© REUTERS/Hannibal Hanschke

The German federal government has decided in favor of building liquid natural gas (LNG) import terminals and infrastructure. In March, Chancellor Angela Merkel’s CDU/CSU-SPD government, in its “coalition contract,” pledged to “Make Germany the site for LNG infrastructure.” This is a notable policy change, because in Germany the opposition to LNG imports and use has been so much stronger than anywhere else in Europe.

The aim of this new endorsement is to reduce maritime and roadway heavy-transport emissions. However, many in Germany argue that using “small-scale” LNG in this way, as a “bridging” fossil fuel, is “wasted investment”. They contend that Energiewende-mandated electric vehicles can and will rapidly de-carbonize heavy transport. Still others oppose LNG imports on the grounds that they would unnecessarily diversify Germany’s gas suppliers with the aim of offsetting increasing reliance on Russian pipeline gas. They insist that Russian pipeline gas has been “historically reliable” and is cheaper for Germany than building large-scale import terminals for LNG.

Though the federal bureaucracy had been advancing this policy change for over a year, top government officials did not make any particular effort to bring the issue to public attention or to drum up support. Accordingly, media and public understanding of the federal government’s motivations has been less than ideal.

Small-Scale Imports for Cleaner Transport

There are two main points to understand. First, the aim of the new policy is clearly to address long-standing environmental and competitiveness problems in German marine and heavy road transport: compared to diesel, LNG as a transport fuel is much cleaner, emits less CO₂ and is generally cheaper. Second, the approved small-scale LNG import facilities will not reduce German dependence on Russian pipeline gas, which is used for conventional purposes. The new policy is not intended to reduce dependence on Russian gas and the controversial Nord Stream 2 pipeline, contrary to various press reports.

The first facility to win approval from Berlin (and previously from Brussels) is planned for the North Sea port of Brunsbüttel, near Hamburg. The initial focus on the Hamburg region is logical. From there, LNG can be shipped up the Elbe River as an inland-shipping and road-transport fuel. In addition, there is access to the Kiel Canal, the world’s busiest artificial waterway, where LNG can be used or delivered into Scandinavia and the Baltic region. Hamburg is also Germany’s major container port, and the shipping industry has begun converting engines to LNG fuel globally.

However, as well as facilities for fueling ships and trucks in the immediate port area with liquid natural gas, and shipping some gas onwards, the plan also includes an onshore regasification unit and connections to the existing gas-distribution network for conventional gas applications—heating, electrical generation, etc. Experts feel this will provide the project’s developers with flexibility, as it will take time for LNG road-transport infrastructure to develop in Germany. Currently, it is almost nonexistent.

The €500 million terminal will have facilities to transfer, store, and redistribute the liquid for use as maritime-bunker fuel, road-transport fuel, and various industrial applications. Such direct use of LNG as a liquid fuel, without regasification, is known as “small-scale” LNG. This is distinct from “large-scale LNG,” which involves much-higher volumes that are re-gasified in huge facilities and injected into the gas grid for conventional uses.

A sense of scale is important. The Brunsbüttel facility will receive LNG equivalent to 5 billion cubic meters (bcm) of gas per year. In 2016 Germany consumed 80.5 bcm of gas. So the Brunsbüttel facility’s capacity to re-gasify a portion of the LNG could help replace a part of the gas Germany now receives from the Netherlands, whose Groningen field is mandated to close soon. But the small scale of the new facility’s means it cannot significantly diminish Germany’s great dependence on Russian and Norwegian pipeline imports.

Indeed, despite a spate of articles claiming the contrary in major media outlets, including Der Spiegel and Bloomberg, the goal of the federal government’s new LNG policy is not to cut dependence on Russian gas. The entire regulatory and ministerial review process clearly focused on fueling maritime and heavy-road transport. Clearly, this small-scale facility provides no serious counterweight to Germany’s Gazprom imports, which are projected to rise from current levels of 55 bcm via Nord Stream 1, to 110 bcm of gas per year when Nord Stream 2 is complete, or about 60 percent of total German gas imports. At present, Germany receives 31 percent of its gas from Russia and 24 percent from Norway. Reversing this reliance on Russia would require multiple large-scale LNG regasification terminals capable of fueling a major portion of the country’s conventional gas demand for electricity generation, heating, etc.

Stalled Transport Cleanup

So what is the motivation for the new LNG policy? 46.1 percent of German GDP is dependent on exports (2016 data), compared to 26.9 percent for OECD states overall. Therefore, it is especially important that Germany be competitive in its maritime and heavy road transport to move all those goods. Yet despite having pinned the nation’s commercial future on the success of the Energiewende, actors from government, industry, political parties, and climate/environmental institutions have, embarrassingly, accomplished virtually nothing when it comes to cleaning up air-pollution and carbon emissions from transport. The so-called Verkehrwende (transport transition) is going nowhere. The ongoing diesel scandal is but one aspect of this, involving passenger vehicles. However, in maritime and heavy trucking, Germany has fallen disconcertingly behind many other European states and the United States.

For example, in California, after some 15 years of efforts, in 2015 fully 60 percent of all buses were running on compressed natural gas (CNG), as were 17 percent of all U.S. buses. This means their engines were emitting about 99% less particulates and sulfur dioxide, 70% less nitrogen oxides, reducing noise pollution about 50% and emitting from 12 to 20 percent less CO₂ than diesel fueled engines, which remain ubiquitous in most German cities. Using LNG in buses would bring similar environmental benefits to Germany.

Moreover, over the past few years, the use of LNG for maritime and heavy-transport fuel has begun to take off in the US, China, and parts of Europe. The US Energy Information Agency expects American railways to undergo a transformation from diesel-to-LNG similar to that of steam-to-diesel for locomotives in the 1950’s; this shift would be both environmentally beneficial and reduce cost, as LNG has a similar energy density to diesel, but it is broadly cheaper and much cleaner.

Alternative Fuel

While Germany has made little progress on cleaning up heavy transport, international organizations have recently mandated new emissions standards. In maritime shipping, clean-fuel regulations requiring that carbon emissions be cut by half by 2050 were adopted for the first time this April by the UN’s International Maritime Organization. Most analysts expect that meeting these targets will “require the shipping industry to completely redesign their fleets around new fuels.” Accordingly, the German maritime sector has pressed the federal government to facilitate LNG infrastructure, lest it fall behind in global competitiveness.

So too, for the trucking industry, as Brussels moved in May to adopt its first carbon emissions targets. German business has pushed Berlin to foster the infrastructure and policies needed to facilitate the shift to new fuels such as LNG. Given the country’s very-high export-dependent economy, it is of utmost importance that it does not become an LNG ‘desert’ among other EU neighbors, who have already begun to meet Brussels’ mandates for LNG fueling stations. If Germany had no LNG capacity, the uninterrupted movement of road or waterway freight via the country would be threatened. Accordingly, the federal government and Brussels have both recently begun providing subsidies for LNG adaptation in Germany.

To be clear, LNG brings serious benefits. But LNG is not carbon free, and is likely to be only a ‘bridging fuel’ to other technology. However, power-to-gas technology, which would use renewable energy to produce natural gas or hydrogen for such purposes, is today far from feasible at scale. This is also true of electrification of heavy road and sea transport.

So, given that LNG is useful in the present, why has there been so much opposition to the import and use of LNG in Germany? This opposition has come, broadly speaking, from two camps.

Two Streams of Opposition

The first camp asserts that, regardless of other countries’ experiences, Russia has been a historically reliable gas provider, and so building large-scale LNG import terminals would be an expensive and unnecessary energy security policy. This dovetails with a widespread conviction among German business and political elites that only via mutual German-Russian interdependence, especially in the energy business, can Germany ameliorate geostrategic tensions. Repeated bad behavior by Moscow does not shake this conviction; on the contrary its makes interdependence even more necessary.

