Things are looking grim for Nord Stream 2. Under the pretense of protecting “the energy independence of their European allies” the American senators demand the State Department and Ministry of Finance to block the project’s realization. Afterwards, the official State Department representative Heather Nauert stated that foreign companies participating in the pipeline’s construction may face sanctions from the US. What is behind USA’s loud declarations and what are they after, RuBaltic.Ru sat down with Adviser to Gazprom Export CEO, Co-chair from Russian side of Worstream 2 “Internal Markets” Russia-EU Gas Advisory Council, professor of the International Oil and Gas Business department of the Gubkin Russian State University of Oil and Gas Andrey Konoplyanik.
— Mr. Konoplyanik, how do you evaluate the Americans’ statements? Can we say that USA are doing a decisive offensive?
— I would not call it a decisive offensive. The definition is not quite correction, because a decisive offensive implies a final battle. And the Americans‘ struggle against the Nord Stream 2 us a long-running strategy. It began before Trump was in office, and in my opinion, it is based purely on economics. Under Trump is gained new meanings: riding the wave of the American shale revolution to the „America First“ slogan of all American administrations, there is no also the idea of USA‘s energy domination.
I think the march against Nord Stream 2 is due to the dropping oil prices in 2014, which led to a change in the trend for not just the oil market, but the gas market as well. This also changed the conditions for the sale of American LNG.
If you remember, during the high oil and gas prices all of the American LNG projects changed from import (accepting) terminals to export ones. This was supported by the shale boom in US: the prices on the internal market dropped. And demand for LNG on the Asia-Pacific region rose after the 2011 Fukushima accident having Japan close its nuclear power plants. What alternative did the Japanese have for energy? Only liquefied natural gas. The growing demand for LNG led to a price rise in the Asia-Pacific region.
That way, the Americans had an opportunity to sell their gas as LNG (the pipeline sales to Mexico and Canada are negligible when compared to global LNG market opening up). The development of the export-orientated LNG production seemed profitable. The plan was simple: natural gas is bought on low internal prices, liquefied in USA and sold to the Asia-Pacific markets at a high export price.
— Was the price difference really high?
— Some numbers for clarity. The main trade platform in USA Henry Hub, in 2012-2014, the gas prices dropped to 2 dollars for a million British thermal units (the standard measurement), and in the APR, the prices were 16-18 dollars. America was anticipating the LNG export to strike gold. This was the foundation for the construction of the Panama Canal third lane expansion for LNG-tankers.
The situation changed in 2014. Due to the world economy becoming more efficient and many domino effects in the American shale revolution, which I covered extensively, the oil prices dropped. And the question appeared: how to recoup those investments already sunken into the LNG projects?
Our American friends are left only with the option to look for favorable markets with enough demand. Europe is one of the closing markets in this regard, a market of the last order. Today American LNG is usually going to regions with the most favorable conditions: Latin America, Middle East and the Asia-Pacific.
And what‘s the problem with Europe? Well, the Russian gass is there and it is more competitive than the American one.
VYGON company experts Maria Belova and Ekaterina Kolbikova recently released a series of works on competitiveness and economic efficiency of US LNG shipments to different regions. They clearly showed that when selling in Europe with the current situation, they will love around 1 dollar for million British thermal units. So they don‘t even make back the usage costs, not to mention recouping their investments, which were probably loans.
The whole shale revolution is built on borrowed money, on project financing. What to do if you can‘t pay the debts? the American market allows you to hdege, to refinance your debt, but then the debt will grow.
Thus, the one shipping American gas in Europe are doing so at a loss and growing their debts. And then it becomes obvious why the American business interests are protected with the administrative and political resources.
— Despite the losses of the American LNG shippers in Europe today, this is still a potentially favorable market for them?
— Potentially very favorable, if you get rid of the competition and raise the price. There is a concept of trans-Atlantic solidarity, historic ties in the Anglo-Saxon system and many other things that tie the US and EU together. But as they say, “friends will be friends, but business comes first.” And I see USA‘s relations with Europe going that route, which I‘ll elaborate on.
Sadly, our relations with Europe are not doing so well at the moment. Let‘s add the transit crises of 2006 and 2009 and all of the anti-Russian political rush that started in 2014 after Crimea and the events in Ukraine. In these conditions, the struggle to „remove a competitor“ is now gaining new forms.
Nord Stream 2 will give Russian gas access to Europe, which already beats the American LNG in competitiveness, in addition to lower risks and costs.
The new gas transit system for Russian gas to Europe (From the Russian Yamal, through the Northern Russia and the Baltics) technologically modern than the current one (from Nadym-Pur-Taz, through Central Russia and Ukraine), which is already in need of modernization.
When the project will be realized, a considerable part of the shipments going through Ukraine will be done directly. For Gazprom, the margin increases – the difference between the gas price in Europe and the cost of its mining and transportation. So if any price wars start, we have an advantage over the American LNG shippers, which are already selling at a loss, to adjust the price and remain profitable.
How can the Americans follow the “America First” mantra and fight for their energy domination? To meddle with Russia‘s new routes to Europe and force it to export its gas through Ukraine, which has more risks and is more expensive (Ukraine already declared it would raise transit tariffs after 2019).
If American LNG encroaches on Russia, then the gas prices in Europe will rise. That is exactly what the Americans want to gain a profit from shipments to EU countries and to slowly get rid of the debt “bubble” which we mentioned earlier.
