When construction began on the second Nord Stream pipeline that was going to double the volume of natural gas ships to Europe—most of it to Germany—the European Union wasted no time in voicing its opposition to more Russian gas.
Led by Ukraine, which fears the transit fee losses that Nord Stream 2 would bring, and the Baltic States and Poland, which are too reliant on Russian gas supplies already, this opposition led to legal battles and threats of sanctions if Russia “tries to use the pipeline as a weapon against other countries,” according to German Chancellor Angela Merkel.
The project also attracted the attention of the new global gas export giant, the United States, for which the European market is a most lucrative one thanks to its repetitively stated desire to diversify gas supply sources.
The U.S. slapped sanctions on the Russian participants in Nord Stream 2 and threatened their Western European partners with sanctions, too. Germany opposed this, for which reason Nord Stream 2 has proceeded and is now nearing completion. And yet, Europe is facing a gas crunch this winter and is eager to see Nord Stream 2 go live.
Earlier this year, when Gazprom fulfilled its gas deliveries to Europe per long-term contracts, it was not enough to fill Europe’s empty storage and prepare it for winter. Ukraine immediately took the opportunity to accuse Moscow of “blackmail,” but the EU, in an unusual move, disagreed.
There were “no indications of specific behaviour by any of our suppliers to drive up prices,” one EC official told the Financial Times in July. “The current situation is a reflection of global market dynamics. All EU regions now have access to more than one source of gas, so are less vulnerable to supply squeezes coming from an individual supplier,” he added.
It’s a love-hate relationship of the purest kind. Europe has been desperate to diversify its gas suppliers, but the only diversification it has achieved is via liquefied natural gas and the Trans-Adriatic Pipeline, which at the time it was put into operation—last year—it was years behind schedule.
Yet the TAP, which carries Azeri gas, has only a fifth of the capacity that either Nord Stream pipe has: it can move 10 billion cubic meters annually, which equals 2 percent of Europe’s gas consumption. Also, most of the gas TAP brings into Europe goes to Italy. The pipeline could be expanded, but this is in the future.
Meanwhile, Europe is facing a gas shortage that prompted an executive from the UK’s Centrica, the utility that owns British Gas, to warn that Britons are facing higher electricity bills this winter and some businesses might be forced to curb activity, not only in the UK but in Europe, too.
“We haven’t seen a price situation like this before. If you can’t attract supply the only alternative is to cut demand to balance the market,” Cassim Mangerah told the FT earlier this month. “If we do see a supply crunch this winter the other way to balance the market is through economic activity. If prices are really high then some gas-dependent businesses in the UK and Europe may simply decide not to produce.”
Meanwhile, Ukraine is still calling on Europe to stop Nord Stream 2 despite assurances from Chancellor Merkel personally that she would not allow Gazprom to deprive Ukraine of the transit fees it receives now for the Russian gas it ships via other pipelines to Europe.
So, Europe resents Russian gas for the influence it gives a country that the EU considers unfriendly, to put it mildly, but at the same time, it is increasingly thirsty for gas because of a prolonged winter last year that drained its reserves. That winter was unfortunately followed by a busy Asian summer that saw LNG cargoes getting diverted from Europe to Asia because Asian buyers were ready to pay higher prices. And here comes the twist: even if the attempts to stop Nord Stream 2 fail, the new pipe will not lead to an increase in European gas deliveries from Russia.
The reason is simple: whenever the pipeline starts, Gazprom’s planned deliveries to Europe for full-2021 are set at 183 billion cubic meters. And with or without Nord Stream 2, this figure will remain unchanged, the state company said at the end of August. The new pipe could ship an additional 5.6 billion cubic meters, the head of Gazprom’s finance department said during an earnings call. But this won’t make a big difference.
So, is Russia already wielding the gas weapon that the EU and Ukraine have feared for years? That may well be the case, according to some observers, per a recent article by Energy Intelligence’ Vitaly Sokolov. On the other hand, Gazprom is sticking to its long-term contract commitments to Europe, so it would be difficult to accuse the company of deliberately cutting supplies. There are no cuts.
Chancellor Merkel said recently that in twenty-five years, Europe will no longer need Russian gas. That would certainly make the continent a lot more energy independent and remove a major headache that is keeping officials in Brussels awake at night. As long as it happens.
By Irina Slav for Oilprice.com
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