With the advent of climate change as a threat to global security and peace, world leaders are being forced to pursue sources of clean energy. While solar, wind, hydroelectric, and nuclear methods of obtaining renewable energy have shown promise, they have struggled to achieve efficient scale, affordability, consistency, and safety levels to fully match current demand. The EU has committed to reduce its CO2 emissions to 60% of its 1990 levels by 2030, a vow that will require balancing the reduction of greenhouse gas emissions and satisfying energy needs (1). The source that has matched these criteria for decades is liquefied natural gas. Compared to coal-fired power plants, natural gas powered plants produce 50% less CO2 emissions (1). Moreover, it is a plentiful resource on the Eurasian continent.
The need for resources has created power dynamics between peoples of different empires and states throughout history, and modern times are no exception. An abundance of Russian natural gas reserves has provided an invaluable opportunity for Moscow in the European market. For the past-half century, Russia has utilized its deep natural gas reserves to establish veins of influence in Central Europe in the form of natural gas pipes.
In 2013, the European Union, Turkey, Norway, Switzerland, and the non-EU Balkan states consumed 18.7 trillion cubic feet (Tcf) of natural gas (2). Of this 18.7 trillion, 30% was supplied by Russia (2). To add to European dependence on Moscow, Western Europe’s natural gas from the North Sea and the United Kingdom “are in decline and could fall by at least 50 bcm [billion cubic meters]- over the next 20 years” (3). Russia recognizes this potential future demand and has been actively pursuing projects to extend its gas distribution networks into Europe.
Russia currently has eight gas pipelines feeding into Central and Eastern Europe, with an additional five in the proposal and development phases (4). In order to reach Central Europe, however, these gas pipelines must transit certain countries’ territories and maritime borders. Of these transit countries, the most significant is Ukraine.
A country with close geographical and historic ties to Russia, Ukraine hosted the flow of 3 trillion cubic feet of natural gas in 2013, or roughly 16% of European natural gas consumption (5). The two largest pipelines carrying Russian natural gas through Ukraine are the Bratstvo/Brotherhood pipeline and the Soyuz/Union pipeline (2). The Bratstvo pipeline is Russia’s largest pipeline feeding into Europe and “splints in two to supply northern and southern European countries,” while the “Soyuz pipeline links Russian pipelines to natural gas networks in Central Asia” (2). These two pipelines allow Russia to exert incredible influence over not only Ukraine, but also continental Europe.
In the past, tensions between Ukraine and Russia have complicated the delivery of natural gas. For instance, in the winters of 2006 and 2009, natural gas supplies to European countries were cut off due to cost disputes between Russia and Ukraine (6). These disputes increased diplomatic tensions between Europe and Russia, and further advanced the Russian desire to decrease dependence on Ukraine for transit of its natural gas funnels into Europe. At a certain point, almost “80 percent of Russian natural gas exports to Europe transited the Ukraine” (5). Today, following the foundation of the Nord Stream pipeline, that number has fallen to between 50 and 60 percent (5).
According to its website, Nord Stream AG is a gas transmission company incorporated in the Swiss city of Zug for the sole purpose of advancing the Nord Stream pipeline project, with the majority of its shares owned by the Russian, state-owned company Gazprom, and other shares owned by European partners (1). Zug, a city infamous for its holding taxation laws, allows corporations registered in Zug “to pay taxes only on income generated in Switzerland” (7). In addition, foreign companies are taxed 8.8%, but laws allowing businesses to deduct these taxes from Swiss federal taxes of 8.5% leave a stunning taxation rate of a mere 0.3% (7). For a natural gas and energy company such as Nord Stream, the laws of Zug offer an unparalleled opportunity to profit from overseas operations.
The Nord Stream pipeline is projected to be able to supply 55 billion cubic meters (bcm) of natural gas for the next 50 years; the line passes through the Baltic Sea from Vyborg, Russia to Greifswald, Germany (8). Despite its path through Baltic waters, the pipeline transverses the economic zones and territorial waters of Russia, Finland, Sweden, Denmark, and Germany, requiring the approval of all five countries before the commencement of the project (8). For Russian-owned Gazprom, the complications that arise from partnering with these four countries pale in comparison to those that arise from transiting gas through Ukraine.
While Russia claims that its Nord Stream pipeline’s purpose is purely economic, certain data suggest otherwise. Due to the European Union’s “Third Energy Package,” Nord Stream currently operates at half of design capacity (6). The Third Energy Package is designed to protect European interests from growing heavily dependent on a single source, prohibiting “monopolistic ownership and use of energy pipelines on EU territory” (6). This policy has ensured that, from a purely economic perspective, the Russian Nord Stream investment has not paid off to its full potential.
To better understand Russia’s intentions behind the Nord Stream project, one need only take notice of Nord Stream II, a planned pipeline that would run parallel to the existent Nord Stream I line and offer a capacity of 55 billion cubic meters of natural gas a year (1). At full operational capacity, Nord Stream II would account for “almost 15 percent of current EU demand when it starts in 2019” (3). Except for one thing: Nord Stream II would also not operate at full capacity. The Third Energy Package prevents this from becoming a reality. In the words of Amos Hochstein, U.S. Special Envoy and Coordinator for International Affairs, “Nobody spends money building pipelines in a low-oil environment when you already have a pipeline that works just fine” (9). So, if it already has an existing pipeline operating merely at half capacity, why does Russia wish to expand its network of natural gas pipelines?
