The Fuse

Nord Stream 2 Nears Finish Line, Despite Last-Ditch U.S. Effort to Sanction It

by Nick Cunningham | December 27, 2019

President Trump signed into law a piece of legislation that puts sanctions on companies working on the Nord Stream 2 pipeline, a last-ditch effort by Washington to derail a major gas pipeline in Europe.

The pipeline has been the source of conflict for years, and is nearing completion. The Trump administration faces steep odds of actually halting the project, although the new sanctions could lead to delays.

Nord Stream 2 and energy security
The U.S. government, along with more than a few governments in Europe, have long criticized Nord Stream 2 because it would deepen European dependence on Russian gas and also because it would increase the vulnerability of Ukraine to Russian interference. The 55-billion-cubic-meter-per-year pipeline would double the capacity of gas shipments from Russia through the Nord Stream system.

But there is not a consensus in Europe. Some governments in Western Europe have been less opposed, particularly those countries who have major companies with commercial interests in the project, such as Germany. Russian gas giant Gazprom is financing half of the long-distance pipeline that runs from Russia to Germany via the Baltic Sea. Five European companies are splitting the rest, including OMV, Uniper, Wintershall, Royal Dutch Shell and Engie.

The Trump administration began promoting the notion of “freedom gas” earlier this year

As much as 40 percent of the gas imported by Europe comes from Russia. It’s noteworthy that the Trump administration began promoting the notion of “freedom gas” earlier this year. The peculiar expression for natural gas relates to the administration’s belief that LNG exports from the U.S. would enhance European energy security, although the timing and location of the announcement – at the opening of the Freeport LNG terminal in Texas – fed skepticism in Europe and Russia regarding the conflation between security and U.S. corporate interests. The Plain English Foundation recently named “freedom gas” among the Worst Words of the Year.

Nevertheless, the U.S. has tried to stall Nord Stream 2 for years, dating back to the Obama administration. The latest National Defense Authorization Act (NDAA), signed into law on December 20, contained language that sanctioned any company working on the pipeline.

In reaction to the legislation, the Swiss company Allseas said it would suspend construction work so as to avoid the wrath of Washington. Allseas was laying pipe for the project. “In anticipation of the enactment of the National Defense Authorization Act (NDAA), Allseas has suspended its Nord Stream 2 pipelay activities,” the company said in a statement.

The announcement came after Senators Ted Cruz (R-TX) and Ron Johnson (R-WI) sent a letter to Allseas, warning the company to cease construction. Even laying pipeline for a single day after the legislation went into effect would open up Allseas to “crushing and potentially fatal legal and economic sanctions,” the U.S. senators wrote.

Russia remains unfazed, and Russian foreign minister Sergei Lavrov said that the Nord Stream 2 and the Turk Stream gas pipelines would proceed despite U.S. sanctions.

According to S&P Global Platts Analytics, even though much of the Nord Stream 2 pipeline has been built, the last section that lies in Danish waters is more vulnerable to disruption from the American legislation. Danish regulators said that the ships used to lay pipeline in its waters needed to have dynamic positioning capabilities, such as the ships used by Allseas. Some Russian vessels are not equipped with this technology and it would take several months to reroute other ships.

German Chancellor Angela Merkel bristled at the latest U.S. legislation. “The German government rejects such extraterritorial sanctions,” spokeswoman Ulrike Demmer said in a statement. “They affect German and European companies and constitute an interference in our domestic affairs.”

Meanwhile, Russia and Ukraine reached a transit agreement that headed off any chance of a supply disruption through pipelines that transit Ukraine. The deal is a five-year agreement that replaces the existing arrangement that expires at the end of this year.

Ulrike Demmer, the spokeswoman for the German government, said U.S. sanctions are “particularly incomprehensible” in light of the Russian-Ukrainian agreement.

Even Trump administration officials privately concede that they have little tools left to stop the pipeline from reaching completion

Nord Stream 2 nears finish line
Prior to the passage of the NDAA, Goldman Sachs estimated that construction of Nord Stream 2 would “finish in the first half of January.” The announcement by Allseas that it would halt work might push that timeline back a bit, but few analysts predict that the U.S. will completely halt the project. Even Trump administration officials privately concede that they have little tools left to stop the pipeline from reaching completion, according to Bloomberg. The sanctions may only delay the inevitable.

“The project seems safe,” said Anna Borisova, an analyst at BloombergNEF. “We don’t see major risks.”

The completion of the pipeline will allow more Russian gas to reach Europe, which will help keep prices down amid already ample supply. Goldman Sachs said that it expects natural gas prices in Northwest Europe to fall below $4/MMBtu by the summer of 2020, and that JKM prices – a crucial LNG price in East Asia – to fall to $4.60/MMBtu. “We maintain our view that the market is going to remain over supplied,” the investment bank said in a note.

 

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