Despite the almost unprecedented divisive nature of Donald J. Trump’s presidency, he is chalking up some impressive foreign policy victories, including finally bringing Beijing to task over its decades long unfair trade practices, stealing of intellectual property rights, and rampant mercantilism that has given its state-run companies unfair trade advantages and as a result seen Western funds transform China to an emerging world power alongside the U.S.
Now, it looks as if Trump’s recent tirade against America’s European allies over its geopolitically troubling reliance on Russian gas supply may also be bearing fruit. On Tuesday, The Wall Street Journal reported that earlier this month German Chancellor Angela Merkel offered government support to efforts to open up Germany to U.S. gas, in what the report called “a key concession to President Trump as he tries to loosen Russia’s grip on Europe’s largest energy market.”
German concession
Over breakfast earlier this month, Merkel told a small group of German lawmakers that the government had made a decision to co-finance the construction of a $576 million liquefied natural gas (LNG) terminal in northern Germany, people familiar with the development said.
The project had been postponed for at least a decade due to lack of government support, according to reports, but is now being thrust to the center of European-U.S. geopolitics. Though media outlets will mostly spin the development, this is nonetheless a geopolitical and diplomatic win for Trump who lambasted Germany in June over its Nordstream 2 pipeline deal with Russia.
In a televised meeting with reporters and NATO Secretary-General Jens Stoltenberg before a NATO summit in Brussels, Trump said at the time it was “very inappropriate” that the U.S. was paying for European defense against Russia while Germany, the biggest European economy, was supporting gas deals with Moscow.
Both the tone and openness of Trumps’ remarks brought scathing rebukes both at home and among EU allies, including most media outlets. However, at the end of the day, it appears that the president made a fair assessment of the situation. Russia, for its part, vehemently denies any nefarious motives over its gas supply contacts with its European customers, though Moscow’s actions in the past dictate otherwise.
Related: Russia’s Oil Output Won’t Go Much Higher
Moscow also claims that the Nordstream 2 gas pipeline is a purely commercial venture. The $11 billion gas pipeline will stretch some 759 miles (1,222 km), running on the bed of the Baltic Sea from Russian gas fields to Germany, bypassing existing land routes over Ukraine, Poland and Belarus. It would double the existing Nord Stream pipeline’s current annual capacity of 55 bcm and is expected to become operational by the end of next year.
Russia, who stands the most to lose not only in terms of regional hegemony, but economically as well, if Germany pushes through with plans to now build as many as three LNG terminals, always points out that Russian pipeline gas is cheaper and will remain cheaper for decades compared to U.S. LNG imports.
While that assessment is correct, what Moscow is missing, or at least not admitting, is a necessary German acquiescence to Washington. Not only does the EU’s largest economy need to stay out of Trump’s anti-trade cross hairs, it still needs American leadership in both NATO and in Europe as well.
Russian advantages
Without U.S. leadership in Europe, a vacuum would open that Moscow would try to fill, most likely by more gas supply agreements. However, Russia’s gas monopoly in both Germany and in Europe will largely remain intact for several reasons.
First, Russian energy giant Gazprom, which has control over Russia’s network of pipelines to Europe, supplies close to 40 percent of Europe’s gas needs.
Related: Oil Majors Win Big In New NAFTA Deal
Second, Russia's gas exports to Europe rose 8.1 percent last year to a record level of 193.9 bcm, even amid concerns over Russia’s cyber espionage allegations, and its activities in Syria, the Ukraine and other places.
ADVERTISEMENT
Moreover, Russian gas is indeed as cheap as the country claims and will remain that way for decades. Using a Henry Hub gas price of $2.85/MMBtu as a base, Gazprom recently estimated that adding processing and transportation costs, the price of U.S.-sourced LNG in Europe would reach $6/MMBtu or higher – a steep markup.
Henry Hub gas prices are currently trading at $3.151/MMBtu. Over the last 52-week period U.S. gas has traded between $2.64/MMBtu and $3.82/MMBtu. Russian gas sells for around $5/MMBtu in European markets and could even trade at lower prices in the future as Gazprom removes the commodity’s oil price indexation.
By Tim Daiss for Oilprice.com
More Top Reads From Oilprice.com:
- Davos In The Desert Could Yield $50B In Oil & Gas Deals
- This Alliance Could Mark A New Era For Oil
- U.S. Shale Has A Glaring Problem
"Without U.S. leadership in Europe, a vacuum would open that Moscow would try to fill, most likely by more gas supply agreements."
What? American leadership in Europe is best demonstrated by keeping the Europeans from buying low cost Russian gas for themselves? That is one crazy idea.
"Not only does the EU’s largest economy need to stay out of Trump’s anti-trade cross hairs, it still needs American leadership in both NATO and in Europe as well."
Nothing like threatening your allies economically to get them to want to buy your expensive energy. Also, i don't believe the Germans would agree with the last part of the sentence.
