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Hydrocarbons and the Turkey – Cyprus relations

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By Floros Flouros(*) and Dr. Athanasios Dagoumas

In this study, the importance of HydroCarbon (HxCY) exploration in Exclusive Economic Zones (EEZ) and most particularly its implication on the involved countries is examined. Moreover, it is well known that Cyprus has been in conflict and confrontation with Turkey during the last decades. It will be argued that the continuation of the HxCY exploration from Cyprus inside its EEZ will strengthen its position with regard to Turkey which means that it will give to the Cyprus Republic a competitive advantage versus Turkey.

The Critical Success Factors (CSF) that affect positively the Cyprus-Turkey relation in the case of HxCY exploration in Cyprus’ EEZ will be identified and then prioritized/ranked by importance/contribution to the examined relation. In addition, a list of export options for the Cypriot government is also considered and it will be investigated whether political or economic/financial factors should be taken into consideration for the choice of such export options.

Framework of analysis

Literature Review

The Eastern Mediterranean region has been facing challenges also related to the energy landscape. Since the economy is foreseen to grow further while at the same time the population of the region is expected to grow from 45.3 mill in 2010 to around 60 mill in 2030, energy demand should also increase significantly over the next years.

On the basis of the Exclusive Economic Law (Law no. 64(I) 2004 amended by 2014 Law), “Cyprus declared its EEZ, the outer limit of which shall not extend beyond 200 nautical miles from the baselines” from which “the breadth of territorial sea is measured in accordance with UNCLOS” [1].

In Table 1 short summary is presented regarding the agreements that Cyprus has concluded so far in the East Mediterranean region with its neighboring countries like Israel, Egypt, and Lebanon but not with Greece, Syria and Turkey and the Palestinian Authority.

Table 1: Agreements between Cyprus and other East Mediterranean countries

Country Date of delimitation agreement/EEZ Remarks
Egypt

March 2003

May 2006

Delimitation Agreement entered into force

Agreement about cross-median line HxCY resources

Lebanon January 2007

Delimitation Agreement entered into force

Not ratified by Lebanon yet. Some difficulties still exist, due to ongoing dispute between Lebanon and Israel about their EEZ settlement

Israel February 2011

Delimitation Agreement entered into force

Even though Israel not signed UNCLOS yet

Greece   Not yet (!)
Syria   Not yet
Turkey   Not yet
The Palestinian Authority   Not yet

In Figure 1, the Maritime Boundaries in the Eastern Mediterranean region are presented [2].

Figure 1: Maritime boundaries and Exploration blocks in East Med at end-2012

cyfig1

(Source: Darbouche at al., 2012).

Turkey considers that the Northern part of Cyprus is of geostrategic importance for at least two reasons: it affects Greek-Turkish relations and it is of global geopolitical interest due to the location [3].

Despite Turkey’s recent activities in Cyprus’ EEZ, that are mainly aimed at preventing Cyprus from exercising its sovereign rights in its EEZ, all licensed companies finally “proceed with their exploration programs, in line with the licenses granted by the competent authorities of the Government” [1].

Finally, it is important to identify those Critical Success Factors (CSFs) that affect positively the Cyprus-Turkey relation in the case of HxCY explorations that have started in Cyprus’ EEZ. As indicated in the previous Table 2.l, CSFs are those key variables that have a tremendous impact on how successfully and effectively an organization meets its mission and in the examined case how Cyprus can continue exploration activities in its EEZ leveraging such a success to its relations with Turkey.

The Research Question

Further to the previous analysis, it is now necessary to address the Research Question and then to search for the useful data and information to answer it. The Research Question is considered very crucial even though the least addressed part of the research process [4].

In the current case, the Research Question can be defined as below:

Identify the Critical Success Factors (CSFs) that would affect positively the Cyprus-Turkey relations in the case of Hydrocarbon Exploration in Cyprus’ Exclusive Economic Zone (EEZ).

