Germany Brushes Aside U.S. Objection to Russia Gas Pipeline Link

(Bloomberg) -- Germany brushed aside U.S. concerns about a major natural gas pipeline that will deliver Russian gas to Europe, suggesting President Donald Trump’s administration appears to be protecting its own interests.

German Economy Minister Peter Altmaier defended the planned Nord Stream 2 pipeline as Chancellor Angela Merkel meets President Vladimir Putin in Russia. Yesterday, the U.S. warned it may impose sanctions to prevent Russia’s gas export monopoly Gazprom PJSC from completing the Nord Stream 2 link under the Baltic Sea.

Russia supplies more than a third of Europe’s gas demand, and its market share is growing as nations led by Germany close their most polluting power stations. Merkel is scrapping coal and nuclear power, making gas increasingly the most important fuel. Altmaier said U.S. efforts to block the link seem to be aimed at protecting Europe as a market for exports of gas in its liquid form from America.

“They are looking for markets, which we can understand, and they can land it here easily," Altmaier said in an interview with German TV station ARD’s Morgenmagazin program. “But it is much more expensive than pipeline gas, so blocking Nord Stream 2 on its own won’t guarantee exports."

The remarks underscore a deepening rift between the U.S. and its allies over how to balance efforts to isolate Russia economically with the need to maintain energy supplies. While gas in the U.S. is about third of the cost of the European equivalent, it ends up being more expensive when costs are added to liquefy and ship it on tankers to terminals from Belgium to the Netherlands.

The chart below shows the costs Russia charges key European countries for its gas, with Germany among the lowest.

Germany Brushes Aside U.S. Objection to Russia Gas Pipeline Link

Gas supplies are on the agenda as Merkel and Putin gather in a Black Sea resort near Sochi on Friday. Germany has repeatedly indicated it doesn’t oppose Nord Stream 2 as long as Ukraine isn’t deprived of a role of a major gas transit country.

Royal Dutch Shell Plc, BASF SE’s Wintershall unit, Uniper SE, OMV AG and Engie SA are helping finance the Gazprom project, which would be the second link directly from Russia to Germany under the Baltic Sea. The concern is that Russia will use the expanded link to bypass Ukraine, currently the main route for gas transiting from Russia to western Europe. That would deprive Ukraine of crucial revenue.

European domestic gas production is declining. Capacity from other importers, namely Norway, is approaching its limits.

“The gas needs to be replaced. We need more imports,” Andree Stracke, chief commercial officer of German utility RWE AG’s supply and trading unit, said in an interview in Amsterdam this week. “Norway is more or less at the max.”

Gazprom aims to increase its share in Europe to as much as 41 percent by 2035 from about 35 percent last year, and Stracke agreed that’s a reachable target.

“The Russians don’t need to battle for market share, they’ll just increase it naturally,” Stracke said.

Pipeline gas flows from Russia and Norway are at “exceptionally high” levels, and that helps deter a further advance in gas prices, Stracke said. For LNG producers, Europe isn’t the first port of call because they can fetch higher rates from hungrier utilities in Asian nations that lack pipeline links.

Once an occasional exporter of LNG from Alaskan fields, the U.S. has started started shipping the fuel from the lower 48 states two years ago after a boom in shale gas fracking flooded domestic markets.

Ships carrying LNG from the U.S. are not contractually tied to a specific recipient. That’s giving Trump’s administration an incentive to pitch LNG exports from Poland to Germany.

“If it’s America first, and they put their economic interest before others, then they have to expect Europe to define their own interests and fight for them," Altmaier said.

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