How a Deepening Natural Gas Market Affects Europe

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Technological advances in the area of natural gas liquefaction and hydraulic fracturing that unleashed the shale revolution in the United States have irrevocably changed the rules of the natural gas market. From a regional resource, natural gas is on the way to become a global commodity. The ongoing transformation has been particularly consequential but also distinctive for the Central and Eastern European region, where new market entrants have challenged Russian dominance.

Natural gas has been increasingly popular, especially in power generation. Compared to coal or fuel oil, natural gas is much cleaner—emitting considerably less carbon dioxide and local pollutants. This advantage is coupled with comparable, if not superior, performance and efficiency.

But in its gaseous, low-density form, natural gas is difficult and expensive to transport. Pipeline transportation has been a traditional go-to method to move the fuel. Given the prohibitively high cost of liquefaction, liquefied natural gas (LNG) has been used only where pipeline infrastructure could not be built. This resulted in markets that are regional in nature—established by long-term investment in pipeline infrastructure and followed by long-term contracts. In areas where one or few regional suppliers exist, this creates dependency, and the commodity then becomes subject to potential political risk and interference.

Over the last decade or so, however, two relatively recent developments have been markedly changing these natural gas market dynamics. First, natural gas liquefaction (LNG) technology advanced to become efficient and cheap enough to provide a viable alternative to piped gas. Second, new supplies of natural gas have been unlocked around the world, including in Qatar, Australia, and the U.S., where new horizontal drilling technology initiated the “shale revolution.” As a result LNG trade tripled over the last 17 years, rendering a more global, liquid, and deep gas market. In this market, there are many new points of supply and demand as well as an increasing share of trades that are either short-term or spot-based. In addition, the geopolitical value of the resource has diminished for traditionally dominant regional providers—potentially allowing more geopolitical sway to non-traditional gas suppliers such as the U.S. or Australia.

These trends challenge in particular the traditional dependency of Central and Eastern European (CEE) countries on Russian gas.

Following the fall of the Iron Curtain and having lost the ability to politically influence countries in the region directly, Russia has used its natural gas resources to achieve geopolitical ends and profited economically from its dominance. But the advent of a more fungible LNG market and the end of many long-term contracts with Russia (expiring in the early to mid-2020s), change the region’s bargaining position vis-à-vis Russia. And at least some CEE countries are ready to take advantage of this opportunity.

Poland and Lithuania have already made the first steps—building and operating new LNG import terminals. Additional terminals to support the CEE region are planned in Croatia, Estonia, and Greece. New long-term contracts have also been signed. Most recently, this included 20-year contracts that Poland’s PGNiG signed for 5.4 billion cubic feet (bcm) of natural gas to be delivered starting 2023. Importantly, the contracts are FOB (free on board) allowing PGNiG freedom when it comes to the gas destination after purchasing the contracted volumes. The company can either deliver those volumes to Poland or decide to sell it elsewhere, if Poland’s demand is not high enough to absorb it or if there is a cheaper source of gas that can be accessed at that time.

This arbitrage opportunity underlies a distinctive wrinkle in LNG trade in Europe. Considering higher costs associated with unconventional gas extraction, liquefaction, and transportation, LNG prices will likely be higher than conventional Russian gas transported via an existing and extensive network of pipelines. As such, LNG is unlikely to replace Russian gas. But it can diversify the supply, provide a price floor and balance the market. And, importantly, the ability to import and distribute LNG by countries in the CEE provides a “credible threat” to current Russian geopolitical and pricing practices. In that role, LNG offers greater energy security not only by diversifying the supply source but also by changing the nature of Russian gas deliveries—allowing CEE to take advantage of cheaper Russian gas on more competitive terms. 

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Technological advances in the area of natural gas liquefaction and hydraulic fracturing that unleashed the shale revolution in the United States have irrevocably changed the rules of the natural gas market. From a regional resource, natural gas is on the way to become a global commodity. The ongoing transformation has been particularly consequential but also distinctive for the Central and Eastern European region, where new market entrants have challenged Russian dominance.

Natural gas has been increasingly popular, especially in power generation. Compared to coal or fuel oil, natural gas is much cleaner—emitting considerably less carbon dioxide and local pollutants. This advantage is coupled with comparable, if not superior, performance and efficiency.

But in its gaseous, low-density form, natural gas is difficult and expensive to transport. Pipeline transportation has been a traditional go-to method to move the fuel. Given the prohibitively high cost of liquefaction, liquefied natural gas (LNG) has been used only where pipeline infrastructure could not be built. This resulted in markets that are regional in nature—established by long-term investment in pipeline infrastructure and followed by long-term contracts. In areas where one or few regional suppliers exist, this creates dependency, and the commodity then becomes subject to potential political risk and interference.

