Oil & Gas Publishers Note: Todd Carney, a first year student at Harvard Law School, posted a good article. Worth your time.
Vladimir Putin and Angela Merkel walk together during a meeting in Rio de Janeiro in 2014. (Imre Toma, https://flic.kr/p/yCehE8; CC BY 3.0, https://creativecommons.org/licenses/by/3.0/)
Since 2014, Russia and Ukraine have been locked in a conflict in Donbas that has killed thousands. Despite the fighting, the two countries have been able to maintain an economic relationship centered around one industry: energy. A new Russian energy project threatens to undermine that relationship and impact U.S. energy interests in Europe.
The new project, Nord Stream 2, will enable Russia to provide natural gas to Germany directly instead of going through Ukraine. This has stark consequences for Ukraine: What little leverage Ukraine holds over Russia comes largely from the fact that Russia has to export most of its natural gas through Ukraine in order to reach Europe. If Russia can bypass Ukraine, the pipeline would make that leverage obsolete.
But this project impacts not only Ukraine but also the United States. Some observers in the U.S. see the pipeline as a way for Russia to subtly spread its influence in Europe by deepening European dependence on Russia for natural gas. Analysts fear this will make it more difficult for the U.S. to recruit European support in holding Russia accountable for its transgressions. In response, the U.S. has enacted sanctions to try to slow down the Nord Stream 2. Despite the sanctions, Russia is nonetheless aiming to continue the pipeline project.
Russia-Ukraine Energy Relationship
European, Russian and Ukrainian natural gas interests are deeply interconnected. About half of Russia’s European natural gas exports pass through Ukraine, and 30 percent of the natural gas in Europe comes from Russia. On Russia’s end, 90 percent of its natural gas exports go to Europe. At the same time, Ukraine is largely dependent on Russia for its natural gas—60 percent of which comes from Russia.
As Ukraine was struggling to achieve financial independence in the 1990s, Russia supplied it with large amounts of natural gas. The gesture was not merely altruistic: The relationship benefited Russia because it needed a natural gas pipeline to go through Ukraine to access Europe. This relationship remained largely stable until 2006 when Russia and Ukraine had a dispute over the price of natural gas, which led Russia to reduce its flow of gas through Ukraine. However, the two countries ultimately reached a resolution just after the spat began.
In 2009, Russia and Ukraine again began having conflicts over gas prices. As a result, Russia shut off its gas flow to Ukraine, and this time the conflict lasted for three weeks. Though Russia and Ukraine resolved the dispute, it prompted both nations to look for ways to lessen their dependence on each other. Russia established gas deals with Germany in 2006 and Turkey in 2007. These deals allowed gas to go to Europe without going through Ukraine. The construction of the pipeline with Germany was completed in 2011, and the pipeline with Turkey was finished in January of this year. Over the next decade, Ukraine began getting more natural gas from Hungary, Poland and Slovakia.
Throughout 2019, Russia and Ukraine had been trying to renegotiate their energy contract but were unable to reach an agreement. Russia wanted to extend the relationship for only one year, but Ukraine wanted to extend the deal for as much as 10 years. Ultimately, Russia and Ukraine agreed in December 2019 on a five-year extension to their natural gas deal.
Nord Stream 2
The past tension between Russia and Ukraine led Russia to develop a natural gas relationship with Germany, which formally began in 2005 when the two countries signed an agreement to create two pipelines that went through the Baltic Sea. This arrangement cut out Ukraine completely. The project was initially known as the Northern European Gas Pipeline but later became known as Nord Stream AG. The two pipelines were finished in 2011 and 2012.
By 2015, Nord Stream AG had proved successful and was providing Germany with 10 billion tons of natural gas, which was also exported to the rest of Europe. As a result, Germany and Russia signed an agreement in June 2015 to construct two additional pipelines that would provide 55 billion tons of natural gas to Germany by the end of 2019. The project became known as Nord Stream 2. The Nord Stream 2 pipelines would supply more than one-tenth of Europe’s natural gas demand and would be 760 miles long, with the two pipelines running parallel to each other. The project would begin at the Russian port of Ust-Luga near St. Petersburg and then go through the Baltic Sea—through waters near Finland, Sweden and Denmark—and end in Greifswald, Germany.
By 2017, many EU members, such as Sweden and Lithuania, were concerned that Russia might use Nord Stream 2 to exert influence over Europe by increasing European reliance on Russia for natural gas. Nord Stream 2 skeptics also feared it could take away Ukraine’s economic leverage that the country had used to push back against past instances of Russian aggression. German Chancellor Angela Merkel, who had in the past advocated for EU sanctions against Russia over its transgressions, pushed back on these concerns and rejected the need for universal support from the EU for Nord Stream 2, arguing that Nord Stream 2 “is an economic project and I don’t think we need an extra mandate for it.”
In 2017, Poland and about a dozen other countries tried to get the European Commission to block Nord Stream 2. Despite the countries’ protestations, the European Commission said it had no legal basis to block Nord Stream 2 because the pipeline is offshore and thus not under EU jurisdiction. Interestingly, the European Commission did not issue a formal declaration on the matter but instead merely sent a statement directly to the Danish government because the proposed route would go through Denmark’s continental shelf, which is an area under Danish sovereignty 350 nautical miles off the country’s coast. If the pipeline was within the territorial waters of Denmark, which extend to 12 nautical miles off the coast, then the European Commission would have had authority over the pipeline.
