1. Nord Stream 2 – A risk for the internal market and security of supply?
Georg Zachmann
Bruegel, brussels-based Economic policy Think Tank, not only academic, but also policy and blog
All our research is open
Paper of larger ongoing research project extending beyond Europe

2. Starting Point: Limited West to East connections
NEL 20bcm
NETRA 21bcm
Only about 110 bcm can flow from West to East
MIDAL 13bcm
MEGAL 22bcm
Transitgas 35bcm
Map: ENTSO-G

3. 63 bcm
38 bcm
36 bcm 12
4.5
7.5
2.7
3.2
39.1*
10.4
****
2.8 **
7.3
18.4
***
36.6
*****
Current situation
Russian gas transited through NS2 (bcm)
Russian gas transited through Belarus (bcm)
Russian gas transited through Ukraine (bcm)
East-West capacity: 111 bcm
* Italy: minus 7 bcm from Libya, plus 0.7 for Slovenia
** All Balkans
*** Ukraine and Moldova
**** Austria and Switzerland
***** half of German demand
0.2
Other imports
Map: SWP
net consumption 2015: eni WOGR16
gas flows 2015: IEA
Total consumption in 2015 East of the red line is bcm

4. With NordStream2 Belarus-transit continues
36 bcm 12
4.5
7.5
2.7
3.2
39.1
10.4
2.8
7.3
18.4
36.6
With NordStream2
0.2
110 bcm
Map: SWP
Belarus-transit continues
Ukraine-transit only for SEE

5. Thought experiment: Only NordStream2
110 bcm 12
36.6
7.5
18.4
4.5
10.4
7.3
0.2
39.1
2.8
East-West capacity: 111 bcm
2.7
3.2
Map: SWP
All Nord Stream 2 gas first sent to NWE to outcompete NL, NO and LNG -> low prices in NWE
Traders buy gas in NWE and bring up to 110 bcm to East << 145 bcm of demand
This induces congestion from West to East (in Germany)
Gazprom can ask higher prices in East and controls their security of supply

6. Conclusion
Risk that Nord Stream 2 can be used to separate markets and exercise market power in CEE, SEE and Italy and to cut supplies to Ukraine
This could be mitigated by:
additional pipeline capacity in West->East direction
alternative import capacities for the region (e.g., southern gas corridor)
allowing full “netting” of pipeline capacities (a one-sided flow increases the accounting capacity in the reverse direction and flows)
But those projects do not come for free, they actually become less competitive through Nord Stream 2, because if they are built, Gazprom with its lower cost and higher Nord Stream 2 volumes will lower prices and make the alternative pipelines uncompetitive (see Lithuania LNG example)
Should we allow Nord Stream 2 in the first place?
Nord Stream 2 involves some risk, that can be mitigated, at some cost

7. The case for/against Nord Stream 2
Germany gains
Network revenues
Lower gas prices
Possibly, lower transit cost
Price discrimination
Trading business
Possibly Security
But:
Network cost increase:
NEP w/o NS2: €3.9 bn,
NEP w NS2: €4.4 bn
CEE/SEE/IT loses
Network revenues
due to higher gas prices
DE + transit cost
or even monopolistic pricing
Security
will be at end of the pipe
Russia gains
No transit rent to Ukraine
Market power in CEE/SEE
higher prices
and/or political concessions (esp. in UA)
Political repercussions:
Project by DE and RU at the expense of the CEE might derail EU energy collaboration (RES, IEM)
Back to coal in the East?

8. Back-up DE and AT have no overbooking-and-buyback rules
Bottlenecks largely in DE, but cross-border cot allocation only theoretical -> hard fro CEE/SEE to build non-commercial pipelines in DE (like MEGAL in the past)
Seasonal flows could even induce more congestion; but, storage could reduce market power
Small pipelines can have an above-proportionate impact to lower market power
gas supply in North Western Europe declines