The US Strikes Back Against Russia’s European Gas Empire

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KYIV, Ukraine—With the Kremlin tightening its grip on the European energy market, the U.S. has hardened its opposition to a controversial Russian gas pipeline, which is currently under construction through the Baltic Sea to Germany.

For months, U.S. officials have said Russia’s Nord Stream 2 pipeline is part of a broader Kremlin gambit to bypass Ukrainian transit pipelines, which have delivered the lion’s share of Russian natural gas exports to Europe for decades.

Yet, despite U.S. protests, construction hasn’t stopped, and the 750-mile-long pipeline is about one-third complete as of this article’s publication. The U.S., for its part, escalated its resistance to the project this month, when U.S. Ambassador to Germany Richard Grenell sent letters to construction contractors working on the Nord Stream 2 pipeline, warning of “a significant risk of sanctions” unless they abandoned the project.

“The problem with Nord Stream 2 is that it is not an economic project. It was developed for only one reason: to create an alternative route for transporting Russian gas on the way to Europe that does not pass through Ukraine,” Grenell said in an interview published in the German Rheinische Post newspaper on Jan. 15.

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Russia’s gas giant, Gazprom, is the principal shareholder of the Nord Stream 2 pipeline project, with five European companies financing half of the construction cost. Allseas, a Swiss-based offshore pipeline and platform company, is the primary contractor building the pipeline.

The laying vessel Audacia of the offshore service provider Allseas lays pipes for the Nord Stream 2 gas pipeline in the Baltic Sea off the island of Rügen, Nov. 15, 2018. (Photo: Bernd Wüstneck/Picture Alliance/Getty Images)

Nord Stream 2 parallels the existing Nord Stream pipeline’s path from Russia under the Baltic Sea, making landfall near Greifswald, Germany. Nord Stream is the longest undersea pipeline in the world, capable of delivering 55 billion cubic meters of Russian gas annually to Germany. That gas can then be forwarded on to other European clients.

Nord Stream—which went operational in 2011—can deliver a little more than a quarter of Russia’s total gas exports to Europe. Once operational, Nord Stream 2 would double Nord Stream’s current annual capacity.

“The best possible end-goal for Russia with Nord Stream 2 is to create strategic dependency of Germany as a state, and of the German political establishment, on Russian energies, bypass Ukraine, and increase the importance of Russian interests in Berlin,” Jakub Janda, executive director of the Prague-based European Values think tank, told The Daily Signal.

TurkStream, another Gazprom pipeline under construction, also bypasses Ukraine, connecting Russia with Turkey under the Black Sea.

TurkStream comprises two pipeline strings, each of which will have the capacity to deliver 15.75 billion cubic meters annually. According to information on Gazprom’s website, the first string is meant to deliver gas only to Turkey, while the second string will directly deliver Russian gas to southeastern Europe.

Ukraine’s pro-Western revolution in 2014 set Russia on a crash-course effort to ditch its former Soviet ally as a gas transit partner. Gazprom announced plans for TurkStream in 2014 and Nord Stream 2 in 2015. The U.S. says Russia’s planned pipelines are strategic threats to Europe’s energy security, entrenching the EU’s reliance on Russian gas.

“If European gas supplies through Ukraine become redundant due to the launch of Nord Stream 2 and TurkStream, Kyiv will lose its importance in the field of security policy, which will increase the risk of intervention by Russia,” Grenell wrote in the letters to Nord Stream 2 contractors, Germany’s Bild am Sonntag newspaper reported.

For Kyiv, Nord Stream 2 is considered a looming economic catastrophe, just as Ukraine’s economy has begun to recover from five years of war and post-revolutionary upheavals.

“In Ukraine, the American position on strengthening the sanction regime towards Russia and, in particular, on the NS2, is highly appreciated,” said Mykhailo Gonchar, founder and president of Kyiv’s Center for Global Studies Strategy XXI.

“Against the background of the failure of the EU to stop Nord Stream 2, today only U.S. sanctions can stop it,” Gonchar told The Daily Signal.

Stranglehold

Ukraine has a contract with Gazprom for $3 billion in annual gas transit fees. That contract, however, is set to expire in 2020.

Gazprom has a standing contract to pay Ukraine for the transit of 110 billion cubic meters of gas annually. According to a ruling last year by the Arbitration Institute of the Stockholm Chamber of Commerce, Gazprom has to pay for its contracted transit gas through the end of 2019, no matter how much of that amount actually travels through Ukraine.

Both Nord Stream 2 and the second, Europe-bound string of TurkStream are slated for completion by the end of 2019—just in time for Russia to have alternate gas routes to Europe in hand when it goes to renegotiate its gas transit contract with Kyiv.

The pipes for the Nord Stream 2 gas pipeline are prepared for welding using assembly line techniques on board the laying vessel Audacia, Nov. 15, 2018. After welding, they are laid at the bottom of the Baltic Sea. (Photo: Bernd Wüstneck/Picture Alliance/Getty Images)

Trilateral talks between Ukraine, the EU, and Russia are scheduled for Jan. 21 in Brussels to discuss the future of gas transit through Ukraine.

Russian President Vladimir Putin has pledged that Russia will maintain gas transit through Ukraine in the amount of 14 to 15 billion cubic meters of gas annually. In that case, Ukraine’s pipelines, which have an overall capacity of 142 billion cubic meters per year,would be operating at roughly 10.5 percent of their capacity, according to International Energy Agency and Ukrainian government data.

“At such a loading level, the [Ukrainian gas transmission system] will generate losses and lose its functionality,” said Gonchar, president of Kyiv’s Center for Global Studies Strategy XXI.

The Ukrainian gas transmission system needs an annual flow rate of at least 50 billion cubic meters per year to break even financially, Gonchar said.

For her part, German Chancellor Angela Merkel pledged last year that Ukraine would maintain its role as “an important transit country” after Nord Stream 2 is operational. Her words, however, did little to reassure Kyiv.

“I don’t believe those assurances. They are useless. Real guarantees need to be based on math and not words,” said Mykola Bielieskov, deputy director of the Institute of World Policy, a Ukrainian think tank.

Ukraine stands to lose about $3 billion annually if Russia cancels its gas transit agreement. That annual loss represents a little more than 8 percent of Ukraine’s 2018 budget of $36.4 billion, and roughly 2.4 percent of its 2018 gross domestic product.

The German Perspective

Germany, for its part, received between 50 percent to 75 percent of its natural gas imports from Russia last year, according to Eurostat, the European Commission’s statistics organization. Russia also supplied about half of Germany’s oil imports.

Germany is the largest single buyer of Russian natural gas worldwide, accounting for 27.5 percent of Gazprom’s total exports in 2017. And in the first half of 2018, Gazprom’s gas exports to Germany increased by 12.2 percent over the same period in 2017, the company reported.

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