Energy Secretary Rick Perry is in Moscow this week and the topic at hand won’t be too pleasing to the ears of Russia’s energy giants, namely Gazprom and its now infamous Nord Stream II pipeline. Perry is supposedly set to discuss talks of sanctions against Iran and what Congress has in the works for tougher sanctions on Russian energy companies.
Washington doesn’t just want to punish Nord Stream II because of Russia’s behavior in Ukraine (or Syria, or election meddling, or poisoning ex-spies in London, etcetera). Everyone in the global natural gas business knows that the U.S. wants to roadblock Nord Stream II in order to entice Europe, a huge gas market, to import more costly American liquefied natural gas. But if the U.S. Treasury does go ahead with threats to fine Gazprom’s pipeline partners, they will be targeting major corporations from the U.K., Germany, France and Austria. Germany is particularly interested in Nord Stream II, which is a sister pipeline to the existent Nord Stream I. Both lines run under the Baltic Sea and connect northern Russia to Germany.
Russia used to have Ukraine as its key gas route into Europe. The old Soviet allies have been embroiled in a messy divorce since the winter of 2014. Many energy policy analysts believe that Nord Stream II is a detriment to Ukraine as a transit route to the E.U. And they believe that Moscow went ahead with the project in order to hurt Ukraine’s economy. Gas exports account for roughly 10% of Ukraine’s GDP, according to state-owned exporter Naftogaz.
Russia’s Gazprom is the largest natural gas producer in the world. Russia accounts for nearly a third of all natural gas imports into Europe and Germany is Russia’s biggest client.
Other than Nord Stream II, Russia also has the Turkish Stream pipeline that it is building as yet another alternative to Ukraine. That pipeline is not yet sanctioned, but if Turkey and the U.S. tensions continue to worsen, Gazprom should suspect that partners in that one risk being fined by Treasury, too.
Preliminary negotiations on energy markets are scheduled in Moscow for Secretary Perry and his Russian counterpart Alexander Novak for later this week, according to Russia’s Energy Ministry. The U.S. Department of Energy said today that Perry was invited by Novak after their meetings at the World Economic Forum in Davos this winter and the World Gas Conference in Washington, DC in July. Perry will also meet other Russian officials as well as oil and gas industry representatives.
The U.S. does not hold all the cards.
Russia and Saudi Arabia have become tag-team partners over the last three years trying to thwart U.S. shale oil and gas firms by keeping the supply at a level that made prices difficult for American drillers. Shale oil is more expensive to produce. Russia, Saudi Arabia and the rest of OPEC will meet on Sept. 23 in Algiers, the capital city of Algeria, to decide whether to increase output.
Oil prices have been great for American shale oil producers lately, hitting over $70 per barrel mainly due to pending Iran sanctions. Those sanctions will take about 25% of Iranian oil out of the market, much of it going to Europe, industry analysts believe.
Moscow and Riyadh will pick up that market share, but the U.S. would also like to fill some gaps with LNG. If Washington ops to sanction Russia harder than they are now, then Russia is likely to join forces with the Saudis to crowd the U.S. out of the European market that energy exporters here are dying to get into in greater degree.
Washington has dialed back the clock to the 1980s ever since Trump was elected. Democrats that are sour from Trump’s win and believe him to have done so with Russian help are teaming with Republicans, many of whom were chastised and ridiculed by Trump on the campaign trail. They have little love for Trump and so the President’s campaign promise to at least try and get along with Russia has been thwarted by both sides of the aisle.
For what it’s worth, President Barack Obama also tried to get closer to the Russians, creating the famous “Russian Reset” with Hillary Clinton, but that went south after the passing of the Magnitsky Act in 2012 and later Russia’s incursion into Ukraine in 2014 and the Kremlin’s protection of Syrian leader Bashar Assad from yet another round of American regime change in the Middle East.
For his part, Trump criticized Germany for complaining about Russia on one hand, while doing business with them on Nord Stream II instead of buying gas from other sources. Trump called Russia competitors in the energy space, adding that he realized the Russians had an edge based on price and location. So far, the Treasury Department and the White House have not gone ahead with fines against Gazprom’s European partners even though the pipeline was singled out in the August 2017 sanctions bill signed by the President. Nord Stream II consists of Gazprom, Shell, Wintershall, OMV, Engie and Uniper.
“The good news is that the channel of communication is not completely closed and frozen,” Ivan Timofeev, an analyst with the Russian Council for International Affairs was quoted saying in Kommersant business daily on Monday.
Perry and Novak are expected to discuss Iranian sanctions impacts on the global oil and gas markets. Tougher sanctions against Russia are most likely unavoidable as Trump is unable politically to deny Congress their wishes to punish Russia further or face the risk of looking like Putin’s puppet, something he will look like for many political figures and their supporters no matter what he does with the Russians.
Team Trump has already announced its readiness to impose sanctions because of the Skripal poisoning case in accordance with a 1991 law countering the spread of chemical weapons. The law allows the U.S. to impose strict restrictions on the export and import of goods, which in this case Washington would like to have applied to equipment used to build Gazprom’s new pipeline into Germany.