Over the last decade or so, however, two relatively recent developments have been markedly changing these natural gas market dynamics. First, natural gas liquefaction (LNG) technology advanced to become efficient and cheap enough to provide a viable alternative to piped gas. Second, new supplies of natural gas have been unlocked around the world, including in Qatar, Australia, and the U.S., where new horizontal drilling technology initiated the “shale revolution.” As a result LNG trade tripled over the last 17 years, rendering a more global, liquid, and deep gas market. In this market, there are many new points of supply and demand as well as an increasing share of trades that are either short-term or spot-based. In addition, the geopolitical value of the resource has diminished for traditionally dominant regional providers—potentially allowing more geopolitical sway to non-traditional gas suppliers such as the U.S. or Australia.

These trends challenge in particular the traditional dependency of Central and Eastern European (CEE) countries on Russian gas.

Following the fall of the Iron Curtain and having lost the ability to politically influence countries in the region directly, Russia has used its natural gas resources to achieve geopolitical ends and profited economically from its dominance. But the advent of a more fungible LNG market and the end of many long-term contracts with Russia (expiring in the early to mid-2020s), change the region’s bargaining position vis-à-vis Russia. And at least some CEE countries are ready to take advantage of this opportunity.

Poland and Lithuania have already made the first steps—building and operating new LNG import terminals. Additional terminals to support the CEE region are planned in Croatia, Estonia, and Greece. New long-term contracts have also been signed. Most recently, this included 20-year contracts that Poland’s PGNiG signed for 5.4 billion cubic feet (bcm) of natural gas to be delivered starting 2023. Importantly, the contracts are FOB (free on board) allowing PGNiG freedom when it comes to the gas destination after purchasing the contracted volumes. The company can either deliver those volumes to Poland or decide to sell it elsewhere, if Poland’s demand is not high enough to absorb it or if there is a cheaper source of gas that can be accessed at that time.

This arbitrage opportunity underlies a distinctive wrinkle in LNG trade in Europe. Considering higher costs associated with unconventional gas extraction, liquefaction, and transportation, LNG prices will likely be higher than conventional Russian gas transported via an existing and extensive network of pipelines. As such, LNG is unlikely to replace Russian gas. But it can diversify the supply, provide a price floor and balance the market. And, importantly, the ability to import and distribute LNG by countries in the CEE provides a “credible threat” to current Russian geopolitical and pricing practices. In that role, LNG offers greater energy security not only by diversifying the supply source but also by changing the nature of Russian gas deliveries—allowing CEE to take advantage of cheaper Russian gas on more competitive terms. 

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Anna Mikulska is a nonresident scholar in energy studies at the Baker Institute. She joined the institute's Center for Energy Studies following her two-year postdoctoral appointment at Rice University’s Local Elections in America Project. Anna's research interests center around European energy markets and energy policy. She has presented papers at numerous national and international conferences and co-authored articles in the European Journal of Political Research and the Journal of Elections, Public Opinion and Parties, as well as a chapter in the “Introduction to American Government” textbook. She has served as a reviewer for numerous scholarly journals and was on the editorial board of the law review at Adam Mickiewicz University in Poland. She speaks Polish, English, German, Farsi, and Russian.

Mikulska earned a Ph.D. in political science from the University of Houston, a master's degree in international relations from the University of Windsor in Canada, and a law degree from Adam Mickiewicz University.

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Anna Mikulska is a nonresident scholar in energy studies at the Baker Institute. She joined the institute's Center for Energy Studies following her two-year postdoctoral appointment at Rice University’s Local Elections in America Project. Anna's research interests center around European energy markets and energy policy. She has presented papers at numerous national and international conferences and co-authored articles in the European Journal of Political Research and the Journal of Elections, Public Opinion and Parties, as well as a chapter in the “Introduction to American Government” textbook. She has served as a reviewer for numerous scholarly journals and was on the editorial board of the law review at Adam Mickiewicz University in Poland. She speaks Polish, English, German, Farsi, and Russian.

Mikulska earned a Ph.D. in political science from the University of Houston, a master's degree in international relations from the University of Windsor in Canada, and a law degree from Adam Mickiewicz University.

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is a senior fellow at the Kleinman Center for Energy Policy and a non-resident fellow with the Center for Energy Studies at Rice University's Baker Institute for Public Policy.

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is a senior fellow at the Kleinman Center for Energy Policy and a non-resident fellow with the Center for Energy Studies at Rice University's Baker Institute for Public Policy.

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LNG won't dominate conventional gas any time soon, but it is a major force in building energy security.

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LNG won't dominate conventional gas any time soon, but it is a major force in building energy security.

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In 2016 the first shipment of U.S. liquefied natural gas left by tanker from a terminal on the Gulf coast.  In the year since, U.S. LNG has made its way to customers around the globe, increasing competition in the gas market and threatening to loosen the grip of some suppliers on captive markets.

Guest Anna Mikulska, Senior Fellow at the Kleinman Center for Energy Policy, talks about the globalization of the natural gas market, the competitiveness of U.S. exports and their implications for relationships abroad.

