Is this the last bottleneck for Nord Stream 2?

The Nord Stream 2 pipeline continues to face challenges, and after receiving permits from the Baltic States, now Denmark seems to be the last bottleneck.

Large energy projects tend to be controversial due to environmental and political reasons. Nord Stream 2 (NS2) is not an exception as it is, arguably, the most contentious energy pipeline currently under construction in Europe. According to the critics of NS2, Europe is increasing its dependence on Russian gas, which would give Moscow unwanted influence in European capitals.

Opposition has been growing since the laying of pipes started. The US has found allies in several Eastern European countries who fear Moscow's intentions due to historical reasons. Regardless of the efforts to thwart the construction of NS2, contractors have continued their work to complete the pipeline before the end of this year. Nord Stream AG, the company responsible for the project, has received permits from all littoral states of the Baltic Sea except for Denmark. Recently, the company made an important decision to end the political stalemate and prevent delays.

Bypassing Danish politics

According to former German Chancellor Gerhard Schroeder, Denmark is the biggest threat for delays concerning the construction of NS2 due to American pressure.

Nord Stream AG intended to construct the pipeline along the route of the original Nord Stream pipeline to reduce costs. The first application for construction activities in Denmark’s territorial waters was submitted in April 2017 and was based on the Danish authority’s guidance. In January 2018 the amended ‘Danish Continental Shelf Act’ went into force which gives the Minister of Foreign Affairs the right to veto infrastructure projects on political grounds when passing through its territorial waters.

Nord Stream AG, therefore, applied for an alternative route in August 2018 through Denmark’s EEZ but outside the country’s territorial waters. Furthermore, two years after applying for the first route, the Danish authorities requested a proposal for a third, south eastern option, which raised multiple eyebrows in Moscow and with investors in Europe. Denmark is blamed for deliberately delaying construction in favour of NS2's opponents.

Nord Stream AG, however, radically changed tack to reduce the political risk by withdrawing its application through Denmark’s territorial waters. Currently, only two proposals in Denmark’s EEZ are pending with the authorities: one in the northwest and a second in the southeast of Bornholm Island. It means that a decision is only subject to the United Nations Convention on the Law of the Seas (UNCLOS), whereby only the environment and ship trafficking is taken into consideration.

According to Matthias Warnig, Nord Stream AG’s CEO, "we felt obliged to take this step because, in more than two years since we filed this application, the former Danish government has not given any indication of coming to a decision."

Keep calm, and continue construction

An unlikely beneficiary of this decision is arguably Denmark itself. Regardless of the Foreign Ministry’s decision, the small European country would have angered a critical ally. If Denmark had agreed with construction, the US and several Eastern European countries would have objected. However, if the project were vetoed, Germany would have been upset.

The Danish government was in a predicament because it couldn’t have said ‘yes’ to the project due to the deteriorated relations with Russia. On the other hand, there wasn't a reason to say ‘no’ outside of the political realm.

According to Katja Yafimava, a senior research fellow at the Oxford Institute for Energy Studies, “the Danish Energy Agency does not really have a reason to say ‘no’ to either of the remaining routes. I do not doubt that if it does say ‘no’ to them, there would be protracted litigation in which Denmark would not be in a position of strength.”

Ukraine’s bargaining position

The original completion date for the NS2 pipeline was the end of 2019, which is right before the transit contract through Ukraine ends on January 1st 2020. Gazprom has been accused of trying to circumvent its neighbour to reduce income from transit fees and increase political pressure. However, if NS2's completion is delayed, the need for Ukraine as a transit country would remain for at least the short term, which would strengthen Kiev’s bargaining position.

Currently, the talks for a future contract are in a stalemate with neither party budging first to strike a deal. Ukraine prefers an agreement in which Gazprom books 60 bcm transit capacity for about ten years and increased diversification, meaning access to Russia’s gas infrastructure by Central Asian countries. Moscow, however, proposes ending all remaining legal disputes between the parties before resuming talks and a more flexible transit contract.

Yafimava, nevertheless, believes the delaying of NS2 would worsen instead of improve the chances of a long-term transit agreement with Ukraine. Supply cuts would increase prices in Europe, thus strengthening the case for diversifying routes. Moscow has already invested significantly in NS2, and it will seek to finish the pipeline sooner or later, regardless of the costs and delays.

This article was originally published on Oilprice.com