European Cold War

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Gazprom's Nord Stream 2 export pipeline has been politically controversial from the outset, opposed by the US and many in Europe despite Russian assertions that it was a purely economic project. But US Secretary of State Mike Pompeo's blunt warning to European firms to “get out now, or risk the consequences,” as the Trump administration intensifies efforts to derail the pipeline's completion, threatens to create more cracks in the trans-Atlantic relationship and rally more European support for the project. The 55 billion cubic meter per year (5.3 billion cubic foot per day) pipeline does make economic sense for Gazprom. Running under the Baltic Sea to Germany, it's the shortest and cheapest route to get gas from new Yamal fields to Europe. But there's definitely a political motive. It also allows Russia to punish transit country Ukraine for turning to Europe in early 2014, which the Kremlin followed up by annexing Crimea and launching military action that triggered Western sanctions. European opposition to the project centered mainly on concerns about Ukraine, which Brussels supported in its standoff with Russia, and security of supply, since Nord Stream 2 and the existing Nord Stream 1 will concentrate up to 110 Bcm/yr of Russian gas along one route. But the European Commission has gradually softened its stance as gas imports from the Caspian and growing LNG imports have helped meet diversification goals, and a last-minute deal in December secured Ukraine's transit role and revenues for another five years. The latest US sanctions threats could tilt the balance further in the project's favor. Not only are they viewed as a breach of European sovereignty, they would hurt the five European companies that lent money to the Gazprom-owned project company -- Royal Dutch Shell, German firms Uniper and Wintershall Dea, France’s Engie and Austria’s OMV. US hostility toward the project has been driven partly by the desire to promote LNG exports in Europe in pursuit of American energy dominance, as well as the Trump administration's view of Russia as a malign force for its interference in the 2016 elections. President Donald Trump’s clashes with Europe over trade and Nato and his poor relations with German Chancellor Angela Merkel, who generally supports Nord Stream 2, helped fuel the sanctions appetite. But the fight for Europe comes as the continent's appetite for gas imports is waning. Coronavirus lockdowns are sapping demand, excess supply is keeping prices under pressure, and storage is almost full. Gazprom's export volumes look set to drop 16% to a five-year low this year, while revenues could crash around 50% (WGI Jul.22'20). US LNG exporters have also found it hard going, with offtakers canceling an estimated 100-plus US cargoes this summer. US exporters are largely protected by the fixed fees they receive when customers cancel, but the cancellations have resulted in a sharp drop in utilization rates. Demand for LNG feed gas at export plants slumped to 3.7 Bcf/d last week from an end-March peak of 9.53 Bcf/d. The longer-term picture also looks bleak. The first wave of US export projects is nearly complete. But as the tougher market prompts more and more delays, the second wave could end up as a trickle.

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