On May 30, 2021 the Danish Board of Environment and Food Appeals has withdrawn permission for the onshore section of the Baltic Pipe pipeline through Denmark
The reports in many media outlets were so confusing and at times inaccurate that it makes sense to recall the background of the project, its component parts, and the project of which Baltic Pipe itself is a part. The Baltic Pipe project, which is part of the European Union, is being developed by the Baltic Pipe project team, and it is worth recalling the history and components of the project, and the quality of the organizational work of the European Commission, the body that can be considered, albeit relatively, as the EU’s “government”.
The origins of the Baltic Pipe project
The idea of Baltic Pipe first appeared in 2001. Denmark does not have large gas fields on its land territory but it has a number of shelf deposits, the largest of which is Tyra. Having come to an agreement with the Norwegian company Statoil (now Equinor), at the start of the century Denmark began expanding a network of gas pipelines from the Norwegian sector of the North Sea to the mainland of that country. This is when Poland first started to talk about how its gas network could be expanded even further, to build a new pipeline overland from the North Sea to the Baltic Sea, and to bring the gas to Poland with a second offshore section.
But even a preliminary analysis showed that it would not be economically feasible – so the idea was shelved. For the second time it was mentioned eight years later, in 2009, but this time the reasons were purely political. In summer 2008 Russia withdrew from the European Energy Charter and its Treaty: our country refused to give European companies the same right to explore, produce and use oil and gas pipelines as we, Russian companies have. In response to such ‘impudence’, the European Commission published the Third Energy Package, demanding that the EU member states urgently implement all its provisions into national legislation.
In other words, a trend towards an anti-Russian policy has begun to take shape in Europe and Poland tried to take advantage of it by pulling the Baltic Pipe project on the public eye for the second time. But the European Commission’s analysis once again led to the same conclusion: economically inexpedient.
It was only in 2016, after the Ukrainian events and the unilateral discriminatory measures unleashed by the European Union and the United States against Russia, that the Baltic Pipe project suddenly became economically viable, gaining, in the words of Polish politicians, “strategic importance for the entire EU”. As you can see, even the most general features of Baltic Pipe’s “biography” show that it had nothing to do with economics, actually – it was nothing more than a ridiculous attempt to damage Russia’s economic interests. And it was in 2016 that the head of the Polish company PGNiG, Piotr Naimski, first announced that this company would not extend the so-called “Yamal” contract for gas supplies to Poland, signed with Gazprom in 1996. What is really behind that catchphrase is below.
Olympic calm in Norway and Poland
It is a ridiculous attempt because the resource source for Baltic Pipe is supposed to be natural gas from the North Sea, produced by Equinor. Norway is consistently ranked second to Russia and Gazprom as far as natural gas supply to the EU, with “stable” being the key word. The production of the large producing fields is declining steadily and the intensified exploration of new fields is not optimistic: new fields exist but they are small and their production only compensates for the decrease in production at the large old fields.
It is the second decade that the volume of Norwegian gas supplies under the contracts with the European companies remains in the 100-110 billion cubic meters per year corridor. Therefore, the volume of gas supplied via new gas transmission pipeline to Poland will not be compensated by Norway to its partners from other European countries.
In addition to Russia and Norway, there are two other states supplying natural gas by pipeline to the EU – Algeria and, as of this year 2021, Azerbaijan. Of course, it is more correct to name companies as suppliers, but in this case there is no mistake: Algeria’s Sonatrach and Azerbaijan’s SOCAR (State Oil Company of Azerbaijan Republic) are fully controlled by the governments of these countries. Algeria has no plans to increase its supplies; Azeri gas goes through Turkey to Greece and on to Italy, both of which cannot be used in the game that the European Commission is playing in the North Sea and the Baltic Sea at Poland’s behest.
Gazprom, on the other hand, has no problem with increasing its supply volumes, which Equinor knows perfectly well, and therefore both these companies have almost no reaction to all the creative initiatives with European “fighters against gas dependence on Russia”. Norwegian and Russian state companies have experience of swap deliveries, extensive and mutually beneficial.
Gas production in the British sector of the North Sea has been falling for a decade now but Eurostat dispassionately states that there is no Russian pipeline gas supply to England and that the Norwegian supply from Equinor is growing steadily. This is not unbelievable as Gazprom has simply ‘taken over’ the gas supply of the Norwegian company’s European partners.