In this regard, we should note US President Donald Trump‘s speech in Warsaw in July 2017, where he stopped along the way to the G20 Summit. On the final press conference, he mentioned how reliable American shipments were and praised those who developed LNG terminals, adding at the end that the prices would rise, but those are negligible details. This phrase was not really quoted in printed resources, which transcribed Trump‘s press conference, and just in video, but it‘s the quintessence of America‘s gas export policy.
I closely follow the agenda of the so-called Atlantic Council in Washington (in my opinion, it is a think tank of sorts, that tests many of the State Department‘s initiatives). Since 2014, they have been actively discussing the Nord Stream 2 problem and how it meddles with USA’s interests in the world market. And I see that in terms of the Nord Stream 2, the Americans turn to “Carthage Must be Destroyed.” The repeated numerous times, like chanting a spell, in different auditoriums and different formats that Nord Stream 2 must not come to be.
On one of the Atlantic Council meetings, its energy program president – former US ambassador to Azerbaijan and former Special Advisor to the President and the Secretary of State for Caspian Basin Energy Diplomacy, Richard Morningstar stated that if they asked him what he wanted for Christmas, his short list would include Nord Stream 2 not happening. Also, the latest meeting on combatting the project was called „Nord Stream 2: What the US and Europe Can and Should Do“ and took place 12 March 2018.
— The press don‘t usually talk about going to a no-transit system of gas shipments. Is that such a crucial moment?
— Any transit always means risks with the transit country being sovereign. So it does not matter too much what the country is called: transit risks appear merely from the need to cross its territory. Many media and western politicians say (including as an argument in favor of maintaining the full-fledged transit of Russian gas to Europe through Ukraine) that there have not been sufficient troubles with transit through Ukrainian territory (excluding the two most famous events: three days in January 2006 and 19 days in January 2009)
But the transit risks exist even during the period of perceived peace, because they are not just tied to politics. Ensuring non-stop gas shipments from producer to consumer on a transit system depends on the third party: they are the ones who have to support the system in a working state.
The amount of documented accidents and leaks of the Ukrainian GTS shows that the required repair funds are not handed out. It has deteriorated a lot.
If you recall, our first gas shipments to Western Europe started in the late 60s: in 1967, the gas passed through Ukrainian and Czechoslovakian territory; in 1968, through Austria. The usual service life of these pipelines is 33 years. And this means that today we should be seeing intensive repairs on the Ukrainian GTS. But the majority of the money the country makes from the transit goes to other needs. As a result, recently the European Bank for Reconstruction and Development urgently gave Ukraine a 300 million credit to support the working order of the gas transit system.
When talking transit risks, we must first talk about the technical and economic components, rather than the political ones. Without modern and adequate repairs, the state of the gas transit system keeps deteriorating, just like a human body would if not taken care of. As we know, the optima blood pressure for a human is 120 by 80. You can survive with blood pressure, say 180 by 100, but the risk of a heart attack increases manifold.
Same with transit risks: the transit can be done, but the risk of interruption (due to technological and not political reasons) rises dramatically. And the threat of the gas supply stopping for import consumers (EU countries) and risk of not completing the contract terms for the exporters (Russia/Gazprom)
And another moment, which is not widely discussed, especially not in the West. The Nord Stream 2 shipments will be done via shorter and technologically superior route. The historic base of our shipments is the Nadym-Pur-Taz region. And through the central corridor from there, through European Russia, through Ukraine, the gas goes to Western Europe. And the Nord Stream and Nord Stream 2 are aimed at a different resource base – the Yamal peninsula.
In order to support and/or grow the mining efforts in the country and to keep the cost of mining from growing, it is recommended to develop new sites: the costs are less that way. Developing Yamal means switching to new mining megaprojects: to replace Urengoy, Yamburga, Medvezhye (Nadym-Pur-Taz) with Bovanenkovskoe and others (Yamal).
By Russian standards, Yamal is not that far from Nadym-Pur-Taz, but when you look at the map, this is longer than the distance from Germany’s North to its South. Switching from Nadym-Pur-Taz in the North to Yamal shortens the export lines to Europe by almost 2000 km (with the Earth being round and all).
As a result, the costs of mining will remain low, the cost of transporting to the EU export market drop, the competitiveness of Russian gas (margin between the gas price and the cost of its mining and transport) rises. This is what our American colleagues don’t like.
Our American partners accuse us that switching to Nord Stream and Nord Stream 2 from the Ukrainian transit is an attempt to punish Ukraine. But we are primarily looking at the economic benefits for our national interests. We are after our own pragmatic interests, which are protected by international law. Back in 1962 the UN Resolution #1803, which talks of the inherent part of a state’s sovereignty over its natural resources.
All of the UN countries agreed that the state is the owner of its resources and has the right to stand on its own people’s interests. This was solidified by the Energy Charter Treaty in 1998. Russia withdrew from it in 2009, but is still a side that signed the ECT. (Russia signed it, but applied it provisionally, not ratifying it)
Today we are holding on and will continue to hold at least a third of Europe’s gas marker, because our shipments are competitive. Another third is EU’s own mining efforts, which have the tendency to decrease. The other import is pipeline gas and LNG from other countries (aside from Russia). And that import segment is where the struggle is happening.
This determines the strategy of our opponents. They want to stop us from delivering gas to Europe via the short route and force us to use the more expensive and risky transit. And if there will be new problems with Ukraine, then they will blame us as unreliable providers. This trick is going for a while. Russia as an “unreliable provider” was talked about in the West during and after those transit crises of 2006 and 2009. If they can’t make us uncompetitive, then they must declare us unreliable, to push us out of the European market under any pretense and take our place.
Translated by Pavel Shamshiev