Denmark had its energy regulating arm, the Danish Energy Agency, look into whether Denmark had the legal authority to stop the pipeline. In October 2019, two years after the inquiry began, the Danish Energy Agency finally issued a ruling over the portion of the pipeline that went through Denmark’s waters. The agency found that under Denmark’s Continental Shelf Act and the UN Law of the Sea Treaty, Denmark could stop Nord Stream 2 only if the pipeline would cause environmental harm. The Danish Energy Agency ruled there was no environmental threat to the waters from the pipeline, so it held that Denmark had no legal authority to stop the project.
Where the U.S. Comes In
The U.S. has remained concerned about Russia’s Nord Stream 2 project because the project would deepen European reliance on Russia for energy to a level that the U.S. fears would make European countries most hesitant to participate in sanctions against Russia.
The Obama administration opposed the development of Nord Stream 2, a stance that frustrated Germany’s government. “Some things the Europeans need to decide for themselves,” Germany’s then-ambassador to the United States said regarding Nord Stream 2. The Obama administration nonetheless maintained its opposition to the pipeline; later in 2016, then-U.S. Vice President Joe Biden declared the pipeline a “bad deal” for Europe.
Despite concerns over Trump’s soft tone on Russia, after the Trump administration came to power it maintained the Obama administration’s policy of opposing the Nord Stream 2. In 2017, Congress passed a new round of sanctions that Trump signed into law. The sanctions largely targeted individuals and businesses that helped Russia launch cyberattacks against U.S. entities, but among “policy statements” listed as justification for the sanctions was the following policy goal: “to continue to oppose the NordStream 2 pipeline given its detrimental impacts on the European Union’s energy security, gas market development in Central and Eastern Europe, and energy reforms in Ukraine.” The legislation listed 12 types of sanctions that the Trump administration could enact and mandated that the Trump administration use at least five. One of the options was enacting penalties on Americans who engaged in gas and oil development in Russia. Some feared that the Trump administration might enact sanctions against Americans working on Nord Stream 2. By 2018, however, the U.S. assured Germany that the Trump administration would not use the latest round of sanctions to target Nord Stream 2.
Nevertheless, a month after the U.S. assurance to Germany, Trump erupted in anger over the Nord Stream 2 at 2018’s NATO Summit and called the proposed project “inappropriate.” State Department officials followed up on these remarks and said the U.S. government could further target the Nord Stream 2 using the 2017 sanctions. The State Department’s follow-up comments ended up being nothing more than a threat; the U.S. never enacted sanctions against the Nord Stream 2 using the 2017 sanctions bill.
But, in summer of 2019, a bipartisan bill was introduced in Congress that directs the U.S. government to enact sanctions against any companies involved in the development of Nord Stream 2. One of the bill’s co-sponsors, Sen. Ted Cruz, stated that Nord Stream 2 “poses a grave threat to the national security of the United States and our European allies,” because it creates a situation in which Russia could strategically withhold energy from European countries and because Russia could spend the money gained from Nord Stream 2 on operations against the U.S. and Europe. The sanctions bill’s other co-sponsor, Sen. Jeanne Shaheen, felt the sanctions were important in order to show that the U.S. would act to counter Russia’s underhanded attempts to influence Europe. In December 2019, after Congress overwhelmingly passed the sanctions as part of an end-of-the-year funding bill, the Trump administration signed the legislation into law. The legislation gave the Trump administration 60 days to report on the progress of the sanctions, so an update on the enactment of the sanctions will be due mid-February. These sanctions are unique from past sanctions, because they specifically target Nord Stream 2 by mandating that the U.S. government freeze assets and revoke U.S. visas of contractors who worked on Nord Stream 2. Ukraine had long lobbied the U.S. for sanctions that directly targeted Nord Stream 2, and these are the first sanctions to pass that do so. 2.
Germany and Russia reacted angrily to the recently passed sanctions. Both governments protested that the sanctions violated their sovereignty, with Russia claiming that the sanctions would only delay the project, not end it. Ultimately, some experts believe that the U.S. ultimately acted too late to stop the pipeline because so much of Nord Stream 2 is already completed.
What Comes Next?
The sanctions seemed to play some role in getting Russia and Ukraine to agree to a natural gas deal. Shortly after the U.S. sanctions legislation was signed into law, Russia and Ukraine agreed on a five-year extension of their current deal. So, although Russia and Ukraine’s deal does not mention Nord Stream 2, the threat of sanctions dooming Nord Stream 2 likely caused Russia to agree to a deal with Ukraine. With the new deal, Russia can continue to have Ukraine as an export partner of gas even if it does not have Nord Stream 2 to increase its gas exports to Germany. If Nord Stream 2 is not completed, Ukraine will retain some economic leverage over Russia because it will remain Russia’s largest connection to Europe. If Russia does manage to complete Nord Stream 2, many observers fear the completion of the pipeline would water down the strength of the new Ukraine-Russia deal.With Nord Stream 2, Russia would no longer need to cooperate with Ukraine to make money off its natural gas resources. Though Russia does have a five-year deal with Ukraine, there is nothing to stop the Kremlin from going back on the deal if it does not need Ukraine as an export partner. In the end, the fate of the project and the weight of its potential impact remain uncertain.