Exactly the same change of sums will happen in case of implementation of the Baltic Pipe project: Equinor’s European partners will once again be compensated by Gazprom for the volume of gas that will go to Poland. For Gazprom the picture will be as follows: what Poland will not buy, other European companies will buy, the volume of Russian gas exports to Europe will not change from the word “in general”. Russia and Norway are as calm as tanks: if the EU wants to put billions of euros on the bottom of two seas and in the land of Denmark – let them invest, the economic interests of Equinor and Gazprom will not suffer.
Surprisingly, Germany is also directly involved in the idea: in order to supply gas to Poland, Euinor will have to reduce supplies via Europipe I and Europipe II, which go from the Norwegian sector of the North Sea to Germany. And this is, incidentally, one of the reasons why relations between Poland and Germany are far from being good-neighbourly – tales about a “friendly family of European nations” have little to do with reality.
Technical and some financial details of Baltic Pipe
The Baltic Pipe project is strictly described in terms of five components:
1) A new offshore IGA with a length of 110 km, as a branch line of the Europipe II IGA to a receiving terminal near the town of Varde on the northern coast of Denmark;
2) An onshore IGS of 220 km from Egtved to a compressor station in the southeastern part of the island of Zeeland on the Danish coast of the Baltic Sea;
3) Everdrup compressor station on the Danish coast, which is to pump gas for a distance of 270 km;
4) the offshore IGS on the Baltic Sea bottom from the Danish coast to the Polish coast, crossing all four strings of Nord Stream 1 and Nord Stream 2;
5) An onshore section in Poland, 210 km in length.
Baltic Pipe has a design capacity of 10 bcm of gas per year and will be constructed and operated by a consortium of two Danish and Polish gas transmission system operators, Energinet and Gas-System respectively, with equity capital in the consortium distributed on a parity basis. Areas of responsibility: Energinet is responsible for parts 2) and 3), Gas-System for parts 1), 4) and 5), i.e. for both offshore sections and for the construction of the transmission system in Poland.
The situation with financing is as follows. The consortium received three grants from the EU budget for the feasibility study: €387 thousand in 2015, €33.15 million in 2017, and €18.3 million in 2018. For the construction itself, €215 million from the EU budget in 2019. The total funding from various EU funds amounted to €267 million.
Everything else will come from bank financing: in July 2020, the law firm Norton Rose Fulbright announced that it had advised a consortium of ten European banks on €1.4 billion in financing for Gas-System as a stable source of funding for the company’s projects to implement its investment concept. The contracts for the construction of the offshore sections of Baltic Pipe were signed by the consortium with grants from this business:
– in the North Sea, the same Swiss company Allseas, which fled the construction of Nord Stream 2 in November 2020 after the introduction of another round of anti-Russian unilateral discriminatory measures by the states, is working
– in the Baltic Sea, Italian Saipem, which was involved in the construction of the Russo-Turkish Blue Stream, is completing preparatory work.
Numerous political commentators on the Baltic Pipe gas project have long speculated that the shareholders of Nord Stream AG and Nord Stream2 AG (read as Gazprom) would refuse to agree technical designs for the offshore pipeline crossings of the four Nord Stream pipelines, but this did not happen, both approvals were obtained fairly quickly by the Danish-Polish consortium. The reasons are already described above: the Baltic Pipe project is neither hot nor cold for Gazprom, and petty vindictiveness has never been the Russian concern’s style. For those who like conspiracy theories, there is an opportunity to speculate whether Gazprom knew in advance about the plight of the Danish muskrats, wood bats and bats, or whether the appearance of this gigantic, planetary-scale problem shocked the entire staff of our gas concern as much as the rest of the world’s population.
Verbal escapades and the harsh reality of the Yamal contract
Now some words on the rhetoric that we regularly hear from Polish politicians and PGNiG management
This company is now controlled by the Polish government; it explores and produces natural gas and oil in Poland itself and is also responsible for importing these energy resources from other countries. In 2017, PGNiG’s management officially informed Gazprom that the Yamal-Europe gas transit contract, which expired in 2020, would not be renewed. Comments to the media made by Polish politicians are clear: we will continue our courageous fight against sinister Russia, we will show, we will prove and we will definitely win! Gazprom – be afraid, the whole of Russia – weep and repent!
But this is just propaganda, and the reality, as usual, is far less romantic. According to the terms of the contract with Gazprom, the party intending to unilaterally withdraw from or refuse to prolong the contract must give notice of such decision three calendar years in advance – and Gas-System did it on the same day. The Polish company could not have done otherwise, as the owner of the Polish section of the Yamal-Europe pipeline is EuRoPolGas. This is the abbreviation, with lots of uppercase letters, for Europe Rossia Poland Gas and this is the correct spelling of the name of the Polish-Russian joint venture, where Gazprom has 48% of the share capital and the seats on the board of directors are split 50-50.
