St. Petersburg International Economic Forum

Marcel Kramer, Chief Executive Officer of South Stream and Alexei Miller, Deputy Chairman of the Board of Directors, Chairman of the Management Committee of Gazprom JSC attend the St. Petersburg International Economic Forum (SPIEF)

This second of three articles on how Gazprom is attempting to revamp its natural gas export strategy in Europe addresses a crucial element for the strategy’s success: Gazprom’s accumulation of gas storage capacity in Germany.

Driven by the fact that many governments in OECD Europe have made commitments to reduce carbon dioxide emissions to 20 % below 1990 levels by 2020, natural gas is becoming a more important European energy source. In particular, this holds true for Germany with its aggressive push toward renewables and simultaneous phase-out of nuclear energy by 2022. In this context, natural gas power generation is designated to replace more carbon-intensive coal-fired power generation and, most importantly, serve as a base-load and backup for intermittent generation from renewable energy sources. The following graphic illustrates this, projecting a steadily increasing share of natural gas in electric power consumption in Europe.

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Consequently, the expected natural gas demand increase will have to be satisfied. As pointed out in the first article on Gazprom’s adjusted natural gas export strategy in Europe, Germany and other Western EU countries with a relatively small rate of domestic production in relation to their consumption and without developing existing shale gas reservoirs, will have to import the majority of their natural gas supplies. Naturally, Russia benefiting from its vast pipeline infrastructure already in place is the dominant energy supplier in Europe and the easiest option for Eastern European nations that lack access to LNG or Western European supply. It is in this context that Germany’s gas storage capacity bears significant meaning for Gazprom.

The first article in this series discussed the traditional role of underground gas storage facilities from the importing country’s perspective. However, with regard to natural gas storage capacity, the far more interesting perspective is one from the exporting/producing country, Russia. Jamestown Foundation’s Senior Fellow, Vladimir Socor, addressed this topic in two recently published Eurasia Daily Monitor (EDM) articles. In short, Gazprom, the Kremlin-controlled Russian gas giant, basically assigned to Germany an additional role. Instead of just being Russia’s largest European gas customer, Germany will – knowingly or otherwise – fulfill the role of a transit country for Russian gas to other Central European gas markets beyond Germany. Mr. Socor views this development as a ‘zero-sum transit game’ arguing that “increasing reliance on German transit would correspondingly detract from the massive Ukrainian transit of Russian gas to the European Union.” This assessment appears feasible given the Ukraine’s considerable political risk amid currently escalating tensions and Moscow’s historic natural gas price disagreements with Kiev that have resulted in European supply disruptions. Mr. Socor explains the new gas transit system within Germany as follows:

“Gazprom via Nord Stream is the exclusive provider of Russian gas to OPAL and NEL, the new transit pipelines on German territory. These large-capacity lines are mainly intended to provide transit service for Russian gas across Germany, en route to third countries. (…) Nord Stream’s annual capacity of 55 bcm is identical with OPAL’s and NEL’s combined capacities of 55 bcm. (…) Centrally managing this system through the Nord Stream, OPAL and NEL consortiums, Gazprom is designated as exclusive gas supplier to these transit pipelines. (…) OPAL is slated to feed some volumes (via Gazelle) into the MEGAL pipeline (44-percent French interest), which runs from Bavaria into France. NEL (with 39-percent Dutch and Belgian interests) is planned to reach from northwestern Germany into the gas markets of the Netherlands and Belgium and potentially farther afield. (…) OPAL and NEL would also supply some volumes for consumption in Germany. Both lines are connected with Germany’s internal pipeline grid, including at least five transmission pipelines (JAGAL, MIDAL, STEGAL in the east, WEDAL and Hamburg-Rehden in the west) that are controlled by the Gazprom-Wintershall joint company Gascade Gastransport.”

The following maps show how Nord Stream’s twin lines from Russia under the Baltic Sea feed directly into the OPAL and NEL pipelines, which run southward and westward, respectively, across Germany to third countries. The Gazelle pipeline in the Czech Republic extends the Nord Stream-OPAL corridor, southward and westward into Germany.

Map of the Nord Stream and connecting pipelines

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Source: Wikimedia Commons

Germany’s Gas Pipeline System

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Source: NET4GAS; from Digital News Service

Though Gazprom’s emerging transit pipeline system appears coherently configured around its central feature – that both the OPAL and NEL pipelines can only be sourced with Russian natural gas through the Nord Stream pipeline – development of gas storage capacity becomes critical. Mr. Socor elaborates on the targeted acquisitions of German storage capacity by Gazprom, a point often missing in the public discourse:

“Gazprom is also accumulating gas storage capacities, indispensable to supporting its export and transit operations in Germany. Development of storage capacities had lagged behind pipeline construction in Gazprom’s export strategy in recent years. (…) Storage sites controlled by Gazprom in Germany are planned to operate in correlation with Gazprom-controlled transmission pipelines. (…) This ongoing process adds a long-missing dimension to Gazprom’s export strategy in Europe.”

So, while Gazprom seems to pursue a new risk-adjusted full-blown export strategy to Europe via Germany by becoming simultaneously main shareholder, operator and gas supplier in each of the three transit pipeline consortiums on German soil, as well as legal owner of various gas storage facilities through its fully-owned subsidiary for storage named Astora, the accumulation of gas storage capacity in Germany can be almost viewed as a ‘Trojan Horse’. It happens in plain sight but free from public scrutiny. Gazprom itself offers the ‘security of supply’ argument: “Natural gas storage facilities are pillars of modern energy infrastructure and essential for the security of the future gas supply, and require considerable investment. They provide the only means of catering to seasonal differences in consumption and providing a demand-compliant natural gas supply. Natural gas storage facilities guarantee that the supply of natural gas will be stable and secure throughout Europe – particularly when demand is high. That makes natural gas storage facilities essential to Europe’s energy supply – and that’s why Gazprom Germania continues to develop, coordinate, and invest in natural gas storage projects.”

This line of reasoning is irrefutable in its logic. The problem is throughout the  value chain there is only one dominant player – Gazprom – and risks to the ‘security of supply’ are not diversified among various actors but instead reside entirely with the Russian gas giant. The degree to which Gazprom was able to acquire gas storage facilities at major pipeline interconnectors in Germany is striking. Mr. Socor draws the following conclusion: “The European Union’s Third Legislative Package precludes gas producers and suppliers from controlling the transport and storage infrastructure. Yet, instead of ‘unbundling,’ Gazprom is actually bundling up storage sites along with pipelines under its control in Germany.”

Gazprom’s operational and prospective Underground Gas Storage (UGS) facilities in Europe

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Source: Gazprom

Gazprom’s intentions do not cease here, as the company’s strategy appears to be one of solidifying its dominance in the European gas market for decades to come. Gazprom and Russia are already working on plans to build two additional export pipelines (“Nord Stream #Three and #Four”) and thus double Nord Stream’s export capacity to Europe.