To Prussia, with Love

A poisoning scandal surrounding Russian opposition politician Alexei Navalny has threatened to derail the Nord Stream 2 gas pipeline, now only kilometres away from the German mainland.

This week’s pod discusses the likelihood of a cancellation and the potential impact on Europe’s gas markets.

Host: 

• Richard Sverrisson, Editor-in-Chief Europe, Montel. 

Guests: 

• Hanns Koenig, Head of Commissioned Projects, Central Europe, Aurora Energy Research, 
• Nathan Witkop, Reporter, Montel. 

Transcript

Anna Siwecka, freelance journalist/podcaster: 0:01

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Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:29

Hello listeners and welcome to the Montel Weekly Podcast, bring You Energy Matters in an informal setting. Today on the pod, we'll be talking about a subject that is rocketed to the top of the news headlines. In fact, it is a topic that has a fascinating mix of geopolitics, the involvement of world leaders, massive infrastructure build, alleged clandestine activity, and Europe's wholesale gas supply and questions of its energy dependence. Yes, listeners we're talking about Nord Stream too. The Russian gas pipeline to Germany was supposed to come online this year. Those plans were set back by the threat of US sanctions. Now, a poisoning scandal surrounding a Russian opposition figure may prove enough to halt the contested project just kilometers away from the German mainland. I'm Richard Sverrisson, and joining me on the show to talk about this today is Hanns Koenig of Consultancy, Aurora Energy Research in Berlin. Welcome to you, Hans.

Hanns Koenig, Head of Commissioned Projects, Central Europe, Aurora Energy Research: 1:25

Thank you very much for having me

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:26

and our own correspondent, Nathan Witkop in Bon. Let's start guys, by talking about the current situation in Germany. You have the Russian opposition, politician, Alexi Navalny, and it's become quite a hot political potato. Now, do you think, Hans, if I can put it directly to you, do you think this pipeline will be canceled or completed?

Hanns Koenig, Head of Commissioned Projects, Central Europe, Aurora Energy Research: 1:47

We still have it in our central scenario to be completed. And I think it's still more likely to be completed a completed than not. But there's a significant chance that it will be delayed further. So I think our previous expectation was for it to be finished over the second half of 2021 to be fully online, beginning of 2022. But now with with the additional pressure that is wrapping up potential for the sanctions that could be delayed further. Is this what you are hearing as well, Nathan? You published a story, you published a number of stories this week on the Nord stream two pipeline. Do you think pressure is building in Germany, opposition to the completion of it? Only as we said, as I said in the intro, only a few c kilometers away from the German shore.

Nathan Witkop, Reporter, Montel: 2:27

Yeah, I think it's a fairly common expectation that it will be finished, that it will aid that it will be finished, but that it'll be finished a lot later, perhaps late next year before we see. Significant flows there. I think it's definitely true that it has brought about the first wobble in Germany's official support for the project. It would've been unheard of to imagine. A senior figure in government say that they were open to cancer or at least questioning the project, changing stances as the foreign minister said at the weekend. And he had the backing of Merkel on this only, I think a week prior to that, Merkel had come out in favor of the. Of the gas pipeline, again, taking questions on exactly this subject. And she repeated the line that the government has been saying for years that it's a commercial deal and Germany sees no reason to block this. But yeah the current situation really I think puts Germany between a rock and a hard place because it's between trying to maintain its relatively. Good relations with Russia on the one hand and trying to maintain its historically good relations with the United States on the other. And it's in the middle of a bit of a political football, I think.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:46

Yeah. How do you see this geopolitical ball game between Merkel, Trump and Putin playing out Hanns?

Hanns Koenig, Head of Commissioned Projects, Central Europe, Aurora Energy Research: 3:52

I think it's an interesting one because in a way, if you think about it, I don't think that we got that much new information over the past couple of weeks because. Even over the past couple of years, it was pretty well known that Russian opposition politicians don't live very safe lives. There was the association of Boris Mof, there were various other similar cases, or maybe not quite as extreme as assassinations, but certainly they were treated very well. And that was all, that was common knowledge that was known, right? Even for the past couple of years. So I think one, one should at least ask the question whether the Navalny case is not. Now also being used opportunistically in a way, as a way of shifting against the pipeline. And shifting course and a little bit also giving into us pressure without actually being a appearing to give into us to us pressure and using the Navalny case as an explanation of it.'cause I don't think we learned that much new of the past couple of weeks.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:45

Then do you think Huns, that Merkel was playing a bit of a waiting game here, that over maybe in a two or three weeks, the row would've blown over and there'll be other things in focus, potentially the election in the States, which is also quite a, we'll come back to maybe later in the pod

Hanns Koenig, Head of Commissioned Projects, Central Europe, Aurora Energy Research: 4:59

at least, that would be a very Merkel thing to do. Like she is she's the master of of holdout games and of basically not committing to either side. Becomes inevitable or until basically one side ideally wins out. So I think we will continue to not have clear statements on this from from that for a couple of weeks at least. And then she'll probably fall in line one way one way or another.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:19

Is she getting support in Brussels for her position, or do you think Brussels could exert any kind of pressure?

