(Bloomberg Opinion) -- Donald Trump doesn’t have to impose sanctions on Russia’s controversial Nord Stream 2 pipeline to Germany if he wants Europe to buy more U.S. liquefied natural gas. The market is doing his work for him.
Increasing competition is already reducing the European Union’s dependence on Russian exports, and U.S. LNG is an increasingly important factor in determining prices.
Asked during an appearance with Polish President Andrzej Duda whether he would use sanctions to block Nord Stream 2, the U.S. president said he was “looking at it” and “thinking about it” because “we’re protecting Germany from Russia. And Russia is getting billions and billions of dollars of money from Germany.”
This made headlines because it appeared to repeat earlier threats from the U.S. Senate and Energy Secretary Rick Perry. But later, when a reporter pushed him by saying he had the power to block the pipeline with sanctions, Trump replied:
Germany has the power to block it. You know how they block it? By not buying it. I mean, Germany made a decision to buy a tremendous percentage of their energy from Russia. Germany – whether they should be doing that or not, they’re the ones that have the power to block it. They shouldn’t buy it. Or, if they want to, they can. But that’s really a decision of Germany.
My reading of these remarks is that Trump is less interested in imposing sanctions than he is eager to get Germany to buy more of the U.S.’s “tremendous” LNG. “I think that’s really the way, if they want to spend a tremendous amount of money,” Trump said.
Regardless of what happens with Nord Stream 2, Germany and other European countries are likely to buy more U.S. LNG because they don’t want to spend a tremendous amount of money — in particular, on Russian gas.
Nord Stream 2 came up at the Trump press conference with Duda because Poland’s state-owned oil and gas company, PGNiG, is an enthusiastic buyer of U.S. LNG. Last year, the utility signed three long-term contracts with U.S. producers, only one of which — Cheniere Energy Inc. — is already supplying the fuel; the others still haven’t built their export terminals.
PGNiG is signing these deals because it is locked into a long-term contract with Russia’s Gazprom and unhappy with the price it’s paying. The dispute is in arbitration, with the Polish utility close to winning a reduction. Even so, the contract runs out in 2022 and PGNiG is threatening not to renew it and seek alternatives from Norway. For those threats to be credible, and for Gazprom to start offering favorable terms, the buyer needs to show that it can already get supplies from elsewhere. It’s making some progress.
PGNiG has long claimed it can source LNG at lower prices than those offered by Gazprom. This year, that claim doesn't look so outlandish. Gazprom’s average export price in Europe reached $254 per 1,000 cubic meters in the first quarter of 2019. Spot LNG prices have been lower, hovering about $5 per million British thermal units, or about $177 per 1,000 cubic meters.
One may laugh at the U.S. branding of “freedom gas,” but its influence on European prices has been liberating. It is a buyer’s market, at least for now.
Only three factors limit Europe’s ability to drive down natural gas prices: Gazprom’s long-term contracts; LNG terminal capacity; and demand in Asia, where prices are higher. The first two of these aren’t immutable: Contracts will run out and be renegotiated, and new terminals are being built (Germany alone has plans for two). That LNG supplies can easily be diverted elsewhere as prices change makes it necessary for European countries to have access to pipeline gas sources — but Gazprom isn’t the only one. It faces competition from Norway and various Mediterranean projects.
Germany stands to benefit from this new setup. It needs a lot of gas as it tries to phase out both nuclear and coal power. Demand forecasts vary wildly, but it’s safe to assume the country will buy as much as it can get. Nord Stream2 alone won’t be enough to cover those needs, so Germany will have to turn to the U.S. That, together with supplies from other sources, should help it to negotiate down Gazprom’s prices.
It’s a win-win situation for the U.S. LNG producers, Germany and even Gazprom as it seeks to keep a foothold in Europe. But two strong arguments still exist for sanctioning Nord Stream 2. One is the need to preserve the Ukrainian transit route for Russian gas. If it dries up, cash-strapped Ukraine would lose a major revenue source. (For now, though, Russia will pump as much gas as it can to Europe to avoid losing its main export market. Given Gazprom’s importance to the personal wealth of Putin’s close circle, that’s not an option.) The other reason is that Nord Stream 2 undermines Poland’s bargaining power over Gazprom: The supplier would be able to say it has found another buyer in the neighborhood.
Trump and U.S. Congress should weigh these dangers against that of further alienating Germany. It might try to defy the sanctions if Gazprom goes ahead with the Nord Stream 2 project without Western partners. Any move by the U.S. against Nord Stream 2 would also confirm to its European allies that Washington’s sanctions policy is merely a tool to advance trade interests.
These considerations make for a difficult decision. Trump’s remarks on Wednesday sounded to me as though he were leaning toward letting the market do its job this time. That doesn’t mean he can’t change his mind tomorrow — especially if his trade war with China ends and his attention switches to Europe.
To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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