A second camp argues that LNG use—large- or small-scale—is antithetical to the renewable-energy goals of the Energiewende. Here, natural gas and LNG are often dismissed out-of-hand as simply another fossil fuel, “largely produced in the USA” by “environmentally dangerous” fracking that is banned in Germany. Therefore, according to this reasoning, it would be “hypocritical” to import it.

However, scientific assessments by the International Energy Agency present serious challenges to many of the popular, environmentally motivated concerns about LNG use. When the agency reviewed studies of “methane leakage” conducted in recent years, it concluded that natural gas is indeed superior to coal, and can and is being improved by better regulation of leakages in its production and supply chain. And while many challenge official assessments of leak-rates from U.S. production sites, most agree such leaks can be minimized with improved maintenance and regulations. Moreover, aside from this concern there is no challenge to LNG’s very significant pollution-and-noise reduction advantages over diesel. Nevertheless, in a number of discussions earlier this year in Germany, I found strong opposition, on principle, to the idea of distributing LNG in liquid form as a transport fuel (i.e., “small-scale” LNG).

Basically, the line of argument here is that, in light of the goals of the Energiewende, Germany can and will be “zero carbon in transport” in a couple decades–and so expenditures on LNG infrastructure will be “wasted investments.” Given Germany’s presently dismal record in greening transport, including the stubborn diesel scandal, the hubris of this technological optimism appears rather large. It also neglects the fact heavy roadway and sea transportation are technically much more difficult to electrify than passenger vehicles.

In response to my inquiries, representatives of major international energy companies in the past year described frustration in finding any interest in Germany for LNG. Unlike in other EU countries, they said they could see no prospects in the German market. They expressed amazement at the German insistence that LNG is not needed to help displace coal or diesel.

 The real Meaning of Brunsbüttel 

Much of the popular and elite opposition to using LNG in Germany is based on a sort of technological optimism that sees the good as the enemy of the perfect.

Nevertheless, what is clear is that political decisions were taken to address long-standing environmental and competitiveness issues in heavy transport. But there was no appetite for a larger, forthright confrontation with the pervasive hubris about what are in reality very difficult and still-unsolved technical and economic problems preventing fully green heavy transport. It is also clear that these decisions had nothing to do with hedging Germany’s heavy and increasing reliance on Russia gas via the Nord Stream 2 project.

The government’s embrace of small-scale LNG is indeed a positive environmental and competitiveness policy change for heavy transport. But Germany still faces far larger energy security problems.

The post Germany’s Real LNG Strategy appeared first on Berlin Policy Journal - Blog.

© REUTERS/Tobias Schwarz

On June 15, the US Senate approved an act to sharply expand sanctions imposed on Russia in retaliation for its intervention in eastern Ukraine and annexation of Crimea in 2014. The broadly bi-partisan move that enshrined Barack Obama’s earlier executive orders – intended as a response to Moscow’s alleged cyber interference in US elections – was a stunning rebuke to US President Donald Trump’s Russia policy, essentially taking a broad swath of foreign policy out of his hands.

In light of Trump’s stance toward Germany, the EU, and NATO, one might have expected a gigantic sigh of relief from Berlin. But this was not to be. Foreign Minister Sigmar Gabriel reacted with immediate indignation to a provision of the bill that would allow the US to target companies cooperating in the Russian-German Nord Stream 2 (NS2) gas pipeline project. A joint declaration with his NS2 partner, Austrian Chancellor Christian Kern, invoked a sort of euro-populism: “Europe’s energy supply is a matter for Europe, not the United States of America … Instruments for political sanctions should not be tied to economic interests.” The irony of citing such a principle in defense of NS2, considering Putin and Gazprom’s labyrinthine record of political and economic pressures on Ukraine, appears to have eluded the pair.

Gabriel’s stance was echoed in an exceptionally stern statement from Chancellor Angela Merkel. Her comments, too, focused exclusively on NS2, ignoring the two key measures the Senate had added to existing sanctions. One would block partnerships with Russian firms anywhere in the world that provide Russia with the next-generation oil and gas technology it so urgently needs to sustain its hydrocarbon state, while the other, even more sweeping measure would actively block cooperation with Russian arms sales globally. Clearly, NS2-targeted sanctions are of lesser significance.

Restraining the Executive

What is perhaps most striking about the comments from Germany is that nothing affirmative was said about the Senate’s motives or rationale. Granted, Gabriel and Merkel – whose parties currently form a grand coalition, but will be battling it out in a September election – are in campaign mode, but this does not fundamentally explain the reasons for their focus on NS2. The explicit motivation of the Senate’s bill flows directly from what former FBI Director James Comey underlined as the “central message” of his June 8 Senate testimony: that he and the directors of all US intelligence agencies were unanimous in their assessment that the Russian government had conducted a cyber campaign against US elections. In fact, as later reported by The Washington Post, US “intelligence captured Putin’s specific instructions” on the operation’s objectives to discredit the election and defeat Democratic candidate Hillary Clinton.

This determination is of acute interest to the German government. In the run-up to the German election, one might think expressions of solidarity with the Senate’s intent would accompany the NS2 complaints. So too, a section of the Senate’s bill explicitly asserts US commitment to Article 5 of the NATO Treaty, an assurance Trump so disturbingly refused to give to Germany and other member states during a recent summit. The Senate also “set up a process by which Congress can block any attempt by President Trump to scale back those sanctions” – another stunning rebuke to Trump, a man who campaigned on his ability to “do deals” with Putin, who immediately moved to lift sanctions against Russia when he assumed office, and now has several members of staff under FBI investigation for suspicious dealings with Moscow.

Of course, such legislation is a blunt foreign policy instrument of the legislative branch in restraint of the executive. However, if the act now passes the House of Representatives it will essentially revoke Trump’s ability to set Russia and Ukraine policy. One would normally imagine such a development to be warmly welcomed by both Gabriel and Merkel. But appreciation of this point was absent in their initial, highly-publicized responses.

Geopolitical Rationale

Indeed, the Senate’s bill could severely sanction German, Austrian, and the other European firms working with Russian energy giant Gazprom on the pipeline project. NS2 is slated to bring an additional 55 billion cubic meters of Russian gas from arctic western Siberia to Germany each year. It purposefully avoids landfall in any Baltic, Eastern or Central European state of the former Soviet Union and the Warsaw Pact, running parallel to the Nord Stream pipeline completed in 2011. NS2 has been championed by Gabriel and former Social Democrat (SPD) Chancellor Gerhard Schröder and enjoys wide support among German elites and energy companies. Gabriel and Merkel’s responses reflect this.

For Russia, the geopolitical rationale is clear. In the final two decades of the Soviet Union, Moscow had fought for its gas to be accepted in Europe as a secure and reliable source of energy. This resulted in huge gas-transit pipeline systems across Poland, Ukraine, and other countries. However, the fall of the Soviet Union resulted in the separation of Russia from its Eastern and Central European neighbors; the latter mostly opted to join NATO and/or the EU as the West had hoped. The dominant geopolitical school of thought in Washington and the EU – as well as most former Soviet satellite states anxious for a lasting divorce from Russia – was that, if Russia were also to reform as a liberal democracy and re-industrialize, it should not have any major problem with this. But, if it did, it would be limited to a rump of its former territory incapable of regaining superpower status.

