THE NORTH-EUROPEAN AXIS: BREAKTHROUGH STRATEGY

: 06 2022
(): Igor TOMBERG
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: (c) Russian Analytica 2005-09-30
: 1667748850


Igor TOMBERG, (c)

Igor TOMBERG

Leading Researcher Center for External Economic Studies Institute for International Economic and Political Studies

Russian Academy of Sciences Ph. D. (Economics)

The contract concerning the construction of the North European gas pipeline (NEGP) signed on September 8, 2005 in Berlin in the presence of Vladimir Putin and Gerhard Schroder is among the most remarkable world-significant political events of the recent months.

According to the terms of the contract between Gazprom and the German BASF and E. ON companies, the new gas pipeline which is going to run across the Baltic Sea water area will bring Russian gas directly to Germany while bypassing the East European countries, the relations with which leave much to be desired. Russia has made a real breakthrough into Europe not only in the energetic but also in the political sphere.

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The subsea section of the NEGP will start at the onshore compressor plant, which is to be constructed in the Portovaya Bay (near the town of Vyborg). The length of the subsea section of the gas pipeline from Vyborg to Greifswald in Germany will be 1189 km. Varios versions stipulate gas pipeline production rate of 19 to 30 billion cubic metres per year. The Project is going to respond to the real market demands. After reaching the rated capacity, the two gas pipeline strings will transmit 55 billion cmpy of the fuel annually.

The total volume of investments to the construction of the subsea section of the North-European gas pipeline (as a one-string version) is estimated as 2 billion Euro, while the overall cost of the NEGP is about $5.7 billion. The project-tied lending is planned. The largest international banks expressed interest in credit granting. The construction of the first string at the Russian territory will be started by Gazprom as soon as in autumn 2005. The German partners, E. ON AG and BASF, will construct the pipeline from the other end.

In order to connect the NEGP to the unified gas supply system of Russia, the construction of a Gryazovets-Vyborg gas pipeline is planned. The new gas pipeline will run along the Vologda and Leningrad regions, which will provide meeting the increasing gas demand of St-Petersburg and adjacent regions.

Gas supply by the NEGP is planned to start in 2010.

The real interest of Europeans in a new gas-main can be judged from the fact how fast the European Commission has approved the Russian-German contract. At the press conference in Brussels, a representative of the European Commission Rupert Krietemeyer said: "We welcome any infrastructure that provides gas supply to

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the EC countries." Moreover, official Brussels appears to have ignored the disquietude of Poland and the Baltic countries. The economic expediency overweighed the attempts at "Russia curbing, " although European Union has been led this way by some countries of ex-Soviet block. The economic foundation of the NEGP Project proved to be much more solid than the political manoeuvring around it.

The consequences of the Hurricane Katrina seem to have compelled Europeans to look in a new way at the problems of energy security of their countries. The stability of energy supply to Europe for the nearest decades depends on the relations with Russia. This was the main statement of the speech of the British Energy Minister Malcolm Wicks on September 13, 2005 in Moscow.

Whereas the dependence on the Russian gas in Germany is estimated to be 30%, that in the East European countries approaches 50%. On the one hand, this frightens Europeans and they are ready to impose restrictions (the proposal to restrict the quota of one gas supplier by 25% has long been considered in Brussels; however, the threat of gas deficiency in Europe caused by the drop of the gas production in the North Sea casts doubt on the sensibility of quoting). On the other hand, an increase in the gas consumption above the level of 100 billion cubic meters stipulated by the concluded long-term contracts is expected at the European gas market by 2010. The operating gas pipelines from Russia to Europe would be unable to fully meet this growing demand. The North-Europran gas pipeline project was started to solve this problem.

The economic benefit from running the NEGP appears obvious. As noted by Director of the International Institute of the

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Energy Politics and Diplomacy Valerii Salygin, even the first year of gas pipeline operation will give a $4 billion revenue: "In view of the gas cost, which is $160 - 170 for a thousand cubic meters in Western Europe, the expenses for the gas pipeline construction equal to $5 billion and the fact that as soon as 2010, the gas pipeline is planned to deliver about 27.5 billion cubic meters, the pay-back period is not expected to last too long. It can be easily calculated that even the first year of operation will give an about $4 billion revenue. "

In addition, the NEGP implies one more route for the Gazprom supplies to the European market. V. Salygin emphasized: "A specific feature of the NEGP is that it does not run across any transit countries, which reduces the sovereign risks and simultaneously increases the reliability of the export supplies." Moreover, the liberalization of the European Union gas market by 2008 will result in the revision or cancellation of long-term 20-year contracts, which currently allow Gazprom not to be concerned about the sale. In order to preserve the export income stability, by this time, Gazprom should increase as much as possible its share at the existing markets and occupy new markets where the company has not participated as yet.

