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Italy, Germany, and Russian Gas Giovanna De Maio

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Italy, Germany, and Russian Gas Giovanna De Maio U.S. – EUROPE WORKING PAPER August 18, 2016 A Tale of Two Countries: Italy, Germany, and Russian Gas Giovanna De Maio Introduction significance for broader European energy dynamics and geopolitics. Italy and Germany are locked in a struggle over access to Russian gas supplies and the Italy has only recently re-emerged as a major construction of the controversial Nord Stream 2 player in the EU after more than a decade of pipeline. That struggle threatens not only to political retreat, and it is exploring both the complicate their bilateral relationship and their limits and opportunities of a new leadership respective relationships with Russia, but also to role. Italy has been willing to challenge thwart European Union (EU) efforts to Germany on a number of issues, including the consolidate a common approach to energy economic austerity measures that Berlin security and to create a formal energy union. insisted on in response to the Eurozone crisis as In the wake of the United Kingdom’s (U.K.) a condition for financial assistance to ailing historic June 23, 2016 (“Brexit”) referendum to national banks and economies within the leave the EU, the negative impact of this countries that adopted the Euro. Italy has also dispute on EU energy and trade issues could moved to oppose the German private sector- become heightened. The U.K., with its backed decision by a consortium of German liberalized energy market, will no longer play a companies to finance and construct Nord direct role in EU energy policy. Clashes over Stream 2 and has accused the European Nord Stream 2 and relations with Russia could Commission of adopting double standards in exacerbate the EU’s cleavages, exactly at a time when the remaining EU member Giovanna De Maio is an Italian Ph.D. countries––especially Italy and Germany, student in International Studies at the which were two of the original six founding University of Naples L’Orientale. Her countries of the European customs union and research deals with Russian politics in single market––need to pull together. Eastern Europe and perceptions of Ukraine following the events of 2013-2014 This paper examines the factors that have Euromaidan unrest. De Maio was a special contributed to the German-Italian dispute over Guest at the Center on the U.S. and Europe Nord Stream 2, including their respective at Brookings in 2016. relations with Russia. It also analyzes their U.S. - EUROPE WORKING PAPER 1 not blocking the project. Germany has pushed transit revenues for Ukraine at a juncture of back on both fronts. Meanwhile Russia, for its acute economic crisis, following Russia’s part, has tried to find ways to take advantage annexation of Crimea in March 2014 and the of the disagreement between Italy and subsequent war in Ukraine’s Donbas region.2 Germany and consolidate its position as the primary natural gas supplier to Europe. Benefits to the EU energy market Nord Stream 2: The project Analysts who question the long-term commercial viability and energy security Nord Stream 2 is a project proposed by a benefits of Nord Stream 2 usually point out that consortium of companies led by Russia’s gas Europe’s gas demand has been depressed monopoly, Gazprom, which holds a 50 percent since the 2008 economic crisis. However, the stake in the venture. The other 50 percent is core goal of Nord Stream 2 is to replace equally divided among Germany’s BASF. and declining volumes of European domestic fossil E.ON, France’s Engie, Austria’s OMV, and Royal fuel production, and to meet new, albeit Dutch Shell. The project would expand and limited, demand for gas that will be generated complement the Nord Stream 1 pipeline that is by Germany and some other EU member already in operation transporting natural gas states phasing out nuclear power.3 The from Russia directly to Germany across the majority of EU member states are projected, Baltic Sea. Like Nord Stream 1, the second under most scenarios, to remain dependent on pipeline would bypass the longstanding gas significant imports of Russian gas until at least transit systems of Ukraine, the Czech Republic, 2030.4 Moreover, absent drastic changes in and Slovakia, and pump 55 billion cubic energy consumption, the European gas supply meters (bcm) of Russian gas to Germany.1 The mix—which includes a significant share of two main points of contention at the EU level Russian gas—is not expected to change have been the prospect that Nord Stream 2 will much.5 increase rather than reduce EU countries’ dependence on Russian gas and the loss of 4 See Ralf Dickel, Elham Hassanzadeh, James Henderson, 1 Severin Fisher, “Nord Stream 2: Europe’s lack of Trust in Anouk Honoré, Laura El-Katiri, Simon Pirani, Howard its market model,” Policy