Київ
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Nord Stream 2 project poses serious threats to Ukraine and the EU – study

Київ, December 02, 2016.

Russia’s energy project that bypasses Ukraine to supply gas directly to the European state might not be a good idea as Russia often uses it as a political leverage suggests the study.

When Nord Stream 2 starts, not only will Ukraine lose about USD 2 billion profit from transit but also lose strategic importance for Europe, which will strengthen the threat from Russia. The project poses a strategic threat to the EU energy security as well. In addition, it is contrary to the principles of the Energy Community. This was stated by experts at a presentation of a research “Nord Stream 2: legislation & policy analysis” made by Alan Riley, professor, Atlantic Council expert, held at Ukraine Crisis Media Center.

Mykhailo Krutikhin, RUSENERGY expert, noted that Nord Stream 2 is a purely political project – a continuation of Russia’s long-standing attempts to supply gas to Europe, bypassing Ukraine. From an economic point of view, it is not profitable. “We can already see that Russian gas is sold below cost price on the border with Germany. […] According to a leading analyst, Thierry Bros, only this year Russia will lose USD 1 billion 300 million”. However, Russia probably hopes to benefit from this project when liquefied natural gas will increasingly flow to the European market.

Risks for Ukraine
Nord Stream 2 is a serious threat to Ukraine from both economic and geopolitical point of view. Firstly, due to the delivery of Russian gas through Nord Stream 2, Ukraine will lose about USD 2 billion, despite the fact that it needs financial assistance even now. In addition, in this case Gazprom will block reverse gas supplies to Ukraine by limiting the volume of incoming gas supplies through the pipeline. “This is not a theoretical threat because this is what Gazprom tried to do in 2014-2015. If Nord Stream 2 is launched, it is easier to do so,” said Alan Riley.

We should not underestimate the risks that in case Ukraine is deprived of the strategic role of gas transporter, this will give a free hand to Russia. Nord Stream 2 is one of the arguments why Russia does not try to lead a large-scale war on the territory of Ukraine. Transporting gas through Ukrainian territory is a huge argument for European partners. This is an issue of our daily security,” stressed Olena Pavlenko, DiXiGroup director.

Contradictions and risks for the EU
Construction of North Stream 2 is in direct contradiction to the principles of the Energy Community, stated Alan Riley. The project will lead to the concentration of supply routes and greater dependence of Germany and Northwest Europe on a single vendor – despite the fact that Gazprom supplies 40 percent of the gas that Germany receives. Moreover, the project will strengthen Gazprom’s market positions in Central and Eastern Europe by increasing the capacity of OPAL and EU-GAL pipelines. “In this case, Gazprom will actually control the pipelines with a capacity of 86 billion cubic meters in the heart of Europe. This is not just contrary to the principles of competition – it undermines the very concept of the single market and the Energy Community,” emphasized the expert.

Alan Riley noted that according to Swedish Defense Research Agency, over the period from 1991 to 2004 Russia shut off gas supply to CEE and Baltic countries 40 times for political reasons. In addition, support for the project contradicts the intention of the EU and the US to support Ukraine in conditions of direct economic and military threat from Russia.

“We in Ukraine and our partners from the Visegrad Four have a clear understanding that the Nord Stream 2 is intended to destroy the Ukrainian economy, gas transportation system and endanger Europe geopolitically. We should remind Europe that the values which form the basis for Europe as a continent rather than its economic interests, beneficial as they are on a short-term horizon, but with a number of threats for the future generations, should be of paramount importance,” stated Hanna Hopko, MP (independent). She emphasized that the RF also allocates its financial receipts for military operations in different parts of the world and for creating instability zones.

Action Plan for Ukraine: consistent and timely reforms
The main task for Ukraine is to implement all planned reforms of the gas transportation system and confirm its ability to be a reliable and predictable partner. The main barriers are corrupt bureaucracy and oligarchic lobbies in politics. “Until we become attractive in terms of business, our diplomacy will depend on implementation of reforms and on the internal environment that we will be able to create. Some our steps are not only questionable, but also harmful,” stated Olena Zerkal, Deputy Foreign Minister of Ukraine. For example, our attempts to revise the charter of “Naftogaz,” which create turbulence. Mykhailo Krutikhin noted that European investors resent the decision to sharply increase the cost of gas transit. In fact, it rushes them into joining the camp of Nord Stream -2 supporters.

“70 percent of measures to counter this project should be done in Ukraine. It is necessary just to do what has been approved and bring it to an end,” stressed Alyona Osmolovska, state oil and gas company “Naftogaz Ukraine” spokesperson. The measures include the adopted law “On the gas market”, the “Naftogaz” corporate governance reform project and the project on separating transportation and storage of natural gas by “Naftogaz.”

The important signals to the EU will be creation of a gas trading exchange, decrease in the gas production rent, development of a consistent energy strategy and involvement of European companies in the reforms and as investors. “If we give such signals and get the information that investors can enter across to them, European companies will soon give up such riskier Russian projects as Nord Stream 2,” noted Olena Pavlenko.

Natalia Katser-Buchkovska proposed to develop a law on energy security, which would detail probable threats and counteractions, and to provide a single center for coordinating actions of all those involved in energy security.

Olena Zerkal noted that for lobbying its interests in external relations Ukraine may also invoke Art. 305 of the Association Agreement and initiate formal consultations on Nord Stream 2. “We need productive relationship with the Energy Community. They should be our main partner in this case,” she added.

Alan Riley stressed that the best way out for Ukraine is to efficiently implement the necessary reforms and fulfil all obligations. “We focus on the fact that the EU should adhere to its legislation, but for this argument to work, Ukraine also should adhere to all the rules,” he stressed. This will allow us not only to counteract Nord Stream 2, but also to significantly improve the situation. He noted that all countries that have liberalized their oil and gas markets, demonopolized control over the gas networks and adhere to the rules achieve the lower gas prices, more alternative supply sources and increased assets of investors.

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