2009-10-28 | Zuzanna Brunarska and Łukasz Antas

The Nord Stream Consortium (NS) is implementing successive stages of the Nord Stream gas pipeline project. The consortium has prepared a logistical base for constructing the first branch, and has started the construction of the Nord Stream OPAL section. It has obtained the first construction permit from Denmark, and successive permits from Germany and Russia will be a mere formality. Nevertheless, it is still far from certain that the construction of the NS' first branch will begin in April 2010. The fact that Sweden and Finland have so far withheld permissions remains an obstacle. It is probable that Helsinki will grant its consent under pressure from Moscow. Stockholm, however, is showing stronger resistance, which may need pressure from Paris (once Gaz de France joins the NS consortium) to overcome. Even if the construction of Nord Stream does begin, the question of ensuring the sources of supplies and markets for nearly half of the 55 billion m3 of gas to be transmitted via the NS will remain a key problem.

Preparations progress systematically

During the last few weeks, the Nord Stream consortium has taken steps which have moved preparations to construct the Nord Stream gas pipeline along considerably. Of the countries in whose exclusive economic zones the pipeline is to be built, Denmark was the first to grant permission for work to be carried out in its zone. Copenhagen's support was partly motivated by the fact that Denmark's DONG Energy concluded a contract on 1 January 2009 to supply gas from the projected second branch of the pipeline. Finland made the first major concession when it granted permission for the destruction of mines on the Baltic Sea bottom in the Finnish zone earlier this month. Construction of the German section of the NS, the OPAL gas pipeline to transport Russian gas via Germany to the Czech Republic, has also started. This €1 billion investment will make economic sense only if the Nord Stream gas pipeline is built. Finally, two further logistic bases (pipe storage facilities) have been put into operation in the Finnish port of Kotka and in Sweden's Karlskrona, and the extension of the German port of Sassnitz has begun. The consortium has already spent €2 billion on preparations for the pipeline's construction.

Obstacles and pressures

The construction of the Nord Stream gas pipeline cannot begin formally until the remaining four countries in whose exclusive economic zones the pipeline is routed (Russia, Germany, Finland and Sweden) have granted their permissions. In practice, the positions of Stockholm and Helsinki, which have been withholding their permissions due to environmental and security concerns, are of crucial importance. While Finland has suggested that it will issue a favourable decision by the end of 2009, Sweden has not declared any final date by which the decision will be taken. It is not certain that Finland will ultimately grant its approval, either. In order for the project to be implemented, Finland has to grant two kinds of permission: the government's permit to use the Finnish exclusive economic zone, and a construction permit from the ministry for the environment. It seems that Helsinki may be playing a sophisticated game in which, on the one hand, the government has pledged to issue the permit in November, but on the other, the ministry for the environment has requested the Nord Stream company to provide additional information in mid-October, which will thus inevitably prolong the approval procedure.
The Russians are trying to persuade the Finns to issue a favourable decision quickly by means of a pledge to postpone the introduction of barrier export duties on Russian timber at least until 2011, and to admit Finnish companies to participate in the Shtokman project. France's involvement in the NS project may also help to overcome the resistance of Sweden and Finland. Talks concerning the accession of Gaz de France (GdF) to the NS consortium are well advanced, the only obstacle being the fact that the French expect a seat on the Board of Directors and the right to veto the consortium's strategic decisions. However, if GdF does enter the consortium, a domino effect may follow in which Finland will grant its consent as a result of lobbying efforts undertaken by Paris, Moscow and Berlin. Finland might then be followed by Sweden, which is currently particularly susceptible to pressure, as it presides over the European Union and seeks to appoint a Swedish national to the post of EU foreign minister. The parties may again use the mechanism applied previously to electing the heads of international institutions, whereby Berlin in co-operation with France pressed the candidacy of Thomas Mirow as the head of the EBRD after Paris obtained Germany's support in having Dominique Strauss-Kahn appointed as head of the IMF.

The fact that all the required permissions have not yet been granted is also an obstacle to obtaining financing to construct the first branch. Creditors are showing keen interest in financing the investment because of the credit guarantees offered by Italy's SACE and the German public institutions Hermes and UFK. However, the procedures in many banks require the investment to have been previously approved by the administrative bodies.

Questions over Nord Stream's profitability

Even after all the permissions have been granted and funding has been raised, question about the project's profitability will remain. It is not clear how gas supplies for the pipeline are to be guaranteed, nor who will buy the gas transmitted via the Nord Stream (especially if both branches are built). Of the 27.5 billion m3 of gas planned to be sent via the first branch annually, arrangements are in place for the sale of 21.5 billion m3 of gas (of which 13 billion is to be purchased by companies in which Gazprom is a shareholder), and it may be difficult to find new customers while the global economic recession continues. Supplies for the first branch will come from the Yuzhno-Russkoe field. In the longer run, the Shtokman field is to provide the raw material base for the NS, although this field is unlikely to come on line before 2016. Given these limitations, the principal option is to build the first branch now and proceed with the second one after the recession ends in the European Union. The other option is to build both branches with a total capacity of 55 billion m3. In that case, Gazprom would solve the problem of ensuring gas supplies for the NS by implementing its strategy of reducing transmission via Ukraine and/or Poland. This would be the easiest solution in the initial period of the pipeline's operation. It would also allow the Russians to pressure those two countries to facilitate Gazprom's access to local gas markets. In addition to entering the Polish market, the question of markets for NS gas could be solved by gaining bigger shares on the markets of other Central and Eastern European countries, as well as by co-operation with Western companies on gas-fired power plant projects.

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