building a strategic new pipeline to Europe that will affect
European energy security for years to come. Called the North
European Gas Pipeline (NEGP), it will cross the Baltic Sea,
directly connecting Russia to Germany, and will bypass the
Soviet-era, land-based energy transit infrastructure that traverses
several former Soviet Bloc countries, including Ukraine, Belarus,
under construction, the NEGP has attracted both investors seeking
large returns and critics protesting Russia's increasingly powerful
energy-transit monopoly. With Europe's steadily increasing appetite
for natural gas, this new direct link will strengthen Russia's hold
over the European gas market and lessen dependence on transit
countries, including Ukraine, Belarus, and Poland. Although
the pipeline will prove beneficial in guaranteeing more secure
Western European access to Russian natural gas, it also has
the potential to increase the dependence of the European Union (EU)
on Russia, thereby making Russia even more powerful and,
possibly, more assertive in the international arena. This could
have insidious consequences in a time of increasing divergence
between Russia's foreign and domestic policies and Western
interests and norms.
to avoid EU overdependence on Russian natural gas, the U.S. and EU
governments should work in concert to:
pipeline proposals, such as Nabucco, which would link energy
sources in the Caspian region to southern Europe via
to pipelines for the transit of natural gas, especially shipments
of liquefied natural gas (LNG);
concert with other G-8 members to persuade Russia to ratify
the Energy Charter; and
and political support for intensified research and development of
alternative market-based energy sources.
Strategic Energy Dependence
gas is the second-largest source of energy in Western Europe. Most
of it is extracted from British, Dutch, Italian, Romanian, German,
and Danish fields, with additional gas imported from Russia,
Norway, and Nigeria.
Russian gas imports account for 26 percent of EU consumption,
representing 40 percent of the imported gas consumed by
households and businesses.
In Central and Eastern Europe, Russian gas accounts for 87 percent
of total imports and 60 percent of consumption.
for natural gas is expected to rise significantly over the next
15-20 years, coincidentally with a steady depletion of
reserves in EU countries.
Strict EU environmental regulations will force EU member
states to replace high-emission fossil fuels, such as coal, with
cleaner burning energy sources, such as natural gas and
nuclear power. Social resistance to nuclear power, especially in
Germany, may prevent it from becoming a major energy source
natural gas would not be constrained by the limited capacity of the
natural gas pipelines, but the process of liquefying gas is still
expensive, and most natural gas exporters and importers have yet to
develop the infrastructure necessary to make LNG shipments
cost-effective. In the near term, therefore, EU consumption of
piped natural gas is likely to rise, and the EU will look
increasingly further afield to Norway, Algeria, and Russia to meet
its natural gas needs.
In the near to medium term, the importance of Russia's role appears
likely to grow.
imports from any of these countries would be a costly endeavor
requiring massive investments to develop the necessary extraction,
production, and transportation infrastructure. Piping gas from
Algeria would require undersea pipelines, which are far more
costly than overland pipelines.
Norway's reserves are limited. The EU is looking to tap other
sources of natural gas, such as the Caspian Basin and Central Asia,
but these regions, like the Middle East, are characterized by high
levels of political instability and are thus less reliable as
suppliers. As for LNG imports, they are economically viable only
over large distances.
other hand, transit infrastructure for natural gas deliveries from
Russia to Europe already exists. Russia currently supplies roughly
40 percent of Europe's imported gas, with higher percentages of
Russian gas consumed in Eastern Europe than in Western Europe. (See
Table 1.) Projections indicate that this percentage will increase
to roughly 60 percent by 2030.