Hanns Koenig, Head of Commissioned Projects, Central Europe, Aurora Energy Research: 5:25

The difficulty with Brussels is that the member states are are so divided. And of course the commission has been has been critical for quite a long time with the with the guest directive and so forth. But because you have a couple of the major member states who have been supporting it quite strongly, not just Germany, but also. France, Austria, the Netherlands. I don't think the decisive action on this will come from Brussels, but the question is, rather, will Germany withdraw its support for the project? And if that happens, then that also opens an avenue for the for the European Commission, for instance, to go against the project more effectively.

Nathan Witkop, Reporter, Montel: 5:58

Maybe we could go into a little bit of detail here on, on two points. One is, as we've said, Germany's historically backed the project. This has brought out some of those who have always been against the project, have become more vocal now. And as you've said, we don't really have any fresh information. What's always struck me about Nord Stream too is a lot of the arguments for or against, seem to be superficial, relative to what's actually going on. Proponents of it say that it's necessary for European energy security. Detractors say it's a threat to European energy security. So maybe we can just get your view as a, as an energy professional, where's the truth here? Is this something that's a threat to energy security or is it. Is it irrelevant?

Hanns Koenig, Head of Commissioned Projects, Central Europe, Aurora Energy Research: 6:43

It's a very good question and of course about 50% of the listeners are probably going to disagree with what I say, irrespective of what I'm gonna say. But I think from a pure supply security perspective, the answer is a clear no in terms of. Do we need this pipeline? And we've done some modeling around this. So Europe right now is being supplied supplied safely and reliably through the existing system. A lot of it comes through Ukraine, of course. And what we see North Stream to doing is basically shifting flows from the Ukrainian corridor, from the brotherhood system to the Baltic Sea and not actually adding that much of additional flows. There's gonna be a little bit of additional flows coming. Of North Stream, but the incremental flows that are coming from Russia are actually quite limited. And that comes on top of or that comes into a world where Europe is basically over supplied with gas import capacities. We have around 230 BCM of l and g import capacities in Europe. And they've been, for the past couple of years, they've generally been utilized significantly below. 2019 was a bit of an exception because LNG got so cheap. But even just there, just in the LNG import terminals, you have two North Stream two pipelines, which has a which has a capacity of 55 or will have a capacity of 55 cubic meters sitting there, which could be used to meet demand. So Europe is constraint from a import capacity perspective. And we don't see European supply security being endangered if not.

Nathan Witkop, Reporter, Montel: 8:12

I think another important point here that often gets lost in the broader discussion, people sometimes object and say, oh, but look, Germany's phasing out nuclear energy. It's phasing out coal. It's going to have to get its electricity from somewhere. It can't just get it from renewables yet. But I think an important point also made repeated on Thursday in a commentary for Deep Site by Felix Matters, an energy economist is, look overwhelmingly gas is used for heating, especially in Germany. Only I believe a fifth of it is used for electricity production. And actually the increased use of gas for electricity will pale next to the decreased use for heating if we get serious about climate change. Maybe you can talk a bit about demand, expected demand versus the fact that Europe's producing less and less of its own gas.

Hanns Koenig, Head of Commissioned Projects, Central Europe, Aurora Energy Research: 9:04

Very happy to. And I also read that article that if you speak German, I would highly recommend our listeners read it as it puts it very well, I think so, as Felix says in the article, only only less than a quarter of German gas consumption, actually, it goes to the power sector and the other sectors. At least if we take climate action seriously, our on strong downward trajectory over the next. And yes, there might be some increase or there will be some increase in gas consumption. From the power sector as we phase out nuclear, as we phase out coal and and renewables won't be able to compensate that at least in, in a kind of a 10, 10, 15 year timeframe. But that will probably, or very likely not lead to overall increases in gas consumption in a 10, 15 year timeframe. And again we've done some modeling on this and the most optimistic scenarios for German gas consumption over the next. 20 years have it broadly remaining constant. And this is really a world in which there's not a lot more ambition on climate change mitigation. It's really a kind of a business as usual world. If we get into the European green deal, if we significantly ramp up renovation rates and houses, de efficiency measures, and industry and so forth, transition towards green gases and hydrogen and so forth, I don't think there's a plausible world in which gas consumption remains at current devils. They will have, they will come down and they will come down. More strongly than domestic production is declining. And then of course you have further LNG terminals in particular under construction you have further pipeline pipelines under construction being planned. So I don't see a realistic way in which in which Europe will be under supplied with gas in a 10 year timeframe, even without North Stream two being completed.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:43