As it turns out, market reforms and liberal democracy did not take root. Russian President Vladimir Putin has repeatedly failed to re-industrialize on a modern basis. He sees the prospect of a rump, isolated, hydrocarbon-export-dependent Russia looming large. Since about 2006 – underlined by his 2007 Munich Security Conference rebuke to what he sees as an encroaching, US-dominated unipolar world – his strategy has been, at minimum, to wreck any further incorporation of Eastern and Central European states into the EU and NATO and, if possible, disrupt or even return some to Russia’s orbit. This is a rational and reasonably achievable strategy, albeit a dangerous and retrograde one.

Turning to Russia’s gas export business with western Europe, the following assertions can be made: First, it is clear that Putin can at present interfere to only a limited extent in major gas transit states such as Poland and Ukraine while he depends on their willingness to transit Russian gas to Western Europe. Second, insofar as these states remain antagonistic toward Russia, Gazprom exports across their territories are vulnerable to government actions and radical elements within their populations. If a way to bypass these states could be found, Russian gas business with Western Europe would be ensured, and the present-day transit states could be subjected to heightened disruption and perhaps even re-incorporated into Russia’s orbit.

The result, in broad terms, is the Kremlin’s strategy to replace existing pipelines transiting the former Soviet bloc with two huge pipeline systems – one extending south through Turkey and into EU states via the Aegean Sea (i.e., the Southern Stream pipeline system) and another arriving into western Europe from the north, via the Baltic Sea (i.e., the Nord Stream pipelines). New liquid natural gas (LNG) shipments will also be added, initially from Russia’s arctic Yamal peninsula, insofar as the necessary technology can be accessed. Notably, the new US sanctions will strike all parts of this geopolitically motivated gas export strategy. Especially in the case of Nord Stream and NS2, the geopolitical motivation is clear, as while there are commercial advantages to the route, the multibillion-dollar projects deliver gas originating from the same fields as Ukraine’s gas currently does, and the Ukraine system has considerably more capacity.

Change through Trade

Germany is and has always been seen as a stalwart of the EU project and of the establishment of liberal democracies based on open and free markets. What would its rationale be for cooperating with Gazprom and Putin in bypassing Ukraine and later possibly Poland and other Russian gas transit states?

There are two important elements to consider. First, the Neue Ostpolitik initiated by Chancellor Willy Brandt in the 1960s always favored direct economic ties between Germany and Russia, especially through large-scale energy projects between big West German corporations and Soviet state monopolies. This policy aimed to defuse Cold War tensions and foster liberal-democratic transition in Russia. While this strategy did contribute to détente and Russian approval of German reunification, Russia’s continued failure to establish free market and liberal-democratic norms and its flagrant violation of respecting European borders by invading Ukraine and annexing Crimea have dealt severe blows to the strategy’s fundamental logic. Though the mantra that peaceful relations are historically guaranteed by deep trade and economic ties is still constantly repeated by German elites, one finds quite broadly that the younger generations are more sanguine toward the real threat posed by an economically and politically unreformed, increasingly autocratic Russia.

This brings us to the second key element. There is good reason to assume that, had Germany and the Western European states succeeded in rapidly fostering free market reforms and liberal democracy, and had they been able to incorporate states such as Georgia and Ukraine into the EU and NATO, German policy might now be quite different in the face of Putin’s revanchist Russia. However, over the past several years, even before the Maidan uprising in Ukraine, it was becoming clear that German elites were broadly losing confidence in the ability of Ukraine – as well as many other Eastern and Central European states – to reform, including some already within the EU and NATO. This is not exclusive to Germany: a similar transformation has been evident in Brussels, where stabilization has explicitly replaced transformation in its policy toward the EU’s eastern and southern neighbors. At the same time, Putin deeply impressed German elites using hard power – including armed interventions in Georgia, the North Caucuses, and Ukraine – and showing his willingness to risk economic and energy stability by interrupting gas flows to Germany and Western European states via Ukraine, all clearly with geopolitical intent. These gas cutoffs were particularly alarming in that they reduced or cut deliveries to Germany and other EU and European states and had the potential to open fissures between member states scrambling for gas in a crisis.

Though in principle Russian gas dependency could and is being reduced by diversifying imports arriving via pipelines from Norway and Algeria and LNG deliveries from Qatar, the US, and elsewhere, Russia will remain a significant, if not the major gas supplier. As there is is no way to break dependence on Russian gas via pipelines for many years, vulnerabilities had to be minimized.

Energy Security über Alles

German elites have become increasingly inclined to reduce the energy security risk to Germany, the EU, and its eastern neighbors from what is seen as Ukraine’s incorrigible energy sector corruption and a Russian-Ukrainian conflict that will not end for many years. The solution: eliminate its own and its EU allies’ dependence on Ukrainian transit by taking over the business itself. While this looks like a mere extension of the Neue Ostpolitik – and indeed, the long-time ideological, political, and business culture of cooperation with Russia as a German national strategy – facilitates today’s new geopolitical turn. Nevertheless, this Neue Neue Ostpolitik is responding to a new situation for the European project and German national interests, while facing new Russian contestation.

Although there are significant numbers of German citizens, lower-ranking party members, and some major politicians who oppose the NS2 project, the reality – as reflected in Merkel and Gabriel’s condemnations of the new US sanctions bill – is that there is overwhelming support for NS2 from the country’s business and political elite. Whether consciously or not, this reflects a new geopolitical role for Germany with respect to Russia and the European project, one aiming to make it an indispensable middleman in energy matters.

Completion of NS2 will ensure that the vast bulk of Russian gas imports to Europe will arrive directly to Germany. As numerous retired and active German diplomats, officials, and energy sector executives have asserted to me in recent years, “the Russians have always been our reliable energy partners” and “will not mess with us.” When the issue of Germany giving up its highly valuable soft-power influence in Eastern and Central European states where this policy is immediately seen as abandonment in the face of new Russian pressures, the German response is simply, “We will distribute the gas!” and, “Don’t they trust us to sell it to them?” It is asserted that Germany taking direct delivery of virtually all Russian gas and reselling it to them is their only path to true energy security.

This can be spun two ways, either as realist or paternalist – in either case the geopolitical and energy security result is identical. This is not to say Berlin does not recognize there are risks in its continued dependence on an unreformed, corrupt, and likely increasingly unstable Russian state for gas supplies, even if those supplies no longer pass through Ukraine, Poland, and the like. However, the key difference from where Berlin sits is that in any future gas dispute with Russia, Germany will now be alone at the table facing its Gazprom and Kremlin partners, without the complications of Ukrainians (or perhaps Poles) engaged in heated struggles with Russia as a part of the process.

Germany as Guarantor

It is wrong to cynically reduce these matters to business considerations and the profits that German and other companies will clearly reap at the expense of ending Ukraine’s gas transit business. Even for a so-called geo-economic power such as Germany, the geopolitical component is crucial, without which the NS2 project might very well not have advanced. European energy unity and security will not be completely ensured by the fact that virtually all Russian-imported gas will at some point be distributed from a German hub. Rather, one could say that Germany is “solving” the problem of gas security in Europe vis-à-vis Russia by employing a strategy analogous to the one the US used to “solve” the problem of the 1970s OPEC nationalizations and instability in the Gulf Region: by putting itself at the center of the oil system, as its guarantor. As a German energy executive told me recently, “You [Americans] have your Saudi SOBs, and we have our Putin.”

This implies the establishment of a form of German hegemonic oversight in the European gas market, just as the global oil system has been subjected to a form of US hegemony globally. If there was confidence in Ukraine and other crucial Eastern and Central European states to actively reform and become economic, political, and perhaps military obstacles to Putin’s geopolitical aims, Germany might decide to ensure that the Ukrainians are treated properly by Gazprom and Russia and continue to rely on gas transiting Europe. Any such confidence has disappeared, however, and Germany is not prepared to use force to enforce, for example, Ukraine’s territorial integrity.

