The gas pipeline from Russia to Germany has been acknowledged as a “fait accompli” by the US. The European market will still need more LNG

Ed Crooks, Vice-Chair, Americas

After Russia’s President Vladimir Putin met US President Joe Biden in Geneva last week, he had some warm-ish words for his American counterpart. “Mr Biden is a professional,” Putin said. “He is focused, he knows what he wants to achieve and does it very skilfully.” He could afford to be generous, perhaps, because Russia is coming close to achieving one of its key energy policy objectives, completing the Nord Stream 2 gas pipeline to Germany, in the face of US opposition.

The new pipeline will help support an expected steep increase in Russian gas exports to Europe next year. But one concern underlying US opposition to Nord Stream 2 — the threat to Europe’s position as a market for its LNG exports — seems likely to be less serious than it initially appeared. The European gas market has been changing fast, and there is scope for imports of both Russian gas and LNG to increase in 2022.

Nord Stream 2 had initially been expected to come into service early in 2020. US sanctions have helped delay it by almost two years, but it is now on course for starting commercial operations late this year. Pipe-laying for one of the project’s two lines was completed at the beginning of June. The second line is expected to be complete within the next three months, and then commissioning work and certification will need to be done before commercial operations can begin.

The Biden administration argues that it is not a practical proposition to try to stop these final steps. Anthony Blinken, the US secretary of state, said at a confirmation hearing in January that he was “determined to do whatever we can” to prevent Nord Stream 2 being finished.

This month, however, he told the House foreign affairs committee that its completion was a “fait accompli”. US sanctions imposed in 2019 meant that the Swiss company Allseas had to stop working on the project, but its vessels have been replaced by two Russian-flagged pipe-laying ships that have been able to continue the work. In May, the US state department told Congress that it would waive sanctions against the Switzerland-based Nord Stream 2 AG project company, a Gazprom subsidiary, and its chief executive Matthias Warnig.

The most significant remaining issue the pipeline faces is that it will have to comply with Europe’s gas directive amendment. This will require unbundling of ownership, third party access, and a regulated tariff on the 54 kilometre stretch of pipeline in German territorial waters. 

Market conditions have been making the point to European consumers that additional import capacity would be helpful. European gas prices have risen sharply over the past 12 months. A year ago, the benchmark TTF futures contract for the fourth quarter of 2021 was trading at about €14 per megawatt hour, or roughly US$4.90 per million British thermal units. This week, that contract went above €31.70 per MWh, or about US$11.1 per million BTU. 

The key factor behind the increase has been the doubling of coal and carbon prices since the start of last winter. That has lifted the price at which it makes sense to switch from coal to gas for power generation by about US$3.50 per million BTU for this coming winter. The price of EU carbon emission allowances in the European emissions trading system has doubled from about €25 per tonne of carbon dioxide equivalent last October, to over €50 per tonne this week.

The completion of Nord Stream 2, which will have a capacity of 55 billion cubic metres per year, will help Russian gas sales to Europe leap higher. Wood Mackenzie is forecasting that European imports of Russian gas will jump by about 12%, from 176 bcm this year to 196 bcm in 2022. That would be a new record, exceeding the previous peak in 2018.  

However, that need not mean that LNG sales in Europe are squeezed out. Europe’s own gas production is declining, as are imports from North Africa, while demand is rising, and that is creating opportunities for other suppliers. If some way is found to stop Nord Stream 2 at the last moment, US and other LNG exporters would be among the main beneficiaries. But even if the pipeline does go ahead, the European LNG market is set to grow next year. We are forecasting that European LNG imports will increase from 105 bcm this year to 114 bcm in 2022. 

The longer-term trends look positive for LNG imports, too. Emissions allowance prices will be underpinned by the EU’s plans for rapid decarbonisation over the coming decade, supporting a continued shift away from coal for power generation, and Wood Mackenzie expects European gas demand to remain resilient. Meanwhile, production is expected to continue to decline.  

The Biden administration drew strong criticism from Republican members of Congress over its decision that the battle to stop Nord Stream 2 was no longer worth the cost. “Lifting these sanctions… prioritizes Russian energy over American energy and Russian jobs over American jobs,” they wrote. It is true that the position of US LNG exporters will be less favourable than it would have been if the pipeline had been stopped. But with European LNG imports set to grow into the 2030s, US exporters should be able to increase sales over time, despite the existence of Nord Stream 2. 

As Murray Douglas, Wood Mackenzie’s research director for gas in Europe, puts it: “As local production continues to fall away while demand continues to strengthen, there is space for both.” 

KeyFacts Energy Industry Directory: Wood Mackenzie