Nord Stream 2 will damage Europe’s security of supply: what needs to be done 1. NS2 will reduce transit capacity and grant Russia more leverage over the EU NS2 will replace 146 bcm/y of transit capacity with 55 bcm/y thus reducing security of supply. A McKinsey study shows that the EU demand for gas will stay stable till 2035. Gazprom’s own assumptions imply demand for its gas will stay unchanged at nearly 200 bcm/year. Therefore, NS2 will lead to a re-routing of gas from Ukraine’s gas transmission system (GTS). It is the only route not controlled by Gazprom. Gazprom has announced that it will dismantle most of its own pipelines in Russia leading to Ukraine and has started this process. Ukraine’s GTS is now loaded by 30%, down from 60% in 2019. A further reduction in flows will rapidly make Ukraine’s huge GTS prohibitively costly to maintain. The EU will use a reliable, flexible and independent route. The alarming dependence of a number of EU Member States on the good will of Russia will become critical. 2. The NS2 re-routing of flows will create a gas deficit in countries south and east of Baumgarten Security of supply will dramatically deteriorate in countries which are reliant on gas supplies from Baumgarten area: Italy, Austria, Slovakia, Ukraine, Poland and the Balkan states. These countries need approximately 59 bcm of gas at Baumgarten per year. The shortage caused by the NS2 re-routing amounts to 26-32 bcm/y (up to 43 bcm/y if EU regulations are applied to NS2). Current available capacity at Baumgarten enables delivery of nearly 50 bcm of gas a year. Given the EU law limitations on the use of OPAL pipeline in Germany, there only 27-33 bcm/y of gas can be available at Baumgarten if the Ukrainian route is not used for transit. The available volume is down to 16-22 bcm/y if EU regulations are applied to NS2.

The capacity shortage during peak demand can reach 40%. In the 2015-2019 the actual peak demand for gas from consumers reliant on Baumgarten area amounted to 188-224 mcm/day. The maximum technical capacity of other routes leading to Baumgarten is 137 mcm/day. Available gas resources correspond to only 90 mcm/day.

In order to maintain both adequate transmission capacity and access to sufficient gas volumes even during peak demand it is therefore necessary that the Ukrainian system is capable of carrying 45-50 bcm/y (55-60 bcm/y if EU regulations are applied to NS2). 3. Europe is facing a Russian gas power play in 2021 – and is not prepared Europe is highly dependent on natural gas. It produces only 14% of its own needs and imports the rest. In 2020, more than 50% of the EU gas imports came from Gazprom. By Russian law, Gazprom is granted a monopoly over pipeline gas exports, though its share in Russian gas production is only about 60%.

Gazprom controls both gas supplies and infrastructure that carries it to the EU. The company’s dominance is especially strong in parts of Germany, CEE and the Balkans. Gazprom and BASF, one of its key industrial clients, have created a number of JVs which control pipelines in Germany and Austria (NS1, NS2, OPAL, JAGAL, STEGAL, MIDAL, EUGAL) - key for supply of gas to the affected countries if the Ukrainian transit route is put out of operation. In 2021, Gazprom implemented a gas squeeze strategy which sent gas prices in the EU to an 8-year high. The company has cut its supplies to minimum contractual volumes and put its various pipelines out of operation for maintenance. Instead of sending additional volumes of gas through Ukraine to meet the demand, Gazprom opted for raising some gas from underground gas storages in the EU. As a result, the levels of gas in European storages are now at the lowest level since 2013 and are twice lower than a year ago. It is likely that Gazprom owns or controls a significant share of gas already in the EU storages. A combination of Gazprom’s strong position in gas supply, control of key gas transmission infrastructure and access to gas storage makes the EU alarmingly vulnerable to Russia’s weaponizing of gas this winter. 4. What needs to be done to mitigate the risks? Gazprom’s monopoly needs to be eliminated in both gas supply and infrastructure control. A set of strategic actions need to be implemented jointly by the EU, countries of the Energy Community and the US. - Prevent / eliminate Gazprom's monopoly control over export gas pipelines to the EU. To achieve this, ensure a stable load of the Ukrainian GTS, commercially and technologically sufficient to maintain. As there are no mechanisms in the EU to influence the choice of time and duration of repairs of Gazprom-controlled pipelines, it is important that sufficient capacity to deliver Russian gas is maintained regardless of Gazprom's political objectives.

- Ensure that all export pipelines are operated under basic principles of competition in the European gas market: unbundling of gas transmission from supply, fair setting of transmission tariffs, transparent access of third parties to gas transmission facilities. In this case, the tariffs for the use of NS1 and NS2 will honestly reflect the costs of construction and operation of these pipelines, and Gazprom will not be able to manipulate their alleged "cheapness" compared to routes beyond its control.

- Achieve the abolition of Gazprom's export monopoly on the sale of Russian gas through gas pipelines. Gazprom continues to maintain a dominant position in a significant number of European markets. If NS2 is launched, the direction of gas flows in Europe will change dramatically. As a result, access of competition to those markets by alternative suppliers will be further reduced. Europe and the US must seek to open competition between suppliers as soon as gas leaves Russia.

- Introduce a joint gas reserve mechanism based on the EU and Ukrainian underground storage facilities to ensure supply of the most endangered countries. Such a reserve should be maintained to a sufficient extent to cover the demand for a critical period of time (several days or weeks). With such a mechanism in place, Russia will have less opportunities to attempt blackmail against the EU and individual European states.