U.S. Sanctions on Russia & The EU Market for Liquified Natural Gas

Russia's undersea Nord Stream pipeline, which carries LNG (liquified natural gas) to north European markets. The Nord Stream opening ceremony in November 2011 featured Angela Merkel, Dmitry Medvedev, Mark Rutte and François Fillon. Nord Stream 2, an expansion project that would double Nord Stream's original capacity, was agreed to and signed in June 2015 (source; click to enlarge).

by Gaius Publius

Are the U.S. sanctions on Russia just another pipeline war?

Like all large developed regions, the nations of the European Union are hungry for energy. Like all resource-rich countries, the Russian Federation is hungry for markets. One of the resources Russia is most rich in is oil and natural gas. Thanks in part to the Paris climate agreement, but also to the existing desire of Western European nations to transition from coal and oil to the so-called "bridge fuel" — methane or "natural gas" — there is an obvious interest in both parties, Russia and the EU, in reaching agreements for the sale of Russian natural gas to the west, and also agreements on funding and building pipelines to deliver it.

The graphic below shows the extent of those pipelines, both built and proposed, for delivery of LNG (liquified natural gas, its most transportable form) to European markets.

Major existing and planned natural gas pipelines supplying Russian gas to Europe (source; click to enlarge)

Three things are clear from looking at the map above. First, Russia is Western Europe's nearest neighbor, and energy purchases from Russia would by nature be less costly than purchases from farther way, from North America, for instance. LNG purchased from North America would have to be shipped by tanker.

Second, all pipelines from Russia to Western Europe go though NATO territory — except Nord Stream. Thus Nord Stream frees Russia from worrying about NATO threats to its land-based pipelines. Note also that if tensions between NATO (a U.S. proxy) and Russia heat up, Nord Stream gives Russia an alternate source of LNG revenue from Western Europe should the status of pipelines to and through Eastern Europe fall into dispute.

Third, Russia is almost completely surrounded by NATO nations on its western border, the two exceptions being Belarus and Ukraine. NATO has been steadily moving east since the breakup of the Soviet Union, and Ukraine, an ethnically divided nation with a large Russian minority population, is strongly considering joining the NATO alliance. The U.S. is currently considering arming Ukraine with U.S.-made anti-tank and anti-aircraft weapons, so tensions are clearly escalating, and the U.S. is a player in those escalations.

Is Nord Stream 2 the Target of the Latest Anti-Russia Sanctions?

One of the outcomes of the recently enacted sanctions on Russia is the closing off of Western funding and penalization of support for a major expansion of the Nord Stream pipeline (all emphasis mine):

Nord Stream (former names: North Transgas and North European Gas Pipeline; Russian: Северный поток, Severny potok) is an offshore natural gas pipeline from Vyborg in the Russian Federation to Greifswald in Germany that is owned and operated by Nord Stream AG. The project includes two parallel lines. The first line was laid by May 2011 and was inaugurated on 8 November 2011. The second line was laid in 2011–2012 and was inaugurated on 8 October 2012. At 1,222 kilometres (759 mi) in length, it is the longest sub-sea pipeline in the world, surpassing the Langeled pipeline. It has an annual capacity of 55 billion cubic metres (1.9 trillion cubic feet), but its capacity is planned to be doubled to 110 billion cubic metres (3.9 trillion cubic feet) by 2019, by laying two additional lines.

The expansion mentioned above has been labeled "Nord Stream 2," and the latest sanctions threaten to shut down further work on it. From the Financial Times (paywalled; quoted here):

Brussels [EU headquarters] has stepped up its diplomatic offensive against the US moves, warning that several oil and gas projects involving Shell, Eni and BP are at risk.

On Tuesday, officials said Brussels was “activating all diplomatic channels” in an effort to persuade lawmakers to dilute the bill’s impact on European companies and the continent’s energy security.

Note that Shell, Eni and BP are Dutch, Italian and British companies, respectively.

EU officials are concerned that the sanctions could damage multibillion-euro pipeline and infrastructure projects straddling Russian territory and beyond in areas as far apart as the Baltic and Black seas.