Empirical research

  • General
  • The identity of the research which took place is presented as following:
  • Research: Qualitative.
  • Type/Method: Interview (one – to – one and electronic).
  • Type of Interview: Semi structured.
  • Sampling: Purposeful sampling and most particular snowball effect.
  • Size of sample: As mentioned above; the sampling is terminated when no new info is forthcoming.
  • Selection criteria: relevant to the field, highly educated (academic degree and over), ethnicity of Cypriot, Greek, Turkish, other.
  • Period: beginning of May – end of July 2015 (3 months).

Analysis

The results are presented in Figure 2, in which EU and USA are considered as the most influencing actors in such cases, since they have been mentioned by almost all the interviewees. Following, Cyprus and Turkey are those countries that are supposed to affect more Cyprus in its actions related to the HxCy exploration and furthermore in finding choices on how to export any quantities from its territory in the near future.

At the same time, commercial companies like those participating in the license part, exploration activities, etc. are also considered that they play an important role in the final plan. Finally, other players mentioned during the interviews are counties like Israel, Greece, Egypt and the Northern part of Cyprus.

Figure 2: Main Stakeholders involved in the exploration and trading gas in East Med

cyfig2

(Source: Authors, 2015).

Stakeholders as institutions like EU and UN are believed to be important factors that can affect the progress and success of the projects and any exports in the region. Technical and geological issues, like the depth of the sea, the morphology of the surface, whether onshore or offshore facilities are all considered by the responders as critical parameters for the preparation, design and evaluation of projects in the gas fields in the Eastern Mediterranean region as per the survey took place during the period May-July 2015.

Figure 3: Critical Success Factors (CSFs)

cyfig3

(Source: Authors, 2015).

Regarding the possible options the Cyprus to export gas, in Table 2 are presented several answers from the responders during the survey:

Table 2: Answers from interviewees regarding better options for Cyprus to export gas

Answer 1 Answer 2 Answer 3 Answer 4 Answer 5 Answer 6
Pipeline to Jordan From netback view: Egypt could give the best ROI/netback. However, there is a risk since climate is not the best. It looks the most reasonable option but not sure if it can be finally done. LNG is not recommended due to small qties. The LNG looks problematic. There is a need for infrastructure. LNG at Vasilikos: it adds power to Cyprus (having the infrastructure at your own land). There is space available at Cyprus. The ideal would be that CY-TR-ISR to cooperate closely.
Pipeline to the Palestinian Administration in the West Bank. From the risk view: the LNG looks preferable, which is not possible to be done (taking into consideration existing amount of gas). CY-Greece pipeline: Does US support it, since it could compete and replace Russian gas? Alternative ways for development needed and the needs for infrastructure that make sense to export the NG. Pipeline to Cyprus due to the distance and geopolitical reasons. LNG or pipeline is a function of qties (need to be high).
Pipeline to the Gaza Strip. If qties 3 tcf or more, then LNG. Thus, taking into consideration existing amount of gas it does not look a choice (and additionally Noble does not have any experience with LNG). Exports to Egypt: yes (+) while Exports to Turkey: neutral (-).

Pipes and LNG are f(qty, market prices).

Export to Greece is not recommended because it would have serious technical problems (deep sea, seismic region, distance, etc) and thus a huge cost

If you want to add value to Turkey, then you decide to pass the pipeline through it. Thus, the question is whether it can go to Greece. Israel-Cyprus-Greece electricity interconnector is a political issue.
Pipeline to Turkey.

Pipeline to Greece: no way. Huge cost, big risk.

Turkey: it could be an option (in theory) but Turkey would increase its power in the region.

Exports to Palestine is not recommended for Israel. Export to Egypt: yes, because of existing unutilized infrastructure and Egypt is looking for NG to support its growth plans. It is feasible. Sisi needs supporters/allies. Depends on negotiations for the solution of the Cyprus problem  

(Source: Authors, 2015).

While energy supply is important for the economic growth of a country, there is a correlation between energy use and GNP. Since GNP is not the only factor “of level of civilization or quality of life in a country”, it is necessary “when planning for energy needs of a nation to consider alternative socioeconomic models, with emphasis on the socioeconomics and not only the economics” [5].