 

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In 2016 the first shipment of U.S. liquefied natural gas left by tanker from a terminal on the Gulf coast.  In the year since, U.S. LNG has made its way to customers around the globe, increasing competition in the gas market and threatening to loosen the grip of some suppliers on captive markets.

Guest Anna Mikulska, Senior Fellow at the Kleinman Center for Energy Policy, talks about the globalization of the natural gas market, the competitiveness of U.S. exports and their implications for relationships abroad.

 

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U.S. natural gas exports are helping to globalize the gas market, putting traditional buyer-seller relationships to the test and raising the possibility of far-reaching geopolitical consequences.

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U.S. natural gas exports are helping to globalize the gas market, putting traditional buyer-seller relationships to the test and raising the possibility of far-reaching geopolitical consequences.

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In October 2012 in Portovaya Bay, Russia, a gathering of heads of state and top industry leaders from Russia, Germany, France, and the Netherlands celebrated the commissioning of the second string of Nord Stream 1. Approximately three years later, a shareholder agreement was signed between Gazprom and Western European firms: E.ON, BASF/Wintershall, OMV, Engie, and Royal Dutch Shell to form a new consortium that would execute the plan and complete Nord Stream 2 (NS2) by the end of 2019. Once completed, NS2 would allow Gazprom to sharply reduce—if not eliminate completely—Ukrainian transit where disagreements had resulted in multiple shutoffs of Russian gas flows to Europe.

Following successful completion of the first two strings of the Nord Stream pipeline, it is unlikely that those in attendance at either event anticipated the difficult work ahead of them. Nord Stream 2 (NS2) would become arguably one of the most divisive and contested projects in European natural gas infrastructure.

The project has been subject to deep disagreements, particularly between the countries of Western Europe and their Central and Eastern European (CEE) counterparts. As I have written here before, both sides display dramatically different views of NS2. The West shares Gazprom’s official perspective that underscores unreliability of Ukrainian transit. On the other hand, CEE countries argue that the company is an instrument of the Russian state and would use the new pipeline to perpetuate Russian gas domination and potential influence, especially in CEE. According to this perspective, the new delivery route could also discourage investment in other infrastructure projects in CEE and/or Europe that otherwise would be pursued and provide greater diversification of natural gas supply and energy security.

As often happens, there are merits to the positions of both sides.

To begin, Western utilities have worked with Gazprom for decades, even during the Cold War. The relationship has been based on market rather than political considerations. This resulted in strong commercial ties and a level of trust between the companies that influences their support for NS2 and informs their governments’ positions. On the other hand, the CEE experience has been diametrically different, with Gazprom often using CEE’s heavy dependence on its gas to further Russia’s political goals. Thus, it should not come as a surprise that a new pipeline promising to expand Russian natural gas delivery to Europe has ruffled feathers and raised serious concerns.

The two EU sides are adamant about their positions, engaging in lobbying activities to further their interests. But both sides seem also to be unwilling to consider the basis of each other’s arguments. The West is too fast in dismissing CEE concerns, unwilling to look deeper into the issues and use of Russian gas supplies to further Russia’s influence in that region. At the same time, CEE countries have not fully acknowledged that the increasing liquidity and depth of the global natural gas market combined with ongoing infrastructure additions in the region are likely to prevent the type of influence Gazprom was able to yield in the past.

In effect, parties are talking past each other. The disagreement has created a rift that runs directly against the common interest of both groups, weakening the EU and creating the possibility that the conflict could spill into other areas in a tit-for-tat fashion. This should give a pause to all EU members. EU's strength is in its unity and this particularly related to the power to withstand any type of political or economic pressure from outside forces.

NS2 has unearthed important issues that divide the “old and new Europe” but should become an opportunity to “work out” the differences and increase understanding between the member states. Instead it has become a political lightning rod that can significantly weaken the EU. If the latter is Russia's goal then NS2 does not need to ever be completed for Russia to "divide and conquer."

On the other hand, if EU members can build understanding—recognizing their different experiences with Russian gas delivery—they could design energy strategies that promote true diversification and security. Whether the pipeline is built or not, the continent could take better advantage of the deepening global natural gas market and make it less vulnerable to pressure from any one supplier, including Russia.

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In October 2012 in Portovaya Bay, Russia, a gathering of heads of state and top industry leaders from Russia, Germany, France, and the Netherlands celebrated the commissioning of the second string of Nord Stream 1. Approximately three years later, a shareholder agreement was signed between Gazprom and Western European firms: E.ON, BASF/Wintershall, OMV, Engie, and Royal Dutch Shell to form a new consortium that would execute the plan and complete Nord Stream 2 (NS2) by the end of 2019. Once completed, NS2 would allow Gazprom to sharply reduce—if not eliminate completely—Ukrainian transit where disagreements had resulted in multiple shutoffs of Russian gas flows to Europe.

Following successful completion of the first two strings of the Nord Stream pipeline, it is unlikely that those in attendance at either event anticipated the difficult work ahead of them. Nord Stream 2 (NS2) would become arguably one of the most divisive and contested projects in European natural gas infrastructure.