A list prepared for EU commissioners shows that projects at risk include the proposed Baltic liquefied natural gas plant on the Gulf of Finland of the Baltic Sea, in which the Anglo-Dutch group Shell has a stake alongside Russia’s Gazprom. The list also includes Blue Stream, the gas export pipeline linking Russia with Turkey in which Eni of Italy has a 50 per cent. The threat to this pipeline centres on penalties against the maintenance and repair of pipelines on Russian land or waters.

Documents seen by the Financial Times also state that BP “would not be able to engage” in its activities with Rosneft if the US penalties hit operations by European companies to maintain, repair or expand pipelines in Russia.

The last point is important. U.S. sanctions would penalize European companies that engage in projects to "maintain, repair or expand pipelines in Russia." This includes financing as well as construction:

The text of the Senate amendment, which was passed with 97 votes to 2 against, requires the imposition of sanctions against those who make an investment or sell, lease or provide "goods, services, technology, information, or support" to projects for the export of energy from Russia.

"It sanctions those who . . . invest or support the construction of Russian energy export pipelines," Mike Crapo, a senator from Idaho who co-authored the amendment, told the Senate.

Needless to say, more than just the Russians are upset about these sanctions. European foreign ministers are opposed as well (h/t Naked Capitalism for the link).

Germany issues stinging rebuke of US sanctions against Russia
By Johannes Stern
17 June 2017

Germany’s Foreign Ministry published a sharply-worded press release Thursday from Foreign Minister Sigmar Gabriel (Social Democrats, SPD) and Austrian Chancellor Christian Kern (Social Democrats, SPÖ) denouncing the United States’ foreign and economic policies.

Note the American stated justification in the paragraph below, then the German and Austrian foreign ministers' rejection of that justification as describing what the bill was "really about":

Republicans and Democrats agreed almost unanimously, by 97 votes to 2, to impose new sanctions on Russia in the Senate on Wednesday. The Senate justified the measure as a punishment for Moscow’s alleged meddling in the US presidential election, the annexation of Crimea and its support for Syrian President Bashar al-Assad. ...

Gabriel and Kern brusquely rejected the US Senate’s measure. The bill was really about “the sale of American liquefied gas and the sidelining of Russian gas supplies in the European market,” according to the two social democratic politicians. That emerges from the text “particularly explicitly.” The goal was “to secure jobs in the American oil and gas industries.”

Angela Merkel stands behind her foreign ministry's statements: "German Chancellor Angela Merkel explicitly backed her Foreign Minister on Friday. There was 'very strong agreement in terms of content with Gabriel’s statement,' stated government spokesman Stefan Seibert. 'It is, to put it mildly, an unconventional action by the US Senate.' It was troubling that European businesses were being targeted by sanctions to punish Russian behaviour. 'That cannot be allowed,' added Seibert."

"Europeans Targeted to Punish Russia"

Whichever way the (sorry to say it, but highly propagandized) U.S. public sees the sanctions bill, European leaders — including Angela Merkel — see it quite differently. For them it's not only an economic attack on Europe by the U.S. It's also a cynical attempt to prop up a struggling U.S. sector of the U.S. energy industry at Europe's expense. That sector, of course, is the inventory-swollen, over-leveraged U.S. oil and gas sector involved in the recent fracking boom.

(A note about the "heavy propagandization of the U.S. public": Consider that, after all the screaming in the U.S. press about how Russia "hacked the DNC" to steal the election from Hillary Clinton, forensics on that supposed "hack" now show it to have been a leak after all. For more, read this definitive and completely underpublicized piece in The Nation by Patrick Lawrence. It's one thing to get rid of Trump; it's another to falsify the trail of evidence to do it.)

There's More Here Than Meets the Eye

The bottom line in all this isn't simple, since as usual with U.S.-Russia relations, there's much more here than meets the eye.

On the U.S. side, the attempt to punish Russia may play well in the national press, but it's driving a wedge between American and European leaders. Already in the articles about European reactions, one can hear strains of "we did what you asked in your other fights with Russia — like Ukraine and Crimea — so why are you hurting us now?"

In fact the conflict with Russia over the Ukraine and Crimea was never black-and-white to begin with. One aspect of the Ukraine story is that, unlike what was reported in the U.S. press, the U.S. was a major instigator of the internal conflict, and the EU had to be dragged to support it.

