Demystifying Nord Stream 2: OMV’s rationale for participating in the project

A lot of (political) controversy and debate is revolving around the gas infrastructure project “Nord Stream 2”. Increasing European gas demand, economic as well as ecological benefits arising from the project are oftentimes neglected, so we want to let “Homo Oeconomicus” speak instead of “Homo Politicus”. Hence we talked to Reinhard Mitschek, Senior Vice President responsible for Gas Logistics and International Projects, in order to understand the rationale behind OMV’s involvement in Nord Stream 2 better.

Future European gas demand will need to be met with higher gas imports

Today approximately 45% of European gas demand is covered by domestic production. However, gas fields in Europe are depleting, while European gas demand is forecasted to remain at the current level. Consequently, Europe is in need of competitive imports of Liquefied Natural Gas (LNG) as well as Pipeline Gas to meet its demand. Renowned institutions such as the Institute for Advanced Studies (IHS) expect Europe’s gas imports to increase by almost 30% in the coming 20 years. That is the reason why new gas transport corridors and existing pipelines will be needed.

Nord Stream 2 connects Europe with Russia’s vast gas reserves

At the beginning of this decade Gazprom successfully constructed the Nord Stream 1 pipeline after receiving all permits. Ever since then Nord Stream 1 has been reliably supplying gas to Europe.
Nord Stream 2 is an infrastructure project consisting of a natural gas pipeline system through the Baltic Sea following the route of Nord Stream 1. Pipe lay of Nord Stream 2 started in summer 2018. “The pipelines will connect the EU gas transmission system directly with the vast natural gas field Bovanenkovo in North Russia’s Yamal Peninsula. Gazprom is the holder of the world’s largest gas reserves (47 trillion cubic meters) and holds in this area alone more than twice as much gas (4.9 trillion cubic meters) as the total proven reserves of the EU (1.9 billion cubic meters)”, explains Reinhard Mitschek. The length of the pipeline is approximately 1,200 kilometers with two parallel lines running along the seabed. The total capacity of Nord Stream 2 will be 55 billion cubic meters of natural gas per year. To put this into perspective, this is enough gas to supply more than 26 million European households for one year.

In terms of funding, Nord Stream 2 is fully financed by the sole shareholder Gazprom along with its five international lenders. Whilst Gazprom will fund 50% of the costs, OMV, Shell, Engie, Wintershall and Uniper will collectively fund the remaining 50% and receive interest on the provided loans. “No subsidies or any other form of state aid is needed. Eventually this means, there are no additional costs for European tax payers. Instead, European contractors were awarded contracts for supply of materials and services for several billion Euros”, adds Mitschek.

Once the Russian gas reaches the EU gas network, substantial gas volumes will be transported onwards through Germany, Czech Republic and Slovakia to the Austrian gas hub in Baumgarten. These additional gas volumes will strengthen Baumgarten’s role as important gas hub for Central Europe as well as for international gas transit and will further enhance the security of gas supply for Central and South Eastern Europe.

Nord Stream 2 is a win-win-win project for Europe, Gazprom and OMV

OMV and Gazprom are looking back at a long-lasting partnership that actually celebrated its 50th anniversary last year. Throughout all these years Gazprom has proven to be a reliable partner. With OMV’s stake in Nord Stream 2, this strategic relationship is deepened even further. Importantly, Nord Stream 2 is a commercially attractive project. Mitschek tells us, “the economic rationale is actually the main driver behind Nord Stream 2.” Nord Stream 2 makes economic sense in three important ways. For one, with its vast gas fields Gazprom is able to supply natural gas via a substantially shorter route directly connecting it to the European market. Secondly, OMV will have access to competitively priced gas and will ultimately be able to secure the supply of its customers. Lastly, Europe will profit from competitive gas supply to its markets. “Lower gas prices will in turn increase the competitiveness of European industries as a whole and ultimately keep gas affordable for European households. So all in all, it is a win-win-win situation for Europe, Gazprom and OMV”, adds Mitschek.

Nord Stream 2 will provide Europe with cost efficient and reliable gas supplies. It will enhance Baumgarten’s leading role as gas hub for Central Europe and further deepen OMV’s strategic cooperation with Gazprom – the holder of the largest gas reserves in the world!”
Reinhard Mitschek, OMV SVP for Gas Logistics and International Projects

 Diversification of gas sources and gas supply routes is key

For sustainable gas imports to Europe, diversification of gas sources as well as gas supply routes is and will be key. Generally, this means that additional sources and routes – LNG as well as pipeline gas – will increase European security of gas supply and will create a competitive European gas market. 

Whereas LNG is suitable to improve Europe’s gas supply portfolio and to cover seasons of peak demand, it currently is not the preferred option to meet base load gas import requirements. On the worldwide LNG market, Europe often competes with higher gas prices in Asia. Due to the future decrease of European gas production and the resulting increase in supply gap, more LNG will need to be imported. However, LNG suppliers will have to offer more attractive terms and conditions in order to be competitive on the European market. Mitschek gives an interesting insight, “In this respect gas transport via pipelines is cheaper than via LNG. This is visible in the overall infrastructure utilization rates: in 2018, LNG terminals were utilized below 30%, while Russian import pipelines are constantly highly utilized”.

Gas is an important contributor to reach European climate targets

In order to reach European climate targets, the share of natural gas in the energy mix will be increased. This will allow Europe to reduce its coal-based power generation. “Gas is a versatile, affordable, low-carbon answer to the climate challenge. In a fully competitive market, it would reduce carbon emissions at low cost. Furthermore, it is a perfect partner and back-up for renewables, as it can gap peak demand in times when solar or wind power is down”, notes Mitschek. Also, gas can be a solution for today’s power storage problems: it can easily be stored at attractive economic and technological conditions.

Depending on the technology used, gas-fired power plants produce about 50% less CO₂ than coal-fired power plants. “If gas were to be used for power production instead of coal, the 55 billion cubic meters of gas of Nord Stream 2’s yearly capacity alone could save about 160 million tons of CO₂ per year. If you think about it, this is the equivalent of 14% of total EU CO₂ emissions from power generation – or the emissions of about 30 million cars per year. This is a tremendous effect,” says Mitschek. 

Furthermore, Nord Stream 2 is the shortest route from the gas field Bovanenkovo: it will hence cause lower fuel gas and much lower CO₂ emissions compared to other routes. “Depending on the distance covered by LNG ships, transport of the equivalent volume of LNG would result in additional emissions of up to 45 million tons of CO₂ – this is the equivalent of about 8 million cars per year”, concludes Mitschek.

Facts “Pioneering Spirit pipe lay vessel”

• Largest pipe lay vessel in the world 
• Lay rate of approximately 3 km/day
• Accommodation capacity: 571 people
• Size: 382 meters by 124 meters – put differently: approx. 6 football fields would fit on the vessel; the length of the vessel equals the height of the Empire State Building in New York