Given dwindling reserves and political and logistical restrictions
on other potential natural gas suppliers, Russia is in an
excellent position to capture the lion's share of the European gas
officials have voiced increasing concerns over Russia's reliability
as an energy exporter, particularly since the January 2006
Russian-Ukrainian gas dispute, when Russia cut off gas shipments to
Ukraine and Ukraine responded by siphoning off gas from Russia that
was destined for EU countries. Ukraine, in turn, claimed that
Russia owed that gas to Ukraine under the existing contracts. The
affair resulted in a temporary mid-winter interruption in the EU
Ukraine is the transit country for most Russian gas exports to
Europe, it is essential for EU energy security that Ukraine and
Russia maintain stable business relations. Fully 80 percent of
Russia's natural gas exports reaches the EU via Ukraine,
with another 20 percent through Belarus.
Both of these countries have long, complicated political
histories with Russia, while Gazprom has supplied subsidized
gas since the collapse of the Soviet Union. Last year, for
example, Belarus received gas at 20 percent of the
average European price.
In February 2004, however, Gazprom briefly cut supplies to Belarus,
which balked at signing new contracts.
before the January 2006 crisis with Ukraine, Russia had long wanted
to diminish the influence of transit states in gas shipment to
Europe, thereby denying both Ukraine and Belarus considerable
transit-fee revenue and eventually assuming ownership over gas
transit infrastructure. In December 2005, concerned about a
repetition of Ukraine's "Orange Revolution" in Belarus, Russian
President Vladimir Putin promised Belarusian ruler Alexander
Lukashenko access to cheap gas.
This was extremely costly for Russia, both financially and
politically, because of Belarus's uncompetitive economy and
Lukashenko's international pariah status.
tenuous relationships between Russia and the transit countries have
created fear of political complications between supplier and
transit countries, causing another gas shutoff to Western Europe
and thereby generating both consumer and supplier support for a new
pipeline that will bypass Central and Eastern Europe and link
Western Europe directly to Russia.
European Gas Pipeline
2003, Russia has begun to cut out the middleman. In February
2003, Russia and Germany proposed the idea of a North Baltic
pipeline extending over 2,000 miles (700 of them underwater) from
Russia to Germany via the Baltic Sea. In January 2004, the Russian
government issued an official decree in support of the pipeline's
construction, and several European oil and natural gas concerns
have shown interest in the majority-Gazprom project. Construction
began on December 9, 2005.
European Gas Pipeline (NEGP or Nord Stream) will extend roughly 300
miles over land to Vyborg, Russia, on the Gulf of Finland and from
Vyborg under the Baltic Sea to Greifswald in northeast Germany.
Based on Russian President Putin's predictions, the pipeline, with
an initial annual capacity of 27.5 billion cubic meters of gas,
will become operational in 2010. The NEGP's capacity is to reach
approximately 52 billion cubic centimeters upon completion of a
second pipeline in 2013.
Gazprom has estimated the cost of construction at $4.7
Stream will supplement existing land-based pipelines, allowing for
greater pipeline capacity for Russian gas exports to Europe. This
is particularly significant in light of Gazprom's development of
the Shtokman gas field in the Barents Sea, with reserves estimated
at 3.7 trillion cubic meters of natural gas, beginning in 2010.
Gazprom's stated intention is to use Nord Stream to transport gas
from the Shtokman field to Europe.
European Gas Pipeline Company (North Trans Gas) has been registered
in Zug, Switzerland, to build the pipeline's submarine
section. Former German Chancellor Gerhard Schroeder, who signed the
initial agreement with President Putin for construction of NEGP, is
now chairman of the NEGP consortium-a fact that caused an
outcry in his home country.
not an equal partnership. Gazprom owns 51 percent of North Trans
Gas shares, and the German partners BASF and E.ON each own an
additional 24.5 percent.
