Trump doesn’t need to sanction Russian gas

Donald Trump doesn’t have to impose sanctions on Russia’s controversial NordStream 2 pipeline to Germany if he wants Europe to buy more US 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 US 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 NordStream 2, the US 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 US 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 US’s “tremendous” LNG.
Regardless of what happens with NordStream 2, Germany and other European countries are likely to buy more US LNG because they don’t want to spend a tremendous amount of money – in particular, on Russian gas.
NordStream 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 US LNG. Last year, the utility signed three long-term contracts with US producers, only one of which 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.
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 Q1 of 2019.
One may laugh at the US 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. NordStream2 alone won’t be enough to cover those needs, so Germany will have to turn to the US. That, together with supplies from other sources, should help it to negotiate down Gazprom’s prices.
Trump and US Congress should weigh these dangers against that of further alienating Germany. It might try to defy the sanctions if Gazprom goes ahead with the NordStream 2 project without Western partners. Any move by the US against NordStream 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 sounded to me as though he were leaning towards 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.

—Bloomberg

Leonid Bershidsky is Bloomberg Opinion’s Europe columnist