If a solution is not found in the Cyprus problem then it is impossible to see any cooperation with Turkey. Regarding export options for Cyprus, he mentioned that apart from the local market it can be also said that “the preferred monetization option is regional pipelines” and that Egypt “has been identified as the main export target for the project, together with the Cyprus domestic market” [1].

Cyprus mentioned that “Cyprus needs to continue trying to convenience Turkey on the advantages it stands to gain from adopting a policy based on international law and from contributing to the settlement of the Cyprus problem; a settlement that could allow the Turkish Cypriots to share the benefits of Cyprus’ natural resources and wealth [6].

Findings

There have been several cases in which the decision to start and build a project related to the energy (i.e. pipeline Baku-Tbilisi-Ceyhan, BTC) was taken based on political and geopolitical parameters and reasons and not economical-financial ones, since the later did not support the continuation of the project [7]. It has been seen an inclination from the state to “use disruption of natural gas supply in order to promote foreign policy goals” which is supporting the idea of political domination when decisions are taken in energy policy of a country [8].

Based on the results of the qualitative research the CSFs that would affect positively the Cyprus-Turkey relation in the case of HxCY in Cyprus’ EEZ can be summarized in terms of importance as following:

  • Most of the responds are related to the political/geopolitical environment as the most important success factor.
  • Stakeholders as institutions like EU and UN are believed to be important factors, also.
  • Geological issues like the depth of the sea, the morphology of the surface
  • Technological issues as whether the facilities are onshore or offshore
  • Commercial and economic issues, related to exploration costs, current and future prices in the Oil and Gas markets, incentives and taxation policy from the government, participation of the government into joint venture schemes with private companies, etc.

A short/medium term approach and a long term one had been considered as following:

Short/Medium term approach: due to the current status of Cyprus’ political relations with its neighbor’s, the liquefaction seems to be the only feasible option for gas exports for the country. Thus, there can be two subsequent options:

  • Develop a joint liquefaction facility with Israel. This would help Cyprus to dispose of enough gas to synergies for its own LNG export projects. In addition, it would be EU’s interest since PCIs are already a reality and it also would assist strengthen EU’s security through diversification of sources. However, such a choice require huge investments while gas prices have been weakened radically during 2015.
  • Participate in a construction scheme to build an export terminal in the Jordanian Free Economic Zone at Aqaba. This would help Jordan to get gas supplies through pipeline and thus serve also local needs.
  • Continue efforts to participate into energy schemes, which to a great extent are “partnerships of an economic nature, can ease tensions, freeze or even terminate conflicts of a political nature” [1].

Long term approach: The regional geopolitical complexity in the Eastern Mediterranean is already affecting the progress in export gas in the area and as soon as regional conflicts are resolved then the pace of development will be increased significantly.

Cyprus needs to “continue trying to convenience Turkey on the advantages it stands to gain from adopting a policy based on international law and from contributing to the settlement of the Cyprus problem”; by this, it could possible for the Turkish Cypriots to “share the benefits of Cyprus’ natural resources and wealth” [6].

Conclusions

Theoretical Findings

Based on the analysis herein, it can be said that any continuation of HxCY Exploration from Cyprus inside its EEZ can strengthen its position with regard to Turkey and this could be supported under conditions like the solidarity of the EU and support from US, the close cooperation with the neighboring counties of Israel and Egypt, the participation of international companies in available business plans in country’s territory and finally the continuation of the efforts of Cyprus towards the Cyprus problem which will eventually allow the Turkish Cypriots to benefit of Cyprus’ natural resources and wealth.

Based on the analysis presented in this study, it has been suggested that the LNG option seems to be one of the most realistic and promising options for Cyprus to cooperate with its neighbor country Israel provided that the state of Israel can relief any concerns about security and sovereignty. Then, the onshore liquefaction at Cyprus would be decided whether it would be related to the existing field of Aphrodite or others to come on stream in the coming years.

The other option for building FLNG in the Mediterranean or Red Sea could alleviate Israel’s fears and provide additional paths to new markets such as Asian avoiding the transportation through the Suez Canal.

