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Is Nord Stream 2 really needed?

Rising liquefied natural gas supplies to Europe and better gas interconnection raise more doubts about the project

When a Qatargas-owned Q-Flex vessel berthed at Poland's new Świnoujście LNG terminal in the Baltic Sea in February, it marked a new step in the region's efforts to end its long and resented dependence on gas piped from Russia.

The biggest such terminal in northern and central eastern Europe, Świnoujście can handle methane carriers with a capacity of between 120,000 cubic metres and, in the case of the Q-Flex class, 217,000 cm. As full commercial operations develop at Świnoujście during the rest of 2016, the need for Gazprom's gas will continue to diminish.

As Jan Chadam, president of terminal operator Polskie LNG, pointed out at the time of the inaugural berthing: "The receiving terminal's potential makes us an important player in energy independence in the whole region."

The collapse in the landed cost of LNG in Europe has combined with the proliferation of new terminals in the gas-hungry Baltic nations to spark a sharp debate in Brussels about the economics of Russia's contentious Nord Stream 2 gas pipeline. It would run directly into Germany, contrary to official EU policy formulated in the wake of the invasion of Ukraine.

The debate has come to such a pitch that Germany increasingly finds itself offside with Spain, whose MidCat pipeline across the Pyrenees would help undercut the need for Nord Stream 2; with most Baltic countries; with the US; and with the European Commission.

In late July, Slovakia's Maroš Šefčovič, vice-president of the European Commission for Energy, openly attacked the entire rationale for the proposed Nord Gas 2 project because of the transformation taking place in global LNG markets. As he told French business newspaper Les Echos, the original basis for the pipeline has been undermined by the approximately 50% fall in the cost of seaborne gas deliveries in the past few years as well as by the mushrooming of receiving terminals around the Baltic Sea and the east of the Mediterranean, with yet more on the drawing board.

Thanks to LNG, assumptions that gas should be delivered through pipelines under fixed long-term contracts are now passé, argues the EU’s commissioner for energy

"Prices are very competitive. And Australia is on the point of overtaking Qatar as the world's leading exporter," he said. Assumptions that gas should be delivered through pipelines under fixed long-term contracts are now passé, he suggested.

The combined capacity of the Baltics' LNG infrastructure is indeed rising rapidly. Two terminals alone-Świnoujście and the new floating Klaipeda terminal in Lithuania, which opened in late 2014 with a maximum capacity of nearly 4bn cm a year-have between them added 7bn cm/y of LNG capacity to the region in the past two years.

The Klaipeda terminal alone shows how effective the new LNG infrastructure can be. According to the Lithuanian government, in 2016 it will now be able to import at least half of its gas needs from Norway. "[This] will put an end to the long-lasting dominance of Russian gas on the Lithuanian market," noted Agata Strachota, energy specialist at Poland's Centre for Eastern Studies (OSW), in a research paper in April.

Part-funded by EU capital, a network of terminals is developing in the region. Świnoujście, which may soon expand with the installation of a third tank, and Klaipeda join other existing terminals in the region-Snøhvit in Norway, Brunnsviksholme in Sweden, and Zeebrugge in Belgium. And a further five are either under construction or in the planning stage.

Meantime, LNG shipments are on the rise. Boosted by two large Australian terminals that started up earlier this year, global export potential is predicted to rise by 40% between now and 2020. This increase will come mainly from Qatar, Australia and the US, the last as more infrastructure comes on stream, further supporting.

"The traditional way of exchanging gas is going to give way to global market mechanisms, as [it does] for petrol," Šefčovič told Les Echos.

Others also see the opportunity. "The presence of new players and the increased volumes of gas available on the market will most likely lead to an evolution of the rules of LNG trade. Contracts will become more flexible and price formulas will change," wrote Strachota, echoing views held across the industry.

Not in the pipeline yet

Australia alone could probably scupper much of the argument for Nord Stream 2-simply through the volumes it adds to the market, freeing up cargoes for shipment to Europe. In 2015, its LNG plants exported A$17bn ($12.8bn) worth of gas. By 2019, Australia will be exporting 85m tonnes a year. Unless Asian demand recovers more swiftly than expected, some of this could end up in Europe.

Germany, though, which has a strong economic interest in Nord Stream 2, is still arguing its case with Brussels, though the withdrawal from the project of two of its companies-E.ON and Wintershall-might lessen its urgency.

Berlin certainly has a fight on the matter with the US. In May, America's special envoy and coordinator for international affairs, Amos Hochstein, pointed out that the existing Nord Stream pipeline isn't even running at full capacity. "Nobody spends money building pipelines in a low oil-price environment when you already have a pipeline that works just fine," he said bluntly.

Few forecasts see a burning need for more Russian gas. Among other energy think tanks, the International Energy Agency predicts that demand for gas in Europe will in fact stabilise over the next few years as nations steadily become more energy-efficient-though this is hardly an argument for building more LNG capacity.

Indeed, that might still be the undoing of Spain's proposed MidCat pipeline across the Pyrenees. The EU strongly supports the $3.36bn project, saying it let regasified supplies reach further in-land, reducing dependence on Russian gas. Spain's existing chain of LNG terminals combined with its network of pipelines from Africa would, it says, have a total import capacity of about 80bn cm/y.

France's Commission de Régulation de l' énergie (CRE), however, repudiates the whole idea. "The Spanish energy commissioner [Miguel Arias Canete] pushes this project," said CRE president Philippe de Ladoucette recently. "But today there is no economic need for it." France would have to pay €2bn to the project as well, he says-too much.

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