Denmark faces dilemma over Russian gas pipeline

By Alissa de Carbonnel and Stine Jacobsen

BRUSSELS/COPENHAGEN (Reuters) - Denmark is under pressure to rule on whether a new Russian pipeline supplying gas to Germany can be built near its Baltic coast, a decision that puts it in the line of fire from friend and foe alike.

Denmark does not want to act alone in resolving one of the biggest foreign policy quandaries that the small European Union nation has faced since the Cold War.

But its search for a united EU stance on the proposed pipeline is deadlocked by divisions among member states over whether to do more business with Moscow despite its military incursions in Ukraine and Syria and accusations it used a nerve agent in an attempted assassination on British soil.

The Danish government is facing fierce lobbying by Russia, EU allies and the United States over the 9.5 billion euro ($11.7 billion) Nord Stream 2 project championed by President Vladimir Putin and financed by five Western firms.

"They are under huge pressure from all sides," one senior EU official said. There is no definite timing for a decision, which had been expected this spring but has been delayed while Denmark considers the security implications. But officials say it cannot be postponed indefinitely.

A Danish veto, under new legislation allowing it to do so on security grounds, would force Russia, which supplies about one third of Europe's gas needs, to find a new route for the pipeline.

"This is not about gas, it is one of the most important foreign policy decisions in Denmark since the Cold War," said senior foreign policy researcher Hans Mouritzen at the Danish Institute for International Studies.

A delay would weaken Russian gas giant Gazprom's <GAZP.MM> hand in talks with Ukraine for a new gas transit deal after 2019 and create uncertainty for the firm's partners: Germany's Uniper <EONGn.DE> and Wintershall <BASFn.DE>, Anglo-Dutch Shell <RDSa.L>, Austria's OMV <OMVV.VI> and France's Engie <ENGIE.PA>.

Access to cheap Russian gas to offset declining Dutch production takes priority for nations in northern Europe, particularly Germany, but eastern European countries fear the pipeline will make the EU a hostage to Russian gas.

SECURITY CONCERNS

In the Nordic states, where Moscow's military posturing in and around the Baltic Sea has rattled nerves, security is the main concern.

The United States has played up these worries in its opposition to Nord Stream 2.

Confidential guidance from Washington, seen by Reuters, for U.S. embassy officials in meetings with EU governments argues that the pipeline could strengthen Russia's projection of power in the region.

Sweden and Finland have yet to issue permits for the 1,225 km (760 mile) pipeline to run under the Baltic Sea through their exclusive economic zone, which is regulated by U.N. law. Germany did so earlier this year.

But only in Denmark would the undersea pipe pass through sovereign territorial waters, giving it a greater say.

U.S. diplomat Sandra Oudkirk, who visited Copenhagen on her first European tour as Deputy Assistant Secretary for Energy Diplomacy last week, said Washington does not want Nord Stream 2 built and wants to understand "if the Danish law is a means to that end".

"TOO BIG FOR DENMARK"

Danish officials say they are loath to take sides and are unwilling to rush the decision.

"In some ways this is too big for Denmark," one official said.

Under the new legislation, Danish diplomats are drafting an opinion on whether foreign and security policy concerns justify blocking 139 km of the pipeline passing through Danish waters.

The opinion may take account of objections by EU allies: that the pipeline would undercut EU support for Kiev by depriving it of gas transit fees, increase dependence on Gazprom or concentrate gas supplies along a single route to Germany.

Lawmakers gave the government powers to reject the pipeline's application for a permit last November but had expected support from Brussels, where efforts to reach a consensus have stalled.

Denmark is one of 14 EU states to expel Russian diplomats in response to the nerve agent attack in Britain. It was too early to say whether the attack would be included in the foreign and security assessment of Nord Stream 2, Foreign Minister Anders Samuelsen said.

If Denmark acts alone to veto the project, that could have unwelcome consequences.

"If we are to handle this difficult case alone, Denmark will end up in an unfortunate situation in relation to both Russia and Germany," said Martin Lidegaard, a senior lawmaker with the Danish Social Liberal Party, which is against the project like the rest of the Danish opposition.

DIVERSION

With ties between Moscow and Kiev badly strained after Russia's 2014 annexation of Crimea and a pro-Russian insurgency in eastern Ukraine, Russia wants to reduce dependence on Ukraine as a gas transit route.

Any serious delay to the 55 billion cubic metre a year pipeline could imperil that plan as Gazprom seeks to extend two years of record gas sales to Europe.

The Nord Stream 2 consortium says it is carrying out surveys for an alternative route north of the Danish island of Bornholm outside Denmark's territorial limits. That would cost time and money.

"We have to plan for the possibility," its Financial Officer Paul Corcoran told Reuters. "It will cost more," he admitted.

Pipeline contractor Allseas has said a change of route would add less than 5 percent to total costs.

But sources close to the matter doubt it will be as easy to reroute the pipeline as the company says.

"The Nord Stream 2 company takes it as a real threat," said a senior EU source who has seen an estimate of the cost of changing routes. "I was shocked by how high it was," the source said without disclosing figures.

Nord Stream 2 declined to comment on the cost of rerouting, saying it did not wish to "speculate about alternatives and its impacts".

For now, Denmark is holding off as long as possible on making the decision. "In this case we're hurrying very slowly," a government source said.

(GRAPHIC: EU imports of Russian gas - http://tmsnrt.rs/2nz1ySg)

(Additional reporting by Shadia Nasralla; Editing by Giles Elgood)