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BREC Director's op-ed for Valday Discussion Club on opportunities stemming from Nord Stream 2

23 August 2016


The Nord Stream 2 project emerged against the backdrop of two complex political challenges: the general deterioration in relations between Russia and the West in the wake of Crimea and the coup in Ukraine, as well as the EU Energy Union.

In the absence of a full-fledged energy dialogue between Brussels and Moscow, the fate of the project is at risk, argues Marat Terterov, the founder and executive director of the Brussels Energy Club.

Russian and German foreign ministers said they do not want to politicize the Nord Stream 2 project. I understand their logic: They are trying to ease the political tensions surrounding this issue in Europe and delaying the project’s launch. However, even the European Commission has called this pipeline a business undertaking to be discussed and decided by the private sector.

In reality, there are no ideal markets when it comes to trading in natural gas. No matter where you look, government players are always involved. Major gas supply deals between two countries are usually concluded at the government level. Consequently, there is always a political element, and Russia’s natural gas trade with European countries is no exception.

The Nord Stream 2 project emerged against the backdrop of two complex political challenges: the general deterioration in relations between Russia and the West in the wake of Crimea and the coup in Ukraine, as well as the EU Energy Union. This political project is backed by leading members of the EU Parliament from Poland and other East European countries, as well as Vice-President of the European Commission Maros Sefcovic and EU Commissioner for Energy and Climate Action Miguel Arias Canete.

One of the project’s goals is to reduce Europe’s dependence on Russian gas. Its backers believe that Russia may be inclined to use natural gas as a political weapon to increase its influence. Here’s the logic of the project’s supporters: We are seeking to build a competitive natural gas market within the EU, so gas should be supplied from a number of different sources. Of course, Russian gas will be part of this mix, and even the main part, but we must prevent any increase in the dependence on Russian gas, which means that EU needs Algerian and Norwegian gas, as well as LNG from the US and other countries, in addition to developing its own resources. As it turns out, Nord Stream 2 is being called into question because it is viewed as increasing Europe’s dependence on Russian gas. Therefore, it has no place in the current European energy policy, let alone its legislative framework.

I have been based in Brussels for the last eight years, and I have to say that there has never been a European Commission as pro-Ukrainian as the one appointed in November 2014. From a geopolitical perspective, it may seem logical. The European Commission has publicly expressed its commitment to supporting Ukraine, which requires it to maintain the current status quo, i.e. to ensure that Russian gas continues to transit through Ukraine on its way to the EU.

Let’s not forget that Ukraine receives more than 3 billion euros per year in transit revenue, which is crucial for the country given the challenging fiscal situation it is facing. Efforts by the EU to ensure that Ukraine remains a gas transit country are aimed at supporting not only Ukraine, but also, for example, Slovakia which is also on the transit route.

However, we should also be mindful of the fact that Nord Stream 2 in some ways could enhance Europe’s energy security. This project would lead to lower transit risks by directly supplying Russian gas to EU territory. In fact, the pipeline will bring Russian gas directly to Germany, where it can then be distributed to other countries under the rules of European and German regulators. This new project could lead to the emergence of a new kind of gas supplier within Europe that would channel fuel to the Baltic states and, for example, the Czech Republic. Czechs are currently not receiving any gas from Russia directly. Instead, they are working with Germany, and it is Germany who sets gas prices for them. The project could also benefit Poland: while in Berlin, Gazprom’s representative guaranteed Poland gas supplies from Germany.

Another objection Europe has against Nord Stream 2 is related to Nord Stream 1. We know that the first gas pipeline, with a capacity of 55 bcm per year, was launched in 2011, has been operating for several years, but until recently used only half of its capacity. Nord Stream’s sea section ends near the city of Greifswald in Germany, from where NEL and OPAL land pipelines carry the gas on to Europe. However, they are working at only half capacity, since under European competition laws one supplier cannot use more than 50 percent of a pipeline. The second half should be reserved for alternative suppliers.

In recent years, Russia’s Deputy Energy Minister Anatoly Yanovsky has been proactive in trying to persuade European partners to address this issue. A new team of EU commissioners was formed without changing anything: Nord Stream is still not operating at full capacity. German regulators came up with a solution back in 2013, but the European Commission refrained from putting forward any proposals. Will Russia be able to fill Nord Stream 2 with its annual capacity of 55 bcm? If not, getting involved in the project would be akin to suicide for investors and European partners.

There is only one solution: revive a substantial energy dialogue between Brussels and Moscow, which has been frozen since the events in Ukraine. In the absence of dialogue, the European Commission is seeking to preserve the status quo and is not willing to lend its support to any major infrastructure projects with Russia. Both sides are making media statements, and politicians hope that public support will push European authorities to soften their stance. I don’t think it will be enough. Without a full-fledged energy dialogue, the future of Nord Stream 2 remains very much in question.

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