US/EU Clash Over Russian Pipeline

The EU and the US are set for opposition over the Nord Stream 2 pipeline that will carry Russian natural gas to Germany. The project is due for completion by the end of 2019.

The project has strong political support in Germany, where it is perceived as boosting supply security. The pipeline is also supported by German businesses, who are believed to get a cheaper, more reliable supply of gas.

Customers throughout western Europe suffered when Russia cut off all gas supplies through Ukraine on three occasions between 2004 and 2013. They will also benefit from the new supply of gas. The move will be advantageous to Europe’s consumers, promising lower gas prices as the continent struggles to meet tougher environmental targets as dictated by the 2016 Paris Agreement on climate change.

Securing natural gas imports is increasingly important for the EU, as its domestic gas production is set to fall by 50% over the next 20 years while gas demand is expected to remain at current levels. The gas can come via two sources: via Liquefied Natural Gas (LNG) cargoes or via pipeline, which are mainly from Norway, Algeria and increasingly, Russia, which supplies around a third of Europe’s gas needs via two ageing transit pipelines: the Brotherhood via Ukraine, Slovakia and the Czech Republic, and the Yamal-Europe via Belarus and Poland.

Nord Stream 2 is being financed by blue chip European energy investors Gazprom, and a consortium of European investors in the form of ENGIE, OMV, Royal Dutch Shell, Uniper and Wintershall, with each company funding up to €950 million.

Russia wants to build Nord Stream 2 primarily because it is faster than pre-existing routes. The completiong of the project also means lower transit fees, and increases gas giant Gazprom’s bargaining clout over countries along transit routes.  For the same reason, Nord Stream 2 is strongly opposed by countries such as Ukraine and Poland, who currently benefit from transit fees but fear that Nord Stream 2 will make the region more dependent on Russian gas supplies.

Tom Tugendhat, chair of the UK’s influential Foreign Affairs Select Committee said: “What Nord Stream 2 does is salami-slice NATO, by cutting some of the Eastern European countries away from the Western ones, and particularly, Germany.”

US administrations going back to the 1980s have repeatedly expressed concern that Europe is overly dependent on Russian imports of pipeline gas.  What’s different this time is that the US wants to do something about it. The Trump administration is angry at Germany for partaking in a huge commercial deal with a geopolitical rival, whilst also not contributing sufficiently to NATO. The two allies are also increasingly at odds over numerous issues, including Iran, climate change, and trade.

Nord Stream 2 has direct commercial implications for the United States, which, due to the shale gas boom, has become a major exporter of LNG, a position that will only grow as the number of terminals along the eastern seaboard of the US increases.

When US LNG exports began in 2016, very few cargoes went to Europe. This, however, is starting to change, partly due to a decline in Asian demand and a global supply glut. Lower prices have made Europe a more attractive destination for gas, particularly as transit costs are lower than for shipments to Asia. The US-China trade war has also increased the number of Europe-bound cargoes shipping from Texas and Louisiana.

“The United States is again delivering a form of freedom to the European continent,” said US energy secretary Rick Perry during a recent trip to Brussels. “And rather than in the form of young American soldiers, it’s in the form of liquefied natural gas.” 

Donald Trump has also commented on Nord Stream 2, calling it a “horrible project…feeding billions of dollars from Germany and other countries into the coffers of Russia.”

The Trump administration is coming under strong pressure to help gas exporters in Texas and Louisiana by targeting Nord Stream 2. Texan Republican Senator Ted Cruz and New Hampshire Democrat Jeanne Shaheen, both members of the Senate Foreign Relations Committee, have sponsored a sanctions bill in the Senate, which would penalize companies involved in laying deep-sea pipelines for Russian energy projects.

This has not gone down well in Europe. Rainer Seele, the head of Austrian energy group OMV, which is helping to build the project, has accused the US of trying to dictate foreign policy to its allies. Seele claimed that Nord Stream 2 was being attacked as Washington wants to secure markets for its own gas supplies. Seele also claimed that the US was trying to portray Russia as an unreliable trade partner when the opposite was actually the case.

German Foreign Minister Heiko Maas has also strongly criticised the threats. “Questions of European energy policy must be decided in Europe, not in the US,” Maas said. “To impose unilateral sanctions against Nord Stream 2 is certainly not the way to go.”

If Nord Stream 2, which is currently around 50% complete, is delayed, or even cancelled, the short-term losers are likely to be European gas consumers, who could face higher gas prices this coming winter.

Moves to wean Europe off Russian gas will also hit consumers in the longer-term. Gazprom is already looking to diversify its export markets and is in the process of building another pipeline to China. Unless Brussels stands up to Washington, Russia may start to prioritise Asian sales over European ones. That could mean that European consumers end up paying more for their natural gas – or it might mean that they receive no gas at all.