Not everyone liked it when, in ancient times, all European roads led to Rome, but they were good roads that guaranteed commerce, and there were no alternatives. This is not unlike the present German attitude toward resolving problems presented by European and its own gas security. The US Senate, however, does not agree that it is time to give up on Ukrainian gas transit because it is not time to give up on these states generally in the face of Moscow’s pressures. The US is also much more inclined to resort to military power to curtail Russia’s actions. It would clearly prefer Germany (and the EU in general) to continue to push for transformation and incorporation of its eastern and southern neighbors. In this, Trump’s stance remains decidedly a minority opinion among US elites.

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© REUTERS/Lucy Nicholson

OPEC’s 171^st meeting in Vienna on November 30 saw an important shift in the global oil market, with member states agreeing to slash production by 1.2 million barrels per day – around 1 percent of global output.  It’s a significant move to tackle the oversupply that has driven down prices. But the OPEC gathering also reflects a new paradigm: After two years, the Saudi-led price war to drive American shale and other “high cost” producers from the market is over. And to the surprise of many – not least the Saudis – shale has survived. What now?

The United States Energy Information Agency (EIA) expects persistent market oversupply to have been quenched by the second half of 2017. The Saudis view the diminishing oversupply as an opportunity to cut production – and they agreed to take on the largest cuts, slashing 486,000 barrels a day. They also worked intensely to coordinate cuts with Russia, which promised to limit output by up to 300,000 barrels a day. Just a day after the Vienna meeting, prices jumped from $50 to $52 per barrel.

The Saudi plan did face numerous obstacles. Iran had refused to participate in any cut, insisting it should first be allowed to re-establish production it lost under years of sanctions. In response, the Saudis threatened to boost their own production, punishing Iran by collapsing prices and denying them market share. The Financial Times’ Nick Butler correctly characterizes this as “playing with fire,” and not only because of the severe pain this would impose on weaker OPEC states, but also for the geopolitical retaliation it might provoke from the new US administration as the Saudis would also bankrupt numerous shale producers in the US.

In the end, the Saudis succeeded in getting Russia, Iran, and the rest of OPEC on board. But the relief is only temporary. US shale is widely expected to expand into the void, re-depressing prices by later next year. In all these scenarios, the future remains extremely difficult for OPEC, for Russia, and for other oil-dependent states.

A Price War Backfires

Oil prices began to rise in 2002, dipped during the financial crisis and rose again steadily through mid-2014. That sustained period of high prices spurred the development of unconventional shale production. Driven by technical innovations in hydraulic fracturing along with abundant venture capital, the US added more new oil to the global market by 2014 than all of what was lost during the Arab Spring revolution and subsequent wars in Libya, Iraq, and Syria. By mid-2014, some two million excess barrels-per-day (bpd) were flowing into storage, and the price collapsed.

Facing unprecedented surplus production, the Saudis insisted that OPEC alone could not cut enough production to boost prices without sacrificing immense market share. However, Russia and other non-OPEC producers would not join any cut, while Iran, Iraq, Nigeria, Algeria, and other OPEC members demanded “hardship exemptions.” This led the Saudis to instead push OPEC to maintain production levels, further driving down prices in an attempt to force US fracking – believed to be too expensive – out of business. Soon, the Saudis, Iraq, and other OPEC states plus Russia were all increasing production, intensifying their low-price pressure on shale and jockeying for market share before sanctions expired on Iranian production. But they were chasing a moving target.

How Has Shale Survived?

Fracking was supposed to be expensive, with an initial gush of oil or gas dissipating and soon requiring additional fracking. But all this has now changed.

First, fracking is more like a manufacturing process than conventional oil production. Shale producers were able to innovate at phenomenal rates – the Permian Basin in Texas, for example, has shown gains of 500 percent over several years. Horizontal well drilling was accelerated, shrinking labor and rig costs. Initial production per new well was also increased substantially.

Second, fracking’s domestic financial backers demonstrated surprising loyalty in spite of high debt and risk levels, reducing bankruptcies below all expectations. And when bankruptcies, mergers, and acquisitions did take place, they generally brought fresh financing, preserved technical capacity and further rationalized operations, producing more robust companies.

All in all, firms in richer regions remained profitable when oil was in the $40s, and survived losses incurred – especially between November 2015 and April 2016 when prices descended to the mid-$20s. It is important to note that OPEC and Russia require high profits to support their oil-dependent national budgets – generally in the $80s – while private US shale firms demonstrated they can pay loans and thrive with modest profit margins in the $40s. How much lower further tech and operations innovations can take them remains to be seen.

Tech advances recently caused the US Geological Service (USGS) to declare an additional 20 billion barrels of West-Texas Permian Basin oil as recoverable – the largest continuous addition in US history. And beyond North America, similar deposits in Argentina, China, and Russia could flourish with capital, expertise, and infrastructure.

In short, shale portends a new era of abundant and generally cheap oil and gas likely to last some decades. Of course, major political disruptions in the Persian Gulf or Russia could usher in a new era of high prices, as the bulk of global conventional oil is produced there. And if global producers continue to under-invest while prices remain low, capacity could be swamped by a demand surge. But the resource base is not in doubt – it only requires investment, time, and effort.

Geopolitical Implications

Revenue shortfalls for highly oil-dependent Russia, Saudi Arabia, and Iran don’t bode well for future relations in East and Central Europe, the Caspian, or the Middle East and North Africa. These three regions have seen their budgets tightened and spend reserves worn thin, and their room for compromise has diminished.

Energy is already central to Russia’s relations with Ukraine, its diplomacy regarding European and Asian pipelines and other energy deals, and its new Mideast focus. The conflicts in Syria, Yemen, and Iraq are all cases of intensified armed contention and collusion among these states as competition on the oil market increases.

Meanwhile, America’s shift towards net-oil-exporter status could make an aggressive Trump administration overconfident in confronting Iran or the Saudis should the latter undermine US shale producers.

The least volatile geopolitical scenario would be for the Saudis to succeed in cutting production as they have now vowed to do, boosting prices and stabilizing national budgets. Howard Hamm, the fracking billionaire close to Trump, told Bloomberg ahead of the OPEC meeting that he hoped his fracking colleagues would react to a production cut with “discipline,” maintaining higher prices. This reflects a widely shared view in the US energy business that mutual interests will work to preserve the decades-old US-Saudi oil market (and geopolitical alliance). But it’s just as likely that the US confrontation with Iran will intensify collaboration with the Saudis; re-imposing oil-sale sanctions on Iran would certainly make life easier for the kingdom – and all other producers – by reducing stubborn global supply surpluses.

Undermining Energiewende

Finally, there will be significant consequences for climate change mitigation strategies, such as Germany’s Energiewende, or energy transition. It was formulated under very different expectations about remaining oil and gas resources and the prices renewables would have to face. The new hydrocarbon abundance contradicts deep-seated beliefs in “peak oil,” the “end of the age of hydrocarbons,” and “perpetually high” oil and gas prices – ideas that underpinned more than thirty years of environmental strategy.

Indeed, cheap, abundant, increasingly fracked oil will have complex and destabilizing geopolitical and climate consequences requiring careful analysis – and action.

NB. This post was updated on December 1, 2016 to reflect OPEC’s decision to reduce production.

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© REUTERS/Alexander Demianchuk

The proposed Nord Stream 2 pipeline project has bitterly pitted European states that back the project, including Germany, the Netherlands, Austria, and France, against project opponents, including Ukraine, Poland, and other former Soviet-bloc states. The project aims to double the capacity of the existing huge, 55-billion-cubic-meter-per-year Nord Stream 1 pipeline, running in parallel to it under the Baltic Sea from near St. Petersburg in Russia directly to Greifswald in Germany.

