Is The U.S. Using Sanctions To Elbow Russia Out Of The European Natural Gas Market?
Is the United States sanctioning Russia’s natural gas pipeline that ends at Germany’s edge because it wants to sell more liquefied natural gas (LNG) to Europe or because Russia illegally annexed Crimea? The stated aim has a dual purpose — to prevent Western Europe from becoming dependent on Russia’s energy sources while also diminishing Russia’s economic leverage in Eastern Europe.
The distinctions are important: If the purpose is to save Western Europe from Russian dominance, the Europeans are not buying it. They are perfectly capable of choosing a fuel supplier, they say, and view the United States as a reliable way to diversify their natural gas sources. The other energy partners are Norway, Algeria, Qatar and Nigeria. The continent, meanwhile, is building receiving terminals — or those to take-in the LNG that is frozen and shipped.
“LNG is often the lower-priced option thanks to a strong supply push,” says Michael Stoppard, chief strategist, global gas for IHS Markit INFO. “Major pipeline suppliers, such as Russia to Europe, are choosing not to flood the market any further. It all adds up to LNG being relatively resilient in the face of gas demand declines.”
It’s one thing if the United States is able to compete on the merits. It’s quite another if it is using economic sanctions as a weapon. At issue is Russia’s so-called Nord Stream 2 pipeline — a companion to its Nord Stream 1 pipeline. It not only allows Russia to double its natural gas capacity headed to Europe but it also allows it circumvent its nemesis, Ukraine. Nord Stream 2 is owned by Gazprom and is a $10.5 billion project that stretches 745 miles from Russia’s gas fields to Germany’s Baltic coast. The U.S. says Russia lacks the technology to finish the pipeline. Russia says it will complete it by 2021.
Russia now supplies 39% of Europe’s natural gas. The United States supplies 3.5%, although a third of all U.S. LNG went to the European Union between January and November 2019, the European Commission says.
U.S. Senator Ted Cruz, R-Texas, is a leading proponent of the sanctions that went into effect in December 2019, saying that Nord Stream 2 is a lose-lose: first, the natural gas sales help finance Russian territorial goals while second, the line bypasses Ukraine and deprives it of revenues to run its country. Ukraine, of course, has aligned strategically with the West, creating conflict with Russia with which it shares cultural and business interests.
“It’s far better for Europe to be relying on energy from the United States than to be fueling Putin and Russia and dependent on Russia and subject to economic blackmail,” Cruz said in December when the Nord Stream 2 sanctions were approved. The sanctions also apply to any third party builder or financier. At that time, the Swiss contractor Allseas Group stopped participating while others with money on the table — Shell Oil and Engie — were befuddled by Washington’s moves.
But Cruz has an ulterior motive: he represents an oil-and-natural gas-producing state, which needs to jack-up sales to Europe — especially now. The lack of demand coupled with the oversupply means falling prices and job losses.
The Nord Stream 2 sanctions are helping the U.S. crack open European natural gas markets. But they have also had a practical and tangential effect of getting Russia to negotiate with Ukraine. At the end of 2019, the two countries formally agreed on a contract to send Russian gas through Ukraine and into Europe. It is a $7 billion deal that lasts five years.
If —’big if’ — those talks would lead to more deals and the subsequent withdrawal of Russia from Ukraine and Crimea, the sanctions will have paid off. But the developed world is already sanctioning Russia by banning the necessary technologies to develop oil and gas while also preventing those deals from getting financed. Russia has also been kicked out of the Group of Seven, formerly Eight. Its economy is contracting while nosediving energy prices are leading to fewer revenues and budget shortfalls.
With its abundance of unconventional natural gas, the United States has become a net exporter LNG since 2017. Donald Trump’s pitch to the American people is that this country would become an energy dominant source — that the country would feed its own needs and then export its shale oil and gas around the world. In that regard, the U.S. Federal Energy Regulatory Commission has approved a dozen LNG export terminals, on top of the five that currently exist.
“LNG demand is weak right now,” says Neil Chattejee, chair of the Federal Energy Regulatory Commission during a call hosted by the Atlantic Council. U.S. “companies are trying to secure long-term contracts and the U.S. is now a net exporter of energy. This has positive benefits economically and geopolitically: It is an alternative to Russia and it is beneficial to our allies. A resurgence of demand will come.”
The biggest European markets for the United States are the United Kingdom, Spain and France. But Germany is the most lucrative catch — a country that is in the process of shutting down all of its nuclear and coal plants. Germany has a goal of replacing much of that energy with renewables. Before that can happen, however, it will look to natural gas to fill the void — a fuel needed to “back up” wind and solar power when the weather does not play ball.
For the record, the Germans are peeved at the Americans, saying that their sanctions against Russia are having an “extraterritorial effect.”
The European Union would be casting a wide net for more natural gas suppliers with or without the U.S. sanctions on Nord Stream 2. In Western Europe, the penalties are largely seen as heavy-handed. In Eastern Europe, and specifically Ukraine, the sanctions are viewed as a hammer — a mechanism to get Russia to the bargaining table.
The geopolitics are complicated. But one thing is not: if the United States wants to gain increasing access to European natural gas markets, it will have to rely on free enterprise and not on coercive techniques.