Nord Stream 2 caught between politicization, hypocrisy and ignorance: a few inconvenient truths

Executive Summary

The Nord Stream 2 pipeline (‘NS2’) is caught between politicization, hypocrisy and ignorance.

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• The U.S. NS2 sanctions are an entirely unacceptable extra-territorial interference in European energy policy. While claiming to ‘protect’ their allies, they are running a, in the face of a meanwhile global gas market entirely unnecessary, U.S. LNG sales campaign.
• The amendment of the Third Gas Directive is no doubt a discriminatory ‘Lex NS2’. While NS2 opponents assert Russia might use gas as a political weapon, it is the EC using regulation as a political weapon.

NS2 opponents qualify gas carried by NS2 as ‘molecules of malign influence’ (the U.S.) and as the Trojan horse by which the Russian president could exercise political blackmail (the European opponents). A few ‘inconvenient truths’ reveal hypocrisy and ignorance:

• Continued transit through Ukraine, albeit also carrying molecules of the very same Russian origin, saw strong political support.
• The rise of Russian LNG, meanwhile ranking no. 4 globally and supplied to Europe in large quantities, is not taken issue with.
• Russian crude oil, its export rendering more than three times as much revenue as gas exports to Europe, is not sanctioned by the U.S. but instead imported in large quantities. Also European NS2 opponents conveniently ignore that Europe buys more than 30% of its crude oil imports from Russia.

Both the sanctions and the ramifications stemming from the amendment of the Third Gas Directive obstruct European climate efforts.

• Modern, state-of-the-art infrastructure, i.e. new pipelines and new, energy efficient compressors, such as NS2 features, contribute significantly to reduce the carbon footprint of fossil gas.
• Even vs. the best LNG alternative (Qatar), 55 bcm/a carried by NS2 would save ~17.1 million tons of CO2equ per annum and ~11 million tons vs. transit through the Ukraine.

The tacit ‘optimism’ that NS2 will be completed and operational with only a minor delay poses an unnecessary risk to security of gas supply. The yardstick for a matter so important should be (achievable) certainty rather than optimism.

• The current capacity arrangements, hinging on such optimism, are all ‘stitched tightly on edge’, i.e. do not cater for alternative capacity to speak of should the delay be longer. If there were another extremely cold winter (e.g. another ‘beast from the East’) and Asian LNG demand were up at the same time, the unavailability of NS2 could result in a serious security of supply issue, causing prices to rise to the detriment of European consumers.
• Spare import pipeline capacity needed to provide a ‘buffer’ for seasonal swing in the heat market and volatility in the power generation space, previously provided largely by the Dutch Groningen field, has over the past several years diminished to critically low levels.
• In the past, Ukrainian transit capacity provided spare Russian import pipeline capacity even beyond the utilization of ~80 bcm/a in 2018/19. Now, the system is going to be reduced to 40 bcm/a. This eradicates, absent NS2, Russian spare import pipeline capacity in its entirety.
• The Yamal transit agreement will expire in May 2020 but ‘nobody moves’. There is no certainty about its continued availability, if only used as a ‘stand-by’ facility with no long-term bookings generating revenues justifying the costs.
• With the Opal utilization restriction re-instituted by the ECJ, spare Russian import pipeline capacity would, even if NS2 were completed and operational, again be reduced to critically low levels if any. The EC could easily remedy the ‘procedural flaw’ perceived by the ECJ in a ‘five minute repeat procedure’ considering Poland. Since Poland’s security of supply is neither affected by Nord Stream 1 (and Opal) nor NS2 (and EUGAL), the result would be the same as in the previous accord.

Demand for gas is rising as a consequence of government imposed phase-outs of coal-, lignite and nuclear baseload power generation and, i.a., the transformation of the heat sector.

