The Fuse

Nearing Completion, Nord Stream 2 Saga Approaches Final Act

by Nick Cunningham | August 05, 2021

In July, the U.S. and Germany issued a joint statement that amounted to something of an agreement on the Nord Stream 2 pipeline, a highly contentious natural gas pipeline running from Russia to Germany via the Baltic Sea.

The agreement seemingly puts an end to a saga that has been fought over for more than half a decade, with economic, environmental, security and geopolitical implications at stake.

Nord Stream 2 deal

Global powers have been jockeying over Nord Stream 2 essentially since the project’s inception years ago, with the Russia, some Western European governments and European energy conglomerates on one side, and the U.S., old Cold War-style security hawks, and some Eastern European governments concerned about Russian influence on the other. The political symbolism of the project arguably outstripped its tangible importance, but the battle lines were drawn a long time ago and mostly remained stuck in place.

The most recent history of the Nord Stream 2 pipeline – which would nearly double the gas system’s throughput, carrying Russian gas to Germany – saw the Trump administration in late 2019 impose sanctions on the project and on any companies involved in its construction. The sanctions were an attempt to halt the pipeline’s completion at the eleventh hour.

The Trump administration succeeded in delaying construction for roughly a year.

The Trump administration succeeded in delaying construction for roughly a year, forcing Russia’s Gazprom to scramble to find pipe laying vessels that could carry on the work. But the sanctions also frayed tensions between the U.S. and Germany, a relationship already damaged by an array of other issues during the Trump era.

The incoming Biden administration prioritized repairing its relationship with Germany, and with Nord Stream 2 mostly completed, the new U.S. government rethought its strategy. In the first few months of 2021, the Biden administration rhetorically stuck with longstanding U.S. opposition to the project, but behind the scenes began formulating a new position.

On July 21, the U.S. and Germany announced an agreement on Nord Stream 2, which was packaged into a broader understanding on energy security issues. The joint statement called for “push back” against Russian aggression in Ukraine and other “malign activities.” It also restated principles of energy security for the continent and the two countries pledged to prevent Russia from using energy as a geopolitical weapon. The agreement also called for new investments in energy in Ukraine to compensate for lost gas flows and lost leverage.

Unless something unexpected occurs, the pipeline could come online by the end of this year.

But left unstated was that the U.S. would essentially stand down from its opposition to Nord Stream 2, paving the way for the project’s completion, although that fact was more or less implied. “Our goal remains to ensure that Russia cannot use energy as a coercive tool as a weapon against Ukraine, or anyone else in Europe,” U.S. Secretary of State Anthony Blinken said at a joint press conference in Berlin in July.

Unless something unexpected occurs, the pipeline could come online by the end of this year.

Discontent in DC and Eastern Europe, but world moves on

The battle over Nord Stream 2 appears to be over, or at least drawing near. But hawks in Washington are not ready to let the issue go. Sen. Bob Menendez (D-N.J.), chairman of the Senate Foreign Relations Committee, released a statement on August 2 opposing the agreement the Biden administration announced with Germany, and Sen. Menendez’s statement was signed by some comparable officials from Eastern European countries.

“We, the Chairs of Foreign Affairs Committees of our respective national parliaments, continue to oppose the Nord Stream 2 pipeline project and with regret note the recent decision of the United States and Germany on Nord Stream 2, which entails resuming completion of the pipeline,” the statement said.

A dozen Senate Republicans also vowed to block two of President Biden’s nominees for the Treasury Department due to the U.S.-Germany agreement.

Meanwhile, U.S. LNG exports are in competition with pipeline gas shipments in Europe, and conspicuously, some of the loudest opponents of the pipeline project hail from U.S. gas-producing states.

With natural gas prices soaring in Europe (and around the world), the additional supplies will likely be welcomed. But in a July note to clients, Goldman Sachs wrote that gas flows into Europe on Nord Stream 2 won’t immediately double, and some of the throughput could be backed up by infrastructure constraints in Germany, and also that some of the gas will displace gas flows via Ukraine.

“[W]hile incremental gas flows from [Nord Stream 2] to NW Europe are possible once the pipeline starts operating, our initial expectations are that these will be marginal,” the bank said.

In the long run, the pipeline’s significance is likely overstated.

In the long run, the pipeline’s significance is likely overstated. As Russia is putting the finishing touches on a massive gas pipeline into Europe, the EU is formulating a major change to its climate policy. In July, the EU announced its “Fit for 55” package, a slew of policies aimed at slashing greenhouse gas emissions by 55 percent by 2030. A follow-on package will address natural gas, which may or may not accelerate the continent’s transition away from gas consumption.

Either way, the EU has a net-zero emissions target by mid-century, and to get there it will need to dramatically reduce its gas consumption, a fact that is also true for every other country aspiring to carbon neutrality or some version of it. Japan, for instance, just announced its intention to slash its imports of LNG nearly in half by the end of the decade.

It won’t happen overnight, or even in the next few years, but with the energy transition accelerating, the great-power competitions over gas pipelines may soon become a thing of the past.

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