“Gas War”: Europe as a Battleground

13:03 24.10.2018 • Andrey Kadomtsev , political scientist, foreign policy adviser to the Human Rights Ombudsman of the Russian Federation

On October 11, the US Congress presented a bill aimed at reducing Russian gas supplies to EU (!).

According to TASS, the document envisages the allocation of $1 billion to finance projects on the use of new sources of energy in the EU, as well as the provision of diplomatic and technical assistance to the European Union between 2019 and 2023. The bill envisages measures for a number of US government agencies to support private US investment in strategically important energy projects in Central and Eastern Europe.

It also proposes to allocate an annual $5 million for project evaluation and technical seminars for early stage project support. The State Department is advised to ramp up political and diplomatic assistance to certain countries in the development of their energy markets. The draft of the European Energy Security and Diversification Act was submitted by the chairman of the Senate subcommittee on European and regional security cooperation, Ron Johnson, and a fellow subcommittee member, Senator Chris Murphy.

On October 17, Russia’s Deputy Energy Minister Anatoly Yanovsky said that Russia is the only country capable of offering Europe such great volumes of natural gas so cheap, therefore there is no real alternative to pipeline gas coming to Europe from Russia. How realistic are US plans to phase Russia out of the European gas market?

Prerequisites for redrawing the European gas market arose in 2009 with the adoption of the EU’s Third Energy Package. Capitalizing on the fact that the policy of developing alternative sources of energy has led to stagnation or a bigger drop in hydrocarbon imports than expected, the European Union has switched to a strategy of diversifying supplies and, in general, imposing new rules of doing business with supplier countries. Comprehensive measures were later taken to develop a new gas import infrastructure. The past years have seen the integration of individual states’ pipelines via the construction of numerous interconnectors as part of the EU’s effort to make sure that the consumer, not the supplier, dictates the rules in the energy market. [i]. As a result, a conflict of interest between the consumer and the supplier has moved from the sphere of purely commercial disputes to the area of political confrontation between countries.

It is no secret that the United States had both geopolitical and economic reasons to encourage the Europeans’ policy, with experts still undecided which of these two reasons was actually prevalent. A more traditional standpoint explains this by the current tendency for the US to return to the world energy market as a potentially significant exporter. The energy boom that started in the US in the mid-2000s, caused by the wide-scale use of hydraulic fracturing (fracking), made the country much less dependent on foreign exports. This simultaneously revived Washington’s claim to be the main regulator (arbiter) of global hydrocarbon markets.

The United States accuses Moscow for its alleged attempts to exert political pressure against the EU and Ukraine as a pretext for its desire to limit Russia’s presence on the European energy market. When meeting with EU leaders in March 2014, US President Barack Obama demanded (!) measures from Brussels that would reduce its energy dependence on Russia. The very same desire is at the core of Washington’s rejection of the Nord Stream 2 project [ii]. Last year, the US adopted the Countering America's Adversaries Through Sanctions Act (CAATSA) that allows Washington to impose sanctions on companies participating in the construction of any new gas pipeline.  As an alternative to Russian gas, Washington is offering Europeans to buy liquid natural gas (LNG) from the United States. In summer 2017, President Donald Trump Летом 2017 unveiled an ambitious plan to make the US the world’s number one gas supplier.

The White House hopes to make America a net exporter to the LNG market by 2020 [iii].

Well, these hopes are not entirely ungrounded though. In line with the strategy of increased gas production initiated by President George W. Bush, the US Department of Energy reported in the spring of 2018 that United States had (for the first time in 60 years) reached the net gas export. The growth of shale production allowed the United States to produce 733 billion cubic meters by the end of 2017. Now, according to lenta.ru, America accounts for 21 percent of global gas production, and Russia, for 16 percent.

