The Nord Stream Pipeline – Bringing Russian Natural Gas to Europe

Nord Stream Route Map

Nord Stream Route Map – From Nord Stream AG (http://www.nord-stream.com/)

Built and operated by Nord Stream AG, the Nord Stream subsea offshore natural gas pipeline system runs 1224 kilometres from Vyborg, Russia, to Lubmin, Germany.  The twin pipeline system aims to maintain one of Russia’s long-standing objectives, which is to supply Europe with a secure and reliable source of natural gas.  On the Russian side, the Nord Stream is connected to Gazprom’s Gryazovets-Vyborg pipeline, while on the German side, the Nord Stream is connected to the OPAL and NEL pipelines.

  • The first of two parallel lines was put into operation in November, of 2011 with an annual transport capacity of 27.5 bcm of natural gas.  The second line was completed on the 28th of June, 2012, and will enter operation in Q4 of 2012.  The ‘twin pipelines will have the capacity to transport a combined total of 55 billion cubic metres (bcm) of gas a year to businesses and households in the EU for at least 50 years’ (“The Pipeline”).
  • ‘The Nord Stream route crosses the Exclusive Economic Zones (EEZ) of Russia, Finland, Sweden, Denmark and Germany, as well as the territorial waters of Russia, Denmark, and Germany’ (“The Pipeline”).  International law affects EEZ’s and territorial waters differently (see the “International Law” section below).
  • The Nord Stream Pipeline will be remotely monitored and controlled from the Nord Stream headquarters in Zug, Switzerland.
  • The Nord Stream consortium is owned by OAO Gazprom (51%), Wintershall Holding GmbH (15.5%), E.ON Ruhrgas AG (15.5%), N.V. Nederlandse Gasunie (9%), and GDF SUEZ (9%).

Price Economics

The western-European market is willing to pay a price that is much higher than that of the substantially subsidized natural gas that is sold to Russians on the Russian market.  In a very basic sense, to have Russian natural gas production in excess of what is currently exportable to ‘high-paying’ countries is to have a decrease in the potential revenue for Gazprom, among other firms.  The incentive is there for Russia to ensure maximum Nord Stream pipeline capacity utilization, and to build upon the Nord Stream system in the future to allow for greater capacity.

One problem that may surface stems from the domestic Russian natural gas market.  Gazprom has been pushing, for a while now, to increase prices due to the fact that the current average, per unit costs of production tower over the per unit prices that are seen domestically.  Russian exports are the sole profit-makers here.   Since the government has actually granted Gazprom the right to increase the price point by a certain percentage annually, Gazprom stands to slowly lose the incentive to prefer exports over imports assuming, naturally, that domestic prices rise at a higher rate than those in Europe.  As more natural gas is extracted from increasingly northern, Arctic-marine areas, the average costs of production are going to be on the rise as well.  These could all impact Russia’s future willingness to supply Europe with natural gas down the road.

The Nord Stream Route is Important for European Confidence

Much of the current European uneasiness toward Russian natural gas imports stems from the ongoing conflict that exists between Russia, and the pipeline-transit states of Belarus and Ukraine.  It is important to recognize that Ukraine has blocked the transit of Russian gas to Europe in the past.  The Nord Stream system thus stands to become an alternative delivery method that can be relied upon to deliver natural gas to Europe.

Gazprom CEO Aleksei Miller said it best when addressing both the Nord Stream and South Stream pipelines at the European Business Congress (EBC) in Portorož, Slovenia;

These pipelines would eliminate the dangerous dependence on transit monopoly by
Ukraine, which in 2006 and 2009 respectively blocked access to the export gas en
route from Russia to European markets. After the new pipelines come into
operation our exports will gain more reliable delivery routes and, no less important,
additional flexibility. This will enable to significantly increase the security of
supply of natural gas to European consumers, to which our company attaches
the greatest importance. Once and for all Gazprom will be relinquished of
arbitrarily imposed responsibility for the consequences of others’ decisions, which
resulted in blocking exports of our gas. (Miller, A. 2012)

The flexibility that Miller speaks of may come in the form of pipeline extensions.  The current line touches Germany where a future branch might touch both Scandinavia and Britain who have already expressed interest.

International Law

The following is a non-exhaustive list of the main articles and provisions of international law that apply to the construction, maintenance, and use of the Nord Stream pipeline system.

Pipelines within a state’s territorial waters

  • Article 76 of the United Nations Convention on the Law of the Sea (UNCLOS) defines the ‘continental shelf of a coastal State [as] the sea-bed and subsoil of the submarine areas that extend beyond its territorial sea’ (UN 1982).
  • Article 2 of the UNCLOS dictates that ‘[t]he sovereignty of a coastal State extends, beyond its land territory and internal waters and, in the case of an archipelagic State, its archipelagic waters, to an adjacent belt of sea, described as the territorial sea’ (UN 1982).

From these articles, one can see that a state has sovereignty over it’s territorial sea.  Nord Stream AG therefore requires a different legal process in dealing with Russia, Denmark, and Germany than it does in dealing with Finland, and Sweden.  As can be seen from the map above, it is very fortunate that there happens to be a space between the territorial seas of Finland and Estonia.  This will have saved Nord Stream AG a great deal of time and money.

Pipelines within a state’s EEZ

  • Article 79 of the UNCLOS grants all states the right ‘to lay submarine pipelines … on the continental shel[ves] [of other states].’  An affected (transit) ‘coastal State may not impede the laying or maintenance of … pipelines’, but is reserved the right to consent to ‘the delineation of [transit] pipeline[s]’ and to ‘take reasonable measures [for the] prevention, reduction and control of pollution from pipelines’ (UN 1982).

Service stations built within a state’s EEZ

  • Article 60 of the UNCLOS grants the coastal state ‘the exclusive right to construct and to authorize and regulate the construction and operation and use of … installations and structures’ and ‘exclusive jurisdiction over such … installations and structures’ (UN 1982).

Initially, there was to be built an intermediate service station platform within the EEZ of Sweden.  Due to Article 60 of the United Nations Convention of the Law of the Sea (UNCLOS), Sweden would have had exclusive jurisdiction over the station, along with the right to construct and operate it.  In 2008, attempting to minimize bureaucratic and legal issues, Nord Stream confirmed that specially-designed inspection tools were available that would have been able to inspect the entire pipeline span without a need for the service platform.  The intermediate service station was thus no longer needed and Article 60 needed not apply.

Environmental impact assessments

  • The Convention on Environmental Impact Assessment in a Transboundary Context dictates the requirement of an Environmental Impact Assessment (EIA) for proposed activities ‘that [are] likely to cause a significant adverse transboundary impact’ (UN 1991)

Sources