Gazprom has announced that a third partner could obtain a 9 percent
stake in the project with favored parties, including Gaz de France
and Dutch Gasunie.
source of supply for the pipeline will be the Yuzhnorusskoye gas
field in the Yamal- Nenets Autonomous District. While this field
cannot supply the entire pipeline, Gazprom
representatives say that by the time the second stretch of the
pipeline has been completed, it will be possible to start
bringing in gas supplies from the Yamal, Obsko-Tazovskaya Bay, and
Shtokman gas fields.
first direct link between the Russian gas transport network and the
West European gas network, the NEGP will mark a new stage of
cooperation between Gazprom and the EU energy
Baltic pipeline complements the ones through Ukraine and Belarus,
the EU will be less concerned about whether the relationship
between Russia and its former allies might disrupt Europe's main
source of gas, and this diminished concern may give Russia freer
rein in its own back yard. Meanwhile, the increased trade between
Russia and Germany may promote increased dependence on Russia,
making it easier for Russia to engage in two-tiered pricing
schemes, offering gas at a discount to smaller Eastern European
countries in exchange for political cooperation.
gas prices vary depending on region and type of gas. In Europe, the
price of gas for each individual country or region is the wholesale
price minus delivery costs. Since delivery costs for shipments
to Ukraine are low relative to costs for shipments to
countries like France that are farther away and have no existing
pipeline infrastructure, Ukrainians should pay less for
Russian gas than do the French. In view of the European pricing
formula, the "market price" that Ukrainians pay for Russian
gas-roughly $95 per thousand cubic meters-is still low. Larger EU
states such as France and Germany may therefore be reluctant
to speak out against geopolitical concerns about the Nord Stream
because they depend on Russia for a large percentage of their gas
Stream has other drawbacks as well, including a potentially
negative ecological impact on the fragile Baltic Sea basin. The
Baltic Sea is a unique and sensitive ecosystem, which the
International Maritime Organization has given the status of
PSSA (particularly sensitive sea area).
During and after World War II, the Baltic seabed was littered
with thousands of tons of ship wreckage and chemical weapons shells
containing various types of blister agents and nerve gas, the exact
whereabouts of which are still unknown.
Pipeline construction could damage these corroded chemical
weapons containers, with potentially severe environmental
of the Baltic pipeline is significantly higher than that of
constructing alternative land-based pipelines, such as Yamal-Europe
II from Russia to Germany via Poland and Belarus.
Even if the Baltic pipeline comes on line in 2010 as scheduled, its
initial throughput capacity will be a mere 27.5 billion cubic
meters a year, whereas transit capacity for pipelines that run
through Ukraine is 132 billion cubic meters a year.
While the Baltic pipeline will not have the capacity to fully
replace existing infrastructure, the motives for its construction
are clearly political as well as economic.
for Nord Stream
launched a strong advocacy of Nord Stream. Gazprom chairman Alexei
Miller has described the NEGP as "a new export route that will
increase Europe's energy security," and Prime Minister Mikhail
Fradkov has said that "in launching this project we are
creating the conditions for energy security in the world."
Stream will alleviate uncertainty in the European market over the
reliability of Russian gas supplies, allowing Russia to export its
gas directly, and in greater volumes, to Europe. It will not only
eliminate transit fees payable to Ukraine and other East European
countries, but also reduce Gazprom's dependence on those
countries for exporting gas, to the economic benefit of both
importer and exporter. Moreover, as Russia invests billions in this
pipeline, the Kremlin will have strong incentives to keep it
the middleman from trade in energy will have other economic and
political benefits as well. Since the collapse of the USSR, Russia
has continued to sell gas to both Ukraine and Belarus at a steep
discount, trading rock-bottom gas prices for their political
loyalty. These deals have proved problematic both economically and
2005 Ukrainian presidential elections, Russia backed
then-Prime Minister (and current Prime Minister) Viktor Yanukovych,
whose falsification of electoral victory precipitated the "Orange
Revolution." Turmoil resulted in prolonged political
paralysis in Ukraine, as well as deterioration of Russian-
Ukrainian relations. To complicate the situation further,
unabashed support for Yanukovych was a source of embarrassment for
Russia in the international community, which by and large
decried Yanukovych and his electoral tactics as
damaging to Russia's international standing has been the Kremlin's
political and economic support for the Belarusian regime of
Alexander Lukashenko, dubbed by Condoleezza Rice "the last true
dictator in Europe."
