The New US Sanctions on Russia – implications for EU’s energy security

The New US Sanctions on Russia – implications for EU’s energy security


No wonder German, French and British energy companies grumbled upon the release of the new version of S.722  – the legislation expanding US sanctions on Iran and Russia. In part for a good reason – there were nuances, which the US Senators failed to address in the original version.


As Russian and Iranian companies hold shares in Shah Deniz – 2 (NIOC and Lukoil own 10 per cent shares) a verbatim application of the provisions of the US sanctions act would have essentially blocked the Shah Deniz project and the whole Southern Gas Corridor.


In the new draft, the sanctions apply only to companies and projects where Russian companies hold at least a 33% stake.


This change was expected as many governments, companies and the EC directly appealed to the US Government and the US Congress to fine tune and amend the sanctions’ provisions.


However, not all EU countries and energy companies would remain happy. The European Commission feels obliged to respond in kind and defy unilateral US actions. Yet, once the US sanctions are adopted there will be few levers that the EC could pull without risking a major transatlantic rift.


The US Congress has elevated the Russian threat to No. 1 and has formally accused Russia of engaging in hybrid warfare against the United States. Therefore, the US sanctions should be interpreted as a nation’s security and self-defense matter, very much in line with the attack on 9/11.


The EU can neither deny nor ignore the right of the United States to define and assess threats to its national security.


Most of the US sanctions are not new – in fact most if not all have replicas in the EU sanctions library.


A quick look at the list of endangered joint projects between EU and Russian companies certifies the main line – Moscow has few chances for symmetrical retaliation against US sanctions. The best it can hope for is to expel US diplomats, a move already factored in since President Obama expelled 35 Russian diplomats in December 2016. Most of Moscow’s efforts would focus on information and propaganda campaigns engaging EU public opinion in an anti-American campaign, playing on the hurt pride sentiment of the EU political and corporate elite – Washington twisting arms and jeopardizing Europe’s energy security.


The Baltic LNG project between Shell (not yet formally an equity partner) and Gazprom is meant to add to Russia’s LNG export potential on top of the record 178 bcm exported to Europe in 2016.


The same narrative – helping Russia sustain and expand market presence of its companies in Europe applies to all of the remaining 7 projects targeted by the US sanctions – Blue Stream (Eni and Gazprom), the Caspian Pipeline project where Shell, Eni and Rosneft partner; Nord Stream 1 and 2; the expansion of Sakhalin-2 (Shell and Gazprom); the Shah Deniz consortium and the South-Caucasian pipeline (where Lukoil holds a 10% stakes); and the Zohr field project in Egypt’s EEZ (BP, Eni and Rosneft).


A closer look at the list, following the changes made in the original Senate version, would give a different picture as the revised US sanctions will cover only projects where Russian companies have either a controlling stake or a substantial stake – above 33%.


Nord Stream–2 attracts most attention as the US government has already made a valid point – EU companies have already sided with Gazprom, financing it against the wishes of CEE countries and helping Gazprom bypass the region. Moscow is using the disguise of commercial interest to conceal a larger impact frame – shifting $10 billion in direct or indirect benefits from CEE to Gazprom’s partners in Germany in brokerage fees and cheaper gas. The objective is to sustain EU gas market fragmentation and pre-empt liberalization and integration.


The EU’s prime interest in addressing the issue of the impact of US sanctions should be weighed against Russia’s energy dominance and should be based on the average consumer’s interest. Energy companies need to compete and secure their own niches while responding to the shareholders’ expectations.


The key difference between 2017 and 2009 – when Russia cut off gas supplies to Europe – is that today Moscow can no longer afford to threaten or even less to turn off gas flows. The alternatives both for oil and gas are in place – it is only a matter of time for alternative supplies to reach par levels with Gazprom. Russia’s energy weapon has been successfully diffused.


Does the EU consumer have any specific or vital interest in specific routes such as Nord Stream-2? Not at all.


The asymmetry in interests between Russia and the EU in general is easy to observe. The project has been conceived and promoted by Russia as part of its own strategy.


The average EU consumer has a general interest in a level playing field with maximum competition from various gas producers and traders.


Europe needs to secure equal access for LNG gas, new alternative suppliers and routes, both land and sea based. European countries need to acknowledge that the interest of EU energy companies and those of EU consumers are not always identical and for sure they are different from Russia’s. Whenever EU energy companies choose to act as proxies for Gazprom in its efforts to retain market shares and stifle competition, including from US LNG, it should be clearly stated – this is neither shared nor public EU interest.


It is not unprecedented for Russia to engage top EU politicians or partner companies through multifaceted operations within a complex web of influence campaigns aimed to block US interests. Moscow has a long record of opposition to the use of top notch US technologies in drilling in the EU – including shale gas exploration and production, which Russian companies are themselves seeking. At the time of the anti-shale campaign across the EU, most member governments took a hands-off approach and allowed eco-activists and leftists a free hand in determining the public agenda on the issue.


The same loose coalition that has blocked local shale gas production is trying today to block the entry of US shale gas as LNG and to mobilize a united EU front against US sanctions.


US LNG does not represent any current threat to Russian gas. Volumes are not exceeding 1 bcm so far, which is totally negligible when judged against Russian gas sales. It is true that US LNG imports could easily raise to levels that could potentially compete with other LNG exporters – but that will not happen overnight either. Hence, US LNG will first have to successfully compete on the global LNG market, then with other LNG importers in the EU and only afterwards with Russian or any other pipeline gas.