It's not that complex. Outside of the smaller eastern European countries, which really hate the Russians, the rest know it has to have the lowest cost energy it can find, so it can maximize its exports. Especially Germany.
European natural gas consumpution is expected to slightly decrease (-11%) over the next two decades, while production is expected to go from 141 to 61 bcm/yr. That is already down from a total production value of 258 bcm/yr in 2000. While this would imply that 80 bcm/yr of new sources of natural gas will be needed in the near future, the impacts of renewable energy is still an unknown. Whatever it is, US LNG is most likely not going to play a significant role due to its price. Yes, the Europeans will buy a small amount of LNG from the US, but not relative to its upcoming needs. Russian piped natural gas is the least cost energy source and everybody knows it.
Maybe the expensive LNG from Qatar, Norway, or Algir might lose a market share to moderate amounts of US LNG, but not Gazprom. Washington will try to force it's gas onto EU, especially after it failed in China.
I have no idea what energy victory byTrump is this author is talking about.
His withdrawal from the Iran nuclear deal was the most inept and short-sighted foreign policy decision. His sanctions on Iran’s oil exports are doomed to fail miserably and Iran will not lose a single barrel from its oil exports. That is why the Trump administration has been back tracking from its drastic zero imports to allowing other purchasers of Iranian crude to get US sanctions waivers provided they cut their imports by at least 20%.
Despite diplomatic pressure, even his closes allies the European Union (EU) have declared that they will not comply with US sanctions on Iran and have devised a special purpose vehicle (SPV) to help European companies to do business with Iran while evading US sanctions. This same device could also be used more broadly to protect European companies in the future from the effect of illegal US extraterritorial sanctions.
His escalating trade war against China was a huge economic and foreign policy fiasco. China has not kowtowed to him and has been retaliating against his intrusive tariffs tit for tat. Don’t depict the fact that China reduced its retaliatory tariff on US LNG from the original 25% to 10% as a great victory. China always does what suits its economy.
However, there is a glimmer of hope that the meeting in November between President Trump and Chinese President Xi Jingping could lead to breakthrough ending the escalating trade war between their countries. If no breakthrough is reached then, the trade war between them could be expected to escalate further.
The first crack in the US armour has appeared when the US Treasury admitted that China has not been manipulating its currency to benefit from trade with the United States. This is one of two accusations President Trump used when he imposed tariffs on Chinese exports. The other is the huge trade surplus China enjoys with the US.
I have repeatedly argued that sooner or later President Trump will realize the futility of his escalating trade war against China. It is a war he can’t win. He will eventually be forced to cut his losses by bringing to an end his trade war with China.
And despite President Trump’s recent tirade against America’s European allies over their geopolitically troubling reliance on Russian gas and his threat of sanctions against Germany with regard to the building of the Nord Stream 2 gas pipeline, Russia’s grip on the EU’s gas market is tightening and growing and the Nord Stream 2 is unstoppable. Of course you will try to depict Germany’s decision to build an LNG terminal as a key concession to President Trump. Nothing is further from the truth. It is purely and simply part of Germany’s diversification of its sources of gas supplies. Germany and the EU have always maintained that they are willing to buy US LNG provided its price matches the much cheaper Russian piped gas.
Another foreign policy fiasco is President Trump back tracking on his threat to mete a severe punishment on Saudi Arabia over the murder of the Saudi journalist Jamal Khashoggi in the face of Saudi threat to retaliate with stronger measures against any US punishment. This is despite the Saudis admitting that the journalist was murdered inside their consulate in Istanbul.
Last but not least is North Korea. Immediately after his meeting with the North Korean leader, President Trump said that North Korea no longer poses a nuclear threat to the United States. How could this be true when North Korea has neither de-nuclearized nor relinquished its nuclear warheads and missiles. Are you going to depict this as a foreign policy victory for President Trump?
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
1. Can the US provide significant quantities of LNG over the next decade when fracking
production in each hole drilled drops by close to 85% over a 2 year period? NO
2. Can the US provide LNG at a competitive price to Russian Gas over the next decade? NO
3. Will the US producers be able to make money by supplying LNG to Germany during the next
decade? NO. Only scenario where it could be profitable if the Germans were dumb enough to
pay over the top to buy US LNG at a significant premium when they can buy Russian gas at far
lower prices.
It's the summit of delusion that you think that somehow this is a win for the US. Prices would need to be near historic highs for US producers to just be cash flow positive. The data shows as far back as one can go the price of natural gas is regularly between $2-4/mcf. Forget about actually making a profit. The mountain of debt which is so high it is another area of the economy waiting for a bailout. So don't think of this as a win for Trump. It is more about Germany humoring the US until their delusions of world surpremacy and that they can be a long term gas or oil producer are blown.
For every Euro you spend in trade with Russia you will have to spend two Euros in increased defense costs.
So any European trade with Russia is at a loss and creates a bigger risk for Europe's citizens.