Cyprus has decided to explore the possibility of exporting NG discovered in the Aphrodite field to Egypt through an underwater pipeline, while NG from the Aphrodite field will also be brought to mainland Cyprus for power-generation purposes. He also mentioned that the government of Cyprus “does not exclude prospects for energy cooperation with Turkey in the future provided that the Cyprus problem is first settled” which is a pre-condition [5].

Based on the literature and the analysis took place, the decision making for a country whether to proceed with an investment or project in the energy sector might be a combination of several parameters such as political or economic, geographical, historical, social, technological. It is also related to each country, since each one designs and follows its own energy policy and it will have differences from those of other neighbor countries.

Policy Proposals

The recent discoveries of HxCY in the territory of Israel and Cyprus, with a good probability in the future for counties like Egypt, Lebanon and Greece to follow, offer substantial opportunities to further deepen relations between them. Even though current quantities do not seriously affect global correlations, however the power of the closest markets shows the importance of energy as a synergist factor and this is important to be taken under consideration by the governments and authorities in the region.

Greece hardly can substitute Turkey in the planning of Israel and Egypt; however, it can be proved as a reliable partner whose opinion continues to have a casting value in regional affairs. Greece has shown that can achieve tangible results through practical agreements.

Actions that Greece and Cyprus take in pursuit of broader partnerships, initially to start a climate of mutual understanding, and then to design the conditions for foreign investments are deemed good. Without having any given differences in the Eastern Mediterranean region, the main challenge is to turn to normality amid intense pressure on societies and regimes.

Experienced diplomats note that Cyprus need to continue to build regional alliances with Israel and Egypt but at the same time to emphasize the development of its exploration program. During this period, time seem to be working in favor of Cyprus, while the same sources estimate that it is not easy for one company to lease drilling platform to carry out research in an EEZ internationally recognized as belonging to the Republic of Cyprus.

By invoking international law, being on military alert, strengthening strategic alliances with regional players, and harmonizing with the geostrategic interests of the US and EU (as well as the economic interests of large international companies) in the region, Greece, Cyprus and Egypt are taking cautious and systematic steps during a difficult period hoping to find more substantial backing among their allies and partners. Although the research was implemented before the discovery of the Zohr field in Egypt, this development works in favor of deepening the cooperation among Egypt, Cyprus and Greece. Some projects, such as the East-Med pipeline, increase significantly their maturity and possibility to be implemented, as disadvantages over the required gas volumes are surpassed, while they could guarantee considerable financing from the European Commission as a Project of Common Interest (PCI), towards enhancing European energy security and a functioning internal energy market.


(*) Floros Flouros has studied Chemical Engineering at the Aristotle University,  Nottingham Trent University, UK and the University of Peloponnese, Greece.  Floros has held several progressive managerial roles in the chemicals, minerals and polymers industry for the last 17 consecutive years. Email: floros.flouros[at]ntualumni.org.uk

REFERENCES

[1] Himonas, S. 2015. Interview during the Qualitative Research of this subject.

[2] Darbouche, H., El-Katiri, L., Fattouh, B. 2012. East Mediterranean Gas: what kind of a game-changer?. Oxford Institute for Energy Studies. NG71.

[3] Murinson, A. (2006). The strategic depth doctrine of Turkish foreign policy. Middle Eastern Studies, 42(6), 945-964.

[4] Haverland, M. 2010. Conceiving and Designing Political Science Research: Perspectives from Europe. European Political Science, 9: 488-494. Doi:10.1057/eps.2010.61.

[5] Sonnino, T. 1977. A National Energy Policy for Israel. Energy, 2: 141-148.

[6] Zodiates, G. 2015. Interview during the Qualitative Research of this subject.

[7] Nourzhanov, K. 2006. Caspian Oil: geopolitical dreams and real issues, Australian Journal of International Affairs, 60: 59-66.

[8] Shaffer, B. 2011. Israel-New natural gas producer in the Mediterranean. Energy Policy, 39: 5379-5387.

First published by Geopolitics of Energy (GoE, March 2016) under the title: “Identification of the Critical Success Factors that affect positively the Cyprus Turkey Relations in the case of the Hydrocarbons Exploration in Cyprus’ Exclusive Economic Zone (EEZ)”. Republished by the authors permission.

