Nord Stream 2 Pipeline

Why Europe Loves Natural Gas

One of the main factors driving the energy crisis in Europe is the rise in natural gas prices.

Europe loves natural gas. It gets about a quarter of its energy from it.

And what’s not to love?

It’s a superior form of fuel to oil and coal because of its energy density.

Natural gas is versatile. You can use it to heat your home or to spin a turbine and produce electricity. You can use it to power home cooking appliances and vehicles.

You can also use it to make fertilizer. And that’s crucial for the food production industry, as I wrote a few months ago.

Natural gas also produces less pollution than some other fuels. It emits about half as much carbon dioxide as coal, for example.

The upshot is that European nations wanted to move away from the dirtier, polluting fossil fuels, such as coal and oil, and, in some cases (think Germany), nuclear. So it had every incentive to fall in love with natural gas.

But there was a problem…

You see, there are two ways to move natural gas around. The first is by sea, using liquified natural gas (LNG) carriers.

This option requires an export facility to chill the natural gas down until it becomes liquid. It is then pumped onto these giant boats and shipped across the world.

Then on the other end, you need an import terminal to re-gasify it. All this infrastructure takes billions to make and years to construct.

The second option is much simpler. It involves transporting natural gas via pipeline.

Europe chose the easier way. It imported natural gas from Russia through pipelines.

Russia was right next door, after all. And it produced lots of natural gas.

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From Nord Stream to No Stream

Until recently, Russia was a major exporter of natural gas to the rest of Europe. Last year, the European Union (EU) got roughly 45% of its imported natural gas from Russia, according to the International Energy Agency.

Russian gas reaches Europe via a complex network of pipelines running through eastern Europe.

The most important pipeline is Nord Stream 1. It’s approximately 1,200 kilometers long and runs under the Baltic Sea between Russia and Germany. Up to 170 million cubic meters of gas can flow through Nord Stream 1 daily.

Since it became operational in 2011, more than 441 billion cubic meters of Russian gas have flowed to Europe via Nord Stream 1.

In 2021, Europe imported 155 billion cubic meters of natural gas from Russia. Nearly 40% – 59 billion cubic meters – came through Nord Stream 1.

Nord Stream 1 is owned and operated by Nord Stream AG, whose majority shareholder is the Russian state company Gazprom.

For years, Nord Stream 1 has embodied the tacit deal between Russia and the European Union.

Russia was willing to supply copious amounts of natural gas at favorable prices. It developed infrastructure to take its gas to Europe.

Europe built industries that depend on that cheap supply of Russian gas. And industrial powerhouses, like Germany, built their entire economies around it.

But then, earlier this year, Russia went to war with Ukraine. That changed everything.

The EU slapped Russia with unprecedented sanctions. Russia retaliated by cutting the flow of natural gas via Nord Stream 1 by about 60%.

Then during its annual scheduled maintenance this summer, the pipeline flow dropped to zero. When it came back online, it came back at 40% capacity before dropping to 20%.

Then, at the end of August, Russia shut down the pipeline again, supposedly for maintenance. This shutdown was to last three days. But at writing, the pipeline remains offline.

Russia’s Endgame Could Mean Lights Out for Europe

As a result of all these actions, the European gas price went parabolic this summer. At one point, it cost $340 per megawatt-hour (MWh). That’s 312% higher than in January 2022, before Russia invaded Ukraine.

You can see the huge spike in natural gas prices that coincided with the Nord Stream 1 shutdown in the chart below.

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Now, while the price has dropped back somewhat in recent weeks, as Europe secures alternative supplies, the uncertainty surrounding their natural gas supply is a huge concern for the eurozone countries.

Consider this…

At about $12 per megawatt-hour (MWh) in November 2021, the eurozone’s energy import costs were $200 billion. That’s 1.6% of its GDP.

If gas settles at about $200 per MWh, this number will increase by roughly $700 billion to 7% of GDP.

At $300 per MWh, it would rise by about $900 billion. That’s a crippling 8.5% of its GDP.

So, Russia’s endgame is simple – to keep gas prices as high as possible to inflict maximum pain on Europe, so it eases off on sanctions.

Energy Rations Becoming a Reality

The way things are going, it looks inevitable that Europe will have to ration gas and energy come winter.

Germany is already discussing its options. German politicians are trying to decide how German industry will be prioritized. Difficult questions are being asked.

Questions like… Who gets the gas when there is a shortage? Who has to close the shop?

But whichever way they slice it, it will likely end up plunging Europe’s largest economy into crisis.

And if that happens, the entire European Union – and potentially the entire world – is in trouble.

Tomorrow, in the second part of this two-part essay, I’ll show you how to turn rising energy prices into profits in your portfolio.

Regards,

Nomi Prins
Editor, Inside Wall Street with Nomi Prins

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Keeping the position of key energy supplier to the Old Continent comes at a price. And it looks like it’s a price Russia is ready to pay it. Moscow is silently investing in the production of hydrogen, potentially aiming to make it flow through its new Nord Stream 2 pipeline. While the future of the controversial project still fuels debates and uncertainties, Russia decided to adapt to its neighbor's needs for cleaner energy sources, and in particular for hydrogen, which the European Commission put at the forefront of its recovery agenda.

