Direct Speech, Energy, EU – Baltic States, Gas

BC: The Nord Stream 2 Pipeline construction is proceeding at full speed, and yet there is still a heated international debate about the future of the project. Fears about dependence on Russian gas have recently led to a European Commission proposal for tougher pipeline regulations, US Senate Foreign Relations Committee announced that it would take up a resolution calling for the pipeline to be stopped. Can the project continue as planned?

Romans Baumanis: It certainly can, and we are on track. The project is being implemented on the basis of the permits from four countries. More than 800 kilometres of the pipeline have already been laid, so anyone calling for an end to the project for political reasons needs to consider the reality of the project and the larger economic picture. Five European energy companies and Russia’s Gazprom have committed more than 6 billion euros in orders to over 670 companies from 25 countries. The project has created an economic output of more than 5 billion euros and more than 31,000 full-time jobs in Europe. These companies involved in the project also have a legitimate expectation of legal security in agreements that have already been made. Service providers are accepting orders and recruiting people based on permits that have been issued in four out of five countries along the route. What’s more, grid operators are already investing in connecting infrastructure to transport natural gas onward to the EU internal market, with some 3 billion euros already committed in Germany and 750 mln euros in the Czech Republic.

BC: There is a lot of discussion in the EU about the need to cut back on coal in the energy sector because of high emissions. However, gas is of course also a fossil fuel – does it have a future in Europe?

RB: The EU will not be able to achieve its climate goals without additional gas. Even today, natural gas could underpin an exit from coal-based power generation with the existing gas power plants, making an essential contribution to reducing emissions under economically viable conditions. None of the frequently promoted technologies for renewable power generation can provide an instant solution for meeting the challenge of switching the entire energy system to low emissions, including electrical power generation, heating and transport – it is simply not possible without natural gas. Let me give you two examples:

• The US and the UK have managed to cut their CO₂ emissions from power generation and still achieve economic growth – and they are both profiting first and foremost from the shift from coal to gas. This is possible in other EU states as well: The gas transported via Nord Stream 2 would make it possible to save 160 mln tonnes of CO₂ every year – the annual equivalent of that emitted by 30 mln passenger cars.
• Second example is the German coal exit. Germany, along with many other EU countries is now looking to phase out coal. If the plans as proposed by the German commission will be implemented, Germany will close its coal- and lignite fired power plants in the 2020s, with last one being closed in 2038. Multiple studies show, that this will not be possible without additional gas to be used in power plants, and estimates are around 10 bcm/a per year already in the early 2020s.

BC: Economics aside, your project remains in the news. The US is threatening sanctions against companies working on the project, citing concerns over growing Russian market power. Other critics say the pipeline is unnecessary because there are already enough import capacities to meet demand. Couldn’t the EU just import LNG as Washington wants?

RB: Companies, not governments or the EU, decide which form of energy to use and where to source it from based on price. In recent years, the EU has created a well-functioning internal energy market in which natural gas competes with other energy sources, and gas-exporting countries compete with each other for this market. The prices are based on supply and demand, with growing competition between various gas providers. Market share is not set in stone, nor does it generate political benefits. If a pipeline gas supplier were to demand excessive prices, EU countries could turn to plenty of existing LNG import facilities, and there are even more planned for construction. However, the European Commission itself has pointed out that 70% of these capacities are currently unused, and that prices need to be competitive for LNG imports to increase, particularly from the United States.

Economic competition is international, as is trade across Europe and the globe. Energy costs are a key competitive driver. In the US, wholesale natural gas prices are half of the EU hub price – a locational advantage for energy-intensive industries and the chemical sector in particular. To ensure that gas prices in the EU remain competitive despite decreasing production, European companies decide where to invest in low-cost gas supplies. While the market will ultimately decide the respective shares of pipeline gas and LNG, pipeline gas from Russia offers key advantages in terms of availability, affordability and reliability of supply.

BC: What would happen if this project is delayed or blocked?

RB: We do not currently see any indication that this will be the case. However, it is important to understand the economic and environmental consequences. Without Nord Stream 2, EU gas prices will increase because more expensive LNG would have to be imported. According to a study by the Institute of Energy Economics at the University of Cologne, not building the pipeline would generate losses to the EU economy of up to 24 billion euros per year. The same study found that Nord Stream 2 will enable massive savings in the chemical industry across Europe. Were the pipeline to be delayed, costs in that area could spike by 30% in Germany alone due to increasing competitive pressure on the worldwide gas markets.

By trying to stop the pipeline, the EU would also be defeating its own efforts to reduce its carbon footprint. This is because the additional energy required would then have to be drawn from higher-emissions sources. In the internal market where suppliers compete over price and availability, saying “No” to a pipeline like Nord Stream 2 also means saying “Yes” to more polluting fracking gas from the US – not to mention increased coal imports.

BC: What about the Baltic region specifically: How will the pipeline affect our gas market?

RB: There will be no immediate effect on Baltic gas markets, as they are connected to other pipeline systems coming from Russia, and in the future from the European networks via Poland. But eventually, better market conditions in Central Europe will improve the conditions for Baltic gas importers in the integrated market as well. That is, unless political pressure forces Western Europe into stronger LNG dependence. That would create more competitors for the LNG importers in Lithuania and potentially drive up the LNG price, and potentially the entire Baltic region, where the integration of the gas market is currently underway.

 BC: One of the most frequent arguments against the project is the uncertainty about the future use of the Ukrainian gas transmission system, which is seen as a major risk to the country. Once the project is operational, will there still need to be gas transit via Ukraine?

RB: That is really a question for the involved market participants, in this case companies from Russia and Ukraine, to determine. The way we see it, continuation of transit via Ukraine and the construction of Nord Stream 2 are not mutually exclusive. This pipeline is not a substitute for any other pipelines. In recent years, the demand for gas transit via Ukraine far exceeded the amount that Nord Stream 2 could possibly get to Europe.

It is true, however, that long-term operation of large sections of the Ukrainian pipeline system requires extensive modernisation that has so far been lacking. At present, the only measures that are being implemented are those financed by emergency loans. If European gas customers are to avoid dependency on the political and increasingly technical risks associated with Ukrainian transit, then a solution will have to be found sooner rather than later.