Natural gas war: Europe becomes US-Russia battleground

By Bahattin Gonultas

BERLIN (AA) - Should the U.S. impose sanctions on the German and Russian-backed Nord Stream 2 pipeline (NS2), it would be regarded as “unacceptable political interference” on Europe's energy policy and could even be “counterproductive”, experts and German leaders warned.

German Foreign Minister Heiko Maas said on Thursday that U.S. sanctions on the NS2 would be the incorrect way to resolve a dispute over energy supplies while asserting that, “questions of European energy supply should be decided in Europe.”

Maas’s remarks came in response to statements from U.S. President Donald Trump earlier this year advising that Germany “free herself” from the energy relationship with Russia. These comments were followed late last week by a declaration from the U.S. Energy Secretary Rick Perry who said Washington could still impose sanctions on the construction of the pipeline.

The U.S. ambassador to Germany Richard Grenell also warned of sanctions against firms linked to the NS2 through a letter that was sent to the American embassy in Berlin on Sunday, Jan. 13.

Experts concede that such sanctions could hit the 1,230-kilometer-long pipeline project hard.

The NS2 will carry Russian natural gas to the German and the European markets through the Baltic Sea bypassing Ukraine. The pipeline will pump 55 billion cubic meters of natural gas per year, enough to supply 26 million European households.

“The companies and the funding will be directly hit by the sanctions and then Gazprom [Russia's state gas giant] will build the pipeline alone”, Stefan Meister, head of Robert Bosch Center for Central and Eastern Europe, Russia, and Central Asia German Council on Foreign Relations told Anadolu Agency.

He added that this could further embitter relations with the U.S. because Trump will try to use this issue to force a better trade deal with Germany and the European Union (EU).

Meister explained the two main reasons behind the U.S.' actions to stop the project, the first being ideological; “There are people in Washington who want to punish Russia, who want to cut off all contacts with Russia and who are willing to damage relations also with the partners in Europe to reach this goal."

Secondly he added that, "Trump is also trying to prove a point back home -- that he isn’t afraid of supporting measures to punish Russia."

As a result, Meister said it is difficult to respond to the U.S. because the project is very unpopular among the member states of the EU as it is a source of controversy within the Union.

Meister said that he was not a supporter of the project because he considers that the EU does not need it while asserting that it will also weaken Ukraine's position -- a country that is certain to lose out with the project as the NS2 route plans to bypass Ukraine significantly alleviating it of transfer fees.

“But I don’t see that Germany and other participating countries will step out, at least not before the sanctions hit,” Meister added.

- Pipeline will be built regardless, says expert

Nonetheless, Trump’s saber rattling is not expected to have much effect, as experts agree that the pipeline will be built regardless.

“Russia is determined to complete the project,” says Luca Franza, a researcher for the International Gas Market at the Clingendael International Energy Program (CIEP).

“Nor is the impact on major European financing for the project being much discussed. This is because $6 billion (out of $9.5 billion) has already been invested,” Franza said.

However, Franza said that sanctions against companies using Western technology could slow the project down. He named the Swiss-based offshore contractor specializing in pipelay, heavy lift and subsea construction, the Allseas Group, as a potential victim of the latest sanctions.

"Allseas still has to lay most of the offshore pipes and this is not easy to replace,” he said.

- Disputing market share in Europe

The competition to supply Europe is growing. The EU, with 28 countries and a combined population of over 500 million people, is a high-value market for natural gas exporters, as Western Europe produces little natural gas, and by 2025, is expected to import 80 percent of the fuel it requires.

The U.S. became a net natural gas exporter two years ago for the first time in almost 60 years, according to the country's Energy Information Administration (EIA), but Russia has long been the dominant source and supplier of gas to the EU.

Russia is currently the largest provider of natural gas to the EU, providing nearly 40 percent of the union’s total consumption while Norway accounts for about 30 percent of all its natural gas imports.