The project has been subject to deep disagreements, particularly between the countries of Western Europe and their Central and Eastern European (CEE) counterparts. As I have written here before, both sides display dramatically different views of NS2. The West shares Gazprom’s official perspective that underscores unreliability of Ukrainian transit. On the other hand, CEE countries argue that the company is an instrument of the Russian state and would use the new pipeline to perpetuate Russian gas domination and potential influence, especially in CEE. According to this perspective, the new delivery route could also discourage investment in other infrastructure projects in CEE and/or Europe that otherwise would be pursued and provide greater diversification of natural gas supply and energy security.

As often happens, there are merits to the positions of both sides.

To begin, Western utilities have worked with Gazprom for decades, even during the Cold War. The relationship has been based on market rather than political considerations. This resulted in strong commercial ties and a level of trust between the companies that influences their support for NS2 and informs their governments’ positions. On the other hand, the CEE experience has been diametrically different, with Gazprom often using CEE’s heavy dependence on its gas to further Russia’s political goals. Thus, it should not come as a surprise that a new pipeline promising to expand Russian natural gas delivery to Europe has ruffled feathers and raised serious concerns.

The two EU sides are adamant about their positions, engaging in lobbying activities to further their interests. But both sides seem also to be unwilling to consider the basis of each other’s arguments. The West is too fast in dismissing CEE concerns, unwilling to look deeper into the issues and use of Russian gas supplies to further Russia’s influence in that region. At the same time, CEE countries have not fully acknowledged that the increasing liquidity and depth of the global natural gas market combined with ongoing infrastructure additions in the region are likely to prevent the type of influence Gazprom was able to yield in the past.

In effect, parties are talking past each other. The disagreement has created a rift that runs directly against the common interest of both groups, weakening the EU and creating the possibility that the conflict could spill into other areas in a tit-for-tat fashion. This should give a pause to all EU members. EU's strength is in its unity and this particularly related to the power to withstand any type of political or economic pressure from outside forces.

NS2 has unearthed important issues that divide the “old and new Europe” but should become an opportunity to “work out” the differences and increase understanding between the member states. Instead it has become a political lightning rod that can significantly weaken the EU. If the latter is Russia's goal then NS2 does not need to ever be completed for Russia to "divide and conquer."

On the other hand, if EU members can build understanding—recognizing their different experiences with Russian gas delivery—they could design energy strategies that promote true diversification and security. Whether the pipeline is built or not, the continent could take better advantage of the deepening global natural gas market and make it less vulnerable to pressure from any one supplier, including Russia.

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Nord Stream 2 unearthed important issues that divide “old and new Europe.” While it could become an opportunity to “work out” the differences, it has become a political lightning rod that can significantly weaken the EU.

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Nord Stream 2 unearthed important issues that divide “old and new Europe.” While it could become an opportunity to “work out” the differences, it has become a political lightning rod that can significantly weaken the EU.

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Anna Mikulska is a nonresident scholar in energy studies at the Baker Institute. She joined the institute's Center for Energy Studies following her two-year postdoctoral appointment at Rice University’s Local Elections in America Project. Anna's research interests center around European energy markets and energy policy. She has presented papers at numerous national and international conferences and co-authored articles in the European Journal of Political Research and the Journal of Elections, Public Opinion and Parties, as well as a chapter in the “Introduction to American Government” textbook. She has served as a reviewer for numerous scholarly journals and was on the editorial board of the law review at Adam Mickiewicz University in Poland. She speaks Polish, English, German, Farsi, and Russian.

Mikulska earned a Ph.D. in political science from the University of Houston, a master's degree in international relations from the University of Windsor in Canada, and a law degree from Adam Mickiewicz University.

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Anna Mikulska is a nonresident scholar in energy studies at the Baker Institute. She joined the institute's Center for Energy Studies following her two-year postdoctoral appointment at Rice University’s Local Elections in America Project. Anna's research interests center around European energy markets and energy policy. She has presented papers at numerous national and international conferences and co-authored articles in the European Journal of Political Research and the Journal of Elections, Public Opinion and Parties, as well as a chapter in the “Introduction to American Government” textbook. She has served as a reviewer for numerous scholarly journals and was on the editorial board of the law review at Adam Mickiewicz University in Poland. She speaks Polish, English, German, Farsi, and Russian.

Mikulska earned a Ph.D. in political science from the University of Houston, a master's degree in international relations from the University of Windsor in Canada, and a law degree from Adam Mickiewicz University.

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Anna Mikulska is a nonresident scholar in energy studies at the Baker Institute. She joined the institute's Center for Energy Studies following her two-year postdoctoral appointment at Rice University’s Local Elections in America Project. Anna's research interests center around European energy markets and energy policy. She has presented papers at numerous national and international conferences and co-authored articles in the European Journal of Political Research and the Journal of Elections, Public Opinion and Parties, as well as a chapter in the “Introduction to American Government” textbook. She has served as a reviewer for numerous scholarly journals and was on the editorial board of the law review at Adam Mickiewicz University in Poland. She speaks Polish, English, German, Farsi, and Russian.