• The postulate to disallow any further fossil gas entirely (and therefore also NS2) is a fallacy. The ‘all-out-electric’ ideology is unfit to bring the energy transformation about. Gaseous molecules are superior to electrons due to their higher energy density and thus pivotal to progress cost-efficient decarbonization. The degree of decarbonization correlates with the type of gaseous molecules deployed. Up to ~65% of decarbonization, fossil gas is enormously beneficial for battling climate change and improving air quality.
• Previous conservative projections of the IEA saw European demand remaining flat at ~450 bcm/a. In a span of two years, these projections have been adjusted towards ~540 bcm/a, i.e. by almost a 100 bcm/a.
• The increasing gas demand in the power sector due to imposed phase-outs is augmented and accelerated by market-driven coal-to-gas switching owing to low gas and high carbon prices.

Import demand is rising ever more. Previous projections assumed flat demand and a continued gradual decline of indigenous production. Already then, an import need of staggering 390 bcm/a was projected. Now we see significantly rising demand and, at the same time, an accelerated decline of indigenous production, bringing total import needs way above 400 bcm/a.

The assertion of NS2 opponents that NS2 would increase gas supply dependency on Russia and thus create exposure to political blackmail is ignoring the massive change of market circumstances since 2009 (Ukrainian gas crisis):

• The European gas market can meanwhile be called an (almost complete) ‘European Henry Hub’, where price formation occurs by supply and demand with no remaining price-setting power of importers including Russia. The – leading - TTF features as European and increasingly also as global price benchmark. The European markets are thus capable of sending out price signals to attract alternative supplies should there be any (accidental or intentional) supply shortage.
• Europe avails, besides vast storage capacity, of significant redundant import capacities. The LNG import capacity alone caters for volumes larger than the entire Russian supplies to Europe. Europe is thus capable of receiving alternative supplies should the need arise.
• The so-called ‘LNG revolution’ has fostered a global gas market. It has spawned ever more destination-flexible LNG supplies (> 400 bcm/a) which would readily respond to European price signals. The availability of and access to global LNG constitutes the ‘policeman’ watching over the maximum achievable price for pipeline suppliers in Europe.
• In consequence, the water-borne LNG trade has turned gas into a fungible commodity comparable to crude oil. European security of supply has transformed from ‘bilateral physical dependency’ (prevailing in 2009) towards a ‘functionality of price signals’ (today), rendering assertions of dependency on Russia yesterday’s news.

With its high degree of diversified supplies and its significant redundant import capacities, Europe is the ‘perfect storm’ for supplier competition. In consequence, prices are low and thus hugely beneficial for European consumers.

• Until 3Q’18 Asian prices were significantly higher (~3.3 $/MMBtu) than the European prices. Had there been a shut-out of Russian pipeline supplies by Europe, European consumers, competing with Asia for LNG supplies, would have had to pay an extra ~50 billion Euros per annum.
• After the Asian price premium collapsed as of 4Q’18, Europe saw a surge of LNG imports as a market of last resort. The ensuing LNG/pipeline supplier competition caused a massive price drop (from 27 to <10 €/MWh) benefiting European consumers.
• Gazprom retained its year-on-year total sales to Europe in 2019 by selling significant volumes via its exchange-like ESP platform, with a variety of traded products at TTF price levels, i.e. acting as ‘price-taker’.

It is a reasonable certainty that Asian demand will pick up again and, subsequently, an Asian price premium will arise. With sufficient pipeline supplies, having to submit to the powerful European traded markets as price taker, European consumers will continue to enjoy competitive prices. But the need to compete for LNG with Asia at elevated prices on a permanent basis would not arise.

Conclusions:

• While European politicians have thus far reacted to the sanctions through ‘outrage by lip-service only’, the insight that also European climate goals are obstructed and security of supply might be at risk, should hopefully trigger second thoughts and result in decisive action against the sanctions.
• The amendment of the Third Gas Directive is misusing regulation as a political weapon. Since hampering the EC’s own aspirations to battle climate change and unnecessarily putting security of supply at risk, its potential negative consequences for the operability of NS2 should be alleviated

Download publication: Nord Stream 2 caught between politicization, hypocrisy and ignorance: a few inconvenient truths by Wolfgang Peters, The Gas Value Chain Company.

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