Germany’s bizarre Russian gas pact

The construction of the Nord Stream 2 pipeline between Russia and Germany has become one of the most controversial topics in European energy policy.

The Telegraph, Ambrose Evans-Pritchard, 23 June 2017

Pipes stacked ready for use in Nord Stream 2. The project has been nicknamed the Molotov-Ribbentrop 2 by a furious Poland, which is trying to block it in the courts

There is one basic point to remember about the Nord Stream 2 pipeline from Russia to Germany: it does not add any extra natural gas supply to the European market for the foreseeable future. This Molotov-Ribbentrop 2 pipeline – as the furious Poles call it – diverts the same Siberian gas from existing pipelines on land: the Yamal link through Belarus and Poland; and the ill-named Brotherhood link through Ukraine to south-east Europe.

These pipelines are in working order and running well below capacity. They need updating but are essentially sunk costs.

The Nord Stream 2 venture creates a sweetheart arrangement with Germany while undermining the security and economic interests of Eastern and Central Europe, and leaves Ukraine at the mercy of Kremlin blackmail.

“It does nothing whatsoever to supply the EU with gas. It deprives the East Europeans of political leverage and rewards an aggressor state,” said Prof Alan Riley from the Institute for Statecraft.

The second set of Nord Stream tubes will double the flows through four pipelines close together in the shallow Baltic – just 15 to 20 metres deep in places – leaving 75pc of the EU’s gas imports (excluding Norway) vulnerable to terrorist attacks and underwater drone strikes. Nord Stream 1 had to be closed in 2015 when the Swedish navy found an unexploded mine nearby.

“No sane strategist would ever do such a thing. They are creating a ‘Straits of Hormuz’ problem. The German SPD (Social Democrats) are just as delusional about this as the Tories are about Brexit,” said Prof Riley.

What is strange is that Berlin is determined to press ahead with this divisive undertaking when eight East European states have protested bitterly, and Poland is trying to block it in the courts.

The saga is a raw example of how Berlin captures the EU machinery. Brussels set aside EU law on Nord Stream, yet applied it on the other pipelines such as Yamal and South Stream. Solidarity and the rule of law in the EU apply only when the Kanzleramt chooses.

This is why the Russia sanctions bill that passed in the US Senate by 98-2 touches such a raw nerve. It codifies existing curbs imposed by the Obama administration after the seizure of Crimea. If backed by a veto-proof majority in the House, the sanctions become rigid law, likely to last for Vladimir Putin’s political lifetime.

Russia will not be able to draw on Western technology to develop Arctic waters and the Bazhenov shale reserves at viable cost. It will be harder to replace depleting wells in western Siberia.

The new twist is a clause to sanction Western companies that collude with the Kremlin in Nord Stream 2. This is not mandatory. The White House could ignore it. Yet President Donald Trump may have little choice if the Mueller probe into Russian subversion throws up anything serious.

The five big companies that signed up to the €9.5bn (£8.4bn) costs of Nord Stream 2 are Germany’s Uniper and Wintershall, Austria’s OMV, Engie in France, and Shell. All have operations in Russia, or aim to have, or have pipeline contracts with Gazprom.

They could defy a Washington ban. This would be suicidal. They would discover it is almost impossible for a multinational to operate if it falls foul of an elite cell at the US Treasury adept at strangulation. Juan Zarate, ex-head of this outfit, describes the method as the “boa constrictor’s lethal embrace”. It works through hegemonic control of the global banking system. “It is a new kind of war, like a creeping financial insurgency, intended to constrict our enemies’ financial lifeblood,” he says.

Once the US Treasury invokes the “scarlet letter” under Section 311 of the US Patriot Act, you are radioactive. Defy that if you dare.

Germany and Austria are livid. “We cannot accept the threat of sanctions against European companies that want to contribute to the expansion of European energy supplies! Europe’s energy supply is a matter for Europe, not for the US!” reads a joint statement laden with exclamation marks.

Nord Stream 2: Germany and Austria stand up to The United States over pipeline sanctions.

There is talk of retaliatory sanctions, but this would be a German diplomatic Stalingrad. Such a démarche would force Eastern Europe to choose between the EU and Washington.

Berlin and Vienna grumble that the Senate bill is really about promoting US exports of liquefied natural gas (LNG) to Europe. Perhaps so, but why should they dislike that? The flood of cheap LNG into Europe from US shale is magnificent news. It breaks Gazprom’s monopoly and forces down prices in much the same way as US shale oil is breaking Opec dominance in crude pricing – and shifting spending power from petro-sheikdoms (and Russia) to global consumers.

When Lithuania opened its LNG terminal, Independence, Gazprom quickly offered a 23pc discount on gas prices to retain market share. Poland has just taken its first delivery of American LNG from Cheniere. The advent of shipped LNG means gas prices reflect the global market. Surging supply from Australia, Indonesia and Qatar have led to abundance.

The coming US wave threatens checkmate for the Kremlin. Washington expects LNG exports to reach 96 billion cubic metres (BCM) by 2020. Half will go to Europe. By comparison: Russia’s total exports to the EU are 118 BCM.

Gazprom produces very cheaply. As Russian officials are quick to point out, it undercuts LNG. But this is irrelevant in geostrategic terms. LNG has become cheap enough, despite suppliers having to liquefy it to transport it by ship. Deliveries to Europe are coming in near $5 (per mil/BTU). Gazprom was able to charge $14 in the heyday. “Russia has to accept enormous profit sacrifice to beat off the competition,” said Prof Riley.

Nord Stream 2 fans say more Russian gas will be needed as North Sea output plummets. This would be plausible if world gas supplies were scarce. Obviously they are not. The International Energy Agency expects LNG to grow to half of the world’s gas supply by 2040.

What the project does is let Russia play a divide-and-rule game that splits the EU, and sweeten Germany with preferential pricing. It really is a bizarre 1939-style pact.

Germany is entering dangerous waters. It has pushed a line that risks undermining American emotional backing for the European order, and is deepening a line of cleavage within the EU itself. It is doing so at a time when western Europe has disarmed and offers an open goal for a rearmed Russia.

The collective feeling in Washington is that American democracy has been raped by Kremlin cyber aggression. A state of political warfare exists between the US and Russia. We know which side Poland is on. Which is Germany on?

‘Germany’s talk of retaliatory sanctions against Washington would be a diplomatic Stalingrad’

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