This dispute has exposed two very different views of Gazprom, Russia’s state-owned gas-export monopoly, and of Vladimir Putin’s Russia itself – one side sees it as a “necessary” and “reliable” energy supplier, the other a dangerous and manipulative adversary. This dispute is but one more collision inflicting lasting harm on the European Project.

The latest row involves a ruling in late July by the Polish Office of Competition and Consumer Protection (Urzed Ochrony Konkurencji i Konsumentow, or UOKiK) rejecting an application by five private western European energy firms proposing to partner with Gazprom to build and operate Nord Stream 2. The firms are Germany’s E.ON (soon to be Uniper) and Wintershall, Austria’s OMV, Anglo-Dutch Shell, and France’s Engie.

Shortly before the Polish announcement, the five companies agreed to withdraw their association proposal to avoid UOKiK initiating a legal process against them. The commission’s president, Marek Niechcial, declared categorically on August 12 that the Polish rejection was definitive, asserting “This will stop the [Nord Stream 2] deal.” The five firms have nevertheless made it clear they are seeking a strategy to work around the decision, and expect to proceed as planned. Gazprom has said the same.

So why go through this proceeding in the first place? To understand these events better, I spoke with several experts and diplomats working on these matters in Moscow, Berlin, Washington, Paris, and Warsaw.

Commercial Arguments, Financial Impact

An often-heard line of argument is that at least some of the five companies might actually have little commercial interest in the project, but need to preserve their relationships in Russia where they have large investments in energy projects. After all, the Kremlin has a track record of taking over projects from foreign partners with whom it has fallen out. A further theme in this vein is that Nord Stream 2 is not really needed in northwestern Europe, even though the Groningen field in the Netherlands and Norway’s reserves in the North Sea are declining, because future demand in northwestern Europe is overestimated and Liquefied Natural Gas (LNG) will be available from the United States. This view led to press speculation that the five firms likely welcomed the Polish decision, allowing them a graceful exit.

However, virtually all the experts I spoke with had no doubt Nord Stream 2 would be a lucrative commercial enterprise over the long run, and that the five firms seem genuinely enthusiastic. Russian gas via pipeline is cheaper than other sources such as US LNG, and there will be a market as current sources decline. In any case, most of the analysts assert it should not be the EU’s concern if private firms insist on making what could be a bad commercial investment. All see the project continuing, albeit likely altered, with Gazprom expected to take delivery of the pipe shortly.

But what then is the effect, if any, of the Polish decision?

The main impact will be financial. The original plan called for each of the five firms to have a 10 percent stake, with Gazprom taking the remaining 50 percent. The five were to purchase stock in the enterprise covering 30 percent of the roughly $10 billion total cost. Gazprom would then contribute equity to cover about half the remaining 70 percent and seek financing for the remaining 35 percent or so. The investments by Gazprom, and especially by the heavy-hitting private western energy firms, were to put Gazprom in a good position to go to banks for the remaining financing.

However, it appears the Polish decision has blocked these contributions. Unless a legal workaround can be found, Gazprom will now have to go to the bank for almost double the original amount (about 65 percent), and without its respectable partners, adding considerably to its financing costs.

Complicating matters, Gazprom needs financing for other large projects too, including its hoped-for Turkish Stream and the costly Power of Siberia line to China; meanwhile, Gazprom and other Russian energy firms are under US, EU, and other sanctions related to Moscow’s Ukraine invasion and seizure of Crimea. The financial portion of the US and EU sanctions in particular block Gazprom from obtaining long-term credit from US or EU institutions – a major impediment.

Experts stressed that if no workaround is found, the Polish decision will impose significant added costs and delays on Nord Stream 2. It remains to be seen if the five firms’ assertions that they are still on board is limited to purchasing and distributing the completed project’s gas.

In Gazprom circles, many are confident that the company can employ enough lawyers and pull enough strings to circumvent such decisions, though the experts I spoke with scoffed at this assessment. The company also believes that the decision is a Polish play to force negotiations, which the country supposedly will use to demand a long-term gas discount and guarantees that Gazprom will continue using the Soviet-era Yamal pipeline that passes across Poland to deliver Russian gas to Germany for another 30 years. One can only say that we will soon see if the Polish decision was made with such intent, in spite of Polish assertions. Legally, the final decision will not be issued till the end of 2016.

Gazprom’s Enhanced Vulnerability

Most significantly, without the five private firms as co-builders and operators of the project, Nord Stream 2 becomes a sole Gazprom endeavor, and Gazprom loses crucial political cover. It was precisely concerns about Gazprom directly supplying too much of Europe’s gas already – it currently supplies about one-third – that led to energy-security and geopolitical concerns over Nord Stream 2.

This risk is multiplied by the fact Gazprom is currently being charged by the European Commission with a long list of monopolist practices; that it has previously interrupted EU gas flows via Ukraine in 2006 and 2009 for political reasons; and that it is the state export monopoly of a country which recently invaded and annexed Ukrainian territory. Although the almost-universal retort in Berlin to such concerns is a dismissive “this is a purely commercial project” and “Gazprom has always been a reliable supplier” – and “they won’t dare” mess with Germany – the fact that 50 percent of Nord Stream 2 was to be controlled by major EU energy firms was key to undercutting arguments from Ukraine, Poland, and others.

And political opposition has already been growing. While complaints from the Visegrad Group, Ukraine, and other former-Soviet sphere states is not surprising, it is striking that, although the European Parliament has no legal say on the project, the delegations of four of the pro-Nord Stream 2 states in that body – Germany, Austria, France, and the United Kingdom (as well as Italy) – are on record as being unanimously opposed to the project.

Whether the Polish decision was a politically independent one is, of course, an important issue.

First, consider jurisdiction. Here, the Polish role is clear. Even though Nord Stream 2, like Nord Stream 1, would run under the Baltic Sea without crossing any other countries, including Poland, under Polish law firms doing business in Poland – which would include all five firms involved – that propose a new enterprise involving more than a certain euro-amount of business abroad (or somewhat less within Poland) must have the association approved by the national competition authority. This is something Nord Stream 2 backers could hardly raise an objection against as, under German law, a similar review is also required.

After extending its review by four months to gather further facts and solicit opinions from Polish firms affected by the project, the competition watchdog website stated in late July:

After analyzing the material [UOKiK] issued objections to the concentration. The findings of the Office show that the concentration may lead to restrictions of competition. At the moment, Gazprom holds a dominant position in the supply of gas to the Polish and the transaction could lead to further strengthening the bargaining power the company could exert on customers in our country.

However, was this decision independent from political influence?

The ruling is clearly in line with the government’s anti-Nord Stream 2 positions, and the government has also moved decisively in recent weeks to diversify its oil imports away from predominantly Russian to Iranian imports. Experts point to the new PiS government’s track record of violating the independence of the country’s constitutional court and the civil service, and its suppression of critical journalists, as reasons to suspect a lack of autonomy from the competition authority. Indeed, the government’s track record caused Standard and Poor’s to downgrade the country in January, citing “weakening institutions”. Five months later Moody’s lowed it to A2, and was close last month to a further downgrade due to a “democratic deficit”. While this is disturbing, there are no specific accusations of irregularities about the Nord Stream 2 decision.

A Harm to Berlin’s Soft Power

However, the key problem the project is facing is political. Whether another Gazprom-dominated mega-project to send Russian gas to Europe for several decades is wise from the point of view of security-of-supply and geo-political risk is a legitimate and necessary issue for Brussels and member states to consider. And there is the legitimate question of whether one should commercially reward – and increase energy-dependence on – a state currently under international sanctions for the unlawful invasion and annexation of a neighbor’s territory. Nord Stream 2 is not merely a gas-supply contract, it is a large-volume and long-lasting energy infrastructure interconnection. This is the foundation of the strongest arguments against the project.

