Nord Stream 2: Putin’s miscalculation

RRussian President Vladimir Putin liked to flirt with the word, but refused to ever use it. But it visibly flattered him. Russia, the energy superpower. The largest oil and gas exporter that does not even need to defend its market leadership in Europe, because it is out of competition. Between Putin’s accession to power in 2000 and 2005, Russia’s energy exports grew by 54 percent. The state export monopoly Gazprom reached an incredible market value of $ 367 billion. Forecasts for European gas demand predicted steady growth, and Putin was planning massive gas pipeline projects to supply Europe from the north and south from Russia’s biggest gas reserves, bypassing his annoying transit partner Ukraine.

More than a decade later, little remains of Putin’s plans. Gazprom’s market value is only one-seventh of its 2008 record. The planned gigantic South Stream pipeline failed due to EU regulations and was replaced by the much smaller TurkStream project. Russian gas has been pumped through Nord Stream 1 since 2011. But now, of all things, Nord Stream 2 is nearing completion.

With this great project, Putin wanted to show that Europeans still want to buy Russian gas despite the annexation of Crimea and constant foreign insults. However, the future of the virtually completed pipeline is more than uncertain after US sanctions and the poisoning of Russian opposition activist Alexej Navalny who flew to Germany.

Resistance to the project, which is controversial across Europe, has recently increased in Germany too. Economy Minister Peter Altmaier is against stopping construction due to the poison attack on Navalny. It had always been of the opinion “that it is problematic to question projects that are designed for several decades every few months,” the CDU politician told the “Handelsblatt.” “Otherwise, private investors will no longer be willing to commit.”

Gazprom could have miscalculated

Regardless of whether the pipeline is being completed or not, Gazprom could have miscalculated with Nord Stream 2. Even if Russia is reluctant to talk about it, there are hints of it in the recently decided and published “Russia’s Energy Strategy until 2035”. Over the next fifteen years, depending on the scenario, Russia plans to export between 255 and 300 billion cubic meters of gas per year through gas pipelines, half to the west. It is now clear to the Russian state that the demand for Russian gas imports in Europe will fall, so Gazprom should gradually increase exports to Asia, to reduce the previous total dependence on the European market.

However, European demand could fall much faster than Gazprom’s top managers and officials in Brussels had anticipated. The Russian export monopoly would have then devastatedly miscalculated. According to Russian planning, the actual volume of export to Europe in 2035 should be a maximum of 150 billion cubic meters.

But will there still be demand for so much Russian gas in Europe? So will Gazprom continue to make a profit? Gazprom still controls the European natural gas market; more recently, the state-owned company had a 39 percent market share. However, many now doubt that it will continue to do so.

In a study two years ago, economists from the German Institute for Economic Research (DIW) criticized the fact that the energy consumption forecasts on which Nord Stream 2 is based “significantly overestimate” future gas needs in Germany and Europe. . The EU baseline scenario favors fossil fuels and underestimates the importance of renewable energy.

Others consider Nord Stream 2 to be a completely losing proposition. The investment department of the state Sberbank, for example, concluded in a report that the pipeline, like all new Gazprom lines, was a frankly “value-destroying” project for the state-sponsored export monopoly of Russia. This also applies to the new “Kraft Siberia” pipeline to China. Nord Stream 2 alone will generate a loss of around five billion euros and will not be profitable in twenty years.

A reflection of old ambitions

The construction companies that belonged to Putin’s friends were particularly enriched by the construction of the Baltic Sea gas pipeline and the billions of euros for the supply pipelines of Russia’s new gas fields. The report’s author, formerly a senior analyst at the state financial institution, was later fired after a scandal. But that did not eliminate questions about the future of Gazprom.

The company is already struggling with excess capacity. According to its own statistics, Gazprom delivered less than 200 billion cubic meters to Europe annually in 2018 and 2019. This year it could only be 166 billion cubic meters due to the recession caused by the corona pandemic, and the demand in Europe it could not recover until 2022. A preview of the next two decades, Michail Julkin believes. The economist advises Russian energy companies and the Russian government, his area of ​​expertise is adaptation to the consequences of climate change.

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“Nord Stream 2 is a reflection of old ambitions. Our strategy is based on the assumption that the world cannot do without our gas. But it can, ”Julkin says. Above all, Germany is already preparing for a future without natural gas. “Cold winters are becoming a rarity in Europe. It just doesn’t need as much gas for heating as in the past. ” But these realities have yet to rise to the top of Gazprom, Julkin says.

Europeans increasingly invested in renewable energy and went ahead with decarbonisation, while Russia watched in disbelief. “With us they say: it’s just a game to keep prices low.” But there is a consistent strategy behind this. And competition never sleeps either, it allows Europeans to diversify their imports through the liquefied natural gas (LNG) shipped. The price advantages of the Russian gas pipeline are decreasing, gas prices are falling. According to DIW forecasts, the share of European gas imports from South America could almost double by 2035, to 18 percent.

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The possible end of Nord Stream 2 is good news for the actor that Russia wanted to weaken economically by expanding its oil pipeline in the Baltic Sea: Ukraine. Gazprom’s plan to bypass the country in the long term and thus save billions in transit fees would have failed at the end of the pipeline. The hated country of transit would have become an indispensable reluctant partner.

Without Ukraine, Gazprom would not be able to serve its European customers, regardless of the scenario in which Russia’s demand for natural gas develops. It is already clear that exports through neighboring Russia will continue until 2025. In response to pressure from Brussels and Berlin, Moscow agreed to export around 65 billion cubic meters of gas through Ukraine in 2020, and 40 thousand million cubic meters each in subsequent years. What the Kremlin envisioned as a temporary solution could, to Kiev’s delight, become permanent.