US pipeline sanctions: Reality check

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

Flags wave outside of the Russian Gazprom company's headquarters in Moscow, Russia, 21 January 2020. [Maxim Shipenkov/EPA/EFE]

US pipeline sanctions suggest a deliberate misreading of the European gas market and a paternalistic “America knows best” view of how Europeans should manage their energy commerce, writes Danila Bochkarev.

Danila Bochkarev is Senior Fellow, EastWest Institute (Brussels). The opinions expressed in this article solely reflect the views of the author, not of his organisation.

On 15 July, the US State Department threatened new sanctions against companies involved with Nord Stream 2 and the second line of TurkStream. The reasons given were based on the usual rhetoric claiming these projects undermine Europe’s energy security, protect Gazprom’s monopoly in Europe, and undermine gas transit via Ukraine – all assertions that are demonstrably misleading.

Much has been said about the potential political fallout from these threats, and how they reflect a diminished transatlantic relationship. Perhaps more problematically, they also suggest a deliberate misreading of the European gas market and a paternalistic “America knows best” view of how Europeans should manage their energy commerce.

The announcement, which provides new guidance for a federal law passed in 2017 that imposed sanctions on Iran, North Korea, and Russia, called “Countering America’s Adversaries Through Sanctions Act,” or CAATSA, contains a number of assertions that are puzzling and even inaccurate to those familiar with the European gas market, starting with the assumption that one single mid-size pipeline could undermine decades of market development and investment by Brussels.

The reality is that the EU – both in terms of infrastructure and supplies – already has a diversified portfolio when it comes to natural gas, including piped gas, gas from Norway and the Middle East, LNG from the US and Qatar, and other supplies.

A great number of pipeline interconnectors and regasification terminals have been funded by EU money and paid for by European citizens. For instance, from 2014 to 2020, Brussels dedicated 5.85 billion euro for trans-European energy infrastructure. Some of this infrastructure even sources gas from the US, such as LNG terminals in Lithuania and Poland built with EU aid, demonstrating the EU’s commitment to diversification.

Germany contributes significantly to these efforts; its share of the EU budget comprises 21%, meaning German taxpayers cover at least one-fifth of the EU funds dedicated to the diversification of energy supplies, and most of these projects are located in the eastern EU. Thus, criticism of either Europe’s lack of energy diversification or Germany’s policies allegedly undermining Europe’s unity is largely unfounded.

Another argument against the pipeline is that it will jeopardize Ukraine’s energy security, but a new transit agreement between Gazprom and Naftogaz was signed in December 2019, safeguarding Ukraine’s gas transit income until at least the end of 2024, and guaranteeing Ukraine $7 billion in revenue.

Ukraine also no longer buys fuel from Gazprom and imports its gas from the EU. Furthermore, as the only transit route with spare capacity, Ukraine’s pipeline system will be valuable long after the launch of Nord Stream 2. Although the existence of Nord Stream 2 may decrease the monopoly position of Ukrainian transit, the new pipeline is intended to provide enough gas for Europe at competitive prices, which should be the ultimate goal of any gas infrastructure.

Additionally, in May 2018, the EU Commission imposed binding obligations on Gazprom to address the commission’s competition concerns and benefit European consumers and businesses more broadly, which stipulated that Gazprom’s customers can resell their gas freely at competitive, market-based prices.

If Gazprom breaches the conditions, it can be fined 10% of its turnover without the need to prove infringement of the EU antitrust rules. Gazprom’s decision to reimburse Ukraine’s Naftogaz and Poland’s PGNiG for overcharging for gas supplies demonstrates its commitment to this rule.

It is also important to note the US actions may be motivated by its own self-interests to safeguard and boost the US LNG market, which has been hit by the economic downturn. A WoodMackenzie study calculated that “[a] positive decision [on the sanctions] will also result in some additional US$ 5/bln for U.S. gas producers and pave the way for future US LNG developments.” Clearly, this decision is not purely motivated by concerns over European energy security.

Finally, Europe’s economic ties and relationship with Moscow do not prevent some strong criticism of Russia’s foreign and domestic policies by other European capitals, especially Berlin. Chris Miller, the assistant professor of international history at the Fletcher School of Law and Diplomacy, observed that German policy today is “as tough on Russia as at any point since the Cold War.” The countries can, and often do, have productive disagreements over foreign policy issues.

Europe has largely reacted very negatively in the face of sanctions threats from the US, and the EU and its Member States have responded at the highest level. Chancellor Merkel said: “extraterritorial sanctions… do not correspond to our understanding of the law…we believe that completing this project is the right thing to do and we are acting accordingly.

German Foreign Minister Heiko Maas stressed that the US administration is disrespecting Europe’s right and sovereignty to decide itself where and how it sources its energy.

The European Commission’s Vice-President Borell confirmed his view of proposed U.S. sanctions “against European companies… engaged in legitimate and lawful activities” as unacceptable, contradicting international law, and weakening transatlantic unity. Jean Bizet, Chairman of the French Senate’s EU Affairs Committee, also called on Europe to act: “It is time for Europe to assert its power. It cannot tolerate such an attack on its energy sovereignty. We must engage in an in-depth dialogue and consider a meeting with the members of the American Congress because Europe is not the enemy of the United States.”

In fact, in reaction to the proposed sanctions, the EU Commission plans to introduce a mechanism improving “Europe’s resilience towards the effects of the extraterritorial… sanctions imposed by third countries.”

Even the Danish government, for all its criticism of Nord Stream 2, has clearly voiced its objections to using US extraterritorial sanctions to stop the project. Elliot Engel, the Chairman of the House Foreign Affairs Committee called on his colleagues to oppose the amendment as it goes “after our allies and targets German companies and many American”. Unfortunately, his point view is not shared by many in Washington DC.

The strong reaction of European politicians demonstrates the importance of allowing Europe to make its own determinations about energy infrastructure. Since many Europeans consider Nord Stream 2 as a necessary and important commercial project for Europe, the efforts by the US to block it will only lead to additional friction with Europe at a time when the alliance is already frayed.

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