That being said, there are quite a few hurdles on the way of expanded US gas supplies to Europe. There is a notable energy shortage in the US domestic market. Therefore, it is hard to imagine an effective strategy for seizing foreign energy markets based on increased export of resources that are not in sufficient supply at home. What is the point of selling what you do not have enough yourself, the business weekly Expert wonders. Storms and severe frosts that hit the US in the early 2018 led to increased consumption of natural gas in the country, effectively dashing hopes for exports abroad.

As a result, 2017 gas deliveries to Europe did not exceed 3 billion cubic meters, while Europeans’ gas consumption in 2017 had reached 500 billion cubic meters [iv]. Moreover, within the next two or three years the currently high prices in the European gas market may drop due to growing LNG supplies, Reuters reported early this month, citing Norway’s draft budget for 2019.  

Any further diversification of sources of gas supply, much talked about in the EU in recent years, will only reinforce this trend. How, in this case, US authorities will manage to convince their energy producers to continue supplies to Europe, where they will have to compete with possibly cheaper Russian or Iranian oil is a big question.

Despite a notable increase in political and sanctions pressure since 2014, in late 2017, Russia accounted for 35 percent of the European gas market. Still, it has had to pay a price for this by making concessions in terms of price and terms of supply. Anticipating a further sanctions squeeze, in late December 2017, Vladimir Putin ordered corrections to the country’s energy security doctrine, the transport strategy for the period until 2030, and also the energy strategy until 2035. He also ordered new projects in the field of LNG where Russia currently occupies a rather modest niche. Russian forecast an over 40 percent increase in global demand for gas by the year 2040. The largest uptick - up to 70 percent - is projected exactly in the LNG trade where competition will obviously heat up.

At the same time, Moscow will need to work out measures to prevent competition between Russian LNG and pipeline gas, Expert believes. This would call for urgent development of technologies and infrastructure in big- and medium-scale gas liquefaction and transportation.

The turn of 2019-2020 could become a turning point for the European gas market.  By the end of 2019, the ten-year Russian-Ukrainian gas transit agreement expires. To bolster its position, in 2018-2019, Gazprom plans to complete two gas transportation megaprojects - Nord Stream 2 and Turkish Stream [v]. President Trump's announcement of entering the market exactly in 2020 may have also factored in the assessment of Gazprom’s future plans and the EU’s next steps to “liberalize” the gas market.

Meanwhile, pragmatically-minded politicians in Europe, primarily in Germany, have consistently been supporting the idea of the entirely economic nature of the second leg of Nord Stream – Nord Stream 2.

On October 12, the Prime Minister of the German Federal State of Mecklenburg-Vorpommern, Manuela Schwezig, posted an article on the website of the weekly Wirtschaftswoche about a steady increase in energy demand in Germany, adding that natural gas is the most efficient way of meeting this demand. She refutes the notion that a new gas pipeline will allegedly make Germany more dependent on Russia. Berlin and Moscow are equally interested in ensuring reliable energy supplies, Schwezig noted. Despite some lingering disagreements between the two, they have shared interests too, including the possibility of an early return to a “close partnership.” She believes that a gradual lifting of sanctions from Russia could also speed up the normalization of relations [vi].

There is one more geostrategic view on what is going on. Many Russian analysts believe that a long-term US strategy is not about a struggle for the gas market (European or even global) as such, but for its transformation by analogy with the current oil market. Washington's goal is to block as many existing gas pipelines and those still under construction so that the lion’s share of gas is transported by sea in the form of LNG.

This will help ‘‘unpeg’’ gas prices from oil and transform the international gas market into a single whole - global and spot [vii] - where transactions are short-term  and made in US dollars to minimize costs and risks. Such reformatting of the market will eventually make it possible to dictate terms to sellers and buyers through exchange rules and Fed policy. This means that the main purpose of the hype that has been going on about the “shale revolution” and “snapping up the world gas market” is to keep the world’s traditional energy market pegged to the US dollar [viii].