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China’s Unorthodox Intervention in the Global Oil Market

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Apparently, China has been the talk of the town for quite some time. While the entire yesteryear passed in a flurry of blame game over the pandemic, this year has been nothing short of a blessing for Xi’s regime. However, while China rapidly compensated for the drastic slump last year, the bustling economy has now cooled down – though a bit prematurely. Due to the expansive outbreak of the delta variant, China – like most countries around the world – now faces surging inflation and a crippling shortage of raw materials. However, while one might get a bolder vibe from China’s recent crackdown on industrial giants, the supposed Second Cultural Revolution’ seems on a divergent path from the government’s latest aspirations for the domestic industry.

China seems to be on a path to harness growth that appears to be slowing down as the global economy battles uncertainty. However, while many expected China to take orthodox measures to prolong growth, hardly anyone expected a drastic change of strategy: intervening in a close-knitted global market like never before.

China recently posted its most robust trade surplus in history, with a record rise in exports jumping 25.6% from last year to stand at $294.3; $10 billion more than any previous month. However, while the glowing figures imply sturdiness, the underlying fragility of the Chinese economy is not disguised. In the past few months, China’s production engine has taken a toll as surging energy costs have inhibited production capacity. The factory-gate inflation stands at a 13-year-high which has forced factories to cut output. Amid declining domestic demand due to covid restrictions, manufacturing surveys show that China’s export orders are eroding as supply bottlenecks coupled with energy costs have weighed heavily on the production function. To counter the problem, China recently supplied its reserves into the domestic market; undercutting the surging global price tag dictated by the petroleum giants.

Last Thursday, China’s National Food and Strategic Reserves Administrator made a press release, confirming that the world’s second-largest economy tapped into its crude reserves – estimated at 220 million barrels – to “ease the pressure of rising raw material prices.” While China is known to intervene in commodity markets by using its strategic reserves, for example, Copper, Aluminium, or even grains.

Recently, China tapped into its national reserves to intervene in the global commodity market of industrial metals for the first time since 2010. The intervention was situated as a release to normalize surging metal prices and retain domestic manufacturers’ margins. However,  it is a novelty that a national agency confirmed an active supply of petroleum buffer via an official press conference. And while no additional details were offered, it is presumed by global strategists that the press release referred to the 20-30 million barrels allegedly poured into the domestic industry around mid-July: when Xi’s government offered to supply crude to the OPEC.

Furthermore, China’s Stockpile Agency claimed that through open auctions, China’s reserve crude was intended to “better stabilize the domestic demand and supply.” It was apparent that as China ventured through a supply crunch when Brent Crude – Global Crude Index/Benchmark – breached the $76 bpd mark, the country instead resorted to utilizing its own stockpile instead of relying on expensive imported petroleum. Thus, it shapes a clear picture of how China managed to clock a phenomenal trade surplus despite not importing its usual crude quota.

While it is common knowledge that economies like the US and Europe maintain strategic petroleum reserves, the buffers held by China were utilized to actively manipulate the price in a ‘normalized’ oil market instead of their designated usage in supply crunches or wars. The situation today is anything but critical for the oil market to warrant such an intervention. As OPEC+ has boosted its output by 400,000 bpd starting August, output has bloomed beyond its peak since the price war back in April 2020. While the oil market is still well below the output capacity, mutually curbed by the OPEC+ alliance, the demand is still shaky and an equilibrium seems set. Yet, when we observe China – the world’s largest oil importer – we extricate reason that despite a growing economy, China continues to experience massive shortages: primarily in terms of oil, gas, coal, and electricity.

Furthermore, with the ensue of Hurricane Ida, massive US crude reserves have been wiped which has majorly impacted China as well. The US and China rarely stand on the same page on any front. However, even the White House recently asked OPEC to pump more crude into the market due to the rising gasoline prices in America. The same scenario is panning in China as energy shortages have led to surging costs while domestic demand is diminishing. The brunt is thus falling on the national exchequer: something China is not willing to haggle. While it is highly unorthodox of China to explicitly announce its intervention, many economists believe that it was a deliberate move on part of China’s communist brass to amplify the impact on the market. The plan seemingly worked as Brent fell by $1.36 to stand at $71.24 on Thursday.