President Lukashenko has long relied on subsidies from Russia in
the form of cheap gas, which he then resells to Western Europe at
market prices, to maintain both Soviet-era social programs and
a base of popular support.
one of a handful of states, including Iran and Cuba, to recognize
Lukashenko's blatantly undemocratic re-election in the 2006
presidential race as legitimate. This prompted questions
regarding Russia's role in the international community,
specifically its G-8 presidency. By diminishing economic and
political ties to Lukashenko, Russia could better safeguard its
export capacity, cut export costs, and avoid the embarrassment of
being taken to task for enabling the continued existence of a
Soviet-style dictatorship in Europe. This could prove beneficial to
the people of Belarus as well. An end to Russian backing of
Lukashenko might well result in the emergence of a genuine
opposition-led government that could bring about real
Stream and Western Europe
Russia, and their project partners believe that Nord Stream will
enhance overall EU energy security, which is particularly
advantageous to Germany because it would make Germany the
primary distributor of Russian gas in Europe. The pipeline will
transport gas from Germany not only to the rest of Western Europe,
but also to former transit countries: the Baltics, Poland, and
other states of Eastern Europe.
But the pipeline could also detract from long-term EU goals,
including reducing reliance on hydrocarbons and enhancing
financial stability in the newer EU member states.
Transit fees from gas crossing through Eastern European countries
will no longer be factored into the price that EU countries pay for
gas, thereby making it cheaper. However, the countries of
Central Europe, including Poland, the Czech Republic,
Slovakia, and Hungary,
will lose some transit revenues that supplement their national
incomes and strengthen their economies.
For example, in 2005, Ukraine's annual gas transit volumes were
calculated at roughly 115 billion cubic meters of gas, for which it
received $1.09 per thousand cubic meters in addition to the 25
billion cubic meters it received as payment.
Central Europe's Vocal Resistance. Polish President
Lech Kaczynski has argued that there is no economic justification
for the NEGP.
Some in Poland have even compared the proposed pipeline to the
notorious Molotov-Ribbentrop pact between Hitler's Germany and
Stalin's Soviet Union.
However, while the pipeline may be the result of German-Russian
cooperation, which makes Poland understandably nervous, it is
hardly an act of war comparable to the one that triggered World War
Prime Minister Algirdas Brazauskas
and a number of Estonian and Latvian politicians have also spoken
out against the NEGP. One Latvian spokesperson estimated that
constructing another pipeline through the Baltic countries to
Germany would have cost 2.2 billion Euros, whereas the undersea
Baltic pipeline will be approximately three times as expensive.
Former Estonian Prime Minister Juhan Parts has even attempted to
invoke a 1982 U.N. convention on sea rights and advocates extending
the tiny nation's territorial waters to prevent the pipeline's
Chancellor Angela Merkel has sought to defuse tensions by promising
to create a working group to examine the project that would include
Poland. Whatever the outcome of such a working group, however, an
enhanced role for Germany and a reduced role for the Baltic
countries in gas transit between Russia and the EU, while not
desirable, now looks inevitable.
Addiction or Global Energy Market Integration?
advantages for the EU in an increased supply of Russian gas, but
there are also potentially negative consequences, such as greater
Russian monopolization of Europe's gas market and lack of energy
market diversification. Global energy markets will not benefit
from European over-reliance on Russian natural gas. Diversification
of supply is essential for market stability, competitive practices
and pricing, and breaking up the monopolistic hold that Russia
currently has over oil and gas transportation infrastructure
between Russia, Europe, and Central Asia.
Moscow has shown itself to be increasingly authoritarian in its
domestic politics and increasingly assertive in its foreign policy,
openly declaring that Russia will use its energy resources as a
foreign policy tool. President Putin has recently made a number of
statements calling for the creation of a "gas OPEC," which would
include Iran and Turkmenistan. Such a gas cartel would control the
world's first, second, and fourth largest gas reserves, which
together house 73 percent of total natural gas reserves,
and would have significant influence over the price of natural
doubts about Russian monopolistic behavior are put to rest by
Gazprom's recent behavior. In February 2006, reports suggested that
Gazprom would try to acquire a stake in British gas firm
Centrica, prompting the British to look for ways to block such
The Kremlin and Gazprom responded to this with threats to reroute
oil and gas exports to Asia if the EU were to block Russian
acquisition of British gas concerns.