perspectives Vol. 4/4, CSS ETH Rogers, Jonathan Stern & Katja Yafimava, “Reducing Zurich, March 2016. European Dependence on Russian Gas: Distinguishing 2 For further readings on the debate about Nord Stream 2 Natural Gas Security from Geopolitics,” OIES Paper 93. see Andreas Goldthau: “Assessing Nord Stream 2: Oxford: Oxford Institute for Energy Studies, 2014, regulation, geopolitics & energy security in the EU, https://www.oxfordenergy.org/wpcms/wp- Central Eastern Europe & the UK,” Strategy Paper 10, content/uploads/2014/10/NG-92.pdf. Department of War Studies & King’s Russia Institute, 5 Tim Boersma, Tatiana Mitrova, Geert Greving, Anna 2016. Galkina, “The Impact of the Crisis in Ukraine on the 3 Tim Boersma, “Further reduction of Dutch natural gas European Gas Market,” Policy Brief, October 2014, production: The end of an era?,” Brookings Up Front, http://www.brookings.edu/research/papers/2014/10/eu June 2015, http://www.brookings.edu/blogs/up- ropean-gas-market-import-dependence. front/posts/2015/06/26-dutch-natural-gas-production- boersma. U.S. – EUROPE WORKING P APER 2 Nord Stream 2’s utility is also questioned in light Stream 1 pipeline by the EU Commission. The of the fact that the full capacity of the Nord Commission’s legal service has since issued Stream 1 pipeline has not been fully-utilized, opinions in defense of Nord Stream 2 that since the consortium has only secured access suggest EU energy market rules also do not to 50 percent of the OPAL pipeline that apply in the case of the second pipeline–– connects Nord Stream 1 to onshore gas transit raising the prospect of another official and distribution networks. This is, however, due exemption from the EU Third Energy Package.8 to anti-monopoly limitations imposed by the EU’s Third Energy Package. In accordance with Bypassing Ukraine these provisions, the companies in the Nord Stream 1 consortium are precluded from using Since the crisis in Ukraine, many EU member the pipeline’s full capacity and must make the states—not just Italy––have pointed out the additional 50 percent available to other gas political incoherence of building a new suppliers.6 pipeline that clearly benefits Russia’s energy sector at a time when Russia is subject to EU Compliance with the EU Third Energy and other international sanctions after the Package regulation annexation of Crimea. The EU has also expressed economic as well as political The Third Energy Package is a set of directives support for Ukraine given that the proximate adopted by the EU in 2009 to integrate cause of the crisis and ensuing war in Donbas national gas markets.7 The package represents was Ukrainian and EU efforts in 2013 to the toughest hurdle for Gazprom’s investments conclude an association agreement and a in Europe because it stipulates that gas deep and comprehensive trade agreement production and transmission must be (DCFTA). The construction of Nord Stream 2 managed by two different entities. In addition, would create a permanent alternative gas third-party access to pipeline networks must be export route from Russia to Europe that would provided to competing gas suppliers. In 2011- eclipse the existing pipeline network across 2012, Gazprom was granted an exemption Ukraine. As a result, Kiev would lose over $2 from the application of the Third Energy billion annually in transit revenues.9 After the Package for the construction of the Nord construction of Nord Stream 1, Poland had a similar experience in 2014.10 Ukraine would also 6 Vladimir Socor, “Gazprom Required to De-Monopolize other major pipeline projects, including Nord Stream 1 Access to German OPAL and NEL Pipelines,” Eurasia Daily and TAP, exemptions have been granted. That also raises Monitor, Volume 9, Issue 56, March 2012. questions on how these cases compare to Nord Stream 2 7 The EU energy liberalization agenda started in 2009. For and about the effectiveness of the EU law—in the sense more background see Tim Boersma “Energy Security and that it should not be influenced by politics. For more Natural Gas Markets in Europe Lessons from the EU and details in this issue, see Sijbren De Jong, “Why Europe the United States,” Routledge 2015. should fight Nord Stream II,” EUobserver, February 2016 https://www.routledge.com/Energy-Security-and- http://europa.eu/rapid/press-release_IP-14-585_en.htm. Natural-Gas-Markets-in-Europe-Lessons-from-the- 9 Interfax Ukraine EU/Boersma/p/book/9781138795129. http://en.interfax.com.ua/news/economic/289356.html. 8 This is a major gray area, and lawyers will have to figure 10 Strzelecki M., Martewicz M., “Gazprom Limits Polish out whether or not the consortium will be exempted. For Gas Supplies as Reverse Flows Halt,” Bloomberg, U.S. – EUROPE WORKING P APER 3 likely find itself cut off from Russian gas supplies transit country for Russian gas will be reduced for its own domestic consumption.
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