If China’s commitment to normalize domestic energy prices is this significant, it is highly likely that another intervention could be pegged later in the fourth quarter. Primarily to counteract the contraction in export orders by cutting imports further to maintain a healthy trade surplus. In my opinion, it is clear that both the US and China are not willing to let Brent (and WTI) breach the $70-$75 bracket as key industries are at stake. However, while one takes a passive approach, the other is touted to go as far as pouring another 10-15 million barrels of crude by the end of 2021. Yet revered global commodity strategists believe that the downturn in prices is “short-lived” just like any other Chinese intervention in a variety of other commodity markets globally. And thus, experts believe that the pump is simply “not enough physical supply” to quite strike a permanent dent in an inherently flawed market mechanism.

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Energy Forum Seeks To Analyze Africa’s Energy Potentials And Utilization

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African Energy Week (AEW) 2021 in Cape Town, fully endorsed by the Government of South Africa, is committed to accelerating Africa’s energy growth with the aim of establishing a secure and sustainable energy future for every individual on the continent. Accordingly, AEW 2021 firmly believes in the role that oil and gas will continue to play in Africa and will emphasise the continent’s upstream market through a collaborative, International Oil Company (IOC) forum. Led by IOC executives, as well as government representatives from notable energy markets in Africa, the IOC forum aims to address the upstream challenges faced in Africa, providing solutions and strategies to drive exploration and make Africa more competitive for investment.

With the discovery of sizeable oil and gas reserves across the continent in recent years, regional and international explorers are turning an eye to the world’s final frontier market – Africa. Nigeria’s 200 trillion cubic feet (tcf) of gas reserves and 37.2 billion barrels of oil (bbl); Mozambique’s 11 tcf of gas; Senegal’s 450 billion cubic meters of gas; Libya’s 48 billion bbl and 53.1 tcf; and Egypt’s 77.2 tcf of gas have all made Africa the ideal destination for hydrocarbon exploration. What’s more, with many African countries making significant steps to enhance their regulatory environments, implementing legislation to create an enabling environment for investment, the continent has become a highly competitive market for exploration and production. Nigeria’s recently implemented Petroleum Industry Bill, Gabon’s new Hydrocarbon Code, and Angola’s inclusive petroleum regulation, to name a few, have all ensured a competitive and highly attractive market.

With the world’s six oil ‘supermajors’ – BP, Chevron, Eni, ExxonMobil, Royal Dutch Shell and TotalEnergies – all actively present in mature and emerging markets across Africa, the continent has become an upstream hotspot. AEW 2021 aims to accelerate this trend, promoting new upstream opportunities and ensuring both National Oil Companies (NOC) and IOCs drive the continent into a new era of energy and economic success. Accordingly, Africa’s premier energy event will host an upstream-dedicated IOC forum in Cape Town, led by IOC executives and government representatives. The IOC forum aims to address key challenges in Africa’s upstream market, whereby the diverse speaker panel will offer up solutions to expand exploration and production, while ensuring the continent remains competitive for investment in a post-COVID-19, energy transition era.

In addition to the discussion on upstream activities, the forum aims to highlight the role of IOCs in enhancing capacity building, whereby emphasis will be placed on IOC-NOC collaboration. IOCs have a critical role to play in Africa, not only regarding resource development, but human capital and local business development. In order for the continent to become truly sustainable and competitive, NOCs require support from IOCs. Accordingly, the forum aims to identify strategies to enhance cooperation and partnerships, with IOCs taking the lead in Africa’s energy development.

“AEW 2021 in Cape Town will offer a real discussion on Africa. Oil and gas are critical in Africa’s development and the African Energy Chamber (AEC) will not succumb to the misguided narrative that Africa should abandon its potential. The IOCs in Africa have demonstrated the continent’s potential, and by sharing strategies to enhance growth, address challenges, and accelerate upstream activities, they will be key drivers in Africa’s energy future. The IOC forum will not only offer a description of African reserves, but will provide clear, attainable solutions to exploitation, exploration and production with the aim of using energy to enact stronger economic growth. By coming to Cape Town, attending the IOC forum, and interacting with African ministers from across the continent, you will be able to be a part of Africa’s energy transformation,” stated NJ Ayuk, Executive Chairman of the AEC.