As Russian foreign policy continues to diverge from Western norms
it is important that EU dependence on Russia not obstruct the
Europeans' ability to conduct independent foreign policy while
openly criticizing Russian policies.
same time, however, Russia needs the EU as an importer as much as
the EU needs Russia as an exporter, especially given that not one
of Russia's proposed pipelines to Asia has yet been
constructed. It is therefore possible that this
interdependence might be used to enhance the EU's ability to
secure greater Russian compliance with the rules and norms of the
global energy market.
Russia has proved resistant to ratifying the Energy Charter, which
it signed in 1994. The treaty addresses investment in and transit
of energy and, if ratified, would require Russia to allow other
Energy Charter signatories direct access to its excess pipeline
capacity. This would effectively break up Russia's monopoly on gas
pipelines to Europe and might force Russia to price its own gas
more competitively in relation to other suppliers.
talks between Russia and the EU produced a communiqué
supporting the principles of the treaty; however, Finance Minister
Alexei Kudrin has stated that "some of the principles it contains
do not suit us."
Despite Russia's intractability, if EU leaders, with possible
U.S. support, were willing to apply firm, consistent pressure on
Russia, or even to threaten the Kremlin with deterioration of
energy-trade relations, Russia might eventually be convinced to
ratify the treaty.
such pressures from the EU and to increase its leverage in world
energy markets, Russia has made overtures to Asian as well as
European consumers-specifically, to China. However, high pipeline
construction costs, uncertain Siberian reserves, the inefficiency
of Russia's monopolistic, state-run natural gas sector, and recent
indications that Russian gas production is showing
progressively slower growth suggest that Russia may not be
able to fulfill its supply commitments to both China and the EU.
Furthermore, Russia relies on cheap Central Asian gas to provide
for its home market while exporting its own gas abroad.
increasing global competition for Central Asian gas, a number of
other export routes from Central Asia have been proposed, including
pipelines from Kazakhstan, Uzbekistan, and possibly
Turkmenistan to China, Pakistan, and even India. Both the U.S. and
the EU have spoken in favor of construction of the Nabucco gas
pipeline, which will originate in Turkey and feed gas through
Bulgaria, Romania, Hungary, and Austria as an alternative
to Russian-controlled pipelines. Also under consideration is a
pipeline from Kazakhstan, Turkmenistan, or Azerbaijan that
would link up with Nabucco, providing the first direct connection
between Caspian and Central Asian gas producers and European
markets. As export options increase, Central Asian states may prove
unwilling to continue selling their gas at a deep discount to
Russia if they can get higher prices elsewhere.
important is the longer-term consideration of the need to
reduce overall dependence on fossil fuels. In energy-inefficient
Eastern and Central Europe, drastically increased prices and
reduced transit revenues could have unexpected positive results in
promoting a combination of energy conservation and more
energy-efficient industries. Some Central European countries might
expand electricity production from nuclear reactors. In
Western Europe, however, a false sense of security brought on by a
more stable supply of fossil fuels might deflect attention
away from the urgent need to find new energy-saving technologies
and new sources of energy. Although the Baltic pipeline will ease
many short-term concerns for both Russia and the EU, in the long
term, it could prove to be more of a hindrance than a
United States, greater Russian influence over Europe's oil and gas
transportation infrastructure is a negative geopolitical
development. Russia has shown increasing resistance to security
cooperation with the U.S. on vital issues involving Iran and
North Korea, is resistant to the promotion of democracy in its
vicinity, and has demonstrated a growing willingness to use its
energy resources to influence other, smaller countries for
the U.S. has a strategic interest in minimizing European
overdependence on Russian energy, which would limit the EU's
ability to side against Russia on questions of great importance,
such as Iranian nuclear proliferation. To avoid a situation in
which Europe is increasingly dependent on Russia, the U.S.
