Danes gives Nord Stream 2 new impetus

When the Danish Energy Agency (DEA) this week authorized the use of Russian ships able to lay the final part of the Nord Stream 2 gas pipeline, advocates of the delayed project rejoiced. The move paves the way for the pipeline to reach its destination in Lubmin near Greifswald on Germany's Baltic coast before the end of this year.

But US sanctions and technical issues could still upset the best laid of plans.

Some 1,230 kilometers (775 miles) in length, Nord Stream 2 is set to run from Russia's Ust-Luga, but is now on hold 160 kilometers off the German coast after US sanctions came into force before Christmas seeing Swiss-Dutch company Allseas to withdraw its ships.

The €10 billion ($11 billion) pipeline would double Russia's direct export capacity to Germany as a first entry point to the EU to 110 billion cubic meters (bcm) per year. It is strongly opposed by Poland and Ukraine in Europe and the US.

Mere technicalities?

The two Russian vessels able to conduct the work are both moored in the German port of Mukran: pipe-layer Akademik Cherskiy and the anchored barge, Fortuna.

In May, Gazprom brought Akademik Cherskiy to the Baltic Sea from the Russian Far East. It is the only modern ship in Russia for laying submarine gas pipelines that is also equipped with a dynamic positioning (DP) system, which allows ships to determine their position and perform precise maneuvers without the use of anchors.

Danish law requires companies building undersea infrastructure to use vessels equipped with a DP system, to avoid the huge stocks of chemical weapons left on the seabed after WWII. But, according to Russian media, to complete the laying of Nord Stream 2, Fortuna, which does not have a DP system, is also needed.

"Gazprom may try to use the two vessels simultaneously," Mateusz Kubiak, an oil and gas expert with Warsaw-based consultancy firm Esperis, speculated. "Another option would be to use vessels tethered, in tandem. This, however, would be a very unusual option and might be quite risky," he noted.

US sanctions

Meanwhile, the US Congress is discussing a new sanctions bill that would extend the scope of already imposed penalties, targeting the insurers, companies working on related pipe-laying activities, such as trenching, site preparation, rock placement and those involved in the modernization or tethering of the vessels.

However, the key provision of the newly proposed sanctions is to hit entities (so-called "classification societies”) that provide certification services for Nord Stream 2.

"Ultimately, this might be even more effective than previously endorsed sanctions on the pipe-laying vessels, as the Russians may not be able to replace foreign classification societies," Kubiak believes. Norway's DNV was assigned to perform this role on Nord Stream 2 and the whole pipeline has been designed and built according to DNV standards.

"It seems highly questionable whether it will be possible for the Russians to meet NS2 compliance with DNV standards. Not mentioning that such a certification should be done by an independent, third-party entity," he said.

Added to this, the bill is not expected to be enacted earlier than in the fall, after Congress returns from its summer break in August. "The DEA's decision might provide a new impetus to adopt such legislation," said Katja Yafimava from the Oxford Institute for Energy Studies. But, "ultimately new US sanctions would not stop NS2 but would significantly worsen the US relationship with Europe," she added.

"Denmark's decision makes it definitely much easier and cheaper for Russia to complete Nord Stream 2," said Anna Mikulska from Rice University in Texas. "Now the question is whether the already existing US sanctions would then apply to Gazprom," she said, noting that Akademik Czersky is now owned by the Samara Thermal Energy Property Fund (STIF), whose operating entity was Gazprom Fleet, a subsidiary of Gazprom.

STIF is on the list of Gazprom-affiliated groups and the vessel remains under operational management of Gazprom Fleet, which is apparently already included in some less stringent sector sanctions

"But the question is not only what these sanctions mean for NS2 and Europe but also what they mean for the US," Mikulska added. "While domestically the sanctions could provide some benefits for US policymakers and politicians supporting them, in terms of foreign policy they may become an issue."

"In Germany, there is disbelief over the US sanctions package, in particular after Germany worked hard to secure Russian gas transits through Ukraine," said Kirsten Westphal, an energy expert at the German Institute for International and Security Affairs (SWP). "There is bipartisan US support to stop the pipeline and some very harsh anti-Germany rhetoric from Trump," she said.

During a recent debate in the Bundestag, government representatives claimed sanctions against the investment would be treated as interference in German and European sovereignty and threatened the EU would impose retaliatory sanctions. "The narrative forming in Germany, and correctly, I believe, is that sanctions would also have a very serious impact economically this time," Westphal said.

"At the end of the day, it is also a EU regulation and the 2019 amendment of the Gas Directive, which is simply being undermined," she added.

The best laid plans of mice and men

Russian Energy Minister Aleksandr Novak said he had no doubt Nord Stream 2 would be completed on time. But not all agree. Mikulska points to Germany's Bundesnetz (Federal Network Agency) decision to reject NS2's application to be exempted from the EU directive. Gazprom is also involved in antitrust proceedings initiated in 2018 by Poland's Office of Competition and Consumer Protection (UOKiK) against all companies involved in NS2 financing.

"These are formidable issues likely to delay the pipeline and make it more expensive," Mikulska said.

"The question is if it is worth creating another spat between the EU and the US — especially given that both have not seen eye to eye in recent years. The differences between allies can be definitely exploited not only by Russia but also by China to the detriment of both the US and the EU," she said, adding there were other ways the US could make it more difficult for Russian gas to gain ground in Europe, such as helping countries in the EU to diversify their natural gas infrastructure, including higher LNG capacity and interconnections.

Gazprom also still needs to finish some additional works such as rock placement and perform commissioning, Kubiak said, which, together with pipe-laying, may take at least 3-4 months, as Cherskiy and Fortuna cannot work at such speed as Allseas vessels.