EU can play the role of an honest broker between Ukraine and Russia. We need to look for solutions that are acceptable to all,” he said. “Russia is and will be a very important supplier. What we need to do is to establish mutually advantageous transport of energy with Russia.” He added that Norway should be a model for Russia’s future gas relationship with the EU.

Southern Corridor

Peter Mather, regional vice-president for British energy company BP, told the panel that Europe should not get hung up over its dependence on Russia for gas, which supplies a quarter of gas needs. “We should not be worried about over dependence on Russia,” he said. “The key is to have an interconnected market. We need to get the gas market to the same level as the oil market.”

He said the market was already moving that way, with the recent start of exports of US liquefied natural gas (LNG) from that country's shale gas boom a game changer. That has helped push prices down significantly and offered Europe an opportunity it should seize.

Sefcovic stressed the commission’s eagerness to diversify supplies, which could also help in the fight against climate change by encouraging the shift away from coal, which has twice the carbon intensity of gas. “It is very important to add new routes, suppliers, sources of gas. We are very interested to change the situation as we have it right now,” he said.

The EU commissioner highlighted the first project within the Southern Gas Corridor - which was previously planned to bypass Russia to tap huge volumes of gas in the Caucasus and Central Asia - through which up to 10bcm of Azeri gas will be brought to Europe via Greece and Italy. The route is  “key” he stressed, saying it has “big potential signalling power”.

Mather said the project to bring Azeri gas to Europe, in which BP is a shareholder,  “opens up a completely new corridor” and is “very scaleable,” given that gas from Turkemenistan, Iran and northern Iraq could potentially be added. One third of the $45bn project is already contracted, he said, and it is on “on time and on budget”.

The TANAP section from Azerbaijan to Turkey has already broken ground, and the TAP section from Turkey to Italy will do so shortly. The consortium of BP (20%), Azerbaijan’s SOCAR (20%), Italy’s Snam (20%), Fluxys of Belgium (19%), Enagas of Spain (16%) and Axpo of Switzerland (5%) is expected to invest €5.6bn over five years into the TAP project, which is due to be completed in 2020. The EBRD is considering helping to finance both TANAP and TAP.

Mather admitted that the fall in gas prices, if maintained, would hit the profitability of the project but he insisted it would still be economic. “The Southern Gas Corridor is viable but it’s not the most profitable project in the world,” he commented. European Union natural gas import prices have fallen by almost half over the past year.