That's very interesting, Hans, because from the outside, if you look at Germany, massive renewables build out. It's green. Credentials are there at least on the surface for many to see. Yet it's supporting this big gas infrastructure, which will lock in this fossil fuel for decades to come. Why is there such. Broad support to the pipeline in Germany. Could you explain that?'cause from, for many outsiders it seems a little bit difficult to understand.

Hanns Koenig, Head of Commissioned Projects, Central Europe, Aurora Energy Research: 11:09

It's a very interesting question and and I think actually the economic reasons that are often given for it in terms of Germany becoming a gas hub and so forth. I think these are. These are generally overstated in, in, in terms of the actual sway they have on the decisions that are, that, that are being made. I think in burden politics, it's really viewed as a means to keep the dialogue and the cooperation with Russia going in some way. Of course, a lot of this had, a lot of this has been ramped down over the past years with the sanctions being imposed and so forth, and this is viewed as a. Lifeline quite literally for Russian German relations. I think more so on the left of the German political spectrum. And I think there's a there's obviously the quite interesting role, our our firm, a former chance like Gerda plays there, but to some extent in, I think in a more pragmatic way, also by me.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:59

If we can go into the opposition to it. It's been very strong in the states. And there's, it's not just Trump who's against it, it's also the Obama presidency was also firmly against it, and there's bipartisan support for, a hard line against Nordstrom to potential sanctions, et cetera. Could you explain that a bit, Hans? What, where, why is there such. Clear opposition in the United States? Is it purely from a selfish perspective to boost its own LNG exports?

Hanns Koenig, Head of Commissioned Projects, Central Europe, Aurora Energy Research: 12:25

I think that's part of the reason, but not all of it. I think to understand the US opposition to this, I think we can actually go back 40 to 50 years because US opposition to European energy imports from Russia or from the Soviet Union formally. Isn't anything new, even in the sixties and 70 seventies, actually the US administrations back then tried very hard to stop the construction of the Jewish bar oil pipeline of the brotherhood gas pipeline through Ukraine. Lobbied very hard in West Germany back then against the supply of pipes for the for these pipelines, which some of which were actually built by West German industrial companies and so forth. US opposition to European reliance and especially Western European reliance on. On Russian energy is nothing new. And in a way this kind of, this bipartisan opposition to the project is a continuation of that. So I think that's the first point. The second point is that of course, what changed through Trump, obviously. The tone and the fierceness with which this opposition is being communicated. Yes, Obama was already against it, but he probably would not have imposed sanctions against NATO allies. And of course the whole tonality of it was very different. So I think that's a clear change that came in through Trump and that may to some extent, become better again if he doesn't, if he doesn't get reelected. To what extent do economic interests play a role? I think they amplify this general opposite opposition because the American gas industry has been struggling over the past couple of years because prices have been very low. There's been alu in the market, and this gas it doesn't need to go somewhere, but obviously they want the gas to go somewhere. So opening up markets for this gas has amplified the opposition and made it more drastic, made it more vocal. The US would've been against it and have been against it even before the tracking boom.

Nathan Witkop, Reporter, Montel: 14:12

Although it's unlikely. We could talk perhaps about the ramifications of a cancellation at this late stage. The pipeline has all of its permits. It's illegal. Allowed to go to ahead. Go ahead. It's it's got just 150 kilometers, I think, out of what 1,250 to go before it lands in Germany. What impact would a cancellation have perhaps on two things you can comment on European gas prices. And perhaps on the legal and diplomatic consequences.

