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 NEW RUSSIAN PIPELINE IN BALTIC SEA COULD 'COLLAPSE' UKRAINE

Russia could conceivably use Nord Stream 2 as a political tool against Ukraine. But if Gazprom wants to keep some of its market share in countries like Italy and France, it will need Ukraine.

A Russian proposed natural gas line through the Baltic Sea could kill Ukraine, says Amos Hochstein, Special Envoy for International Energy Affairs at the U.S. Department of State. Hochstein warned about the economic impact on Ukraine in an interview with a Slovakia news publisher called EurActiv. He retweeted his interview on his Twitter account July 29.

The 745 mile pipeline is a joint project between Gazprom and five West European partners including Shell Oil. Russia's gas giant Gazprom owns 50% and the Europeans companies own 10% each. Critics in the Baltics, including the largest vocal opponent, Poland, say that the pipeline isn't needed because there already is one connecting north Russia gas fields to Germany. The company, Nord Stream AG, is a joint venture between Gazprom and four other European players, including France's GDF Suez and Wintershall once again.

Hochstein said the pipeline undercuts deliveries from the southern belly of Europe, which traditionally have come into the West via Ukraine. Russia and Ukraine have been locking horns since the 2014 ouster of a pro-Russia president and the annexation of Crimea, then a Ukrainian administered peninsula on the Black Sea.

Hochstein said the pipeline costs $12 billion, but Platts estimates that it costs less than half that.

"If you were a shareholder and you walked into a company and said, 'We are going to spend 12 billion dollars for something we don't need' they'd fire the CEO. Unless, it is not about shareholder value. Unless, it is not about economic value. Unless, it's there to pursue political gain by the political levels and not by the CEO and the Board," Hochstein said. Gazprom is state-run but its stock trades in the market.
Hochstein's comments have been repeated incessantly by the West, causing Gazprom CEO Alexei Miller to say two months ago that the project was not political.

"Here is the level of damage you do with a project like Nord Stream 2: You take two billion dollars of revenue from shaky economy like Ukraine at a time when the international community is trying to support it. How do you recover from that? There is an easy answer. You can't," Hochstein said in the interview. "The economy will collapse."

Nord Stream 2 might also be negative for southern Europe, which defers to Ukraine pipelines for Russian gas. On May 23, Eni CEO Claudio Descalzi told Reuters it was a project that would gives energy pricing advantage to northern Europe, while Italy may face higher transit fees.

"It is really a pipeline for the north of Europe," Descalzi said. "The impact of North Stream 2…is clearly that we are going to create a stronger hub in the north and we are going to create a higher price for the south."

Gazprom and partners don't just have political headwinds, they have falling energy prices to tend with and a glut in LNG supplies from the U.S., Middle East and Scandinavian countries.

European gas demand forecasts are also lower. The International Energy Agency's 2030 gas demand forecast for OECD Europe was 526 billion cubic meters (bcm) in 2015, down about a third from the 788 bcm it forecast for 2030 some 10 years prior.

One of the key impacts of the Nord Stream 1 pipeline in the Baltic Sea was to reduce Russian export flows through Ukraine to Europe from up to 80% in 2009 to around 50% or less in 2015. Russia only flowed 64 bcm through Ukraine in 2015, less than half the 140 bcm it is equipped to deliver. All of Russia's other export pipelines flowed at nearly full capacity, except for Nord Stream 1, which flowed at around 70% of its 55 bcm capacity, according to a Platts report published in April.

Worth noting, the original Nord Stream pipeline had political support from the European governments and from Germany in particular. Germany's policy was to promote diversification of import routes following disruptions of Russian gas supplies via Ukraine in 2006 and2009.

Fast forward to 2016 and its a different world. Poland has an LNG terminal. Lithuania has one, too. Washington now allows for the U.S. to export oil and gas. This was not reality two years ago when Nord Stream 2 was a topic of discussion in Gazprom.

Nord Stream 2, which runs alongside Nord Stream 1, does not help diversify the EU's gas import routes and so will unlikely get any special political or financial support outside of the private sector. Gazprom's partners, however, can finance the deal themselves. But they can't get it built without political support.

Moreover, even as Ukraine and Russia go through a bitter divorce, there has been no disruptions of Russian gas via Ukraine since 2009 thanks, in part, to the E.U. acting as mediator in contract negotiations between Gazprom and state-owned Naftogaz.

Gazprom still needs Ukraine, regardless of their dislike for each other these days.

In April, Naftogaz CEO Andriy Kobolyev said he wants to start talks with Gazprom for a post-2019 transit contract. Both sides are waiting for a ruling on the disputed 2009 contract from Stockholm's arbitration court, expected some time next year.

For now, the Americans won't have to worry about Ukraine going belly up because of Gazprom.

Kobolyev even said he doubts Gazprom and partners can get Nord Stream 2 online by 2019. The Russians will have no choice but to negotiate a new transit contract with the Ukrainians. Kobolyev has been ringing alarm bells on Nord Stream 2 since last year.

Moreover, Hochstein said that Europe is not fully prepared to import LNG as an alternative to Russian gas anyway. Pipeline infrastructure is non-existent in countries like Spain and Portugal, both with LNG terminals.

"The first 12 or 13 cargoes the United States sold went to Brazil, Argentina, Chile, Dubai, Kuwait, Portugal and India," Hochstein told EurActiv. "Why is more LNG not going to Europe? That is the question people should ask. It has nothing to do with price."

Russia could conceivably use Nord Stream 2 as a political tool against Ukraine. But Russia may eventually need those transit routes as much as it does the northern ones, as the southern European markets can get gas from elsewhere. If Gazprom wants to keep some of its market share in countries like Italy and France, it will need Ukraine. This makes Gazprom and the Russian government that administers it a bit nervous. The country proposed a similar pipeline through Turkey, known as South Stream. When Turkey shot down a Russian fighter plane over Syria earlier this year, relations between Ankara and Moscow soured. Now the two sides are talking again, and so Hochstein may yet be right, only it will be South Stream and not the Baltic twin pipelines that will undercut Ukraine as a lucrative transit route for Russian natural gas.

Kenneth Rapoza, Forbes Contributor
 
 
 
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