US greenlights sanctions on mega Russia-EU gas pipeline, but it’s probably too late

The U.S. Senate has approved a defense bill that will see sanctions imposed on companies working on Russia’s massive flagship gas pipeline project to Germany — but the sanctions might not have much effect given that the Nord Stream 2 pipeline is almost complete.

The Senate voted overwhelmingly to pass the multi-billion dollar billion defense policy bill, formally known as the National Defense Authorization Act (NDAA), on Tuesday. The NDAA covers a broad range of defense policy and military spending.

The annually-set NDAA is also significant for Europe’s energy scene, however, as the 2020 bill also contains provisions to impose sanctions on companies installing deep sea pipelines for Russia’s $10.5 billion Nord Stream 2 (NS2) gas pipeline linking Russia and Germany (via the Baltic Sea).

The pipeline is Russia-led, under the aegis of the country’s state-owned energy giant Gazprom, but has been part-financed by several European energy companies, including Shell, OMV and Engie.

The TurkStream project which stretches from Russia to Turkey, and estimated to cost around $12 billion, was also mentioned in the defense bill but the pipeline is set to launch early January so sanctions would be ineffectual.

Sanctions

The defense bill says that no later than 60 days after it’s enacted, a report should be filed to congressional committees identifying vessels that are “engaged in pipe-laying” for Nord Stream 2. Individuals who are identified as being involved in the projects could also have U.S. visas revoked and see transactions related to U.S. property blocked, although the bill allows a 30-day period for individuals to “wind-down” their operations in the project.

The NDAA, which also greenlights the creation of a U.S. Space Force and paid parental leave for federal employees, was approved by the House of Representatives last week. It will now be sent to President Donald Trump to be signed into law; he signalled last week he would do so without delay.

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Germany’s Foreign Minister Heiko Maas has joined Russian criticism of the sanctions, saying last week that “European energy policy must be decided in Europe, not the U.S.” while Russian foreign Minister Sergei Lavrov said last week that “I assure you that neither Nord Stream 2 nor TurkStream will stop” because of U.S. sanctions.

Race against time

The U.S. sanctions would not have mattered at all if Nord Stream 2 had been completed on time.

However, the project was subject to months of delays because Denmark was hesitant about the pipeline traversing through its territorial waters before it finally granted a permit for the project at the end of October. The decision was seen as removing a last hurdle to the completion of NS2, and a blow to U.S. efforts to stymie the project.

But the delay caused by Denmark’s procrastination means that U.S. sanctions, if targeted quickly, could impact several specialist companies involved in pipe-laying for the project — although there is not much of the route left to complete.

Nord Stream 2 was tight-lipped about the possible impact of U.S. sanctions on the project’s contractors, telling CNBC in a statement Wednesday that it is “aware of the ongoing legislative procedure in the U.S. and the political debates. We cannot comment on any implications for our project.”

A worker is standing at the construction site of the Nord Stream 2 Baltic Sea pipeline.picture alliance

NS2 would not provide direct comment on when it expected the pipeline to be completed, or how much more of the route was yet to complete but in November, Russia’s deputy prime minister told reporters that the pipeline was expected to launch in mid-2020.

At the end of October, Nord Stream 2 said the pipeline was 87% complete, or 2,100 kilometers long (the total of both Nord Stream 2 and its parallel predecessor pipeline, Nord Stream), so it’s estimated that the pipeline is currently 90% complete.

Controversial pipelines

The NS2 pipeline is particularly controversial for the U.S. which see it as a way for Russia to increase its energy dominance in Europe, a region the U.S. wants to increase its own liquefied natural gas (LNG) exports to. Ostensibly, however, the U.S. says that sanctions aimed at the Russian-led pipelines is to protect Europe’s energy security.

In June, Senator Ted Cruz summed up U.S. sentiment toward Nord Stream 2 saying it “poses a grave threat to the national security of the United States and our European allies.” Urging NS2′s construction to be halted, he said “the United States must stand with our European allies, support energy diversity, and combat Russia’s economic blackmail.”

Germany begs to differ and defends the pipeline, which will double the capacity of gas that Russia can pipe to Europe, saying it is essential for Europe’s wider energy supply, although opinion in the EU is divided with Poland and Lithuania among those that see the pipeline as a threat to energy security.

Russia was the largest supplier of natural gas to the EU both in 2018 and 2019 (only first trimester data is available), according to Eurostat. In 2018, just over 40% of EU imports of natural gas came from Russia, followed by Norway (at around 35%).

Ukraine is most unhappy with the Nord Stream 2 pipeline as it is currently the main conduit for Russian gas to central Europe and earns roughly around $3 billion a year in gas transit fees.

The Nord Stream 2 pipeline to Germany will allow Russia, and its state-owned gas giant Gazprom, which is leading the gas pipeline projects, to largely bypass Ukraine – a country with whom Russia has strained geopolitical and commercial relations due to its annexation of Crimea and ongoing territorial dispute in east Ukraine.

NS2 was meant to be completed by the end of 2019, in time for Gazprom’s 10-year gas transit deal with its Ukrainian equivalent Naftogaz to expire, but the delay to NS2 means (inconveniently) that Gazprom is having to negotiate another shorter-term gas transit deal with Naftogas, whose CEO has cheered on U.S. sanctions on NS2, telling NBC News last week that they would be a “game changer” for Ukraine and the European gas market.

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