A dialog between Berlin and Moscow is currently underway to produce green hydrogen on a large scale. That information was revealed during a conference held at the German-Russian Chamber of Commerce on February 16th. But as surprising as it may appear, this narrative is not new. Firstly mentioned in 2018, the hydrogen option for Nord Stream 2 was then put on the table by Uniper who, in March 2020, envisioned the ability of the pipeline to transport up to 80% hydrogen.

“One of the key arguments against Nord Stream 2 is that adding natural gas contradicts the decarbonization objectives of Europe. Here, Russia's counter-argument is that Nord Stream 2 also has a hydrogen potential, and can fulfill those decarbonization objectives”, according to Luca Franza, a researcher on EU-Russia gas relations.

The choice of hydrogen investment by Russia can be interpreted as a tactic to make the project more appealing and to change Western countries’ stance on Nord Stream 2 sanctions. But beyond the geopolitical aspect, it raises several questions on its actual feasibility.

Firstly, will this hydrogen be blue (produced from fossil fuel sources) or green (carbon neutral)? The question is difficult to answer since the EU is not adopting a “color-blind” approach to hydrogen anymore. According to Luca Franza, “Russia has a better comparative advantage along the blue hydrogen value chain: it is, therefore, better positioned to send blue hydrogen rather than green, for which costs are still very high”.

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Stephan Weil, prime minister of Lower Saxony State, remains hopeful about Russia’s renewable energy potential for green hydrogen. “Russia can offer giant land potential as a basis to build up solar and wind power, and huge water resources for hydropower,” he commented, quoted by Reuters. However, looking at Russia's current energy mix, the country still relies for more than 60% on coal and natural gas and is far from being a role-model in renewable energy production.

Moving to a 100% green hydrogen economy implies using blue hydrogen as a transition fuel until at least 2045 when costs are expected to begin to converge. The cooperation framework set between Russia and Germany seems to ignore these considerations and is determined to pursue green hydrogen production.

The second major question then: how will this hydrogen be transported?

The first option, and the least realistic one, would be the transportation of just hydrogen through the pipeline. Another solution consists of blending hydrogen with natural gas, but this method has several drawbacks. Regulations on allowed proportions of blending vary per EU member state and can range from 1% in the Netherlands to 8% in Germany under certain conditions. Recently, several MEPs have called for the harmonization of these blending standards, but the goal is far from being achieved.

Finally, the compatibility between the pipeline materials and the transport of hydrogen is also not that obvious. Research is being carried out on the need to add polypropylene to the pipeline to avoid corrosion. Addressing the leakage issue of hydrogen also becomes a necessity.

Although technical modalities of the Nord Stream repurposing seem blurry, Russia is not starting entirely ex nihilo in the hydrogen field. In the long run, its ambitions are much larger than the Nord Stream 2 pipeline. Guided by the 2024 Hydrogen Roadmap, Russian companies started ramping up investment in clean hydrogen.

Russian energy giant Gazprom started developing the pyrolysis technology, which converts natural gas into hydrogen after heating it up. This technology is less energy-intensive than the electrolysis process, and less polluting than methane reforming, this method has the potential to kill two birds with one stone. The only issue is that it has not been commercially produced on a large scale yet.

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Russia's hydrogen production would be divided into two clusters: the North-Western one will transport hydrogen towards Europe, whereas the Eastern one will have Pacific-Asia as a final export destination. In parallel, Rosatom has been tasked with the mission of testing a hydrogen-fueled train in the industrial Sakhalin region. The nuclear company is also looking at the production of hydrogen from nuclear power – an option that is gaining popularity nowadays. It has already received funds from the Russian government for this research.

However, nothing is less certain than the fact that Russia will be Europe’s most competitive supplier. Moscow does not yet possess sufficient hydrogen production capacity to become price-competitive. Thus, it will not be likely to meet European demand, estimated to reach 700TWh in the “business-as-usual” scenario (or 8% of total energy demand) by 2050 according to the EU Hydrogen Roadmap.

Projections are even more difficult to make in a market that does not yet exist and will be created only based on political will. “We tend to live in the future concerning hydrogen: Europe has ambitious projections concerning hydrogen demand, but we act like we are already there”, says Luca Franza.

It is also unclear why Europe would prefer importing hydrogen from Russia instead of installing Carbon Capture and Storage (CCS) capacity for blue hydrogen produced domestically.

In the end, although this green rebranding of Nord Stream 2 adds another element to the equation between energy security and environmental impact, it will not change the opinion of its traditional opponents, and even less to impact the sanctions imposed on it.

Tatiana Serova

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Nord Stream 2 Pipeline

The Main Reason Behind the Energy Crisis in Europe…

In this Article

Why Europe Loves Natural Gas

From Nord Stream to No Stream

Russia’s Endgame Could Mean Lights Out for Europe

Energy Rations Becoming a Reality

Is The World’s Most Controversial Pipeline About To Pivot To Hydrogen?