OPINION: A last-minute decision by Denmark’s Energy Agency to grant a construction permit to the Gazprom-owned operator of the Nord Stream 2 pipeline could make it less likely that Russia and Ukraine will be able to achieve compromise in extending their current gas transit agreement beyond 1 January 2020.
After many months of deliberation, the Energy Agency has allowed Nord Stream 2 to lay a 147-kilometre segment of its twin pipeline in the Danish exclusive economic zone.
In Moscow, the decision is viewed as a deserved victory, with the Kremlin believed to have pulled all possible political and economic strings in Europe to influence decision-making in Copenhagen.
For a long time, these efforts seemed unlikely to work. Russian President Vladimir Putin suggested in October “little Denmark risks losing its sovereignty” under “huge pressure” from the US not to allow Nord Stream 2 to be built.
Putin welcomed Denmark’s decision last week, while adding that Gazprom could have laid the gas pipeline to Germany, avoiding Danish maritime waters, had it been necessary.
He has also toughened his stance on the future of Russian gas transit flow to Europe across Ukraine, reiterating that Ukraine's state gas importer and distributor Naftohaz Ukrainy should halt its “bacchanalia” of arbitration claims against Gazprom.
A ruling last year of an international arbitration institute in Stockholm said that Gazprom should pay Naftohaz over $2.5 billion for the Russian company’s failure to stick to the contractual volume of transit gas shipments since 2009, when both companies signed a 10-year transit agreement, expiring on 1 January.
Encouraged by the arbitration win, Naftohaz has filed more multi-billion dollar claims in the same arbitration institute, with the most recent calling for Gazprom to pay a higher transit transportation tariff retroactively.
These claims came despite Putin clearly stating that Naftohaz and Gazprom should start talks on a new transit agreement “from scratch” with no claims against each other.
Ukraine’s President Vladimir Zelensky said that, while Kiev had been prepared for the Danish decision, he was disappointed, saying “the country would never grant it” if Danish authorities had listened to his arguments.
Responding to earlier hints from the Kremlin, Zelensky, whose People’s Servant party has a majority in parliament, pushed forward a law at the end of last week that unbundled gas pipeline operator Ukrtransgaz from being a subsidiary of Naftohaz and passed it into direct state ownership.
Authorities in Kiev have also declared it a goal to pass other legislative changes that are aimed to create an operating environment similar to that Gazprom faces elsewhere in Europe before the end of this year.
Earlier, Gazprom executives and Putin said the gas giant will be ready to sign a transit agreement with Ukraine’s new gas pipeline operator if the Russian company obtains the same terms as it gets in Europe.
Even though Gazprom is expected to get Nord Stream 2 fully running only during the first quarter of 2020, the Kremlin is seen as ready to move into January without any transit arrangement with Ukraine, which ships the bulk of Russian gas exports to Europe.
Putin has repeatedly demonstrated that Gazprom’s commercial activities cannot be considered in isolation from Russia's political interests.
With Denmark's decision seen by some in Russia as a sign of European weakness, the Kremlin may see a temporary reduction in transhipments to the continent as a price worth paying early next year, especially if Ukraine ends up taking some of the blame.
(This is an Upstream opinion article.)