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Nord Stream 2: A Geopolitical Tension between Russia and Ukraine and the European Dependence

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nord stream

Nord Stream 2 gas pipeline is a 1,230-kilometer direct linkage between the Russian natural gas producers and the consumer market of Europe. The model was made keeping in mind the successful operation of the existing Nord Stream pipeline after a thorough analysis by Nord Stream AG. The main aim of NS2 is said to be the increase in the annual capacity of the existing pipeline up to 110 billion m³. The pipeline starts from the Russian region of Ust-Luga then stretches through the Baltic Sea and ends at the area of Greifswald in Germany. It is due to this route that the project is mainly considered to be controversial. Bypassing directly through the Baltic Sea, the importance of Ukraine for Russia for exporting natural gas to the European market would reduce significantly which will end the $3 billion transit fees gained by the Ukrainian government in the year 2018 alone, causing a sudden and huge strain on the GDP of the country.

This project worth $11 billion would double the market of Russia in Germany which is the largest market in Europe, possessing a key position in international politics. It is said by the Russian officials that the pipeline has almost been completed and it may get operational by the end of August in the year 2021. Some analysts and International Relations experts have considered this as a geopolitical weapon that gives leverage to Russia to influence future events in the region particularly the ones related to the Crimean annexation.

Threat to Ukraine

Recently in a meeting with German Chancellor Angela Merkel, the President of Ukraine appeared to be displeased by the Western recognition of the NS2 pipeline. He called it a “dangerous political weapon” in the hands of the authoritative regime of Russia which has already annexed an integral part of their country to fulfill their geopolitical and economic desires. The desperate opposition of this project by the Ukrainian government has several underlying factors which are very important to discuss.

Firstly, the transit fees earned by Ukraine just by giving passage to the gas going from Russia to Europe make up a fine amount of the GDP of the country. If projects like NS2 get operational then the importance of Ukraine will decline, causing an end to the $3 billion transit fee. Although Russia has ensured to still use Ukrainian passage for the export of their gas, this does not seem to be happening in the future. States are after their national interests and Russia would prefer the direct linkage with the European market instead of paying billions to the Ukrainian government. Currently, out of the quarter of natural gas transported to Europe, around 80% has to pass through the Ukrainian territory.

Secondly, after the expiry of the transit deal between Russia and Ukraine in 2024, it would depend upon the negotiations between the two parties to revive the fate of this deal. Although Kremlin’s Spokespersons have ensured the revival of this deal after its expiry in 2024, debates still exist about the prospects. No one can claim with certitude about the future of this deal between the two states.

Thirdly, Ukraine is intimidated by the future of the country if the Russian gas pipeline bypasses its territory. There already exist many gas-related disputes between the two states which resulted in the cut-off of the gas supply in 2014 and later on in 2015. Russia can pressurize Ukraine for accepting their demands to get their gas supplies back. Recently, Ukraine has started to reduce its dependence on Russian natural gas by switching back to European gas. But this would not be beneficial in any sense if the Russian monopoly over the gas market increases through the NS2 pipeline.

And lastly, the dependence of European markets on Russian gas can undermine the Crimean cause. Once a state has to depend on the other state for the necessities, it has to let go of many important causes and decisions. As Angela Merkel has repeatedly called the NS2 pipeline a geo-economic project rather than a geopolitical “weapon” that can be used by the Russian government as a decisive tool at times of disputes and crises, this already shows the drowning picture of the cause. In addition to this, previously the US administration was very aggressive towards the pipeline but the current government despite its opposition, is unable to do much for stopping the project which can get operational very soon.

