Nord Stream online: Russia’s gas export policy reset

The Czech Republic is relatively immune to risks arising from the new Russian gas export route, but its neighbors have cause to worry

V úterý 8. listopadu těsně před polednem otočili v severoněmeckém Lubminu symbolicky obřím kohoutkem první větve plynovodu Nord Stream německá kancléřka Angela Merkelová a ruský prezident Dmitrij Medvěděv. | na serveru Lidovky.cz | aktuální zprávy V úterý 8. listopadu těsně před polednem otočili v severoněmeckém Lubminu symbolicky obřím kohoutkem první větve plynovodu Nord Stream německá kancléřka Angela Merkelová a ruský prezident Dmitrij Medvěděv. | foto: © ČESKÁ POZICE, Jiří Bušek, ČTKČeská pozice
V úterý 8. listopadu těsně před polednem otočili v severoněmeckém Lubminu symbolicky obřím kohoutkem první větve plynovodu Nord Stream německá kancléřka Angela Merkelová a ruský prezident Dmitrij Medvěděv.

On Tuesday (Nov. 8), the first of the two lines of the Nord Stream gas pipeline was launched into full operation. Just before midday in Lubmin on Germany’s Baltic Sea coast, German Chancellor Angela Merkel and Russian President Dmitry Medvedev made a symbolic turn of a large tap to officially launch commercial operation of the first of two lines of the Nord Stream gas pipeline. The longest submarine gas pipeline in the world is set to change the dynamics of the European gas market.   

While Germany celebrates the opening of the 1,224 kilometer pipeline from the Russian port of Vyborg to Lubmin, the new route is a cause for concern further east. Why?  

Forty years ago in Czechoslovakia, amidst much fanfare, construction began on a major pipeline to carry gas from the Soviet Union to central, western and southern Europe. While Czechoslovak state-controlled media extolled the “construction project of the century” as “proof of the political thaw in Europe,” there was no mention that the project was first and foremost a huge hard currency spinner for the Soviet Union.  

There was no mention that the project was first and foremost a huge hard currency spinner for the Soviet UnionEssentially, conditions of transit of the Soviet gas were determined by inter-governmental agreements — and for its part communist Czechoslovakia received Soviet gas at advantageous rates.     

Even prior to the gas crisis at the beginning of 2009, which saw Russia turn off shipments to Europe via Ukraine as a result of a spat with Kieve over prices, Moscow was looking to diversify its export routes to Europe to significantly lower dependence on its southern neighbor. The current economic and political interests of Russia declared as “increased diversification of transit routes” represent nothing less than a comprehensive redefinition of Russia’s gas policy.    

The gas policy of the Soviet Union was based on the reality of a divided Europe and consisted of a different approach to “free-currency” consumers, i.e. Western Europe, and the countries of eastern and southeast Europe, controlled by Moscow.      

While Moscow’s approach to its western European consumers consisted of making maximum efforts to ensure that it built and preserved a reputation as a reliable supplier, in relations with its European satellite states gas was used as tool to apply political and economic pressure. And even in the Soviet era, due to large local consumption, Ukraine was not capable or willing to transit enough gas to satisfy demand for Soviet in West Europe. Moscow frequently resolved this by limiting supplies to its east European satellites.    

It should be pointed out that during the Soviet era the USSR sold its gas to the West on the outer borders of its empire, i.e. on the borders with Germany and Austria, while the Warsaw Pact satellites purchased gas on the USSR’s borders.

Trading houses

The current reset in post-Soviet Russia’s gas policy has already passed through several phases. In the early 1990s, Moscow opted to establish trading houses for its gas to be operated in cooperation between state-controlled Gazprom Export and western European importers of Russian gas. Incidentally, one such trading house was established in Slovakia, but the proposal was rejected by the Czech Republic.     

It was ascertained — unsurprisingly the credit was attributed to Vladimir Putin — that over 40 percent of the earnings from gas exports went to traders and middlemen. Through these trading houses, it was possible to buy Russian gas directly outside of the framework of the long-term priority supply contracts. Originally these trading houses were supposed to resolve the problem of sporadic lapses in gas supply, but in practice they became a source of personal fortunes for Russian entrepreneurs. These excesses reached a head around 10 years ago resulting in a massive reduction of gas trading via these houses.

It was ascertained — unsurprisingly the credit was attributed to Vladimir Putin — that over 40 percent of the earnings from gas exports went to traders and middlemen. 

Another deeper felt problem was the fact that independent Kiev controlled the taps on the major export route for Russian gas, which led to the proposals to build alternative export routes to the west bypassing Ukraine. The first was the Yamal–Europe pipeline from Russia via Belarus and Poland to the German border town of Frankfurt-on-the-Oder. This involved increasing the capacity of a Soviet-era pipeline for exports to Poland only and extending it to the German border.