Quite simply, by having the full capacity to satisfy German demand for natural gas with an additional Nord Stream pipeline, Russia would have the ability to maintain supply to Germany and cut off gas supplies to Eastern European rivals, such as the transit country of Ukraine, in the event of political escalations. While such a situation is unlikely to endure for more than a short period of time, Germany would otherwise be placed in an uncomfortable position. Another point of interest: In the recent past, influential members of the German government have been involved in Nord Stream operations. Former German Chancellor Gerhard Schröder, a heavy proponent of the initial Nord Stream pipeline, was “named the head of the Nord Stream shareholders’ committee literally days after stepping down as chancellor” (6). While current Chancellor Angela Merkel is steadfast on her position to mitigate Russian aggression towards German ally Ukraine, Schröder’s legacy and political allies in the Christian Social Union party and Social Democratic Party are making it difficult for her to justify politically opposition to Nord Stream II, especially with upcoming elections (6). Should Nord Stream II become operational, Germany would reinforce its status as a hub and center for the distribution of liquefied natural gas for Europe.
Despite efforts from various parties, the future status of Nord Stream II is highly uncertain. On August 12, Gazprom’s five Western partners rescinded their agreement to build Nord Stream II, rightfully citing concerns from a Polish regulator that the project would violate the Third Energy Package (10). Without the support of its Western European partners, Gazprom will struggle to execute Nord Stream II. With the increased risk of failure for Nord Stream II, Gazprom will most likely attempt to advance forward its Turkish Stream pipeline through Turkey, continuing its pursuit of reducing the amount of Ukraine-transited natural gas (10). Following Western condemnation of its handling of its recent attempted coup, Ankara is forging a delicate balance between honoring its NATO commitments and building amicable relations with Moscow.
Through its construction of what have frequently been economically unproductive gas pipelines, Russia has gradually attempted to expand its influence in energy supply over both Eastern and Western Europe. Existing and potential routes traversing the Baltic Sea and Turkey will further contribute to this expansion of Russian power, specifically in diminishing the influence of Ukraine as a transit country. These construction projects violate antitrust European laws and create overt European dependency on Russian natural resources. In the years to come, the United States must aid its European allies through the provision of its own natural gas reserves. Europe, for its part, must not forget the importance of its Third Energy Package in upholding diversity of supply and of exploring alternative sources of energy. It would also be well advised to curtail the advancement of Russian pipelines into its territory and to recognize them for what they truly are: channels of Russian influence threatening to divide Europe.
(1) "The Nord Stream and Nord Stream 2 Are a Brand New Pipeline Routes to Transport Russian Gas to Europe." Gazprom Export, n.d. Web. 20 Aug. 2016.
(2) Metelitsa, Alexander. "16% of Natural Gas Consumed in Europe Flows through Ukraine." U.S. Energy Information Administration - EIA - Independent Statistics and Analysis, 14 Mar. 2014. Web. 20 Aug. 2016.
(3) "A Network of Russian Veins of Influence : Gas Pipelines of the European Continent." Eyes on Europe Middle East News. N.p., 06 Oct. 2015. Web. 21 Aug. 2016.
(4) "A Network of Power: Gas Pipelines of the European Continent (Infographics)."South Front. N.p., 21 Aug. 2015. Web. 21 Aug. 2016.
(5) "Ukraine: An Important Transit Country for Natural Gas and Petroleum - IER."Institute for Energy Research. N.p., 24 Mar. 2014. Web. 20 Aug. 2016.
(6) Cutler, Robert M. "Baltic Security And The Nord Stream Two Pipeline - Foreign Policy Research Institute." Foreign Policy Research Institute, 20 Apr. 2016. Web. 22 Aug. 2016.
(7) Walt, Vivienne. "Zug's Secrets: Switzerland's Corporate Hideaway." Time. Time Inc., 11 Jan. 2010. Web. 21 Aug. 2016.
(8) "Nord Stream - The New Gas Supply Route for Europe." Nord Stream AG. N.p., n.d. Web. 20 Aug. 2016.
(9) Delcker, Janosch. "Germany Blocks out Allies’ Wails over Russian Pipeline Love." Politico. N.p., 17 May 2016. Web. 21 Aug. 2016.
(10) Jong, Sijbren De. "Is Nord Stream II Dead?" EU Observer. N.p., 18 Aug. 2016. Web. 28 Aug. 2016.
Image: © Leonid Eremeychuk | Dreamstime.com - Construction of gas pipeline on the ground
Stephan Llerena is a member of the second cohort of the World Bachelor in Business, a three-degree undergraduate business program jointly run by the University of Southern California, the Hong Kong University of Science and Technology, and Bocconi University of Milan. His work experience includes interning at a top 5% U.S. criminal law defense firm and with North American diplomats in Hong Kong. He is fascinated by the roles of international trade, law, and relations in maintaining global stability and security.