WIREDGOV

In the light of the German decision to halt the Nord Stream 2 certification process, a solution will need to be found to meet Europe’s energy needs.

Within hours of Russian President Vladimir Putin recognising the independence of eastern Donetsk and Luhansk and ordering troops into the region, German Chancellor Olaf Scholz said the certification of Nord Stream 2 would be halted.

Many saw the announcement as the right move from Germany following weeks of criticism that Berlin was failing to extend a helping hand to Ukraine as it faces the threat of 190,000 Russian troops and heavy military equipment massed around its borders.

In contrast, Dmitry Medvedev, deputy chairman of the Russian Security Council, huffed and puffed, describing it as the start of a ‘new world’ and suggesting that European consumers would soon be paying double what they currently pay for gas after the suspension of the pipeline linking Russia to Germany via the Baltic Sea.

Medvedev is, of course, entitled to his outbursts of anger, but he probably knows well that once current tensions eventually die down, Nord Stream 2 will most likely make a comeback.

Those who have been closely watching Russia’s activity in Europe’s energy markets will surely remember that even the ill-fated South Stream – which the EU cancelled due to non-compliance with its laws – reappeared as TurkStream, with the only small difference being that instead of entering Bulgaria from the Black Sea, it switched over to Turkey.

It would therefore not be a surprise if, in a few months, Putin and his German friends try to persuade European consumers of the need to bring back Nord Stream 2.

The question is what happens once Nord Stream 2 returns to the discussion table.

Most likely, the entire debate that preceded the halting of the certification will return in full force, with German companies and affiliates clamouring for its immediate commissioning and Ukraine – which has been the historical transit route for Russian gas – opposing it.

At this stage it is possible to expect that European officials will seek to broker a deal whereby Nord Stream 2 is filled up to 55 billion cubic metres (bcm), its annual nameplate capacity, and Ukraine would get to keep its transit role.

However, things will get complicated once parties have to agree on what to offer to Ukraine.

The country has a five-year transit agreement with Russian producer Gazprom, whereby the latter is expected to book 40 bcm until 2024 and pay for it even if it does not use it. Kyiv fears that if Nord Stream 2 enters commercial operation, its own transit volumes would be diverted to the Baltic route ahead of the contract’s expiry.

It is possible that following diplomatic negotiations, parties would be looking to give Ukraine guarantees that the transit will continue until 2024 and may even be renewed afterwards, perhaps for another five years.

It would not be a surprise if, in a few months, Putin and his German friends try to persuade European consumers of the need to bring back Nord Stream 2

There are two possibilities that may arise here.

The first scenario is that Ukraine will continue to transit 40 bcm of gas until 2024 and beyond.

From the Ukrainian point of view, this would not change anything compared to current arrangements. The volumes would be far below the country’s total annual transit capacity of 146 bcm, but would still allow Kyiv to earn around $2 billion in transit fees.

From a European perspective, however, allowing Nord Stream 2 and the Ukrainian route to coexist would mean allowing Gazprom to increase its EU market share, as well as increasing Europe’s dependence on natural gas at a time when it seeks to reduce it.

In a second scenario, Russia would divert the 40bcm/year currently transiting Ukraine to the 55bcm/year of Nord Stream 2, but would be asked to transit reduced volumes of gas to make up for Europe’s falling indigenous production.

It is difficult to guess at this stage how much gas would be shipped via Ukraine.

If we assume that Europe requires an additional 45 bcm/year of imports to make up for its declining output, as predicted by the International Energy Agency, then Ukraine would be asked to transit a maximum of 30 bcm/year.

These quantities would be even lower than current levels and would force Ukraine to increase its transmission tariffs to make it viable enough for the transmission operator to maintain the pipelines.

Whatever solution is found, it is clear that it would either hurt Europe, deepening its dependence on Russian gas, or inflict economic pain on Ukraine and further diminish its role in the European arena.

What could be the solution to Europe and Ukraine’s challenges? As was always the case, the answer lies in Ukraine’s transmission system.

Being one of Europe’s largest transmission networks, the Ukrainian infrastructure can handle flows above 140 bcm/year, but its importance resides not just in quantity but also in quality.

It was built with flexibility in mind, meaning it can immediately respond to sudden peaks and troughs in demand because it uses a combination of multiple pipeline routes and storage.

For any European policymaker honest enough to look at the facts, there is only one solution: to use Ukraine’s EU-compliant transmission system

The system proved its mettle in November 2021 when, only a few days after Russia decided to reroute its historical gas transit route to Hungary to the new southern TurkStream corridor, flows via this route were stopped because of technical issues.

Ukraine stepped in at short notice to allow the gas earmarked for Hungary to transit its territory.

Neither the TurkStream nor the Nord Stream corridors benefit from flexibility provided by a combination of multiple pipelines and storage; they send the same volumes to customers throughout the year, with the exception of maintenance periods when they are shut down.

Ukraine also ticks the EU’s favourite boxes for gas markets: transparency, third-party access, and the unbundling of transmission operations.

The same cannot be said about Russia’s first Nord Stream pipeline also linking it to Germany, which does not boast third-party access and whose transmission operations remain firmly under Gazprom’s control up to the entry point into Germany.

Finally, a favourite argument among critics of the Ukrainian gas system is that it is old and dangerous. The pipelines may be older than Russia’s newer Nord Stream and TurkStream lines, but they appear to emit much fewer emissions than Russia’s domestic infrastructure.

Available satellite data show that in October last year alone, the Russian system had an estimated emissions rate of 164 tons of methane an hour. If the discharge lasted an hour at that rate, it would have had the same short-term climate impact as the annual emissions of about 8,000 cars in the UK. And that was just one of the incidents reported over the years.

It is difficult to anticipate at this stage what will happen to Europe’s gas imports, Ukraine’s transit and Nord Stream 2.

Should tensions abate and Nord Stream 2 be brought back to the discussion table, Western politicians will most likely fumble for a solution that is good enough to appease both sides and buy themselves peace of mind.

However, for any European policymaker honest enough to look at the facts, there is only one solution: to use Ukraine’s EU-compliant transmission system, capable enough to respond to Europe’s demand fluctuations and consign Nord Stream 2 to the scrapyard.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

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