Finally, there is one consideration given short shrift so far in Berlin. If Germany is serious about playing a role as leader of Europe, one would expect its government and elites to be willing to go the extra mile to win the confidence of those European partners expressing valid, historically rooted concerns about their national security vis-à-vis Russia. Berlin’s enthusiasm for this lucrative project, flying in the face of its partners’ geopolitical and energy-security concerns, is doing its much-valued soft-power profile great harm.

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© REUTERS/Sergei Karpukhin

On 18 June, during the annual St. Petersburg International Economic Forum, an agreement was signed to build a controversial new “Nord Stream 2” pipeline under the Baltic Sea that would go directly from Russia to northern Germany, with a capacity of 55 billion cubic meters (bcm). The project, which consists of two segments that would run along the same route as the existing two segments of the 55 bcm Nord Stream line, completed in 2011, has met with strong opposition from energy officials in Brussels, as well as leaders in Ukraine and some other EU states.

Indeed, the agreement between Russia’s Gazprom and a consortium of German, Austrian, French, and Anglo-Dutch companies came as a surprise. After all, in January 2015 Gazprom announced it had abandoned the project, blaming both the falling price of gas over the previous year and anti-monopoly restrictions in the EU’s Third Energy Package, which prohibit suppliers of gas from also owning pipelines delivering it. This provision has prevented Gazprom from ever filling the original North Stream more than half way.[1] In retrospect, the sudden signing of a Nord Stream 2 agreement only six months after the project was supposedly abandoned, plus the fact that the consortium foresees a quick start reveals the prior cancellation to have been a political ruse.

However, at the signing, Gazprom chief Alexei Miller, obviously quite satisfied with his coup, declared business is winning over politics: “As far as Nord Stream is concerned – there was no politics at all. The decision was taken in November 2011 and all the work has been done based on the decisions taken three years ago.” Both he and others asserted work would be complete by the end of 2019 – a particularly significant target, as this is the year Russian President Vladimir Putin has repeatedly said Russia intends to end transshipment of gas to Europe via Ukraine. Energy officials in Brussels and eastern European leaders have warned that Nord Stream 2 will do exactly this.

Berlin Viewpoints

However, within business and government circles here in Berlin, the project is widely seen as a reasonable and even rather clever solution to Putin’s penchant for using gas deliveries via Ukraine as a geopolitical lever. The principal argument heard is that Russia has never interfered with gas deliveries to Germany, and that it dare not; and Germany would be a reliable and trusted re-seller to countries now vulnerable to Russian cutoffs and monopoly pricing. The fact that this approach is directly contrary to EU gas-security policy is generally dismissed with explanations of how “reasonable” the plan is, and that long-term European dependence on Russian gas is both inescapable and even desirable for EU-Russian relations. It will, of course, also be lucrative for the northern-EU companies involved, especially as “Gazprom is willing to pay” for the pipeline, as is often pointed out.

However, Nord Stream 2 is not solely a German affair. The European consortium includes German energy companies BASF and E.ON, French company ENGIE, Austria’s OMV and Royal Dutch Shell, an Anglo-Dutch company. As for Shell, the Nord Stream 2 deal is but one element of a new global partnership with Gazprom according to Miller, who revealed in St. Petersburg that the deal heralds a spate of new Shell-Gazprom energy asset swaps and joint projects in Europe, Russia, and around the globe. For Austria and OMV, the economic allure is strong. As Miller explained, “… by the end of 2019 gas will travel far beyond Germany as OMV aims to turn Austria into one of Europe’s largest gas hubs.” Experts have also pointed out that this will concentrate at least two-thirds of Russian exports to Europe into one route, all arriving in Germany – already the largest recipient of Russian gas – and should enable Germany to develop as a hub for re-sale of Russian gas throughout Europe. Indeed, an advantage for Gazprom, which would now not need to develop its own hub, is that “it will allow Austrian and German trading hubs – NCG, Gaspool and CEGH – to become more important than the UK and Netherlands’ TTF/NBP hubs”, and Gazprom should be able to determine the speed of development.

All this is legal, as the EU, unlike the United States, has not extended its sanctions to Gazprom; however, challenges by EU authorities under the Third Energy Package rules are expected. Nevertheless, by very closely following the route of the previously approved, original Nord Stream, the consortium expects the project will be able to proceed.

Ending the Ukraine Gas Route

Putin’s consistent energy priority over the past couple of years has been an end to Gazprom’s sending gas to Europe through Ukraine by 2019. Why would Putin want this so badly?

First, Putin is utterly opposed to allowing Ukraine to draw closer to the EU, and has worked to wreck Ukraine’s ability to do so. Up till now, if Putin has wanted to exert pressure on Ukraine by restricting its gas supplies, it required cutting back on the gas Gazprom feeds into the 26 bcm annual-capacity Soyuz pipeline and the 132 bcm Brotherhood and Urengoy-Pomary-Uzhgorod pipelines. These two systems not only bring Russian gas to Ukraine, but continue on to supply Europe with half of the gas it gets from Russia. Of course, if Gazprom does not send Ukraine its portion, Ukraine can simply siphon off what gas it needs from the huge supplies passing through its territory. So, in 2006 and again in 2009, claiming to only want to cut off Ukraine – ostensibly over price or payment disputes – Putin actually cut off the entire flow through Ukraine to Europe, causing a major geopolitical backlash from both the EU and its US allies.

So Putin wants an alternative way to get this gas to Europe without transiting Ukraine, and he ordered Gazprom to accomplish this by 2019. If he succeeds, he will have accomplished three specific things. Since Ukraine controls the two lines transiting its country, ending their use will deny Kiev about $2 billion annually in transit fees its economy desperately needs. It would also leave Ukraine highly vulnerable to energy pressure from Putin. On the one hand, he could then cut off Russian gas shipments to Kiev without cutting off any of Gazprom’s millions of European customers downstream, thus avoiding any direct energy confrontations with the EU. On the other hand, It would also end Slovakia’s new ability to “reverse flow” gas back to Ukraine to counter any Gazprom cut-off there, as Slovakia only gets that gas from Russia via Ukraine transit – which is also why Gazprom declares Slovakia’s aid “illegal”.

Pipeline Bait and Switch

Putin’s initial scheme for replacing Ukraine as a transit state was to build a new “South Stream” pipeline from Russia across the Black Sea and through Bulgaria. However, Brussels, after some initial fumbling, finally made it quite clear that the European Commission would implement the anti-monopoly provisions it had lain out in its Third Gas Package, which became law in March 2011. These require that corporate sellers of gas to EU states be different from the corporate owners of the pipelines transporting that gas – i.e., that the two be “unbundled” in the interests of gas-market competitiveness. So Putin suddenly killed his Bulgarian scheme, and announced a deal with Turkey for “Turkish Stream”. This pipeline would also enter the Black Sea, but would now veer south and make Turkey the transit state to replace Ukraine, delivering some 63 bcm of gas – 16 bcm promised to Turkey itself in a first phase whose construction was intended to start in 2016, and another 47 bcm in a second phase to go beyond to the European market.

However, Putin’s latest demonstration of Russia’s new “muscular” geopolitical “decisiveness” entailed intervention in Syria on the side of Bashir al-Assad, and Turkey’s President Recep Tayyip Erdogan is deeply opposed to Assad. This clash with Turkish interests, exacerbated by Russian fighters violating Turkish airspace in early October 2015, has led to a breakdown in negotiations on construction of Turkish Stream. Moreover, the project’s main contractor, Italy’s Saipem, already had its contract to lay pipe under the Black Sea suddenly cancelled by Gazprom in early July (a few weeks after signing the Nord Stream 2 deal) just as Saipem’s ships were about to begin work. Industry sources say it will be difficult now for Gazprom to convince any new contractor of its serious intentions for Turkish Stream, and Gazprom itself announced that the project will aim for only half its initially touted 65 bcm, with construction delayed till 2017.

