ENERGY WATCH #1 - December 13, 2018
Criticism of the Nord Stream 2 project routinely misses the bigger picture of EU’s lower carbon targets, Groningen’s impending switch-off and Russia’s own dependence on natural gas exports to Europe.
Pipeline projects by their very nature ought to be functional, reliable and crucial pieces of energy infrastructure built mundanely away from prying eyes, but Nord Stream 2 – the 1,200 km undersea pipeline project aimed at doubling Russian gas capacity to Germany, and by extension to Northern Europe – has proved to be anything but.
The project might be financed by a consortium comprising of Russia’s Gazprom and its five backers, Uniper and Wintershall of Germany, OMV of Austria, Engie of France, and Royal Dutch Shell, the Anglo-Dutch oil major, but its political ownership rests with Germany.
With the first 30 kms of the pipeline extension to the original Nord Stream having been laid, the criticism is getting louder. The primary moan – that Berlin is becoming “dependent” on Moscow for its energy needs – is not new, but the critics’ roster has changed, not least, to include US President Donald Trump, who often likes conducting international diplomacy via Twitter.
Trump belatedly joins a plethora of US senators threatening sanctions against all parties involved. Several Eastern European governments, especially Poland, and proponents of rival southern European pipeline projects have joined ranks with the Americans.
German Chancellor Angela Merkel has even been buffeted by those on her side. Manfred Weber, head of her centre-right leaning EPP group in the European Parliament, and Norbert Röttgen, chairman of the German parliament’s foreign affairs committee, have been vocal in their opposition too, preferring to send her letters of complaints rather than fire tweets.
And if all that was not enough, while the first bit of pipeline is being laid undersea, the scheduled works could not have come at a worse time with tension between Russia and Ukraine at its highest. The recent seizure by Russian forces of three Ukrainian navy vessels and their crews in the Kerch Strait at the entrance to the Sea of Azov, following Moscow’s Crimean annexation has complicated matters further.
Ukraine has always maintained that Nord Stream 2 is a Russian geopolitical tool packaged as energy infrastructure. Until the project comes onstream, much of Europe’s natural gas imported from Russia transits via Ukraine. Transit fees netted Ukraine’s Naftogaz $2.8bn (€2.5bn) in 2017, representative of 1.5% of the country’s GDP.
Despite assurances by Merkel that Ukraine will not be sidelined, few critics are buying it. Yet, for all the noise, much of the criticism seems to be low on facts and figures, especially when it comes to cataloguing Germany’s dependency.
Not in Moscow’s pocket
Trump’s claim that Berlin is “captive” because it imports 51% of its natural gas from Moscow is an exaggeration to put it mildly. Of course, Russia is Germany’s biggest gas supplier. However, it provides only fractionally more in volume terms than two other providers – Norway and the Netherlands.
Dissecting this down to power generation, natural gas, as of 2017, only accounts for 23% of Germany’s primary energy use and only 13.5% of the electricity generated at power plants. Not all of it comes from Russia, but near doubling of gas volumes from 53 billion cubic metres to 110 bcm via Nord Stream 2, as Berlin phases out nuclear and coal fuelled power plants is worrying many.
But much of the imported gas via the German gateway is likely to be passed on and sold on to the rest of Europe. If Trump is so concerned about Germany’s dependency on Russian gas, then perhaps he should look elsewhere on the continent too.
Austria, Bulgaria, Czech Republic, Estonia, Finland, Latvia, Poland, Romania, Slovenia and Slovakia, all imported more than 75% of their total national imports of natural gas from Russia.
How this dynamic will alter over the coming decades, after the Groningen in the Netherlands – once Europe’s largest operational gas field, is shut down by 2030 – remains to be seen but given proximity to Russia, it is only logical to turn to the neighbourhood for solutions.
A necessity that works both ways
Germany, like much of Europe, needs natural gas as a bridging fuel in its march to a low carbon economy. A cursory glance at the country’s underlying market conditions would reveal that. For instance, the UK’s decarbonisation of power generation has gone down from 900gm per KWh to about 225gm per KWh; in terms of CO2 intensity in British electricity generation.
That is largely down to coal shutdowns. But if you look at the comparable data for Germany – it has been steady at 800gm per KWh, which shows the magnitude of the task ahead.
“In order to decarbonise and meet its own high climate change targets, Germany needs natural gas. The most convenient, and economically viable, source at present for Berlin is Russia’s Gazprom,” says Ashutosh Shastri, Director at EnerStrat Consulting.
Likewise, Russia’s natural gas industry needs Germany, and by extension Europe, as much as they need it.
“Complementary, if not as cost effective, sources of LNG imports from Qatar, Algeria and US are emerging for Northern and Southern Europe, but for Gazprom, Europe remains the primary play, and its commercial mainstay,” Shastri adds.
Little surprise then that Gazprom has long ditched its past insistence on coupling natural gas prices with the oil price, and in the price negotiations of both 2008 and 2012, initiated compromises and discounts for supply contracts.
Matter of pure economics
Shuttering political rancour, the commodity business is about finding cost effective solutions and not playing supply games. While the political classes were obsessing over Nord Stream 2 last month, Qatar, the world’s largest LNG exporter, held talks with German energy firms Uniper and RWE, about cooperating on a potential local import terminal and liquefaction train.
Institutional investors pin possible location sites for the terminal at Brunsbuettel and nearby Stade, two small ports on the Elbe River close to Hamburg. Should it come onstream, as is Chancellor Merkel’s express wish, the terminal would join several others in Europe. These facilities provide complementary importation avenues, foster competition and keep the Russians on their toes.
In theory, if US LNG exports to China decline in the wake of trade tensions with Beijing, Europe could be the beneficiary of American LNG terminal projects seeking additional offtake. The country’s gas exports in first half of 2018 alone were more than double the figure posted in 2017, and total US LNG export capacity reached 3.6 bcf per day in March 2018, via Cove Point and Sabine Pass LNG projects.
But American exporters will need to sell for at least $6 per million btu in Europe in order for it to be profitable. It is a price level, Gazprom can, and in many cases does, discount by 20-25%, according to industry sources in Austria and Germany.
The Russian company has shown itself to be a very rational market player in recent years. “If you give up market share, who knows what you might have to do in order to claw that back again. Gazprom’s consistent strategy of defending market share sees Nord Stream 2 at its core, and sometimes you have to take it at face value,” Shastri says.
Little surprise it is then that Russia has labelled Trump and the US’ targeting of Nord Stream 2 as “anti competitive” and “unfair”, and aimed at furthering American LNG exports. Undoubtedly, Nord Stream 2 would foster piped gas versus LNG competition. How it gets played out in different parts of Europe remains to be seen, but both sides are likely to keep the other honest.