Role of US and NS2 Pipeline

The United States of America is well aware of the changing dynamics of the region and the intentions of resurgent Russia. The Republican government under Trump proved to be very destructive for the project. The US did not only oppose the gas pipeline openly but also imposed sanctions on entities aiding Russia in the development of this gas pipeline. In January 2021, Trump imposed sanctions on the gas-pipeline laying ship, “Fortuna” and its owner under the Counter American’s Adversaries Through Sanctions Act (CAATSA). Previously, work on the pipeline had to be suspended as the US imposed sanctions on the main company, Allseas. President Biden was one of the many policy-makers who opposed this pipeline and considered it dangerous for the US and its allies. Although it was not clear what Biden’s policies would be, Blinken ensured to use “persuasive tools” against the pipeline, after acquiring the office. President Biden indeed imposed sanctions on the Russian ships and other companies involved in the laying of pipeline, but analysts think this would not cause any impact on the project as it is almost running towards completion. Rather, anti-sanction policy-makers consider it more important to waive off these sanctions and get into formal negotiation talks with the Russian government.

In May 2021, the President of the US and the Chancellor of Germany gave a joint statement for the agreement signed between the two countries related to the NS2 project. Some of the main features incorporated in the agreement are the announcement of sanctions on Russia in case it violates the peaceful use of the pipeline and utilizes it as a weapon against Ukraine. Germany would not only oppose such a step but would also press on the EU to take counter-measures. Similarly, it was decided to revolutionize the energy sector of Ukraine by the creation of a Green Fund for Ukraine by Germany worth $1 billion. Initially, it was decided that Germany would contribute an amount of $175 million. Also, it is said that Germany would use all its leverage to ensure an extension of the current transit agreement (which is going to expire in 2024) between Russia and Ukraine for at least up to 10 years. This would continue the role played by Ukraine as a transit state, helping its GDP and putting off the security threat over it. There is a sharp criticism on the Biden administration over this agreement which did not involve Poland and Ukraine while deciding their future. Also, the deal does not put any process of hindering the pipeline which is against the aspirations of all Americans and most of its allies.

In addition to limiting the role and influence of Russia in the European continent, the US is also looking forward to the opportunities of fulfilling its national interest. If the US becomes successful in hindering the operation of NS2, it can expand its gas buyers in the European countries. This way, like the post-war era the US can get a strategic and decisive role in this part of the world which can ultimately help it to counter the threats related to the rise of China and the Sino-Russian nexus. We can say that the US cannot only use this as an economic incentive but also utilize its importance in the future of great power rivalry.

Why states are against this Pipeline Project?

Along with the direct impacts of this project on Ukraine and Poland (to some extent). The major concerns of the states which oppose the NS2 pipeline include the additional leverage which Russia will gain when its national gas firm would directly export gas supplies between Russia and the European continent. This may result in a sudden disruption of the supplies, influenced by the changing dynamics of the region. The Russian authorities had cut off the gas supplies of Europe in the winters of 2006 and 2009, leaving millions without gas for days. Similarly, the increased dependence of Europe on Russian gas can be counter-productive and may hinder the interests of the states and the US soon. This situation can be utilized by both Russia and China to exploit the bonding between the US and its allies.

From the security perspective, the presence of Russia and its naval forces can cause a security threat to the states surrounding the Baltic Sea. The unsettled conditions may lead to chaos and problems in the region.

If Russia was to get a high stake in the energy market of Europe, this would also allow it to exploit the situation and create a monopoly over the market. This may not also lead to political outcomes and consequences but can also end the game of local and international gas market players in the continent. This is the biggest threat that is encouraging the US to make NS2 a security threat for itself and its allies.

Way Forward

Keeping in view the nature of international politics and changing economic dimensions to the project, the only possible way forward is an agreement between Russia and the US related to the pipeline and the future of Ukraine. If developments can be made over the existing US-Germany agreement then concerns of the states can be mitigated to a huge degree. The options of imposing sanctions on the pipeline are no more practical and can be counter-productive for the US concerning its allies especially Germany.

Conclusion

The Nord Stream 2 Pipeline despite its economic benefits cannot be separated from its geopolitical aspects and consequences. In international politics, the hardest thing to do is to trust the intentions of the other state, especially when it was a superpower previously and has several examples of violating the sovereignty and rights of neighboring states. But presently, all those who oppose the pipeline have no other option than to allow its proper functioning under certain terms and conditions.

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