Russia’s Nord Stream an Ultimate Triumph? Think Again.

A launch of a new Nord Stream gas pipeline from Russia to Germany through the Baltic Sea on November 8, 2011, by the monopolistic giant Gazprom was a triumph to secure its European energy market, but kind of.  More immediately, Nord Stream dealt a blow to Ukraine, which is a transit country of Russian gas to Europe and has been in a repeated dispute with Russia since 2005 over gas pricing, debt and supply.  The Russo-Ukrainian gas war brought gas cutoffs in wintertime to downstream Western European markets.  With a capacity to carry 55 billion cubic meters of gas per year, the new $12.1 billion pipeline bypasses Ukraine altogether and is likely to boost Russia’s leverage on Ukraine in the recurring crisis between the two and help secure Gazprom’s position in the European markets.  While the former may be true, it is hard to bet on the latter. 

While Germany is a main beneficiary of the Nord Stream pipeline, the general sentiment in Western Europe is deep cynicism about Gazprom and fear of more dependence on it as European markets recover from the global economic downturn.  Receiving two thirds of its gas supplies from Russia, Europe’s main goal going forward is diversification of supply sources, which includes greater price and volume flexibility with imports of LNG, development of domestic shale gas in individual EU member countries (e.g. Poland, Germany), and building a direct pipeline access to energy riches of the Caspian countries.  It is unlikely that the launching of Nord Stream and a pending South Stream pipeline (from Russia through Black Sea to Bulgaria, Greece, Italy and Austria) would keep Europe locked to Gazprom.

Recognizing Europe’s policy of diversification of energy sources, a common attitude among Russian policymakers and energy observers is also centered on seeking other markets, particularly to its eastern direction.  While the October 2011 visit of Prime Minister Vladimir Putin to China ended again in an impasse on a gas deal due to price disagreements, Russians are confident that Beijing would eventually need their gas for its energy-thirsty economy and the sources from Turkmenistan and Qatar would be insufficient.  China continues to demand nearly half the price that Russia charges for its gas to Europe.  Some Russian energy observers argue that rushing in to the growing Chinese gas market and accepting its price will be highly disadvantageous to their country.  The Kremlin is aware that the Gazprom's supplies to European markets will be shrinking with time, but until then it is likley to bide its time to negotiate an acceptable price with China as well as to seek entry to the markets of South Korea and Japan.