“Germany hooks up a pipeline into Russia, where Germany is going to be paying billions of dollars for energy into Russia. And I’m saying, ‘What’s going on with that?”’ President Trump said at a recent meeting with the leaders of Latvia, Lithuania, and Estonia at the White House. The remark certainly reflected the views of the Baltic leaders on Nord Stream 2, but what it did not reflect was Germany’s view on the matter, and Germany is the destination of the expanded pipeline.
Germany fully approved Nord Stream 2 at the end of March, and its regulator was confident that the approvals from the other four countries along the route of the pipeline will come soon. This week, Finland granted the first of two approvals for the project. Russia, Sweden, and Denmark remain. Germany will certainly do what needs to be done to convince Sweden and Denmark that Nord Stream 2 is a necessary piece of infrastructure and that whatever the political sentiment towards Russia in Europe, economies need fuel.
Germany itself is an example of this pragmatic approach: Angela Merkel slammed Moscow for its alleged involvement in the nerve gas attack against a former double spy and his daughter in the UK, but this did not prevent the government from standing behind Nord Stream 2 from the very beginning. On a side note, the Skripal narrative is beginning to unwind fast, and one senior German government official has already breached the right party line, questioning the lack of evidence in the case.
Nevertheless, the US President’s remarks are accurate: Germany will end up paying billions to Russia for gas. This is what happens when one country imports a lot of a commodity from another country. Still, Germany pays a lot less for Russian gas than other, smaller clients, such as Bulgaria. And as much as it might displease Trump, Russian gas is and will remain cheaper for Germany than U.S. LNG for a very simple reason called distance. Until U.S. producers find a way to make LNG production so cheap that the length of the journey to Europe allows it to remain competitive with Russian pipeline gas, the current state of affairs will persist.
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Bloomberg reports how German lawmakers mocked President Trump’s comments on Nord Steam 2, saying that he was looking for ways to ensure markets for U.S. LNG, and felt that Nord Steam 2 interfered with these plans.
Of course, the United States will be looking for ways to sell its growing production of natural gas, just as Russia is seeking to strengthen its market share on a key market. But Germany is having none of Trump’s pressure, it seems. And, not to put too fine a point on it, but Germany is already planning to boost its LNG import capacity.
Europe’s largest economy is perfectly aware of the importance of energy source diversification. It is also perfectly aware that its energy needs will continue to grow as the economy grows and as it phases out all nuclear plants in the next few years. It cannot afford to rely entirely on Russia and Norway, so it is building LNG terminals. That should be good news for Washington. In reality, there is likely enough gas demand for both Russian and U.S. gas in Germany. There is also the geopolitical aspect of the Nord Stream saga, but history has shown that market forces usually trump politics and ideology.
By Irina Slav for Oilprice.com
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The truth of the matter is that President Trump’s opposition to Nord Stream 2 is plain and simple an attempt to ensure markets for US LNG and displace Russia as gas supplier to Europe.
Germany’s recent approval of the Russian-led Nord Stream 2 gas pipeline makes great economic sense and provides energy security not only for Germany but for the whole European Union (EU). This week, Finland granted the first of two approvals for the project and soon Sweden and Denmark will follow suit. Russia provides roughly 40% of Europe’s gas needs.
Germany receives 57% of its natural gas and 35% of its crude oil from Russia. Furthermore, Russian gas is and will remain cheaper for Germany than US LNG for the foreseeable future until US producers can match Russian gas prices.
Still, Germany is building LNG terminals not only for diversification of energy sources but also because of fast-rising demand for gas in Germany.
Once completed by the end of 2019, Nord Stream 2 along with its twin Nord Stream 1 will eventually provide a total of 110 billion cubic metres per year (bcm/y) of Russian gas supplies to Germany and the North-West European gas market.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London