Departments of State and Energy should therefore:
endorse the construction of a gas pipeline from Azerbaijan,
Kazakhstan, or Turkmenistan to Southern Europe through
Turkey. Such a
pipeline, connected to the proposed Nabucco pipeline through
Bulgaria, Romania, Hungary, and Austria, would bypass Russia and
offer an alternative to Russian gas in Europe, helping to break up
the Russian near-monopoly on energy transportation
infrastructure to Europe. It would also allow Central Asian
states, such as Azerbaijan, Kazakhstan, and (in the future)
Turkmenistan, to play a more active role in marketing and selling
their natural gas without Russian interference and detract from
Russia's ability to exercise political influence in those
EU leaders to look to increased LNG consumption as an alternative
to permanent pipelines. Significantly
cheaper than pipeline construction, LNG shipments are not
restricted by limited field and pipeline infrastructure and
should allow Western Europe to import its natural gas from a wider
range of sources, including Norway and Nigeria. Short-term
investments in LNG infrastructure will likely yield significant
source diversification and long-term political and economic
concert with EU countries and Japan to encourage Russia to ratify
the Energy Charter, which would enhance Moscow's
predictability and transparency in energy markets.
having signed the Energy Charter, which would require it to allow
other energy producers access to its extra pipeline capacity, the
Russian Duma has refused to ratify the treaty. Given close energy
trade ties and the prospect of increased trade volumes between
Russia and the EU, EU leaders should pressure Russia to ratify the
charter, as they did in the recent summit with Putin in Finland.
Being a signatory of the Energy Charter would discourage
Russia from further two-tiered pricing schemes, strategic cutoffs
of energy supplies for political reasons, and monopolistic
practices. Russia should be persuaded to allow Western firms equal
access to its energy reserves.
research and development of market-based alternative energy
sources as the
only long-term solution to reducing Western reliance on
non-transparent, potentially unstable states for vital
hydrocarbon supplies. The U.S. and EU countries should follow the
example of countries like Brazil, which have been successful
in reducing dependence on foreign oil by making ethanol (from sugar
cane) economically viable as a source of transportation fuel.
This will require not only changes in manufacturing
regulations and infrastructure, but also reducing or eliminating
agricultural tariffs and subsidies that keep the price of sugar
cane and corn artificially high.
economies cannot immediately achieve greater energy efficiency on a
level that will significantly decrease demand for
hydrocarbons. Attaining greater security in access to hydrocarbon
deliveries is therefore of the utmost importance in the
near-to-medium term. However, it will be a net loss to EU countries
if they allow this approach to lull them into a false sense of
energy security and bind themselves too closely to an energy
supplier whose actions suggest that its oil and gas are national
resources to be used for its own national interests.
economic benefits that will accrue to Russia and Western Europe
from the North European Gas Pipeline will be substantial in the
next 10-15 years. They will be partly offset, however, by the loss
of revenues to former transit countries and the resulting
increase in Russia's ability to use its oil and gas assets to
project influence into its former sphere of influence. It is a
medium-term solution and, if not supplemented by longer-term energy
solutions, could eventually impose great political and
vital that the EU and the U.S. work together to find and implement
innovative methods of reducing energy dependence on a monopolistic
Russia. At a minimum, they should work to support new transit
lines that bypass Russia and to limit the length of time that the
EU spends being over-reliant on Russian gas.
Cohen, Ph.D., is Senior Research Fellow in Russian
and Eurasian Studies and International Energy Security in the
Douglas and Sarah Allison Center for Foreign Policy Studies, a
division of the Kathryn and Shelby Cullom Davis Institute for
International Studies, at The Heritage Foundation. Conway Irwin
assisted in the preparation of this paper.