Amy Goodman in 2014 (emphasis mine)

A New Cold War? Ukraine Violence Escalates, Leaked Tape Suggests US Was Plotting Coup

A short-lived truce has broken down in Ukraine as street battles have erupted between anti-government protesters and police. ... At least 50 people have died since Tuesday in the bloodiest period of Ukraine’s 22-year post-Soviet history. While President Obama has vowed to "continue to engage all sides," a recently leaked audio recording between two top U.S. officials reveal the Obama administration has been secretly plotting with the opposition....

The top State Department official has apologized to her European counterparts after she was caught cursing the European Union, the EU, in a leaked audio recording that was posted to YouTube. The recording captured an intercepted phone conversation between the U.S. ambassador to Ukraine, Geoffrey Pyatt, and Victoria Nuland, the top U.S. diplomat for Europe. Nuland expresses frustration over Europe’s response to the political crisis in Ukraine, using frank terms.

VICTORIA NULAND [on tape]: "So that would be great, I think, to help glue this thing and have the U.N. help glue it. And, you know, [bleep] the EU."

Victoria Nuland, Hillary Clinton's Assistant Secretary of State for Europe, is a well-known neocon who during the campaign "figure[d] prominently among her current advisers" and is well known for her strong anti-Russian views. Her husband is Robert Kagan, another strong Clinton supporter during the campaign and co-founder of the Project for a New American Century, the neocon think tank that strongly advocated for the 2003 Iraq War.

The U.S. was a major player fomenting or adding to the conflict in Ukraine. However strongly the EU was in their public support, this current attack on Russia via the sanctions is too much even for them. Quoting the German Foreign Minister again:

the threat to impose extraterritorial sanctions which violate international law on European companies participating in the expansion of European energy supplies” could not be tolerated. Europe’s energy provision was “a European affair, and not one for the United States of America!”

It sounds like he means it.

The Players and the Game

As this evolves, keep the players and their interests in mind. The major players are:

• The U.S. foreign policy establishment, many of them Democrat-supporting neocons, most of them hardliners on Russia for decades

• Democratic Party leaders, eager to tar Donald Trump with the blackest brush they can find, in hopes that this will absolve them of the 2016 loss without having to make substantive policy changes going into 2018 and 2020

• The U.S. natural gas industry, desperate to open markets for product they are vastly oversupplied with

• The mainstream U.S. press, eager help the U.S. ruling establishment be rid of Trump, but also eager to cash in on the ratings that a years-long slow-motion Mueller-fueled train wreck will provide

• European leaders, turning away from U.S. international leadership as each day goes by — the Paris climate agreement and Trump's childish bellicosity toward North Korea are just two example of many — just as the U.S. is threatening Europe's right to make its own energy decisions

• Russia, which seems willing to patiently let all of this play out, knowing it doesn't need to drive a wedge between the U.S. and EU if the U.S. foreign policy establishment will drive that wedge for them

It's unlikely the U.S.-Russia conflict in Europe will end well. All of the American players listed above will continue to benefit from a ratcheting up of conflict with Russia over these sanctions, including the profit-hungry U.S. press.

Democratic Party leaders in particular will find an additional benefit to strong anti-Russia rhetoric and action — they can use it to further damage their strongest and most hated domestic opponent, Sen. Bernie Sanders, who was one of just two senators to vote against the sanctions bill. The mainstream Democratic Party, it seems, is determined to give just lip service, if that, to progressive policies while trying to position themselves as the only policy alternative to the Trump regime.

(In my view, their latest attempt at triangulation will fail in 2018, just as it did in 2016. There is more than one policy alternative to the Trump regime — the "Sanders wing" alternative — and the public knows it. If the Party won't offer that alternative, the public may just vote with their feet, by not voting.)

In the U.S. press, one hears a doubling down on worries that increased Russian LNG sales to Europe will make Western Europe "dependent" and vulnerable to Russia. Clearly the Europeans define independence differently than the U.S. establishment does. With Trump in the White House and both Merkel and Macron openly distrustful of U.S. world leadership, I don't see either side backing down.

The irony is that even if the U.S. foreign policy establishment succeeds in forcing Europe to buy LNG from American companies, the price is unlikely to rise enough to save those companies — though the added revenue may buy them a bit more time before the next round of bankruptcies. Stay tuned.

GP