Analyses and Alternatives
While everyone was celebrating the New Year, significant events with long term consequences happened in the gas world. Most were not adequately covered and analyzed in the media. It is no coincidence that many bilateral gas supply contracts with Gazprom were conditioned and signed literally in the last hours of the year, dependant on the outcome from the main negotiations between Naftogaz, the GTS operator in Ukraine and Gazprom.
As in many similar transactions, both parties claim victory and assert to be the winners.
The event of the first day of this year is the commissioning of the first line of the new EUGAL project in Germany. It runs parallel to the existing pipeline OPAL from Lubmin – the entry point of Nord Stream 1 into the German mainland to the exit into the Czech GTS at Brandov.
Why it matters? Because we will see this as a guide into what could and will happen to the Turk Stream segment in Bulgaria
Two key arguments feature in the Russian press underlying the narrative that Moscow has ultimately won the “grand” battle with the EU and the US over Gazprom’s dominance of the EU gas market.
The first argument builds on the fact that the Russian-Ukraine gas agreement legitimizes lower mandatory volumes for the transit, compared to 2018, a reduction to 40 billion cubic meters in 2021-2025. This narrative implies that the EU and the US have finally succumbed to Moscow’s will and have been forced to recognize the two Ukraine-bypassing projects Nord and Turk Stream-2.
The second covers the commissioning on January 1st, 2020 of the EUGAL gas pipeline in Germany, which has the same projected capacity as OPAL – 31 billion cubic meters of gas. Thus, Gazprom could in theory overcome the restrictions on the use of more than 50 percent of the OPAL capacity, confirmed in a recent European Court of Justice ruling.Both claims have their legitimate base. The devil, however, is hidden in the details.
It is beyond doubt that the EU and the US will, at some stage, have to accept that the Nord and Turk Stream and their onshore successors are a faites accomplis, whether in 2020 or 2021 or later. The real challenge for Gazprom is the maximum loading of these capacities, which is key to justifying the enormous investments. This final score will determine whether the projects are primarily “politics” or “market” rooted.
Such hard facts apply both to the offshore and the onshore sections of the projects.The EU and the US are well aware that sooner or later, Russia and Germany will find a way to complete the construction of the second leg of the Nord Stream pipeline.
Sanctions against the vessels of the involved companies have a time-limited effect. A pipeline construction, driven by a geopolitically motivated resolve to get it completed “at any cost,” can hardly be blocked. While it is still difficult to find substitutes for the large sophisticated ships of Saipem and All Seas Group, it is relatively easy to identify alternatives that can engage and complete work on the land-based infrastructure. The technologies are widespread, and substitutes are next door.
This might explain why in the NDAA the wording on the sanctioned activities, related to the Turk Stream in Turkey, Bulgaria, Serbia, and Hungary is so vague. This could either be a deliberate ambiguity, meant to keep the companies and governments second guessing, or the US lawmakers want to leave their options open, given the complicated state of play wtih many unknowns and variables.The 30 days, the State Department and the Department of Treasury have to come up with a list of companies subject to the potential sanctions, might shed light on the exact meaning of the enigmatic phrase of “successor” onshore projects, that ultimately make sense of the maritime part.
The fact that the Russian media claim that Gazprom will be able to use the capacity of the EUGAL pipeline to circumvent the European Court of Justice’s limitation on the twin OPAL project is sheer propaganda. We have an EU court precedent that will sets the legal frame not only for EUGAL but for any other EU based project on the territory of any Member State, or any infrastructure in adjacent non-member countries, that enters into the EU.
Gazprom could use 50 percent of the capacity of EUGAL’s first line and, later, the second line, but unitl the Nord Stream -2 sea section is completed, the issue remains – the lack of legal grounds to use 100 percent of the Nord Stream-1 section in the territorial waters of Germany, where the restrictions continue to apply.
The decision of the European Court of Justice on OPAL refers to the gas transmission infrastructure in its entirety – both sea and land-based.
The fanfares in Moscow are rather off-mark and premature.
Kremlin uses the EUGAL to claim victory, adding the Bundestag’s decision shielding Nord Stream and its onshore part in the 12-mile zone in German waters from EU law and regulation. However, both Berlin and Moscow are fully aware that both the interpretation and the derogation from European law, are the sole prerogative of the European Commission.
Even assuming that Mrs. von der Leyen, who has prioritized her “German” over her “European” identity on the Nord Stream, makes further statements in support, her words have no legal consequences. An elementary appeal on the Bundestag’s attempt to override EU law in the European Court of Justice will restore the legal and institutional balances.We have yet to see the decision of the German regulator on the EUGAL, the reaction at the EC level, and whether appeals will follow. At any rate, uncertainty will persist.
After the transit deal with Ukraine and the payment of $ 2.9 billion by Gazprom on the Stockholm Court of Arbitration ruling, the world already knows – market has won a decisive victory over geopolitics. Should Gazrpom prioritize to protect its market shares In Europe, it will need to compete and offer better terms and prices, rather than resort to geopolitics born and bred at the Kremlin.
One can figure out the trend by comparing the key characteristics of the market and the geopolitics of natural gas in 2009, 2015, and 2020 and predict what the future brings for Gazprom in the next ten years.The winners from the new transit agreements in Ukraine and the restrictions on the Nord and Turk Stream are many gas companies in Russia, including the independent producers and gas traders, deprived of access to the Nord and Turk Streams. In this regard the EU standards in gas trade will undoubtedly lead to major restructuing in the gas sector of Russia and its liberalization.
One of the most logical ways to comply with the EU anti-trust legislation on Nord and Turk Stream is for the Kremlin to finally allow other Russian-operating producers to export gas, alongside with Gazprom.
But this will serve the Kremlin an official death notice of natural gas as its prime foreign policy tool.
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