The geopolitical weight of the US and the promises made by President Trump to the leaders of CEE countries could make some difference. The drastic 30% cut in the budget and reshuffles in the State Department might, however, compromise efficient diplomatic escort of the US LNG export drive in region in the short term.


The fact of the matter is that EU energy companies have a long track record and established business networks with Russian oil and gas companies.  Most of Russian gas is sold on long-term oil indexed base with some contracts spreading well over 5 to 20 years. Gazprom seems willing to add flexibility and engage Western European energy companies in acting as brokers in its gas supply chain.


Uniper, one of the partner companies in Nord Stream–2 and one of the largest gas players in Germany – has a standing 20-year contract (until 2035) with Gazprom. Shell Energy Europe, also a partner in Nord Stream–2, on its part, also has a 20-year contract for gas supply with Gazprom, albeit for much smaller quantities. Due to an asset swap with BASF, Gazprom has 100 percent ownership in other top German gas importers – WIEE, Wingas and WIEH, which in 2016 alone have imported 30 billion cubic meters, selling it out of Germany to France, Denmark, the Czech Republic and Austria.


More and more of Gazprom’s gas, once imported via Nord Stream, is being traded on secondary markets, making Western European energy intermediaries directly interested in Gazprom expanding market shares and blocking access of its competitors. By default, most of the ‘angry’ responses to US sanctions come from these EU business quarters. Germany has become a major net gas exporter, largely due to Nord Stream–1 and a second line will make it nominally the third or fourth largest gas exporter in the EU. While gas consumption in Germany trends around 75 bcm, imports of Russian gas continue to grow by double digits, deliberately increasing the EU’s dependence on Russian gas and defying common EU energy security benchmarks.


EU consumers, including Germans, should be grateful for the US shale revolution for the drastic cuts in oil and gas prices. Failing to secure free and uninterrupted gas flows from the US oil and gas market – the world’s energy swing producer – while increasing imports of Russian gas – giving it preferential treatment – is a recipe for sustained EU gas market inefficiencies spilled well beyond German borders and a prelude to a transatlantic partnership breakup.


EU gas consumers have paid in 2016 $45 – $50 billion less for Russian gas, compared to 2012. The cost savings in cheaper oil are even starker – the total cost of the EU’s oil imports has fallen from $449 billion in 2012 to $167 billion in 2016, with 29% of this oil coming from Russia.


None of this would have been made possible without the US shale revolution and a strong transatlantic strategic bond, essential in developing alternative supply routes, including the Southern Gas Corridor.


None of this would have been delivered in the case of a new edition of German Ostpolitik.


Newcomers to the EU gas market are facing barriers and tough competition, not only when trying to access end gas users in Europe. US LNG exporters have to rely on local players, that in most cases are already bound by contractual arrangements with Gazprom. This lies at the core of the EC’s concern for roadblocks to EU market diversification.


More pain comes along when new competitors of Gazprom try to access the transit grid and move gas across borders in the CEE region. What is pretty routine for Gazexport is an uphill, often impossible tasks for newcomers, lost in a mix of institutional capture and market immaturity.


The forecasted gas glut in the global LNG market, expected after 2019, will reverberate with lesser strength in the EU gas market, due to the dominance of fixed long-term supply contracts with Gazprom, if new suppliers are not allowed in and if the EU remains cut off from global LNG competition.


The latest gamble of Moscow is to encourage EU partners to retaliate against US sanctions at the individual country and EU level in hope that Brussels will do the hard work.


It is true that the latest US financial sanctions would bite deep into Russia’s interests. They would in effect cut off access of Russian energy companies to long-term capital, limiting maturities of debt to 60 days, effectively allowing only refinancing operations.


In time, this will lead to fresh cuts in oil and gas output, now disguised as ‘voluntary’ reductions under the OPEC led export quota agreement. Sustaining pre-sanctions production levels over a long period of time is impossible without the import of essential US technology, to say nothing about developments of new fields in the Arctic, shale deposits or deep water offshore areas.


The US Congress sanctions would dramatically reduce the chance that President Putin could agree behind closed doors with the US president to lift them.


Ultimately, the European Union and the US share essentially the same strategic goals and security interest. The EC gave waivers to some EU companies with work in progress on blocks in the Black sea and the Arctic.


But the US has a case to seek free entry for its LNG exports to Europe.


Gazprom’s companies in Germany and Russian gas in general are given political backing from the German Government or the European Commission, which translates into preferences over US LNG and any other gas that could compete on the EU gas market.


This is neither a good policy, nor good business.


By Ilian Vassilev

Leave a comment

Risks and stakes in the Turk Stream for Bulgaria

Risks and stakes in the Turk Stream for Bulgaria

PM Borisov’s pet project – the Balkan Gas Hub has risen in prominence after his talks with President Trump. Not…
PM Borissov's visit to Washington - making use of Trump's transactional foreign policy

PM Borissov's visit to Washington - making use of Trump's transactional foreign policy

There has been much talk recently of a return to the balance of great power interests and spheres of influence.…
Foul play at the auctions 2020 Revithoussa LNG - the consequences

Foul play at the auctions 2020 Revithoussa LNG - the consequences

Last week the Bulgarian PM inspected work progress at the Interconnector Greece-Bulgaria, noting that it is a landmark project for…