Mikulska earned a Ph.D. in political science from the University of Houston, a master's degree in international relations from the University of Windsor in Canada, and a law degree from Adam Mickiewicz University.

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Anna Mikulska is a nonresident scholar in energy studies at the Baker Institute. She joined the institute's Center for Energy Studies following her two-year postdoctoral appointment at Rice University’s Local Elections in America Project. Anna's research interests center around European energy markets and energy policy. She has presented papers at numerous national and international conferences and co-authored articles in the European Journal of Political Research and the Journal of Elections, Public Opinion and Parties, as well as a chapter in the “Introduction to American Government” textbook. She has served as a reviewer for numerous scholarly journals and was on the editorial board of the law review at Adam Mickiewicz University in Poland. She speaks Polish, English, German, Farsi, and Russian.

Mikulska earned a Ph.D. in political science from the University of Houston, a master's degree in international relations from the University of Windsor in Canada, and a law degree from Adam Mickiewicz University.

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Anna Mikulska is a nonresident scholar in energy studies at the Baker Institute. She joined the institute's Center for Energy Studies following her two-year postdoctoral appointment at Rice University’s Local Elections in America Project. Anna's research interests center around European energy markets and energy policy. She has presented papers at numerous national and international conferences and co-authored articles in the European Journal of Political Research and the Journal of Elections, Public Opinion and Parties, as well as a chapter in the “Introduction to American Government” textbook. She has served as a reviewer for numerous scholarly journals and was on the editorial board of the law review at Adam Mickiewicz University in Poland. She speaks Polish, English, German, Farsi, and Russian.

Mikulska earned a Ph.D. in political science from the University of Houston, a master's degree in international relations from the University of Windsor in Canada, and a law degree from Adam Mickiewicz University.

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Anna Mikulska is a nonresident scholar in energy studies at the Baker Institute. She joined the institute's Center for Energy Studies following her two-year postdoctoral appointment at Rice University’s Local Elections in America Project. Anna's research interests center around European energy markets and energy policy. She has presented papers at numerous national and international conferences and co-authored articles in the European Journal of Political Research and the Journal of Elections, Public Opinion and Parties, as well as a chapter in the “Introduction to American Government” textbook. She has served as a reviewer for numerous scholarly journals and was on the editorial board of the law review at Adam Mickiewicz University in Poland. She speaks Polish, English, German, Farsi, and Russian.

Mikulska earned a Ph.D. in political science from the University of Houston, a master's degree in international relations from the University of Windsor in Canada, and a law degree from Adam Mickiewicz University.

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Technological advances in the area of natural gas liquefaction and hydraulic fracturing that unleashed the shale revolution in the United States have irrevocably changed the rules of the natural gas market. From a regional resource, natural gas is on the way to become a global commodity. The ongoing transformation has been particularly consequential but also distinctive for the Central and Eastern European region, where new market entrants have challenged Russian dominance.

Natural gas has been increasingly popular, especially in power generation. Compared to coal or fuel oil, natural gas is much cleaner—emitting considerably less carbon dioxide and local pollutants. This advantage is coupled with comparable, if not superior, performance and efficiency.

But in its gaseous, low-density form, natural gas is difficult and expensive to transport. Pipeline transportation has been a traditional go-to method to move the fuel. Given the prohibitively high cost of liquefaction, liquefied natural gas (LNG) has been used only where pipeline infrastructure could not be built. This resulted in markets that are regional in nature—established by long-term investment in pipeline infrastructure and followed by long-term contracts. In areas where one or few regional suppliers exist, this creates dependency, and the commodity then becomes subject to potential political risk and interference.

Over the last decade or so, however, two relatively recent developments have been markedly changing these natural gas market dynamics. First, natural gas liquefaction (LNG) technology advanced to become efficient and cheap enough to provide a viable alternative to piped gas. Second, new supplies of natural gas have been unlocked around the world, including in Qatar, Australia, and the U.S., where new horizontal drilling technology initiated the “shale revolution.” As a result LNG trade tripled over the last 17 years, rendering a more global, liquid, and deep gas market. In this market, there are many new points of supply and demand as well as an increasing share of trades that are either short-term or spot-based. In addition, the geopolitical value of the resource has diminished for traditionally dominant regional providers—potentially allowing more geopolitical sway to non-traditional gas suppliers such as the U.S. or Australia.

These trends challenge in particular the traditional dependency of Central and Eastern European (CEE) countries on Russian gas.

Following the fall of the Iron Curtain and having lost the ability to politically influence countries in the region directly, Russia has used its natural gas resources to achieve geopolitical ends and profited economically from its dominance. But the advent of a more fungible LNG market and the end of many long-term contracts with Russia (expiring in the early to mid-2020s), change the region’s bargaining position vis-à-vis Russia. And at least some CEE countries are ready to take advantage of this opportunity.

