Some states are blessed with vast energy reserves readily available for exploitation, while others must import energy from abroad to meet the drastic needs of their people in the 21st century. While nations in the Middle East can boast of vast hydrocarbon reserves sitting beneath their feet, for most Europeans that is not the case as what little can be extracted is not enough to meet the needs of industrialised European Union member states.
As the member states of the EU increasingly turn to renewable energy sources, the domestic production of natural gas, nuclear heat and coal declines, and its member states' dependency on energy imports from outside the Union increases. The Nord Stream 2 pipeline project between Germany and Russia cuts to the heart of this issue, posing difficult questions about the EU's energy policy going forward, straining relations between members states, as well as forming a point of contention over which two energy giants compete over influence in the European energy market.
In this post I hope to provide a brief overview of the Nord Stream 2 pipeline project and how it fits into current debates on the future of European energy policy. I aim to demonstrate that political opposition within and without the Union toward the project is considerable, threatening the completion of the project, and intensifying competition over the delivery of energy to the EU between the United States and Russia.
European Energy Dependency and Nord Stream 2
The EU is dependent on natural gas imports from outside the Union to keep the lights on. This growing dependency on natural gas imports is the result of a gradual reduction in the domestic production of natural gas, nuclear heat and coal. Russia is dominant when examining all sources of the Union’s natural gas imports—delivering approximately 40% of natural gas coming into the EU. Any decision to further this dependency would run contrary to the diversification goals outlined in the EU’s Energy Union Framework. Nord Stream 2 is exactly such a case as German support for Nord Stream 2 sets to deepen the Union’s dependence on a single external supplier of natural gas.
A significant dependency on external partners in meeting domestic energy needs means that the stability of EU member states' energy supply may be threatened if a high proportion of imports are concentrated among relatively few external partners. This is particularly the case at times of systemic shock or crisis, where disruptions in energy supplies have the potential to cause catastrophic economic damage to import dependent states.
The Energy Dependency Rate shows the extent to which an economy relies upon imports in order to meet its energy needs. It is measured by the share of net imports (imports - exports) in gross inland energy consumption. In the EU in 2018, the dependency rate was equal to 58 %, which means that more than half of the EU’s energy needs were met by net imports. Source: Eurostat, Available here.
The European Union is heavily dependent on few partners for sourcing the majority of its energy. In 2018, almost two thirds of crude oil imports from outside the Union came from Russia (30%), Iraq (9%), Kazakhstan Nigeria, Norway, and Saudi Arabia (7% each). In the same vein, natural gas imports see almost three quarters of the EU's imports came from Russia (40%), Norway (18%) and Algeria (11%), while almost three quarters of solid fuel (mostly coal) imports originated from Russia (42%), the United States (18%) and Colombia (13%). With Russia occupying an already dominant position in the European energy market, it is not difficult to see why the completion of Nord Stream 2 would only further exacerbate the very issue member states have sought to solve through diversification project.
With a price tag of roughly €9.5 billion, the pipeline promises to annually deliver 55 billion cubic metres of Russian gas to Germany underneath the Baltic Sea. It is an economically important project and an investment that will find considerable support in the Bundestag. To Germany, Nord Stream 2 is largely viewed as the consequence of free market forces facilitating a cost-efficient route to transfer natural gas to its domestic market. Berlin supports the Nord Stream 2 project because its commercial investors are promoting economic development at home, a politically viable policy with the end goal of reducing energy prices for its population. But the project is facing steadfast opposition from within and without the EU, with Washington and a group of Eastern European countries determined to shut the project down.
A controversial project, the natural gas pipeline has created clear rifts between members of the European Union. As construction preparations were picking up speed in 2016, a letter objecting to the project was signed by the prime ministers of the Czech Republic, Estonia, Hungary, Latvia, Poland, Slovakia and Romania and the president of Lithuania. Further, Nord Stream 2 has also been a thorn in relations between the United States and Germany, with U.S. pressure threatening to cause further divisions between the long-time allies. Finally and more concerning, the pipeline has inflamed a fierce, old rivalry between Washington and Moscow. In the bluntest of terms, each now perceive the other as an adversary that must be checked on all fronts.
The competition over the delivery of energy supplies to Europe has come to dominate the increasingly adversarial relationship between the United States and Russia. The progress made in the construction of the Russo-German Nord Stream 2 pipeline has led to increasingly sharp threats from the United States, with Washington seeking to derail the project by imposing harsh economic sanctions. Before, these threats have not been backed by direct action against German companies probably because Washington has been careful not to upset its relations with Germany. But with new U.S. sanctions announced, the situation has changed and the fate of the Nord Stream 2 project is now up in the air.
Considerable Opposition
The reasoning presented in longstanding U.S. resistance to Nord Stream 2 has largely been on the basis that the pipeline poses a geostrategic threat to Europe’s energy security. The U.S. applied sanctions in December 2019, forcing the Swiss-based "Allseas" company to shut down pipe-laying operations. Since then, the Nord Stream 2 project has been practically frozen with no concrete time frame for a resumption of construction. Nevertheless, despite the cessation of construction operations, Russia intends to circumvent U.S. sanctions and complete the remaining pipe-laying operations on its own.