- LNG flows are largely decided by market forces

The Trump Administration is seeking to export Liquid Natural Gas (LNG) to Europe as part of the administration’s overall effort to increase U.S. exports and reduce its trade deficit.

But Franza noted that these efforts are unlikely to succeed. “The U.S. government is trying to pursue the same objective with China,” he said.

“Yet political interference is at best useless because LNG flows are largely decided by market forces. Flexible LNG goes to the customer who is paying the highest price,” he affirmed.

Imports of LNG to the 28 countries that make up the European Union (EU-28) averaged 5.1 billion cubic feet per day (bcf/d) in 2017, increasing for the third consecutive year but remaining below their 2011 peak, according to the EIA. In 2017, LNG imports to the EU-28 accounted for only 13 percent of the global total.

- LNG costs more than pipeline gas

LNG imports are abating in Europe, as LNG is a far more costly option than pipeline gas. The utilization of the EU-28's LNG import facilities has declined from about 50 percent in 2010 to between 20 percent and 25 percent in recent years as expansion in regasification capacity has far exceeded demand for LNG imports, according to EIA estimates.

Although 13 of the EU-28 member countries currently import LNG, in 2017, LNG accounted for only 11 percent of the EU-28’s overall natural gas supply, EIA data showed.

Germany's Federal Minister for Economic Affairs and Energy Peter Altmaier said last week that Europe is ready to build the necessary infrastructure to import LNG from the U.S. but it will be up to the U.S. to offer prices that are competitive.

Political interference could even be counterproductive, Franza argued.

“China threatened tit-for-tat tariffs hurting U.S. LNG after the U.S. threatened sanctions on Chinese goods. In Germany, U.S. interference might prove counterproductive by putting opponents of the Nord Stream 2 in an embarrassing position. In fact, some of the European players that are opposed to Nord Stream 2, such as the European Commission, are also critical of American sanctions. American sanctions are regarded as an unacceptable political interference on European energy policy and they would set a worrisome precedent,” he added.

Nonetheless, Trump seems to think that he can bully Germany into accepting more expensive LNG from the U.S. Trump has accused Germany of being "captive" to Moscow because of its heavy reliance on Russian gas and has called for Germany to drop support for the over €10 billion NS2 pipeline plan to pump more gas from Russia to Germany.

“It looked as if Trump is looking for ammunition against Germany,” Ulrich Speck, a German foreign policy expert at the German Marshall Fund of the U.S. told the Washington Post. “If he would have been serious on pushing against Nord Stream, he would probably have brought this up much more forcefully with Putin.”

Speck added: “It's hard to know what is going on in his mind.”

- Nord Stream 2 would not endanger Europe's supply security

On Dec. 12, 2018, the U.S. House of Representatives approved a non-binding resolution calling the pipeline a “drastic step backwards for European energy security and United States interests.” The resolution also called upon Trump to “use all available means to support European energy security through a policy of diversification to lessen reliance” on Russia. Nonetheless, little in the supply picture for Europe has changed since then.

Yet Franza said that concerns over the NS2 are largely exaggerated.

“First of all, the construction of the pipeline would not mean the end of Ukraine's transit. Ukraine transit amounts to 93 billion cubic meters (bcm) annually, while Nord Stream 2 has a projected capacity of 55 bcm per year. Moreover, the EU’s import needs are probably going to increase due to nuclear and coal phaseouts in the early 2020s and lower EU domestic production, ” he said.

While Russia wanted zero Ukraine transit until a few years ago, and the Ukrainians were insisting on full transit, both parties have softened their views in recent years and a compromise of around a figure of 30-40 bcm seems possible, he added.

Secondly, Franza argues that the NS2 would not endanger European security of supply. “Europe has access to flexible LNG thanks to redundant regasification infrastructure and global markets are extremely well supplied. Reverse flows would allow LNG transport to Central-Eastern Europe. A few links are missing, but work is underway to complete them,” Franza concluded.