Poland and Lithuania have already made the first steps—building and operating new LNG import terminals. Additional terminals to support the CEE region are planned in Croatia, Estonia, and Greece. New long-term contracts have also been signed. Most recently, this included 20-year contracts that Poland’s PGNiG signed for 5.4 billion cubic feet (bcm) of natural gas to be delivered starting 2023. Importantly, the contracts are FOB (free on board) allowing PGNiG freedom when it comes to the gas destination after purchasing the contracted volumes. The company can either deliver those volumes to Poland or decide to sell it elsewhere, if Poland’s demand is not high enough to absorb it or if there is a cheaper source of gas that can be accessed at that time.

This arbitrage opportunity underlies a distinctive wrinkle in LNG trade in Europe. Considering higher costs associated with unconventional gas extraction, liquefaction, and transportation, LNG prices will likely be higher than conventional Russian gas transported via an existing and extensive network of pipelines. As such, LNG is unlikely to replace Russian gas. But it can diversify the supply, provide a price floor and balance the market. And, importantly, the ability to import and distribute LNG by countries in the CEE provides a “credible threat” to current Russian geopolitical and pricing practices. In that role, LNG offers greater energy security not only by diversifying the supply source but also by changing the nature of Russian gas deliveries—allowing CEE to take advantage of cheaper Russian gas on more competitive terms. 

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Technological advances in the area of natural gas liquefaction and hydraulic fracturing that unleashed the shale revolution in the United States have irrevocably changed the rules of the natural gas market. From a regional resource, natural gas is on the way to become a global commodity. The ongoing transformation has been particularly consequential but also distinctive for the Central and Eastern European region, where new market entrants have challenged Russian dominance.

Natural gas has been increasingly popular, especially in power generation. Compared to coal or fuel oil, natural gas is much cleaner—emitting considerably less carbon dioxide and local pollutants. This advantage is coupled with comparable, if not superior, performance and efficiency.

But in its gaseous, low-density form, natural gas is difficult and expensive to transport. Pipeline transportation has been a traditional go-to method to move the fuel. Given the prohibitively high cost of liquefaction, liquefied natural gas (LNG) has been used only where pipeline infrastructure could not be built. This resulted in markets that are regional in nature—established by long-term investment in pipeline infrastructure and followed by long-term contracts. In areas where one or few regional suppliers exist, this creates dependency, and the commodity then becomes subject to potential political risk and interference.

Over the last decade or so, however, two relatively recent developments have been markedly changing these natural gas market dynamics. First, natural gas liquefaction (LNG) technology advanced to become efficient and cheap enough to provide a viable alternative to piped gas. Second, new supplies of natural gas have been unlocked around the world, including in Qatar, Australia, and the U.S., where new horizontal drilling technology initiated the “shale revolution.” As a result LNG trade tripled over the last 17 years, rendering a more global, liquid, and deep gas market. In this market, there are many new points of supply and demand as well as an increasing share of trades that are either short-term or spot-based. In addition, the geopolitical value of the resource has diminished for traditionally dominant regional providers—potentially allowing more geopolitical sway to non-traditional gas suppliers such as the U.S. or Australia.

These trends challenge in particular the traditional dependency of Central and Eastern European (CEE) countries on Russian gas.

Following the fall of the Iron Curtain and having lost the ability to politically influence countries in the region directly, Russia has used its natural gas resources to achieve geopolitical ends and profited economically from its dominance. But the advent of a more fungible LNG market and the end of many long-term contracts with Russia (expiring in the early to mid-2020s), change the region’s bargaining position vis-à-vis Russia. And at least some CEE countries are ready to take advantage of this opportunity.

Poland and Lithuania have already made the first steps—building and operating new LNG import terminals. Additional terminals to support the CEE region are planned in Croatia, Estonia, and Greece. New long-term contracts have also been signed. Most recently, this included 20-year contracts that Poland’s PGNiG signed for 5.4 billion cubic feet (bcm) of natural gas to be delivered starting 2023. Importantly, the contracts are FOB (free on board) allowing PGNiG freedom when it comes to the gas destination after purchasing the contracted volumes. The company can either deliver those volumes to Poland or decide to sell it elsewhere, if Poland’s demand is not high enough to absorb it or if there is a cheaper source of gas that can be accessed at that time.

This arbitrage opportunity underlies a distinctive wrinkle in LNG trade in Europe. Considering higher costs associated with unconventional gas extraction, liquefaction, and transportation, LNG prices will likely be higher than conventional Russian gas transported via an existing and extensive network of pipelines. As such, LNG is unlikely to replace Russian gas. But it can diversify the supply, provide a price floor and balance the market. And, importantly, the ability to import and distribute LNG by countries in the CEE provides a “credible threat” to current Russian geopolitical and pricing practices. In that role, LNG offers greater energy security not only by diversifying the supply source but also by changing the nature of Russian gas deliveries—allowing CEE to take advantage of cheaper Russian gas on more competitive terms. 