The NEGP is also expected to dispel the anxiety of Moscow about the transit countries, i. e., Ukraine, Poland and the Baltic states (political problems with the neighbours, problems with the gas traffic rates, etc.). The North-European pipe should contribute to avoiding the risks created by these countries and simultaneously to reduce the transit expenses of Gazprom.

The gas pumping from Russia to Europe through Ukraine comes expensive for Gazprom. About 13% of the whole amount is left for Ukraine as the transit fee and, in addition, according to information provided by Gazprom, about 7% is spent for pressure

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maintenance in the pipes (operation of turbine compressors and inevitable process losses). One should add the transit fee and the operation losses in Belorussia and Poland.

Last year, the transit volume through Ukraine reached 138 billion cubic meters, while the plan for 2005 is 128.1 billion. If 55 billion cmpy are removed from this direction to be transported instead by the North-European gas pipeline, the annual savings will make about $1.17 billion only as regards Ukraine.

In other worlds, the construction of the NEGP will pay off rather quickly even if its cost, as predicted, is $5.7 billion.

The NEGP contract changes appreciably both the political and the energy balance in Europe. The new route, which is going to run both offshore and onshore, would allow connecting several more countries to the "Gazprom" network. First, these are UK, the Netherlands and Denmark. The possibility of takeoff lines to Scandinavian countries is also envisaged. Simultaneously, this would ensure the energy security of the Kaliningrad region.

However, some important details of the Project still remain obscure. The key question is filling of the pipeline. It is unclear as yet where the raw material for the pipeline will come from. The South Russian field, mentioned by Gazprom, will not suffice: the production rate planned for this field by 2010 - 2013 is 25 billion cmpy, while the capacity of the first string of the NEGP is 27 billion cubic meters. Moreover, this production rate is hypothetical. According to the Gazprom report, no wells were drilled during the first 6 months of 2005 at the South Russian field.

The Stockman field requires $20 billion investment and the time of its development is also obscure. In addition, Gazprom was going to use this gas for the liquefied natural gas (LNG) production

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project, as it represents the most promising and rapidly growing sector of the international gas market.

The demand may also become a problem. The German participants of the gas pipeline contract, namely, E. ON Ruhrgas, BASF and Wintershall, have not undertaken any particular obligations on gas purchase. The idea of finding any purchasers one day later is risky: the North-European gas pipeline draws Gazprom to a new market - North Western Europe and Britain, which is an area of severe competition between the Norwegian gas and the liquefied gas from the Persian Gulf. The commissioning of the first NEGP string in 2010 may oversupply the market. The anxiety is aggravated by the Blue Flow project case where Turkey, by referring to a crisis, compelled Russia to reduce the price, declined a substantial part of the Russian supplies and easily dictated its terms, being the only consumer for the Blue Flow project.

Nobody of the political figures or directors of Gazprom has presented so far an economic substantiation for the idea that construction of the NEGP is an optimal choice for Russia. There exist at least two alternatives that may compete with the North-European pipeline: (1) construction of the second string of the Yamal - Europe gas pipeline (a way to increase, faster and most likely with lower expenditure, the supply to the Eastern Europe where the demand grows and no rivals are present); (2) liquefied gas projects which allow fast response to demand variations by delivering the gas to the place with higher prices). It is a pity that the cost-performance of NEGP has not been compared with the cost-performance of other options.

The NEGP has an obvious political base. The start of the North-European gas pipeline is a serious defeat of the anti-Russian circles

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in the and in Russia. One can understand the remonstrances and temper of the official Warsaw: the country is going to have elections, while . Kwasniewski is reproached for the improvidence and a strategic mistake. Alexandr Kwasniewski has just celebrated the conclusion of the contract with Ukraine dealing with a gas pipeline construction bypassing Russia, but now Poland is, in turn, left out.

It is believed in Warsaw that the pipeline running along the Baltic bottom would markedly deteriorate the energy security of Poland, the more so, as similar cases are known. For example, in February 2004, Gazprom has disconnected the Belorussian segment of the mains for Minsk's debts. This immediately affected Poland, which depends almost entirely on the Russian gas. The demarche was terminated due to the protests of the German consumers. Now Warsaw apprehends that with the "Baltic alternative", Russia will punish obstinate neighbours without looking back to Germans, who will use fuel from the new pipeline.

The only way left for Poland is to plan switching to other vendors, which is undesirable for Moscow. Poland has long been looking for an alternative to the Russian gas. In 2001, they have nearly arranged for purchasing gas from Norway and Denmark; the supply of Danish gas was expected as soon as 2005; however, finally, the Polish party has refused the contract with Norway, while the contract with Denmark has never been signed. The reason was trivial: the Russian gas is cheaper than the Scandinavian.