Clearly, Putin realized that sending fighter planes and troops to Syria would undo Turkish Stream as his substitute for Ukraine’s pipelines. However, by June he had another alternative signed and sealed in St. Petersburg that would send sufficient gas to Germany and Austria. Nord Stream 2 had already been widely seen as enabling Putin to bypass Ukraine, and has removed Turkey’s energy leverage over his Syrian adventure   Whatever his actual intention in dampening fighting in eastern Ukraine since early September, the effect has been to remove any argument German officials might have invoked in the face of stiff German business demands that “politics” not block the Nord Stream 2 project.

However, there remains one problem for Putin to replace Ukraine as a transit state: opposition from Brussels, and especially those European states most vulnerable to Putin’s use of Gazprom gas supplies as a means of coercion – and who are demanding more “solidarity” from Germany, Austria and the Netherlands.

Opposition from Brussels

To nay-sayers, Nord Stream 2 will lock in a deeper European dependence on Russian natural gas supplies for 30 years. In recent days Brussels has taken decisions to increase LNG supplies to the continent, and over the past months has given significant impetus to a number of formerly languishing projects to boost imports of both non-Russian LNG (liquid natural gas) and pipeline gas supplies to Europe, as well as build new internal-distribution pipelines and storage facilities that enhance member states’ gas-sharing capability and energy independence from Russia.

Shell and its partners present Nord Stream 2 as necessary to replace waning supplies of gas to northern Europe from old Dutch fields. However, with the global market bursting with new gas supplies, including LNG, and with Poland, Lithuania, Croatia, Spain, Portugal, and other member states making major efforts to bolster their access to non-Russian gas imports, Germany has made no significant efforts towards LNG, and there seems to be little consideration of how new non-Russian gas set to flow into southern Europe could be brought to bear. Maroš Šefčovič, the EU’s energy union vice president, has protested, “How is [Nord Stream 2] in compliance with our strategy for diversification of supply? What kinds of conclusions should we draw if the aim of such a project is to practically shut down the Ukrainian transit route?”– a fair question, given that the project will completely change the gas balance for Central and Eastern Europe, to which no satisfactory answers have been forthcoming so far.

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[1] Gazprom owns about half of both of OPAL pipeline, an extension running from near the Nord Stream’s landfall in northern Germany down to the Czech border connecting Nord Stream gas to the European network. Opal is the particular line Gazprom has been barred from filling beyond 50 percent, which in turn has limited its utilization of Nord Stream.

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© REUTERS/Ints Kalnins

Since Russia first invaded Ukraine last year, Putin has boasted of his ability to exploit natural gas dependency to undermine European solidarity. Indeed, though the continent as a whole relies on Russia for only 30 percent of its natural gas, roughly six states are completely dependent, a gap Putin has worked hard to widen.

While Europe’s gas vulnerabilities cannot be easily undone, through better gas market integration they already have been reduced. However, there is another way to diminish Moscow’s energy leverage: diversifying away from Gazprom supplies. And indeed, a handful of well-known projects could achieve just that. But most of these projects have languished, victims to precisely the sort of petty national rivalries and isolationism that the EU is supposed to obviate. And for whatever reasons, the EU’s heavy hitters – Berlin and Paris – have not pursued the sort of activist diplomacy required to break these logjams.

Nevertheless, advances have recently been taking place; and it is interesting to see where the leadership is coming from.

Algerian Gas via Spain, Portugal, and France

One such logjam has long kept Spain and Portugal isolated as a gas “island” apart from the rest of the continent, greatly diminishing the ability of Algerian gas to enter the E.U. market. This is finally ending.

While Europe has only 21 LNG regasification terminals to receive gas from the global market, eight are on the Iberian Peninsula – seven in Spain, more than in any other EU state, and one in Portugal. In addition, Spain receives pipeline gas from Algeria from across the Mediterranean. But these LNG and pipeline facilities have large unused capacities.

The reason more gas has not been imported through Spain and Portugal into continental Europe is that large energy firms in France have for years blocked construction of the necessary pipelines over the Pyrenees and across France, fearing competition to their domestic energy business. They similarly opposed electrical transmission wires from Spain until recently. At present, there are two pipelines to France, Larrau and Biriatou, with only 5.36 billion cubic meters (bcm) capacity. Completing another – the Midcat pipeline, on the list of EU priorities projects – would provide another 12 bcm, enough to replace 7.5 percent of Europe’s Gazprom imports, but construction has long been stalled only 70 kilometer from the French border in Cataloñia.

However, Brussels’ new energy commissioner, Miguel Arias Cañete, took an activist stance upon coming into office, and convened talks with France, Spain, and Portugal. The idea was to unlock the potential of Algeria – the world’s seventh largest gas producer – to send much more gas to Europe. Algeria’s pipelines to Spain and Italy are now used at only about half their capacity. And, while Spain consumes only about 25 bcm domestically, its LNG facilities alone have a capacity to import 60 bcm. Spain’s energy minister has emphasized that, if allowed to build the required infrastructure, Spain could, in the midterm, provide about 50 bcm to Europe, which could replace about 40 percent of the gas now imported from Gazprom.

In June, Cañeta’s active efforts paid off with a three-party agreement to complete Midcat. Its capacity will be in addition to an upgrade of the old pipelines to 7.1 bcm, set to come online later this year.

LNG for Croatia, Poland, and Lithuania

Two other projects widely seen as success stories in diversifying European gas supplies are the new LNG import facilities in Lithuania and Poland. In the case of Lithuania, to get a facility up and running quickly, the Klaipėda LNG floating storage and regasification unit (FSRU) was purchased and began operations on 3 December 2014 with a capacity of 4 bcm. Only the fifth such facility in the world, this ship provides the first competition for Gazprom in Lithuania, and has already spurred it to lower its pipeline price by 23 percent in recent negotiations.

A new LNG regasification facility will also come online in Poland in the second quarter of 2016, at Świnoujście on the Baltic near the country’s western border with Germany, with an eventual capacity of 7.5 bcm, or about half of Poland’s gas demand. Again, the alternative supply is expected to lead Gazprom to offer lower prices.

Lithuania and Poland are no longer isolated from the world’s gas market. But energy security is a market externality, and these are expensive projects – Poland’s cost about €950 million, while Lithuania’s ship is leased for 10 years with the option to buy. These projects were not seen as commercially viable and required subsidies. However, even if these LNG facilities were never actually used, experts feel that the money saved in each country from the lower prices they forced Gazprom to agree to should be sufficient to recoup the cost of each country’s facility.

The key here is that each is a project within a single nation state, so the necessary transference of funds can be accomplished. In the EU, however, a major problem is that the costs of such projects are generally not incurred in the same nation state where the resulting price and security benefits accrue, and there is no mechanism to transfer the funds between states.

An example of the sort of impediment still encountered is in Croatia, a EU member since 2013. Here, an LNG import facility long sought for Krk Island would provide much more gas than small Croatia can absorb, meaning it would only be viable if pipelines enabled the country to sell excess gas to its neighbors. In fact, the idea is that Poland and Croatia would construct a distribution network running between their LNG facilities.

