The future of EU energy security

The news regarding the four leaks in the Nord Stream pipelines leaves little doubt that such an event is too rare to be a coincidence, leaving everybody with the same thought: This could very well be sabotage. If this proves to be the case, it’s quite possible that we will never find out who actually sabotaged the pipelines. However, it might be useful to examine who and how could stand to benefit from it.

Without a doubt, one has to look to Russia for the possibility of sabotage. Russia is most definitely a country with the technical military capacity to perform such an operation. More importantly, Russia has a strong motive. A Nord Stream 1 leak would provide a great opportunity for Gazprom to evoke “force majeure” on its obligation to deliver natural gas to the EU this winter.

Force majeure is probably the only way Gazprom could escape massive legal procedures against it, leading to extensive compensations awarded by various arbitral tribunals in case it had not resumed the Nord Stream 1 flow this winter – before the pipeline cracked. Evoking force majeure in offshore pipeline operations is not at all unlikely. Last time such an event took place was in the 2017 Forties oil pipeline crack off the coast of Scotland that led Ineos to evoke force majeure to protect against the closure of the pipeline for several weeks.

Risks & consequences

It needs to be said though that although having the ability and the motive to sabotage the pipeline, Russia would be taking a huge risk in carrying out such an operation. Four acts of sabotage on the pipelines, with heavy explosives, at depths of 100 meters in the middle of one of the busiest choke points in European waters is no easy task. Whether it would be military divers or some special submarine mission, or drones damaging the pipelines in a controlled way (so as to not destroy them completely) would need some extended operation that would be extremely difficult to carry out unnoticed.

Although Russia seems to be the primary suspect in the case this was state-sponsored sabotage, there is an issue that raises doubts. If Russia is indeed behind this, it would not have a motive to destroy both the Nord Stream 1 and 2 pipeline systems. The Kremlin would achieve all its above objectives by only sabotaging the Nord Stream 1 system. This would have made it easier for Russia to argue that this was an accident and – more importantly – it would increase the pressure towards the EU to utilize the abandoned Nord Stream 2 pipeline.

When it comes to the consequences of the event, the extent of the damage seems to be beyond any easy repair. We should therefore take for granted that the Nord Stream system will be out of commission for the upcoming winter, thus adding to the EU’s troubles regarding its security of supply. Regardless of the pipeline not sending gas in September, with the upcoming start of the winter period Gazprom would have been pressured to fulfill its contracts with its European clients and start delivering gas, so having this option now off the table is a serious problem for the EU.

However, this event should not be enough to let Russia off the hook. The EU could pressure Gazprom to deliver some of the lost quantities of gas through the Ukrainian and Belarusian pipeline routes that are still in operation and continue to deliver Russian gas to Europe, working at around 20% of their capacity.

This where the second incident last week comes into play when the financial dispute between Gazprom and its Ukrainian counterpart Naftogaz came to light. It might come as a surprise to many, but it needs to be said that during these past seven months since the Russian invasion, Russian gas has been still flowing through Ukraine to the EU, so the Ukrainian state-owned company has been collecting transit fees from the Russian state-owned company.

Critical arbitration disputes

The two companies have been under contract since the end of 2019 that included a take-or-pay clause, so that if Gazprom did not send the agreed quantities through the Ukrainian network, it would still have to pay Naftogaz the full transit fees.

At the beginning of September Naftogaz initiated arbitration proceedings against Gazprom before the International Court of Arbitration of the International Chamber of Commerce in Paris, demanding to be paid the full amount of money from the take-or-pay clause. This was supported due to the fact that Gazprom had been sending deduced amounts of gas through the Ukrainian transportation system. Naftogaz stated that “funds were not paid by Gazprom, neither on time nor in full.”

In response, last week, a day after the Nord Stream incident, Gazprom announced that it does not accept the arbitration, and that if Naftogaz does not stop the process, Russia will impose sanctions that will result in Gazprom not being able to pay anything to Naftogaz.

This second development is making things extremely difficult for the EU. If the situation with the arbitration dispute escalates, Ukraine will have to decide whether it will continue to allow Russian gas to flow to the EU even after Gazprom stops paying transit fees altogether.

Running out of options

We need to keep in mind that even at 20% capacity these past seven months, the Ukrainian route has been still providing around 15 billion cubic meters of natural gas per year of Russian gas to the EU. These volumes alone are equivalent to the 15 bcm/y that the EU secured from the US a few months ago when Joe Biden and Ursula von der Leyen met. The US has already been exporting as much LNG to the EU as it can and a new gap of additional 15 bcm/y will be difficult to cover.

More than recent developments with the Nord Stream, the Gazprom-Naftogaz arbitration dispute is therefore the real source of concern for the EU’s energy security. The combination of the two events constitutes the first time that there is an actual danger for the EU’s supply with gas this winter. Up to now, concerns were based purely on speculation and without any actual facts indicating inability to cover the EU’s gas demand. From now on, and according to how things will develop with the arbitration, there is actually a solid reason for concern.

The Ukrainian and Belarusian routes still have the capacity to cover the necessary gas demand for Europe, combined with the extensive LNG imports, and the stocked-up storage facilities that are already in place, so things are not yet too desperate for Europe. Now, together with the geopolitical and financial issues, legal developments are also coming into play in the EU energy security saga this winter.

Michalis Mathioulakis is an energy strategy analyst, academic director of the Greek Energy Forum, and research associate on energy issues at the Hellenic Foundation for European & Foreign Policy (ELIAMEP).