Throughout the recent years, the development of relations between Russia and Poland has experienced the calls to ensure diversification of gas import and to decrease the energy dependence on Moscow. Under these conditions, Poland has

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succeeded in obtaining unexampled concessions from Gazprom on decreasing the purchase amount of the Russian gas by one-third within the framework of long-term contracts. The Polish consumers have immediately noticed the benefits: the state company PGNiG was compelled to purchase gas from intermediate sellers under spot contracts for higher prices.

Having called the NEGP agreement the Schroder-Putin pact, A. Kwasniewski has admitted the heaviness of the knock on his policy. This actually eliminates the prospects for construction of the second string of the Yamal - Europe gas pipeline, which was regarded in the 1990s as the main route for Yamal gas delivery to Europe. In addition, recently the European Commission rejected the Amber project for a gas pipeline across Poland, Ukraine, Latvia and Lithuania proposed by the Prime Minister of Poland Marek Belka.

The Baltic capitals have joined A. Kwasniewski's rhetoric by considering the NEGP contract almost as a sort of new Ribbentrop - Molotov pact. On September 8, ex-Chairman of the Lithuanian Seym, a member of European Parliament V. Landsbergis said by the Lithuanian National Radio: "By dropping an anchor in Germany, Russua would rule over large areas and split them. Therefore, knowing the intentions of Russian policy planners, it is beyond doubt that the so-called economic union between Russia and Germany will be nothing else than a political alliance, "

The Prime Minister of Latvia Aigar Kalvitis claimed: "The construction of a gas pipeline across the Baltic sea planned by Russia and Germany may threaten the security of this region; moreover, the project is based on political rather than economic reasons." Almost at the same time, the Foreign Minister of Latvia Artis Pabriks declared: "Large-scale energy projects like that are to

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involve all the EC countries, while this is actually a particularly Russian-German project. "

The representatives of Lithuania and Finland behaved most calmly. Prime Minister of Lithuania Algirdas Brazauskas said that the contract on the North-European gas pipeline was the affair of only Russia and Germany. - At the joint press conference with the Finnish colleague Matti Vanhanen in Helsinki, he said "No matter how Poland or Latvia object, two large states, Russia and Germany, have concluded an agreement, which is to be abided."

First, Ukraine did not express any opinion concerning the NEGP agreement (Ukrainian political crisis was so acute that they could not pay attention to gas), but on September 10, the Head of the Naftogas of Ukraine, Aleksei Ivchenko said that the NEGP does not present any danger for Ukrainian interests.

Ivchenko's confidence is based on the fact that with the growth of gas consumption in Europe by 50 billion cmpy, NEGP with its design capacity of 27.5 billion cubic meters would hardly be able to enfeeble the transit role of Ukraine in the European direction. The more so, as the Project cannot be implemented sooner than after five to seven years.

However, the design capacity of the NEGP equal to 55 billion cubic metres (due to construction of the second string) announced by . Miller does not fit into this plan: in view of the determination of the concern to retain its 25 percent share of European gas in the market, this may imply a business loss for a transit country, most likely, for Ukraine. Obviously, no decrease in the load of the Yamal - Europe or Blue Flow pipelines is planned by Gazprom, which is a principal shareholder or, in the Belorussian section, the only owner of these gas pipelines. Even if the second string of the NEGP is

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constructed in ten years, the Naftogas of Ukraine may lose a quarter of its transit fees.

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Alexandr Kwasniewski has hotheadedly called the North-European gas pipeline "a bad project". One can hardly agree with this opinion. The level and, what is more important, the geopolitical significance of the NEGP are beyond the "bad - good" binary scale. The projects of this sort always leave choice. The Kremlin has chosen the "Baltic pipe" construction and immediately caused a political storm in Europe.

The total failure of the appeals of the "offended" transit countries to Brussels demonstrated once again that the political situation in some countries that convey oil and gas from Russia to Western Europe is unstable; the Ukrainian events also confirm this statement. In view of the growing instability in the world energy markets, it becomes quite clear that in the opinion of European leaders, Russia as a proven partner is preferred over the fast-ripening democracies of the "new Europe".

When considering the NEGP project, one should take into account one more highly important circumstance, which influences the formation of a new agenda of the world community. Russia has made the most serious claim for the role of Energy Superpower No. 1. This concerns all countries that possess substantial oil and gas reserves. Their role in the world economy and international relations grows to such an extent that the earlier definitions of a Great Power and evaluation of the relative weights of particular countries seem to call for revision.

06 2022

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