Is Europe's Gas Alliance With Russia A Match Made In Heaven?

Authored by M.K.Bhadrakumar via IndianPunchline.com,

Amidst the excitement over the killing of the ISIS chief Abu Bakr Al-Baghdadi, a development of much impact on international security passed by when Denmark made the innocuous announcement on October 30 that it would permit the proposed Nord Stream 2 gas pipeline to pass through its exclusive economic zone.

Copenhagen modestly explained that it was “obliged to allow the construction of transit pipelines” under the UN Convention on the Law of the Sea.

The Nord Stream 2, which will connect Russia’s Leningrad Region  to Germany’s Baltic coast, bypassing the traditional route via Ukraine, aims to double the capacity of the already-built Nord Stream 1 to 110 billion cubic meters (bcm) per year that is more than a quarter of the European Union’s gas consumption.

On October 31, Gazprom, Russia’s energy Leviathan, had said 83 percent of the pipeline construction — more than 2100 km of the pipeline — was complete. The permit to construct in the Danish Exclusive Economic Zone south-east of Bornholm covers a 147-km-long route section.

Pipelay has been completed in Russian, Finnish and Swedish waters, and for the most part in German waters. The construction of both landfall facilities in Russia and Germany is nearing completion. Thus, the development last week signifies that Russia is certain to finish the project by the end of this year.

Despite the rising tensions in Russia’s relations with the United States, a massive energy project is all set to slither along the seabed between Russia and the European Union. The US wants to stifle the serpent in its infancy but Germany and Russia navigated it to the home stretch.

The project is expected to ensure safe and stable supplies of gas to Europe. The competitive Russian gas supplies will enable European customers to save anywhere around 8 billion euros on their gas bill in 2020.

More importantly, according to a study conducted by the University of Cologne EWI, “When Nord Stream 2 is available, Russia can supply more gas to the EU decreasing the need to import more expensive LNG. Hence, the import price for the remaining LNG volumes decreases, thereby reducing the overall EU-28 price level.”

Herein lies the rub. Europe has become a natural gas battleground for the US and Russia. Of course, apart from being a prized market, Europe is also a political battleground between the US and Russia.

Russia traditionally dominated the European market while European Union appears to be keen to wean itself off Russian gas, given the geopolitical implications of over-reliance on Moscow for its energy security. On the other hand, the US is looking to step up its exports liquefied natural gas (LNG) to Europe and faces a big resourceful competitor who cannot be dislodged  from the market  — Russia.

Russia loomed large as the largest supplier of natural gas to the EU in 2018. According to the European Commission’s latest data on EU imports of energy products in October, eleven member states imported in 2018 more than 75 percent of their total national imports of natural gas from Russia.

Russia has multiple pipelines in operation, which gives it a big advantage in cutting down transportation costs for the European consumers, as compared to more expensive LNG imports from the US. Clearly, both geoeconomics and geopolitics are at play here.

The US’ transatlantic leadership is largely conditional on the climate of relations between Europe and Russia in general and between Germany and Russia in particular. Washington is acutely conscious that Nord Stream 2 can provide the underpinning for a stable, predictable relationship between Europe and Russia, which would go against the grain of the Trump administration’s projection of Russia as a revisionist power that the US is determined to counter.   

In sum, Washington apprehends that if Nord Stream 2 is completed, it will come as a severe blow to transatlantic relations, although on the face of it, the US has been arguing that the project runs counter to the Western sanctions imposed on Russia following its annexation of Crimea.

Actually, this argument is sheer sophistry, since Europe’s dependence on Russian energy supplies is a legacy inherited from the days of the Soviet Union. Moscow is a stakeholder in preserving its reputation as a stable, reliable supplier of energy to Europe at competitive prices. The crux of the matter is that the European consumer prefers the cheaper Russian gas to the expensive LNG exports from the US.

Meanwhile, the Ukraine crisis alerted Russia to the geopolitical reality that it could be vulnerable to US pressure politically, which in turn prompted its energy pivot to China. Gazprom aims to become China’s top gas exporter by 2035. When the Power of Siberia pipeline (under construction in Eastern Siberia to transport gas to Far East countries) becomes active later this year, it will deliver 38 billion cubic metres of natural gas annually to China, which will make China Russia’s second-largest gas customer after Germany.

However, paradoxically, Russia’s gas exports to Europe are only increasing in recent years. In 2018, Gazprom’s gas sales to Europe and its share of Europe’s gas market reached record highs. This trend can only continue as the Nord Stream 2 and Turk Stream pipelines, which will become active shortly this year, will deliver an additional 86.5 billion cubic meters annually to Europe.

The vessel “Audacia” laying pipes for the Nord Stream 2 gas pipeline in the Baltic Sea off the island of Rügen

Simply put, Europe’s addiction to Russian gas remains a fact of life and with the continent’s own gas production on the decline, Europe needs to import much bigger volumes of gas and lots of it is going to come from Russia.

The amazing part has been the dogged resistance by Germany to the US pressure tactic to abandon Nord Stream 2. The US even threatened to sanction German companies; US Congress passed resolutions calling for an end to construction of the pipeline. Germany’s manufacturing economy is dependent on imports for 98% of its oil and 92% of its gas supply, and cheap gas is the lifeblood of its export-based economy.

But then, there could be more to it politically than meets the eye. Can it be a coincidence that Germany is also resisting US pressure to shut out Chinese tech giant Huawei from its 5G networks? Like with Nord Stream 2, Washington advanced the same argument apropos Huawei — national security concerns. But Germany snubbed the calls from the US.

The Economist magazine wrote some months ago that the “The Atlantic Ocean is starting to look awfully wide. To Europeans the United States  appears ever more remote.” To be sure, the coming into fruition of Nord Stream 2 is yet another sign that the transatlantic relationship currently faces significant challenges.

The US-European policy divisions have emerged on a wide range of regional and global issues. Although US and European policies toward Russia remain broadly aligned, Nord Stream 2 turned out to be a key US-European friction point.