Most gas supplies to Germany were rerouted from the Ukraine-Slovakia-Czech Republic route to the Yamal pipeline.

Poland and Russia took equal stakes in the Polish stretch of Yamal and a supposedly independent company with a 5 percent stake was established to act as a balance. The Poles soon discovered that this company was in fact controlled by Russians and Warsaw had to go to considerable diplomatic lengths to redress the situation. Nevertheless, according to mutual agreements, the Russian gas shipped via Yamal is sold to German firms on the German border.

Pincer effect

The Nord Stream pipeline, which when the second line is completed will have a capacity of 55 billion cubic meters (BCM) annually, is a far larger step in decreasing dependence on Ukraine as a transit route. Nord Stream will also become an alternative route for Russian gas supplies to the Czech Republic next year when the Opal pipeline running from the landfall of Nord Stream in Germany through the former East Germany is linked up to the recently-completed Gazela pipeline at Olbernhau. The Gazela route passes from the German state of Saxony, through north and west Bohemia then crosses the German border at Waidhaus, where it links up to the gas hub there.  

The next phase in the new Russian gas export policy is the planned South Stream route, which if built will pass from Russia, under the Black Sea through Turkish territorial waters, bypassing Ukrainian waters, to landfall in Bulgaria, then via Serbia and Hungary to the Baumgarten hub in Austria, where it would join with major transit routes to Germany, France and Italy, as well as Slovakia and the Czech Republic. Together, Nord Stream and South Stream would form pincers reducing the traditional supply routes to Poland, Ukraine, Slovakia, and to a lesser extent, Hungary. Thanks to Gazela, the Czech Republic will be the only country in the CEE region to benefit from an alternative supply route.

Thanks to Gazela, the Czech Republic will be the only country in the CEE region to benefit from an alternative supply route.  

The governments of the former Soviet satellite states in the CEE are well aware of the potential political and economic dangers the new Russian gas export channels could pose. However, each country in the region is attempting to address the new gas reality in its own way, though it is a theme which is regularly discussed at meetings of the Visegrád Four (V4) – Poland, Czech Republic, Slovakia and Hungary.      

Warsaw is supporting exploration of shale gas in Poland — and beyond — in the hope these supplies will provide a significant counterbalance to dependency on Russian natural gas supplies. Poland also plans to build a terminal at the port of Świnoujście for imports of liquefied natural gas (LNG).

While Hungary has signed up for Russia’s South Stream project, the country’s leaders are placing hopes in the realization of the EU-backed Nabucco pipeline project: if realized the pipeline will carry gas from Azerbaijan and potentially Iraq, via Turkey, Bulgaria, Romania and Hungary, to Baumgarten.

Ukraine is currently stepping up exploitation of its own gas sources and looking to source more supplies from states other than Russia.

Consequences

There’s a possibility that the transit gas when arrives on Czech territory will be Russian, only to be miraculously become German again 150 kilometers down the lineThe reset in Russia’s gas policy has a number of repercussions for the Czech Republic. The first can be seen in the draft State Energy Concept, which calls for large-scale development of nuclear power in order to achieve greater energy security. Although it appears that the country only stands to benefit from Nord Stream and Gazela, uncertainties over Ukraine persist and ghosts of past gas crises have not been exorcized.   

The second consequence is the position of the Czech Republic as a gas transit country. Although the author of this article does not know the contents of the new gas transit contract with Russia up to 2035, we can safely say that a considerable volume of transit gas will be switched to the Gazela route.  

Incidentally, it will be interesting to find out whether Germans or Russians will pay the fees for the transit of gas via Gazela through the Czech Republic. Presumably gas for Germany will be bought on Germany’s Baltic coast, but that won’t necessarily apply to transit gas; there’s a possibility that the transit gas when arrives on Czech territory will be Russian, only to be miraculously become German again 150 kilometers down the line in Waidhaus. And such a scenario would raise questions about our national sovereignty.  

Major turning point

Another question is how the older major pipelines from the Ukrainian border, through Slovakia to the Czech Republic and onwards to Germany, will be used. This route, owned and operator by gas network operator Net4Gas, is central to the Czech national distribution network yet some technological elements of the system are now being removed as superfluous. Also RWE of Germany is not hiding the fact that it is considering offloading its majority stake in Net4Gas.

However, if the EU’s energy plans are implemented the pipeline should form an important part of the network spanning EU member states which should allow for the flow of gas in any direction, and it would be a wasted opportunity if the Czech Republic became a dead end in this network.  

The launch into operation of Nord Stream thus marks an important turning point in the European gas pipeline network and in Russian gas exports.

Although the risks presented by the project and the shift in Russian gas export policy do not pose a direct danger to the Czech Republic, it would be a crime and perilous to ignore the strategic interests of our neighbors who will find themselves in a less advantageous position.