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Anna Mikulska is a nonresident scholar in energy studies at the Baker Institute. She joined the institute's Center for Energy Studies following her two-year postdoctoral appointment at Rice University’s Local Elections in America Project. Anna's research interests center around European energy markets and energy policy. She has presented papers at numerous national and international conferences and co-authored articles in the European Journal of Political Research and the Journal of Elections, Public Opinion and Parties, as well as a chapter in the “Introduction to American Government” textbook. She has served as a reviewer for numerous scholarly journals and was on the editorial board of the law review at Adam Mickiewicz University in Poland. She speaks Polish, English, German, Farsi, and Russian.

Mikulska earned a Ph.D. in political science from the University of Houston, a master's degree in international relations from the University of Windsor in Canada, and a law degree from Adam Mickiewicz University.

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Anna Mikulska is a nonresident scholar in energy studies at the Baker Institute. She joined the institute's Center for Energy Studies following her two-year postdoctoral appointment at Rice University’s Local Elections in America Project. Anna's research interests center around European energy markets and energy policy. She has presented papers at numerous national and international conferences and co-authored articles in the European Journal of Political Research and the Journal of Elections, Public Opinion and Parties, as well as a chapter in the “Introduction to American Government” textbook. She has served as a reviewer for numerous scholarly journals and was on the editorial board of the law review at Adam Mickiewicz University in Poland. She speaks Polish, English, German, Farsi, and Russian.

Mikulska earned a Ph.D. in political science from the University of Houston, a master's degree in international relations from the University of Windsor in Canada, and a law degree from Adam Mickiewicz University.

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is a senior fellow at the Kleinman Center for Energy Policy and a non-resident fellow with the Center for Energy Studies at Rice University's Baker Institute for Public Policy.

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is a senior fellow at the Kleinman Center for Energy Policy and a non-resident fellow with the Center for Energy Studies at Rice University's Baker Institute for Public Policy.

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LNG won't dominate conventional gas any time soon, but it is a major force in building energy security.

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LNG won't dominate conventional gas any time soon, but it is a major force in building energy security.

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In 2016 the first shipment of U.S. liquefied natural gas left by tanker from a terminal on the Gulf coast.  In the year since, U.S. LNG has made its way to customers around the globe, increasing competition in the gas market and threatening to loosen the grip of some suppliers on captive markets.

Guest Anna Mikulska, Senior Fellow at the Kleinman Center for Energy Policy, talks about the globalization of the natural gas market, the competitiveness of U.S. exports and their implications for relationships abroad.

 

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In 2016 the first shipment of U.S. liquefied natural gas left by tanker from a terminal on the Gulf coast.  In the year since, U.S. LNG has made its way to customers around the globe, increasing competition in the gas market and threatening to loosen the grip of some suppliers on captive markets.

Guest Anna Mikulska, Senior Fellow at the Kleinman Center for Energy Policy, talks about the globalization of the natural gas market, the competitiveness of U.S. exports and their implications for relationships abroad.

 

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U.S. natural gas exports are helping to globalize the gas market, putting traditional buyer-seller relationships to the test and raising the possibility of far-reaching geopolitical consequences.

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U.S. natural gas exports are helping to globalize the gas market, putting traditional buyer-seller relationships to the test and raising the possibility of far-reaching geopolitical consequences.

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In October 2012 in Portovaya Bay, Russia, a gathering of heads of state and top industry leaders from Russia, Germany, France, and the Netherlands celebrated the commissioning of the second string of Nord Stream 1. Approximately three years later, a shareholder agreement was signed between Gazprom and Western European firms: E.ON, BASF/Wintershall, OMV, Engie, and Royal Dutch Shell to form a new consortium that would execute the plan and complete Nord Stream 2 (NS2) by the end of 2019. Once completed, NS2 would allow Gazprom to sharply reduce—if not eliminate completely—Ukrainian transit where disagreements had resulted in multiple shutoffs of Russian gas flows to Europe.

Following successful completion of the first two strings of the Nord Stream pipeline, it is unlikely that those in attendance at either event anticipated the difficult work ahead of them. Nord Stream 2 (NS2) would become arguably one of the most divisive and contested projects in European natural gas infrastructure.

The project has been subject to deep disagreements, particularly between the countries of Western Europe and their Central and Eastern European (CEE) counterparts. As I have written here before, both sides display dramatically different views of NS2. The West shares Gazprom’s official perspective that underscores unreliability of Ukrainian transit. On the other hand, CEE countries argue that the company is an instrument of the Russian state and would use the new pipeline to perpetuate Russian gas domination and potential influence, especially in CEE. According to this perspective, the new delivery route could also discourage investment in other infrastructure projects in CEE and/or Europe that otherwise would be pursued and provide greater diversification of natural gas supply and energy security.

As often happens, there are merits to the positions of both sides.

