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Nord Stream project facing more uncertainties and delays

Nord Stream, the Russo-German gas pipeline project on the Baltic seabed, seems to be receding into the distance – analysis by Vladimir Socor.

According to Chairman of the Russian Gas Society and Vice-Chairman of the Duma Valery Yazev, the project’s first trunk line is to become operational by 2012 and its second line by 2013 (rather than 2010 and 2011 as initially envisaged). The main delaying factors include cost overruns on construction on the pipeline’s overland portion in Russia as well as the rapidly rising price of steel pipes.

Speaking at a Russian-German gas conference on May 20 in Berlin, however, Yazev attempted to shift part of the blame onto Baltic riparian countries, most of which are questioning the pipeline’s construction through their respective exclusive economic zones or opposing it outright. Yazev criticized European Union authorities in Brussels for “doing to little to remove the objections of riparian countries. … We expect more in this regard from our European partners” (Financial Times Deutschland, May 21). Such wording reflects Moscow’s wedge-driving tactics toward the EU. It implies that some of the EU’s new member countries, such as the three Baltic states and Poland, are nuisances that need to be reined in by Brussels or Berlin. In the Nord Stream case, however, the objecting countries include the “old” EU member countries Sweden and Finland.

The Russo-German consortium had announced at its foundation in 2005 that the Baltic seabed pipeline’s first trunk line would become operational in 2010 and the second one in 2011. In 2007, however, the consortium changed those dates to 2011 and 2012, respectively. Yazev’s announcement brings the second postponement. Finland and Estonia were the first to be asked by the Nord Stream consortium in 2007 to conduct preparatory activities in their territorial waters and economic zones. More recently, Sweden received a similar request for activities preparatory to construction. The three countries exercised the legal right to turn down some elements in those applications and to request clarification on some other elements. None of the objections were political. They focused on the project’s impact on the Baltic environment, navigational safety, fisheries and other marine resources, and legal rights of riparian countries in the respective territorial and economic zones.

With Gazprom the driving force in this Russo-German consortium, its applications to those three countries seem to have failed to meet European standards. The Swedish government complained, for example, that major environmental aspects were simply omitted from the application. Estonia had made similar observations last year in its reply to the application. Insufficient gas resources is the major delaying factor that Moscow would not acknowledge publicly. The West Siberian gas field Yuzhno-Russkoye, with estimated reserves of 800 billion cubic meters, was initially earmarked as the main source for Nord Stream. That resource, however, would clearly not suffice for a project of Nord Stream’s declared capacity and time frame.

Since 2006-2007 the Russian government has held out the prospect of gas from the Barents Sea offshore Shtokman field feeding Nord Stream. Development of Shtokman, however, has fallen behind schedule by several years. It can hardly be expected to materialize before 2015, and then at such high costs as to push the overall costs of Nord Stream even higher. The project’s initial cost estimate of €5 billion is now acknowledged to have been substantially understated, with new estimates approaching €10 billion. As a net result of these factors, Nord Stream has not lined up the financing for the project. In its present state the project does not seem bankable.

Nord Stream’s Baltic seabed portion is projected to consist of two trunk lines with an annual throughput capacity of 27.5 billion cubic meters each. The combined capacity of 55 billion cubic meters is roughly equivalent to one half of Germany’s annual gas consumption. At present, of the gas used in Germany 18% comes from internal production, another 18% from the Netherlands, 26% from Norway, 34% from Russia, and small volumes from other areas. With production tending to decline in the Netherlands and Norway, many in Germany seem reconciled to growing dependence on Russia, and some circles seem even euphoric about it at times. Some areas in northern Germany offer favorable geological conditions for building underground large-capacity storage sites. Preparations are under way for constructing at least two such sites. At Hinrichshagen near Greifswald (in Mecklenburg-Vorpommern), terminus of the Baltic seabed pipeline, the joint venture Gazprom Germania plans to build a storage site for 2 billion cubic meters by 2011.

The joint venture Gazprom Export-Verbundnetz Gas plans to build one site and enlarge another, both near Bernburg (in Sachsen-Anhalt), with a combined capacity of 1.7 billion cubic meters also by 2011 (Financial Times Deutschland, dpa, BNS, May 21, 22). Given the mounting uncertainties about the Nord Stream project’s viability, let alone time table, plans to use gas from that source in Germany may have to be put on hold. (