Opinion

Nord Stream 2: with Europe already divided, the US adds a new layer of geopolitical complexity


When Gazprom officially launched plans to build the second Nord Stream gas pipeline system to Germany in June 2015, the accusations that Gazprom's main aim was to increase its dominance over European gas came thick and fast.

When five European majors from five EU member states (Austria, France, Germany, the Netherlands and the UK) all joined the Nord Stream 2 project, it left Europe essentially divided — those in northwest Europe who supported the pipeline and those strongly opposed, mostly countries in eastern Europe.

The previous US administration was notionally opposed to the project, with former Secretary of State John Kerry warning of its impact on the countries of eastern Europe — and in particular Ukraine — given the anticipated fall in transit revenues and concern over the fact that so much Russian gas could be delivered to Europe via just one route.

But now the US has joined the complex geopolitical web being spun around Nord Stream 2 with concrete action, the Senate last week proposing sanctions against companies that invest in Russian energy pipelines.

The sanctions are not a done deal yet by any means, but the reaction from Germany and Austria — home to Nord Stream 2 financiers Wintershall, Uniper and OMV — was as fierce as it was immediate.

A joint statement the day after the Senate vote included — very unusually — no fewer than four exclamation points, proof if any were needed of how strongly the two governments felt.

  • “We cannot accept the threat of sanctions against European companies that want to contribute to the expansion of European energy supplies!”
  • “Europe's energy supply is a matter for Europe, not for the US!”
  • “Foreign policy interests must in no way be linked to economic interests! There is still enough time, and opportunity, to prevent this!”

These are clearly not comments that could be open to misinterpretation, and have triggered a new diplomatic spat.

Germany and Austria said the potential US sanctions had brought a “new and very negative” quality to US-Europe relations and there has even been talk already in Berlin of reciprocal sanctions against the US.

Germany and Austria went one step further, too — accusing the US of looking to promote the role of US LNG in Europe at the expense of Russian gas.

The US, it seems, could have mixed motives for imposing sanctions on Nord Stream 2: punishing Moscow further for the annexation of Crimea and for not implementing the 2014 Minsk Protocol to halt the conflict in Ukraine; and promoting US LNG supplies in Europe, which would have the knock-on effect of supporting domestic US gas industry. 

Of course, gas has always been a political animal in Europe, but with Nord Stream 2 things have seemingly moved to a new level.

All the while, there is actually only a limited impact that any measures would have on Nord Stream 2.

Gazprom had already pledged to move forward alone with the Eur8 billion project when Poland in August 2016 succeeded in blocking the creation of the Nord Stream 2 joint venture.

There is no reason to believe that Gazprom would stop work to build the pipeline, even if sanctions block the five European companies from investing further in the project.

Gazprom should be able to afford the pipeline, which is relatively cheap compared with, say, the Southern Gas Corridor, and of course it has the full backing of the Kremlin.

Indeed, Gazprom and Russian President Vladimir Putin both shrugged off the US Senate proposals, Putin calling them “nothing extraordinary.”

The gas giant has repeatedly stated that Nord Stream 2 would give European buyers a new option for buying Russian gas, which can only be positive in contributing to a liquid market. If you put extra volumes — or even the possibility of extra volumes — into Europe, you would expect that to improve liquidity and optionality.

No one would be under any obligation to make Russian gas purchases via the new route.

Gazprom has also repeatedly stated that it is not seeking increased market share in Europe — as recently as May that position was reaffirmed by Gazprom Export CEO Elena Burmistrova, who said it was Gazprom's ambition to retain a share of around one third in Europe.

Russia's share of the European gas market grew in 2016 to 34%.

“Market share is not a goal in itself for us. We don't want to take the market and die by doing this,” she said. “The European gas market is a territory of peaceful competition, not a war of ‘all against all'.”

For Gazprom, any US sanctions will do very little to change its role in supplying gas to Europe.

Nord Stream 2 is a pipeline designed to serve markets in northwest Europe where domestic gas production is falling rapidly.

And under some scenarios, Russia would still need to use Ukraine's transit pipelines to meet demand in Europe even with Nord Stream 2. 

Still, the political focus on Nord Stream 2 looks likely to be amplified in the coming months as all eyes switch to how the sanctions plan pans out in Washington.

In fact, with the US and Germany/Austria now embroiled in a very public spat, the attention has ironically shifted away from Moscow somewhat.

Gazprom — accused before of a “divide and conquer” strategy in Europe — may well find the latest developments pitting Washington and Berlin against each other of significant interest.

Gazprom, of course, is still trying to convince Brussels that it is happy to change its gas selling behavior in eastern Europe with more commitment to market forces.

Let's not forget — Gazprom is still very much bound up in the European Commission antitrust case against it, accused of abuse of its dominant position in gas markets in central and eastern Europe.

Gazprom has offered to change its selling behavior in those countries, but still firmly rejects the allegations.

Deputy CEO Alexander Medvedev said earlier this month: “We do not accept guilt, and we are not going to accept guilt. We decided to meet the EC half way so the market can continue to develop. We are interested in having competition develop, as we are an active market player.”

One country that still sees Gazprom as a political organization as much as a market-driven commercial entity is Ukraine.

Kiev would, of course, be the main loser once Nord Stream 2 is built — it stands to lose its $2 billion/year in transit revenues if gas is diverted away from the Ukrainian route.

“Gazprom wants to control flows of gas to Europe,” Yuriy Vitrenko, chief commercial officer at state-owned Naftogaz Ukrayiny, told S&P Global Platts last week.

“From a commercial standpoint, Gazprom should continue using the Ukraine system — it is very flexible and very reliable. Commercially, they should need the Ukrainian system, but we're not sure they are driven by commercial interests,” Vitrenko said.

Clearly passions continue to run high around Gazprom and Nord Stream 2, and with the pipeline due to come online only at the end of 2019, there is still time — undoubtedly — for more twists in this tale.

Author

Stuart Elliott, Senior Writer
A journalist with over 17 years of experience in business reporting and analysis with a focus on the ever-changing oil and gas sectors.



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