The Danish Cabinet recently discussed a draft bill amending the Danish Continental Shelf Act. This bill is to be submitted to the Danish Parliament for its new session starting in October 2017. At its core is a new provision, that a permission to lay pipelines can only be granted if compatible with Denmark’s foreign, security and defense political interests based on a recommendation of the Minister for Foreign Affairs1.
Contrast to international law and rules
If adopted, this provision would be in stark contrast to the principles and rules of international law, such as the freedom of transit of goods of GATT Art. V, detailed for energy in Art. 7 of the Energy Charter Treaty (ECT), which provides for not placing obstacles to new capacity being built. It would also violate the protection of investment against arbitrary change of rules under Art. 10 of the ECT. As a member of those treaties, Denmark has accepted to apply their rules, and its international partners should be able to rely on Denmark’s respect of its legal obligations.
A special law to hinder Nord Stream 2?
The timing and scope of this draft bill suggest that it is specifically designed to prevent the planned pipe laying of Nord Stream 2 through Denmark’s territorial waters south of the island of Bornholm by an arbitrary decision of the Foreign Minister.
The roughly 1200 km route planned for Nord Stream 2 outside of Russian waters is parallel to the route of Nord Stream 1 and would cross less than 50 km of Danish territorial waters south of Bornholm. Nord Stream 1 was laid through the territorial waters of Bornholm without any problem. In fact, it set a benchmark for complying with the highest environmental standards in the construction phase and to this date operates without any problem. Nord Stream 2 with an identical route will meet the same standards, so there is no reason to deny the laying of Nord Stream 2 under existing procedures. Nord Stream 2 could rely on Denmark applying its own rules as they are as well as upholding international law.
Benefits of Nord Stream 2
Nord Stream 2, like Nord Steam 1 links the new Yamal gas province with untapped reserves of about 20 000 billion cubic meters to the core EU gas market, ensuring deliveries for decades to come. Yamal is approximately 2000 km closer to the EU gas market than Nadim Pur Taz, the source of Russian gas deliveries in the past. The shorter distance, as well as the modern design of the pipelines from Yamal, both onshore and offshore, result in lower costs and in a substantially lower carbon footprint. Switching to Yamal makes sense in view of source diversification, economic and ecological considerations.
In free markets, suppliers choose how to bring their goods to the market, and they are the ones paying for transport. The costs of bringing gas to the EU market via Nord Stream 2 are paid out of the revenue of Gazprom, they are no burden on EU customers nor EU taxpayers. By increasing interconnectivity, including through reverse flow and new rules, the EU reached its target of a single gas market, which is resilient against interruptions. Increased access to Russian gas through Nord Stream 2 will contribute to filling the EU supply gap resulting from the decline in domestic gas production. At the same time, it will improve the security of gas supply for the whole EU gas market by reducing EU dependence on LNG imports while lowering LNG and other gas import prices. The German institute EWI (Energiewirtschaftliches Institut Köln) estimates the benefits of Nord Stream 2 for EU gas supply in 2020 at about 8 billion €/a in a well-supplied LNG market, and at about 24 billion €/a in a tight LNG market2. This benefit will be equally shared by all EU gas importing countries, with minor differences due to the costs of transportation within the EU. Nord Stream 2 hedges the EU gas market against price and supply risks of the LNG market, as well as a further reduction of domestic supplies.
The Danish draft bill – if adopted – would only affect a minor part of Nord Stream 2. It would however jeopardize the benefits of Nord Stream 2 for all of the EU gas market without having any conceivable benefit for Denmark. Moreover, Denmark risks arbitration procedures with high claims under the ECT, as well as severe reputational damage.
And for what? The draft bill would not be able to stop the Nord Stream 2 project, which could be laid by-passing the Danish territorial waters, only causing unnecessary delays.
The Danish approach towards Nord Stream 2 reminds of an unfortunate precedent 40 years ago: on 9 September 1977 Norpipe was inaugurated. It brought associated gas from the Norwegian Ekofisk field, which otherwise would have been flared, to Germany and other parts of the EU market. Norpipe has been in operation ever since without any problem. The start of operation however was delayed by two years due to Danish requests to pour additional sand on the short part of the pipeline in the outer part of the Danish sector, a measure which proved ineffective. Result of this unnecessary delay: over two years about 10 billion cubic meters of gas were wastefully flared instead of being used, and with detrimental environmental effects. And with no conceivable benefit for Denmark.
1. By Ralf Dickel, senior visiting research fellow at the Oxford Institute of Energy Studies, former Director of Transit and Trade at the Energy Charter (2004 – 2010)