The Power of the Pipes

BERLIN/MOSCOW/BEIJING (Own report) - The privileged German-European access to Russian natural gas could be lost, is the warning, as the battle over the "Nord Stream 2" pipeline persists. According to a recent analysis published by Oxford University, western sanctions, imposed on Russia in 2014, have encouraged Moscow to seek alternative markets for its resources. China, in particular, plans to purchase large amounts of Russian natural gas. The first pipeline is scheduled to go into operation this year. A second pipeline - tapping the fields currently supplying gas exclusively to Europe - is in planning. The same applies to new Russian liquefied gas projects. In the future, "European customers" will most likely have to compete in Russia with "Asian customers," the Oxford University analysis predicts. Instead of forcing Moscow to its knees, the sanctions could put an end to Berlin's privileged access to Russian natural gas and if the "Nord Stream 2" fails, it could further worsen the EU's position.

Privileged Access

Major economic and political decisions Moscow had made in the 1990s and during the first decade of the millennium had provided Germany and the EU privileged access to Russian gas. At the time, Russia obviously had an economic interest in expanding its supply of gas to the EU - because it could build on the already existing infrastructure, Europe's geographical proximity as well as the growing consumption within the EU. Russia's 2004 attempt to export gas to China had initially been a failure, because the People's Republic of China was basically able to cover its consumption demands through domestic production and had already envisaged gas imports from Turkmenistan in view of satisfying its growing demand. Russia's gas relations with the EU had also helped Moscow in its effort to intensify cooperation with the West. After President Putin took office, efforts were concentrated on alliances with the EU and its major power, Germany - providing the Wintershall energy company direct access to Russian gas fields.[1] Moscow's striving for closer German-Russian cooperation also launched the "Nord Stream 1" and "Nord Stream 2" pipelines.[2]

Russia's Dependence

This, however, brought Russia into a risky dependence on its European sales market. According to an analysis, published in November 2018 by the Institute for Energy Studies of the University of Oxford, 34 percent of Gazprom's total revenues in 2017 were derived from exports to the European market. Approximately 4.2 per cent of total budget revenues come from taxes on gas exports to foreign - mainly European - countries.[3] Losses could be serious, if Russia's exports to Europe significantly suffer. In view of the importance of its natural gas exports for its economic survival, Western aggression in the Ukraine conflict - particularly the EU and US sanctions - have driven Moscow to seek new customers to "provide a geo-political balance for its more strained relations in the West," the author of the analysis notes.

The Power of Siberia

In spite of the complications and historical encumbrances to relations between Russia and China, Moscow's first choice was Beijing. Once again, economic and political reasons were equally decisive. The People's Republic of China, whose demand for natural gas had rapidly been increasing, could no longer be satisfied by its domestic production. China has thus become one of the most lucrative natural gas markets ever.[4] From Moscow's perspective, gas supplies to the People's Republic of China seem to also be safe from possible western boycotts. The agreement in principle on comprehensive natural gas supplies, signed by Moscow and Beijing in May 2014, was the first step, followed by the official beginning of construction of the "Power of Siberia" pipeline, September 1, 2014 in Jakutsk. Construction has been accelerated because Chinese consumption is growing faster than expected. The pipeline is scheduled to begin operation this December. Initially an annual delivery of 38 billion cm³ (bcm) had been planned, however, now an annual five - ten bcm is in discussion. Thus, Moscow will become increasingly independent of its European gas exports.

West Siberia's Gas Reserves

Additional projects oriented on supply to Asia have been developed. At the end of 2017, a liquefied gas (LNG) plant went into production on the Yamal Peninsula, constructed by Russia's Novatek, in cooperation with France's Total and China's CNPC. A second LNG plant ("Arctic LNG 2") is also planned in the vicinity. With these two projects and the older plant on Sachalin Island, Russia seeks to become the world's leading supplier of liquefied gas, even without counting its pipeline gas. The liquefied gas is mainly being delivered to Asian countries, such as Japan, and India. New Delhi, which had been buying its gas from the USA, began receiving Russian LNG in mid-2018.[5] Russia is also planning a "Power of Siberia 2" pipeline, which will also supply China. In contrast to the "Power of Siberia 1" pipeline, the second pipeline will not tap East Siberian gas fields, but rather, the Yamal Peninsular LNG plant immediately and later the enormous West Siberian Arctic LNG 2 reserves as well.

No Longer the Monopsony Buyer

This is of enormous significance, because, until now, the West Siberian gas field had only been tapped by pipelines leading to Europe - including Nord Stream. "The European consumers and politicians," to date, have been in "the relatively comfortable position of being the monopsony buyers of Russian gas exports from West Siberia," according to the Oxford analysis, therefore, the emergence of competition from China would "increase the strength of Russia's bargaining position" helping to create "longer-term pressure" on the EU.[6] The paper's author reports that Beijing had initially insisted on buying East Siberian gas, to not provoke the European powers. However, given the rapidly escalating US aggression, China is now prepared to engage in "Power of Siberia 2" to reduce its dependence on ship-delivered LNG imports, which could - in the case of conflict - be attacked by the US Pacific Fleet at any time, a scenario that, since some time, no longer seems farfetched.

Overestimating One's Own Power

This means that Berlin and the EU could not only lose their privileged access to the West Siberian gas reserves, but also the German gas sector's previous influence in Russia. Moscow could also be in the position to seriously hike its prices, using China, its second major customer, as a reference.[7] This would not only affect private consumers. The chemical industry - among Germany's largest gas consumers - would lose a significant competitive advantage, in the event of a hike in gas prices. Berlin and the EU's negotiating position would deteriorate even further should the "Nord Stream 2" pipeline fail, because the European market would lose even more significance for Russia. From Berlin's perspective, the attempts to politically bring Moscow to its knees, which began with the sanctions against Russia and are now continuing with the anti-"Nord Stream 2" campaign,[8] can lead to a loss of strategic advantage, along with as a sensitive weakening of its own competitive position.


[1] See also German-Russian Flagship Projects.

[2] See also Area of Natural Gas and Energy Realignment Toward Russia.

[3], [4] James Henderson: Russia's gas pivot to Asia: Another false dawn or ready for lift off? Oxford Energy Insight 40. November 2018.

[5] Georgi Kantchev: Russia Flexes Muscles as Natural Gas Industry Booms. 26.11.2018.

[6], [7] James Henderson: Russia's gas pivot to Asia: Another false dawn or ready for lift off? Oxford Energy Insight 40. November 2018.

[8] See also Pipelines im Visier and Die Souveränität der Macht.