Getting Squeezed From North and South

Gazprom’s supply dominance is already being chipped away from the north and south by two initiatives. Statoil, Norway’s state company, has long advertised itself as an alternative to Gazprom, and the push is now paying off; in the first quarter of 2015, Statoil’s exports to Western Europe “convincingly” exceeded Gazprom’s for the first time save a brief period in 2012, marking a significant step for European supply diversity. And from the south, the Southern Gas Corridor pipeline, beginning in 2018, is set to bring 10 bcm of non-Russian gas from Azerbaijan, with plans to increase capacity significantly in ensuing years. The project is to traverse Turkey as the Trans-Anatolian Natural Gas Pipeline (TANAP) and continue across Greece and Albania as the Trans-Adriatic Pipeline (TAP), terminating in Italy, with later spurs possibly bringing gas as far north as Austria. Putin is making special efforts to scuttle it by redirecting a planned larger Gazprom pipeline – the South Stream, which was originally to enter the European market via Bulgaria – to pass through Turkey (now as “Turkish Stream”) and continue on across Greece, where an agreement was signed by the new Syriza leadership.

This hastily re-organized Russian project aims to pressure Ukraine by establishing yet another link circumventing it, and to scuttle the EU- and US-backed Southern Corridor project. However, Southern Corridor has firm commitments – long-term contracts – signed with suppliers and consumers, while Southern Stream, although planned as a much more grandiose affair, remains sketchy on such details.

Who is Taking the Lead on Energy Security?

The projects cited are all proving to be within the realm of the possible, even though most have spent years in limbo. A big part of this is, once again, narrow national economic interests. For example, the disparity between the security of Germany’s Russian gas supplies via Nord Stream, which Putin scrupulously avoids interfering with, and the precarious nature of other states’ supplies delivered via Ukraine is something often cited by vulnerable states as the material basis for different perceptions of the Russian energy-security threat.

In fact, the “flagship” agreement signed in mid-June at the annual St. Petersburg International Economic Forum was a deal to double Gazprom’s exports to Germany via Nord Stream, bringing it to a whopping 110 bcm. Clearly, this will greatly bolster Germany’s role as a European hub for Russian gas and undermine diversification of European supplies. Meanwhile, France’s years-long pursuit of narrow economic self-interests in blocking Spain’s access to the European gas market has been especially egregious.

Putin is not relenting in his attempts to use Gazprom supplies as a geopolitical lever, and the war he is fueling in Ukraine continues to generate concern for supplies transiting that country. While the US has in recent years increased its energy diplomacy capacity on these questions and has advantages as an “honest broker” between some EU states with old enmities, Washington is at a disadvantage compared to EU heavyweights Germany and France.

Be that as it may, others are taking action, and though it is early days, Putin may find that he has overplayed his hand on gas. While it remains easy to chide Brussels for bureaucratic dysfunctions on energy and geopolitical matters, it is evident that Russian policies have provoked a focusing of resolve in the team leading the new European Energy Union (EEU), as well as in the leaderships of the most Russian-gas-vulnerable states. Recent progress on high-value but long-stalled energy projects shows the potential for permanently slashing Gazprom’s market share – and with it Moscow’s gas-based geopolitical leverage.

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(c) REUTERS/Jim Bourg

Pin-pointing the reason for the dramatic – and continuing – fall in the price of oil is relatively easy: OPEC held its 166th conference in late-November 2014 to decide on a strategy to address oil prices, which had been falling at five to ten percent per month since July.  Rather than pursue a production cut to boost prices as usual, OPEC adopted a Saudi proposal to keep output steady at 30 million barrels per day. The explicit intent of the Saudi strategy is to drive prices down until the highest-cost non-OPEC producers are forced from the market, with their shares reverting to the “most efficient producers” – that is, to OPEC.

For Russia, Iran, and Venezuela, this Saudi strategy is ruinous, so much so that many in these countries declare the whole affair a geopolitical plot hatched by the Saudis in league with the US and EU. However, while the impacts on Russia and Iran are certainly not unwelcome in Riyadh (or, for that matter, Washington or Brussels), Saudi oil minister Ali Al-Naimi – who was kept in place last week by Saudi’s new ruler King Salman, while most other high ranking ministers were reshuffled – insists that today’s new market realities had presented OPEC with no choice but to defend its market share in this manner. The pain imposed on Moscow, Tehran, and Caracas is but collateral damage to states already facing crises rooted in their politics.

The past decade of high oil prices, only temporarily interrupted by the Great Recession of 2008-09, enabled a plethora of small- and medium-sized US “fracking” firms, along with other marginal producers, to take significant market share.  As long as prices remained high, this was not an existential difficulty for OPEC.  However, when prices began to fall in mid-summer 2014, the impact was severe, especially for OPEC’s “price-hawk” faction.  These are high-population OPEC states earning export-revenues-per-capita several times less than the Saudis and small Gulf OPEC states. In the run up to the OPEC conference, Venezuela, Iran, Algeria, Nigeria and other poorer, higher-population states were especially keen for OPEC to cut production to prop up prices. These price hawk states are, however, rarely willing to cut their own production;  Libya, Iran, and Iraq all asked for and received hardship exemptions from having to cut in the event OPEC decided to do so.

Al-Naimi insisted that oversupply was so great that any cut would only be effective if non-OPEC producers joined in.  The Venezuelan foreign minister, Rafael Ramirez, took the lead trying to satisfy Al-Naimi’s condition, and brought the Mexican and Russian oil ministers to meet Al-Naimi in Vienna before the OPEC conclave began there. Al-Naimi related what the Russian oil minister then offered:  “In the end, he said he could not make any reductions because their wells are old, and if they reduce, the wells will not come back up … We said ‘thank you’ and the meeting was over. So too, the Mexican minister explained his country’s difficulties.”

With both OPEC and non-OPEC producers unable to cut production, the OPEC conference agreed there was no choice but to maintain production until falling prices force sufficient numbers of high-cost producers from the market.

From mid-2014, a veritable “perfect storm” of market factors capable of depressing prices was gathering such that, had OPEC alone cut production and pushed prices up, it would have just given market share to American shale-oil producers.

On the demand side, the main driver of the past decade was Asian economic growth.  While Asian demand will generally expand, its rate is slowing.  In 2014, China experienced its lowest growth, 7.4 percent, in 24 years.  The EU has also gotten itself into a low-growth, perhaps-deflationary mode.  And as for Latin America, with growth dependent on commodity exports, China and the EU’s situation augers protracted low growth.  And even though the American economy is in recovery, its oil-use profile was transformed in recent years, with long-term oil demand plateauing.

On the supply side, since 2006 the United States has produced more new oil due to hydraulic fracturing technology than all the production removed from the market in Libya, Iraq, Iran, and other Middle East and North African (MENA) states due to conflicts and sanctions. However, protracted high prices enabled other marginal producers, including those in Canadian developing Alberta’s previously uneconomic “tar sands” extra-heavy oil; Brazil’s national oil company, Petrobras, which developed new, deep-offshore “sub-salt” fields; and West-African states that developed new high-price-tag offshore projects.  And, had prices remained high and Russia unsanctioned, complex and costly Arctic projects with western firms’ know-how were on the agenda to compensate for Western Siberia’s decline.

But it is not only a matter of market fundamentals that brought prices down.  In the futures market, the huge, speculation-driven price boosts seen before the Great Recession did not reoccur in mid-to-late 2014, even as ISIS advanced dramatically in Iraq, Libya’s civil war flared, and Russian Arctic projects were undermined by sanctions, because new US laws restricting pure speculation in the futures market were now in place.

Although implications for Russia, Iran, and Venezuela are very negative, this is not because the Saudis, the US or EU took aim at them.  While their plights do derive in part from political decisions taken by their leaders, the harsh reality is that, even if those decisions were now reversed – and they are unlikely to be – the trajectories of their outdated and poorly managed oil-sectors, increasingly uncompetitive in the “big leagues” of today’s high-tech and higher-efficiency marketplace, would take longer to correct.

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