Both the aforementioned scenarios are fraught with serious problems for Europe. If Russia halts gas transit via Ukraine from 2020, and all attempts to avoid the blocking of Nord Stream 2 fail, Europe will have to urgently look for alternative suppliers, and US LNG will be the first thing it will have to go for. However, in this case Germany’s economic leadership will be thrown in doubt, and, consequently, the prospects of strengthening the unity of the EU.

If the European Union is to fight for real energy independence, then it will have, among other things, to look for ways to bring down the share of international commodity trade made in US in dollars. In September 2018, the European Commission President, Jean-Claude Juncker, described as “absurd” a situation where 80 percent of the EU’s its energy imports (300 billion Euros a year) are paid for in dollars. Meanwhile, a mere 2 percent Europe’s energy imports come from the United States. Juncker said that the euro should become "an instrument of a new, more sovereign Europe" and promised to "present initiatives to strengthen the international role of the euro."

German Foreign Minister Heiko Maas later came up with a proposal for the EU to have its own system of international payments. To make this happen, European financial authorities will need a greater deal of financial centralization of the EU and  a political partner for the European Central Bank in the form of a pan-European Finance Ministry [ix].

In this largely unpredictable and controversial situation, it is necessary to prepare for different scenarios. However, this task per se could further stoke up conflicts  between EU members.

Faced with this largely unpredictable and controversial situation, countries need to get ready for different scenarios.

According to one such scenario, by increasing its LNG production and export capacity, the United States can toughen its sanctions on Russia. If and when Washington is ready to replace Russian gas with its LNG, the EU could once again consider restrictions on Russian gas supplies to Europe. According to expert estimates, shale gas liquefaction plants currently under construction in the US, will not be able to produce necessary volumes before 2020 and even 2022 [x]. In spite of all sticking points currently existing between the EU and the US, after meeting with President Trump in Washington in July 2018, Jean-Claude Juncker announced the EU's intention to build "more terminals for importing LNG from the US."

Another option could be a possible US attempt to impose a price war on Russia. If Washington shows readiness to sell its LNG to Europe at dumping prices, Gazprom would have to engage in an even tougher political and price struggle to keep the European gas market.

 

The opinion of the author may not coincide with the position of the Editorial Board.

 

 



[i] http://russiancouncil.ru/analytics-and-comments/analytics/evrosoyuz-kak-game-changer-pravil-energeticheskoy-igry/

[ii] Nord Stream 2 project envisages the construction of two legs of a gas pipeline to annually deliver 55 billion cubic meters of Russian natural gas to Germany under the Baltic Sea. The construction’s estimated cost is 9.6 billion Euros. Nord Stream 2 AG acts as the project operator, while Gazprom is the only shareholder. Due to be wrapped up before the end of 2019, Nord Stream 2 is a joint project of Russia's Gazprom with France's Engie, Austria's OMV AG, UK-Dutch Royal Dutch Shell, and Germany's Uniper and Wintershall, which will finance 50 percent of the construction costs (Deutsche Welle)

[iii] http://expert.ru/2017/06/28/donald-tramp-ob_yavil-gazovuyu-revolyutsiyu/

[iv] http://expert.ru/2018/07/18/vstrecha-v-helsinki----nachalo-gazovoj-vojnyi-za-evropu/

[v] The gas pipeline from Russia’s Krasnodar Region running under the Black Sea to Turkey consists of two legs with a combined capacity of 31.5 billion cubic meters a year. The construction of the Turkish Stream pipeline started in 2017. By the mid-2018, the cost of construction was estimated at 7-9 billion Euros. (Vedomosti).

[vi] https://tass.ru/ekonomika/5671081

[vii] Spot (business deal) a contract of buying or selling a commodity, security or currency for immediate settlement (payment and delivery) on the spot date, which is normally two business days after the trade date.
[viii] http://expert.ru/expert/2017/37/trubyi-goryat/

[ix] https://regnum.ru/news/economy/2499954.html

[x] http://expert.ru/2017/06/29/energeticheskoe-dominirovanie/


 

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