It seems that when the statute of the company was being agreed the drafters decided in this way to insure against conflicts – we can argue, but we will have to reach an agreement in search of a compromise to make a common decision. But the decision was unambiguous – the contract would not be extended and Gazprom, as a shareholder, had no objection to this.
It could not object because in 1996, when the transit contract was signed, Poland was not a part of the EU and was truly an independent state. It was in line with Polish and Russian law at that time but a lot has happened since then. Poland, as you know, joined the EU in 2004, transferring some of its sovereign powers to Brussels officials. I am by no means condemning this step of Poland – the country is independent, sovereign and takes decisions at its own discretion.
But this step had one unavoidable consequence: since 2004, Poland has been diligently implementing in its legislation many EU decrees and regulations and, of course, all the provisions of the Third Energy Package and its Gas Directive. As a result, the conditions of the contract as of 1996 are not in accordance with the Polish law in force and, of course, Poland had no possibility, under any circumstances, to extend it.
The situation looks exactly the same with the Yamal contract on Russian gas supplies to Poland, which Poland resoundingly refused to extend in 2019, not failing to announce it through its politicians and politicians in all the media, both Polish and European.
But for what reason those texts were repeated by many Russian media outlets without making any attempt to explain what was going on is, of course, an interesting question. There are only two variants – either they are deliberately misleading (read as “common lies”), or thoughtless translation without any attempt to go into the heart of the matter. Unfortunately, even our large and authoritative media are increasingly giving completely illiterate comments: for example, the commentators of Radio Sputnik and RT in Russian managed to declare Baltic Pipe a “Polish-Norwegian project”, and the editors have quietly allowed such blatant nonsense to be published.
Who is threatened by Nord Stream-2?
In May 2020 the contract for the transit of Russian gas through the Yamal-Europe pipeline was indeed terminated, the board of EuRoPolGas decided to switch to the rules prescribed by the EU’s Third Energy Package. No contracts, just regular auctions to reserve transit capacity for different periods – week, month, quarter, half a year. The Polish side managed to present this as another “victory over Gazprom” and Gazprom itself did not comment on this at all for quite obvious reasons.
First of all, 48% of the profit that EuRoPolGas earns from transit rightfully belongs to Gazprom, but, more importantly, secondly, stopping the transit through Yamal-Europe does not threaten Gazprom with any penalties, for this Gazprom Export only needs not come to the next auction.
“Gentlemen of Poland, were you willing to work under the conditions of the Third Energy Package? We welcome your wise decision!”
And this is a point of principle: the commissioning of Nord Stream 2 poses a threat to transit not at all to Ukraine (let me remind you that the contract between the Operator of Ukraine’s Gas Transit System and Gazprom is valid until the end of 20204). The rhetoric of the young democracy’s senior partners in Dnipro is well known: NNG-2 must not cause economic damage to Ukraine, but no one, except for Poland itself, has ever talked about protecting Poland’s economic interests.
Gazprom’s hypothetical refusal to cooperate with the Ukrainian GTS Operator would not only mean fines for Gazprom, but also a blow to its own reputation as a reliable and predictable partner, which is generally unacceptable among European gas companies. But a failure to attend another auction organised by EuRoPolGas for Gazprom means nothing but strict adherence to the Third Energy Package to the last comma and no fines. In Poland in general and in Gas-System – shareholder and operator of EuRoPolGas – they understand this situation very well and it is this understanding that explains why the tariff for Russian gas transit (per 1000 cu m per 100 km) through Polish section of Yamal – Europe is almost twice lower than the one stated in the contract of Gazprom and GTS Operator in Ukraine, even taking into account that a half of this tariff will return to the same Gazprom.
Polish politicians can say what they like, when they like and to whom they like, but the professionals that are responsible for the functioning of Yamal-Europe do not say anything – they have a job to do – they have to ensure energy security of Poland and try to keep at least some profits from the operation of the gas pipeline, not to allow termination of the transit or reduction of the volumes. However, we will get back to this topic.
The “mysteries of the Baltic Pipe” do not end there – the story has just begun. The next article will be about another one. As already said the EU is one of the investors of the project, but the Commission is only entitled to spend EU funds if the gas infrastructure project has a regional impact. And a project is regional only if it involves at least three EU member states. If the money from the EU budget has already gone, then there is at least a third participant in the Baltic Pipe project, apart from Denmark and Poland. That’s why there are four additional participants, and what the Baltic Pipe project looks like from the perspective not of the media, journalists and commentators, but of financiers in the city of Brussels – next time.
Borys Martsinkevych, Ukraina.ru