Hanns Koenig, Head of Commissioned Projects, Central Europe, Aurora Energy Research: 14:41

So on the gas prices, what is often said is that, okay Russian gas is much cheaper than, for instance, LNG in terms of its production costs, and therefore we'll see a big shift in the gas prices if this pipeline isn't completed. I think that's a difficult argument to make for two reasons. On the, on, on the one hand, as I said. Russian gas actually don't change all that much through the completion of North. It's more a from the Ukrainian corridor. The other thing is is that you have to look into how. How gas prices are set in Europe and what is marginal, and that is LNG. So even the Russian exporters Gas Pro are tracking in their pricing, the prices of LNG that are coming in the spot prices in Europe. So if you replace some Russian gas with some LNG, actually with some more LG actually the impact on, on, on the price level. Won't be all that large. So this is the high level explanation for what we see in our modeling which is that if you maintain the current Ukrainian infrastructure as it is, and and you don't complete a North Stream two there will be, in our expectation, barely any effect on European gas prices significantly below half a euro per megawatt hour. If there's a significant reduction in Ukraine in transit capacities, and we we have to shift towards LNG and other sources significantly, that could be closer to one euro per megawatt hour. But that's still in the grand scheme of things. And compared to the swings and prices we've seen over the past couple of years, that's still not very much. Politically, or it's, I, of course I can only speculate there. So politically, diplomatically, there would clearly be a big fallout between Germany and Russia. While it would perhaps open the door towards the normalization of Polish German relations, which have deteriorated significantly over the past years. Also for other reasons, but very much also driven by North Stream too. There, there would be some diplomatic benefits and some costs associated. To it on the legal side. This is really outside my area of expertise. I must admit there could be, and this is this has been said by representatives of nor Stream two and the companies that are invested in it. There, there could of course be grounds for compensation claims against the government if this stopped now, but that very much depends on the legal avenues that are being found and used to stop the pipeline. So I think that what we'll have to see.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:00

Do you think it would also you say it could bring Germany and Poland close together? What would be the ramifications for Germany's relationship to the United States?

Hanns Koenig, Head of Commissioned Projects, Central Europe, Aurora Energy Research: 17:08

I think it would also help so far Germany has tried to basically make some concessions to, to use to use demands in terms of. For instance, supporting the construction of LNG terminals and so forth, but just short of stopping the project. So I think this would get one of the difficult areas we have we have with the US right now, out of the way. On the other hand, of course, a lot of the others, the trade deficit and so forth, they will remain, but it could it could help. Yeah.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:34

I kind of wanna return to the opposition in the States and the threat of sanctions. The companies involved in the Nord Stream two pipeline, they, these are large, international companies. What would be the effect of sanctions? Is this a realistic threat? And what could the potential consequences of the imposition of sanctions on these large companies, what could that do?

Hanns Koenig, Head of Commissioned Projects, Central Europe, Aurora Energy Research: 17:54

I have to say I'm not a legal expert. It's hard for me to speculate, but so far these companies continue to support the project, which probably means that either they don't believe this is a credible threat or they think it can be managed in some way or rather the cost of pulling out of Nord Stream two would be larger than the probability weighted impact of any sanctions that could be that could be imposed. I think the Nord Stream two partner. That would be most heard by the sanctions is or by potential sanctions, is clearly shell because they have a sizable US business. Actually the other European partners, so Juniper, NGB, and and so forth actually aren't that active there, but challenge also Winters Health, which are involved. They could be heard quite a bit.

Nathan Witkop, Reporter, Montel: 18:35

I think Uni did flag this at the, in the financial results recently they did mention explicitly that they. Saw now the potential for this to be canceled for the first time. And I think it was newsworthy in itself that one of the investors in the pipeline flagged this. I acknowledge

Hanns Koenig, Head of Commissioned Projects, Central Europe, Aurora Energy Research: 18:51

this. Yeah. I guess they, they acknowledged the risk, but they continue to support the completion. Yeah,

Nathan Witkop, Reporter, Montel: 18:55

of course. Yeah. Yeah. Just for context and for listeners background, just the threat of sanctions introduced at the end of last year by the US was sufficient to deter the Swiss pipeline. Company all seeds from completing the project. It do, it, it does depend on what the US is prepared to legislate.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:13

And a final question really, should Joe Biden win the presidential election in November? Would there be, would that mark any change both in tone or strategy or, the threats that are being thrown around at the moment?

Hanns Koenig, Head of Commissioned Projects, Central Europe, Aurora Energy Research: 19:26

I think in tone. And tone. Yes. And potentially in terms of some of the harshness of the actions that are being threatened in terms of sanctions and so forth. Yes, but I don't think the us even under a Biden administration would be comfortable with the project.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:40

Hans Nathan. Thank you very much for joining the Monte Weekly podcast this week. Thank you.

Hanns Koenig, Head of Commissioned Projects, Central Europe, Aurora Energy Research: 19:45

Thank you. It was a pleasure.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:46

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