Political solitaire: will it be profitable to finish building Nord Stream 2

The following problems are looming on the horizon: will Nord Stream receive certificates and a permit for operation, what load will the new pipe have, what will change if the Green Party comes to power in Germany?

Yelena Ivanova, Natalia Seibil

There is nothing normal around the construction of Nord Stream 2 by Gazprom. Even the standard procedure for the placement of Eurobonds by the gas giant causes “circles in the water”. Whether or not Gazprom needs to finish building the long-suffering gas pipeline, and does it want it?

When preparing prospectuses for borrowing, companies identify their maximum possible risks. Usually financiers describe situations, the likelihood of which is often akin to winning the lottery, or a flood. But the whole point is that nothing boring and routine happens with a gas pipeline under the Baltic Sea. But all kinds of economic and political tsunamis for Nord Stream happen with enviable regularity. The project has long turned into the "hunger games" of the European continent. The history has been going on for many years, so Gazprom is reacting to all the aggravations that coincide with the preparation of the next placement, says Dmitry Alexandrov, head of analytical research at the investment company Univer Capital. The validity of the rumors is due to the fact that everything should have been working for a long time, a year and a half ago, but so far it does not work:

"The matter went far beyond the competence of any of the project participants and rose to the level of political agreements. There are chances that Nord Stream will not be completed, of course, and there are even more chances that even if it is completed, it will not work normally, or its work will be burdened with additional restrictions, for example, no more than a certain volume (no more than half of the volume), or related to the fact that the pumping should not exceed the pumping share through the Ukrainian GTS or some other bindings. From the point of view of operational, financial, payback of the project, these are additional risks".

Now two pipe-laying vessels are working on the pipeline at once - "Fortuna" and "Akademik Chersky". "Fortune" has 10 km to go in the Danish and German zones, "Akademik" - 75 km in the German water area. The intrigue is not whether the pipeline will be completed, but whether Gazprom will be able to collect all the necessary certificates to obtain a permit for operation. The story of work insurance is repeating itself: those insurers who started the project abandoned it due to US sanctions, but this did not paralyze the gasket. This means that there were other, possibly Russian, insurance companies that took on the risks. Maybe there will be service companies that will issue certificates. The battle for a place in the market continues.

Igor Yushkov, a leading analyst at the National Energy Security Fund, is confident that the pipeline will be completed. Only war can stop him:

- Something extraordinary must happen so that, in fact, the Europeans introduced American sanctions prohibiting the provision of construction services. This requires some kind of military incident, but something very tough, something like the annexation of Crimea and a military conflict in Donbass. In 2014-2015, economic sanctions were imposed due to severity only for these two reasons. I think that when Russia and Ukraine were on the brink in April so as not to clash again, it could be called a provocation to convince the Europeans to stop the construction of Nord Stream 2. Now both sides have moved back, went to de-escalation and removed the troops from the border. I think that a certain behind-the-scenes agreement was reached.

Experts agree that everything around construction is politicized, for example, the speeches of environmentalists. In Denmark, an environmental organization filed a lawsuit and the building permit was suspended. But no work was carried out in the Danish water area. Now a similar lawsuit has come from German environmentalists - with the same requirements.

"All these environmental issues, all these claims, they are discussed at the discussion stage before the project begins to be implemented. Now everyone understands perfectly well that this is a political action that has nothing to do with the environment. Therefore, the chances of the environmental organization are scanty", - says Igor Yushkov.

This game of cat and mouse will continue until the last day, so the question arises: which is more profitable - to finish building or not? The best option is to complete the construction and gradually, through the negotiation process, bring the gas pipeline back to normal operation, experts say. Moreover, the Europeans can only stop the Nord Stream through sanctions. According to the current legislation, there is no other way for this. The decision of the question on the principle of "like it or not like it" is impossible in Europe. The Americans have already done everything they could. It is possible, of course, to impose sanctions against the issuance of an operating permit, but then these will be sanctions against Europe. The Biden administration is not prepared to take such steps against its own allies. The countries that are on the side of the USA - Poland and the Baltic states - sent warships to the place of laying, fishing ships torpedoed the handlers - but all to no avail. It seems that the US has already come to terms with the fact that the "Nordstream" will be completed.