The U.S also sees Ukraine’s energy infrastructure as a deterrent to Russian encroachment, which Moscow seeks to undermine. Washington is adamant that Nord Stream 2 will bypass Ukrainian gas infrastructure, enabling Russia to significantly reduce transit away from Ukraine. Reports suggest that this would deprive Ukraine of more than $2 billion per year in transit fees. In addition, Ukraine’s transit routes into southeast Europe and Turkey are bypassed by TurkStream—a natural gas pipeline that links Russia to Turkey underneath the Black Sea. If Ukraine faces the gradual loss of transit fees due to both Nord Stream 2 and TurkStream, Moscow will hold a stronger position to coerce Kyiv with cheaper gas over any number of issue areas. This would essentially mean that Ukraine would be put in the difficult position of standing with Moscow and receiving cheap gas, or exhausting its debt-laden budget by importing the more expensive Western European reverse-flow deliveries.
Despite assertions from Nord Stream 2 supporters that the pipeline project constitutes a commercial venture, the U.S. argues that since Gazprom is subsidized by the Russian state, the EU must give precedence to the geostrategic nature of this project. Washington says that since Gazprom is an extension of the Russian state, Berlin must give precedence to the geostrategic implications of such a venture for EU energy policy, and should thereby be treated as a matter of security for the Union. They posit that the company in charge of the project, "Nord Stream 2 AG", is owned by Gazprom, and therefore deemed to be an element of Russian foreign policy, using its commercial agreements as camouflage. Therefore, according to the United States, Nord Stream 2 must not be judged in purely commercial terms.
Germany has found this argumentation problematic and even illegal. Germany maintains that Nord Stream 2 is a commercial venture, and that its sovereignty is being undermined by extraterritorial sanctions employed by the United States. Germany’s insistence on the commercial nature of the project has been accompanied by suspicions that the U.S. is hiding its own economic interests under the guise of European energy security. After all it is no secret that the U.S. has a far-reaching energy dominance strategy. Therefore, some observers suspect that U.S. sanction measures against Nord Stream 2 are in fact a move to capture a larger market share in Europe with its liquefied natural gas (LNG) products.
U.S. Energy Dominance
The National Security Strategy of the Trump administration, published in December 2017, states that one aim of an energy dominance strategy is to “help our allies and partners become more resilient against those that use energy to coerce.” In practice, however, this strategy would mean a drastic realignment of the global energy supply structure away from OPEC and Russia and toward the United States.
Though this policy rhetorically fits with the Trump administration's oft-touted motto of “America First,” it in no way represents a turn to isolationism. Driven primarily by economic considerations, the policy is largely focused on encouraging U.S. allies to import U.S. fossil fuels in lieu of existing energy suppliers. Washington's persistence in shutting down the Nord Stream 2 pipeline is one such case where the U.S. is pressuring Germany to abandon the project, while at the same time offering its own LNG natural gas deliveries as a substitute. The tensions borne out of this pressure between traditional allies were best demonstrated when Trump opened a recent NATO conference by rebuking Angela Merkel for her approval of the Nord Stream 2 project, blaming her of betraying the alliance.
While German policymakers have shown resilience to U.S. threats in the past, all that may change quickly as Washington continues to pile on the pressure. On July 15th, U.S. Secretary of State Mike Pompeo announced that the U.S. would be applying further sanctions against those involved in the Nord Stream 2 project, declaring that the measures are for the purpose of countering “Russian malign influence” by targeting companies tied to the construction of the pipeline. In light of these sanctions, the European Union made its position clear as it considers the extraterritorial application of sanctions to be contrary to international law. European policies should, they argue, be determined by Europeans and not by outside powers.
It is against this background that U.S. Senators Ted Cruz, Tom Cotton and Ron Johnson revealed on August 5th a new effort to prevent the pipeline from being completed. A letter signed by the three Senators was sent to the owners of the German company which operates the Mukran Port—a critical port of call for Russian vessels preparing to complete the project. The letter issued a strong warning to the owners of the port - bring your support to an end or face 'crushing' legal and economic sanctions that will “destroy the future financial viability of your company.” This kind of ‘smart sanction’ is specifically designed to coerce German elites more broadly (and the financial backers of the project specifically) through extensive asset freezing and travel bans, with the ultimate goal of achieving a change in German policy to one which seeks to prevent the pipeline from being completed.
With reports suggesting that the Nord Stream 2 gas pipeline is roughly 94% complete, it remains unclear how Russia intends to complete the project. As we continue to speculate, the U.S is expected to maintain the threat of sanctions against any stakeholders who may be implicated in the realisation of the project. What recourse German policymakers can take is difficult to identify, but a German Bundestag committee hearing in July suggested that the EU presently lacks any effective measures to protect German companies from extraterritorial sanctions applied by the United States. Should the pipeline not be completed, investments of roughly twelve billion euros would have to be written off. With Russo-German cooperation in finalizing the project now in question, what comes next may determine the future relationship between Germany and the United States, the shape that the EU’s energy policy takes going forward, and will further inflame an already tense standoff between Washington and Moscow.