The implications of relying on foreign state-owned entities for critical infrastructure
In November 2022, eight months into the war in Ukraine, Germany announced the takeover and nationalization of Gazprom Germania, a former subsidiary of Russian government majority-owned Gazprom, a multinational gas corporation which, until that point, indirectly controlled Germany’s largest gas storage facility located in northwestern Rehden. The now renamed Security Energy for Europe Gmbh (SEFE) is yet another step toward breaking away from Germany’s reliance on Russian energy.
In the years leading up to the war in Ukraine, Russia’s Gazprom has played an increasingly manipulative role in the supply chain driving Germany’s energy operations. In 2013, Russian natural gas exports to Germany grew to over 40 billion cubic meters (bcm). The lion’s share of those exports entered Germany through the twin Nord Stream pipelines on the Baltic seabed and then moving inland across Germany via the OPAL and NEL pipelines. At that time, Gazprom was the main shareholder, operator and gas supplier for each of those pipelines.
Over and above pipelines, Gazprom expanded its operations into gas storage capacities, which are a critical component of its export and transit operations in Germany. Substantial efforts were undertaken to develop underground gas storage facilities in Germany which could be linked with Gazprom’s pipeline holdings.
To that end, in 2013, Rehden, not only Germany’s largest gas storage facility but also the largest underground gas storage site in Western Europe with a capacity of 4.2 bcm, came under the full operational control of Gazprom.
Fast forward to 2022 and Russia’s invasion into Ukraine and we see a significant drop in national gas transports, leaving Germany, among other Western European countries, scrambling for solutions to fill their gas storage facilities. However, it is important to highlight that daily delivery records made public by Gazprom reveal that the energy giant had been reducing European natural gas supplies since the summer prior to the onset of the war. And well before Russia essentially cut off gas exports to Europe via the Nord Stream, Russia had only been routing roughly 20 percent of its maximum possible volume into Germany, citing advanced technical problems and unsubstantiated sanction-related delays in the delivery of a repaired turbine, explanations which German officials discard as a ploy for a political power play.
In fact, German State Secretary for Economic Affairs Oliver Krischer went so far as to accuse Gazpom of deliberately manipulating the German gas supply in preparation of the war. He made the claim that Gazprom deliberately allowed the Rehden storage facility to run empty throughout the winter season prior to the war ‘in order to increase dependency and vulnerability.’
This case draws attention to the potential implications of allowing a foreign entity, particularly a state owned foreign entity, to regulate critical infrastructure as a third party in another country. By giving Gazprom authority over vital natural gas storage facilities, Germany was left vulnerable to a plotting Putin.
The general consensus among regulators, government officials and even the public is that there is no real harm in allowing foreign governments to invest in local infrastructure via their state-owned entities, the rationale being that outside investment promotes funding in infrastructure projects which may otherwise be delayed or even held off indefinitely. Furthermore, the argument is often made that the country retains control over its own infrastructure by virtue of the fact that the installation itself resides there. And while these considerations are valid, we can see from this case study that allowing a state-owned foreign entity to regulate not only the entire critical natural gas supply chain but also the reserve capabilities of another country can actually weaken that country’s sovereignty vis-à-vis foreign influence and coercion.
We believe that this is a valuable lesson which must be made known to decision makers looking to allow foreign infrastructure investment. Had this outcome been considered by German decision makers in advance, some of the repercussions may have been avoided. Once it became known that Gazprom had deliberately allowed the Rehden storage facility to run empty, the German Federal Ministry of Economics prescribed minimum filling levels as part of a new Gas Storage Act. However, this measure was, as the saying goes, too little, too late. It is necessary to build in clauses like minimum filling levels into the licensing agreements well prior to commencement of construction. Failing to do so, in this case, left Germany vulnerable.
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