The arrival of new pipeline gas contributes to the fact that, due to the favorable price for the consumer, there is much less space for LPG. In addition, the price of liquefied gas is falling. This is disadvantageous to those who would like to sell the CIS in Europe.

"In addition to the United States, which benefits from higher prices, Australia is theoretically interested, from which Poland was ready to buy, if only not from Russia. But this is economic madness. That is, they will buy from Australia only in conditions of very high demand, which, in principle, should not be, only if they abandon nuclear and coal energy at the same time. Qatar is the largest player in the LNG market. There is also NOVOTEK. Its program involves a multiple increase in capacity within three to four years. Under a favorable scenario, the new additional export capacity of NOVOTEK may amount to the same 50 billion cubic meters", - says Dmitry Alexandrov.

Producers and supporters of renewable energy sources (RES) are opposed to Nord Stream 2. Gazprom is in a hurry to complete construction this summer, before the elections to the Bundestag, because opponents of Nordstream and big fans of renewable energy sources, the Green Party, will be in the German government one way or another. If they manage to support the current trend, then for the first time in the history of the country, Germany will have a "green" chancellor - Annelena Berbock. To avoid unnecessary discussions, the Russian giant needs to present the country's new government with a fait accompli - the pipeline must be completed. By supporting renewable energy sources, the new leaders of energy policy cannot completely abandon hydrocarbons, and then gas will be the lesser of evils.

- Everything will depend on which logic prevails. Gas is hydrocarbons, and we need to abandon them, or - let's better balance our own energy sector, because this winter has shown how high the risks of tying ourselves to renewable energy are, so let's have reserve capacities that will be on traditional energy sources, and of these, let's concentrate on gas. Then it will play into the hands of the completion of the construction of the Nord Stream, but, again, with the proviso that there should be social responsibility, there should be no threat to political security, independence of Ukraine, and so on. Then the construction of the Nord Stream is completed, and for security purposes, restrictions are introduced for Gazprom and for buyers, which will ensure that the cash flow for Ukraine is not reduced.

Ukraine in the medium term may become the loser in the gas gambit. The forceful approach will prevail - and the country may lose transit in 2024. Any other mixed transit option through Ukraine will be viewed as a purely political decision. The share of this gas pipeline remains about 15 billion cubic meters. If you pump 10 billion, the unit costs will be disproportionately large. Pumping will become unprofitable for Ukrainian NaftaGaz, and then Russia and Ukraine will return to the problem of tariffs. This will inevitably exacerbate an already smoldering conflict.

Optimists say that everyone will benefit from the new route. KPMG Partner Anton Usov thinks as follows:

"I have an analogy: in Soviet times, they built gas and oil pipelines. Also in the context of the sanctions policy in connection with the Cold War. Can we say that Europe suffered from this? Of course not! When everything is good, you can discuss. As soon as the cold winter comes, like in Texas this year, reserve volumes are needed. Therefore, I think that in the long term, with a change in the energy balance in Europe, the transition to environmentally friendly fuel, and gas is much more environmentally friendly than coal, I think that everyone will benefit".

Europe clearly benefits from Nordstream. It replaces the delivery of gas along an unstable route through Ukraine - with high technological deterioration and constant military-political risks - with a direct supply from the producer without the intervention of third parties. If Europe has to buy liquefied gas, the American CIS will raise prices for all products manufactured in Europe. This is the last thing European business wants. But Gazprom will have to fight for the full load of Nord Stream. How much gas will go to Europe will be decided not by the seller and consumers, but by politicians - in accordance with the political situation and arguments far from how many contracts Gazprom has signed. War is like war.