American LNG and the Future of Energy in Eastern Europe

On Oct. 17, 2018, Poland’s largest energy company PGNiG signed a contract with two American LNG companies to deliver up to 1 million tons of gas each over the next 20 years. It is the first large U.S. LNG contract in Eastern Europe, and it won’t be the last. Indeed, it is very likely that American LNG companies will become major suppliers to Eastern Europe in the near future.

There are a number of reasons for this, both politically and economically. It is, of course, well-known that oil and gas exports, and particularly the latter, have long been used by Russian rulers as political weapons to achieve specific policy objectives—more often than not directed against Western interests. So none of this is either new or especially surprising. What is new is the active collusion by an EU member in helping Russia in achieving these objectives. And it is not just any EU member, but the largest and most influential of them—Germany.

It started with a Gazprom pipeline designed to bypass Eastern Europe and deliver gas directly to Germany via the Baltic Sea called Nord Stream. At the time it was being built, the Polish foreign minister did not hesitate to call it the “Molotov-Ribbentrop pipeline” condemning its collusive nature in the starkest terms possible. Now Russia and Germany are in the process of building Nord Stream -2, which entails doubling the capacity of the original pipeline to 100 million metric tons per year despite the vigorous protests of Ukraine and the Eastern European EU member states.

This, it should be noted, is a capacity nearly twice as large as German needs and allows it to become a key reseller of Russian gas and earn huge profits at the expense of gas transit fees previously earned by Ukraine and Eastern Europe. Despite the rather obvious political motivation of the Kremlin in pushing the pipeline, the entire German political establishment, starting with Chancellor Merkel, defends the project rather hypocritically as simply “commercial.” Here is how the noted energy expert and former Bulgarian ambassador to Russia, Ilian Vassilev, describes the prevalent views in Eastern Europe regarding the project: “Nord Stream -2 will allow Gazprom to distort competition, pick winners and losers and transfer lavish Russian state subsidies into the heart of Europe.” Further, NS-2 would allow “Germany to act as Russia’s proxy beyond German borders by using subsidies forbidden under EU legislation” thus “acting as a shield for Gazprom against EU laws.”

The way German and Kremlin acolytes of NS-2 defend that project is by denying its political motivation and claiming that it enjoys the advantage of lower Gazprom prices currently, after a 30% politically motivated cut in 2009 and another 10% in 2014. This, however, is deeply misleading, as many U.S. experts have documented. Prominent LNG expert, Mark Mills, for instance, makes a persuasive case for U.S. LNG exports by noticing the following trends: Following the shale gas revolution, the United States has now emerged as the world champion in gas production with 27 trillion cubic feet daily in 2017 versus 22 trillion for Russia. With supply growing faster than demand, America is on its way to become the largest LNG supplier in the world. Already, U.S. export gas prices are half of what they were five years ago and they are no longer linked to oil prices but to spot markets and shorter-term contracts. In another major innovation, the U.S. has now built (at Elba Island, Georgia) the first micro terminal supplying LNG in containers, something that has large-scale implications for distributed energy in Eastern Europe.

The Eastern Europeans have taken due notice of these developments and are busy preparing for an LNG future. Poland, Lithuania, and Greece already have LNG terminals and Croatia is also building one. Ten East European countries have now united in what’s called the Three Seas Initiative (Baltic, Black Sea and Adriatic) that is predicated on energy independence from Russia and close cooperation with the United States.

What’s needed now to promote this highly positive trend is for the Trump administration to stop Nord Stream -2, by imposing sanctions voted on by Congress. Several Western European participants have already declared that they will quit the project if subject to American sanctions. It is high time for Washington to act in its own best interests as a potential LNG supplier and help the Eastern Europeans, who are by far America’s best friends in Europe.

 

Alex Alexiev is chairman of the Center for Balkan and Black Sea Studies and is a member of the Institute for Energy Research Advisory Council.

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