To begin, Western utilities have worked with Gazprom for decades, even during the Cold War. The relationship has been based on market rather than political considerations. This resulted in strong commercial ties and a level of trust between the companies that influences their support for NS2 and informs their governments’ positions. On the other hand, the CEE experience has been diametrically different, with Gazprom often using CEE’s heavy dependence on its gas to further Russia’s political goals. Thus, it should not come as a surprise that a new pipeline promising to expand Russian natural gas delivery to Europe has ruffled feathers and raised serious concerns.

The two EU sides are adamant about their positions, engaging in lobbying activities to further their interests. But both sides seem also to be unwilling to consider the basis of each other’s arguments. The West is too fast in dismissing CEE concerns, unwilling to look deeper into the issues and use of Russian gas supplies to further Russia’s influence in that region. At the same time, CEE countries have not fully acknowledged that the increasing liquidity and depth of the global natural gas market combined with ongoing infrastructure additions in the region are likely to prevent the type of influence Gazprom was able to yield in the past.

In effect, parties are talking past each other. The disagreement has created a rift that runs directly against the common interest of both groups, weakening the EU and creating the possibility that the conflict could spill into other areas in a tit-for-tat fashion. This should give a pause to all EU members. EU's strength is in its unity and this particularly related to the power to withstand any type of political or economic pressure from outside forces.

NS2 has unearthed important issues that divide the “old and new Europe” but should become an opportunity to “work out” the differences and increase understanding between the member states. Instead it has become a political lightning rod that can significantly weaken the EU. If the latter is Russia's goal then NS2 does not need to ever be completed for Russia to "divide and conquer."

On the other hand, if EU members can build understanding—recognizing their different experiences with Russian gas delivery—they could design energy strategies that promote true diversification and security. Whether the pipeline is built or not, the continent could take better advantage of the deepening global natural gas market and make it less vulnerable to pressure from any one supplier, including Russia.

[summary] => [format] => full_html [safe_value] =>

In October 2012 in Portovaya Bay, Russia, a gathering of heads of state and top industry leaders from Russia, Germany, France, and the Netherlands celebrated the commissioning of the second string of Nord Stream 1. Approximately three years later, a shareholder agreement was signed between Gazprom and Western European firms: E.ON, BASF/Wintershall, OMV, Engie, and Royal Dutch Shell to form a new consortium that would execute the plan and complete Nord Stream 2 (NS2) by the end of 2019. Once completed, NS2 would allow Gazprom to sharply reduce—if not eliminate completely—Ukrainian transit where disagreements had resulted in multiple shutoffs of Russian gas flows to Europe.

Following successful completion of the first two strings of the Nord Stream pipeline, it is unlikely that those in attendance at either event anticipated the difficult work ahead of them. Nord Stream 2 (NS2) would become arguably one of the most divisive and contested projects in European natural gas infrastructure.

The project has been subject to deep disagreements, particularly between the countries of Western Europe and their Central and Eastern European (CEE) counterparts. As I have written here before, both sides display dramatically different views of NS2. The West shares Gazprom’s official perspective that underscores unreliability of Ukrainian transit. On the other hand, CEE countries argue that the company is an instrument of the Russian state and would use the new pipeline to perpetuate Russian gas domination and potential influence, especially in CEE. According to this perspective, the new delivery route could also discourage investment in other infrastructure projects in CEE and/or Europe that otherwise would be pursued and provide greater diversification of natural gas supply and energy security.

As often happens, there are merits to the positions of both sides.

To begin, Western utilities have worked with Gazprom for decades, even during the Cold War. The relationship has been based on market rather than political considerations. This resulted in strong commercial ties and a level of trust between the companies that influences their support for NS2 and informs their governments’ positions. On the other hand, the CEE experience has been diametrically different, with Gazprom often using CEE’s heavy dependence on its gas to further Russia’s political goals. Thus, it should not come as a surprise that a new pipeline promising to expand Russian natural gas delivery to Europe has ruffled feathers and raised serious concerns.

The two EU sides are adamant about their positions, engaging in lobbying activities to further their interests. But both sides seem also to be unwilling to consider the basis of each other’s arguments. The West is too fast in dismissing CEE concerns, unwilling to look deeper into the issues and use of Russian gas supplies to further Russia’s influence in that region. At the same time, CEE countries have not fully acknowledged that the increasing liquidity and depth of the global natural gas market combined with ongoing infrastructure additions in the region are likely to prevent the type of influence Gazprom was able to yield in the past.

In effect, parties are talking past each other. The disagreement has created a rift that runs directly against the common interest of both groups, weakening the EU and creating the possibility that the conflict could spill into other areas in a tit-for-tat fashion. This should give a pause to all EU members. EU's strength is in its unity and this particularly related to the power to withstand any type of political or economic pressure from outside forces.

NS2 has unearthed important issues that divide the “old and new Europe” but should become an opportunity to “work out” the differences and increase understanding between the member states. Instead it has become a political lightning rod that can significantly weaken the EU. If the latter is Russia's goal then NS2 does not need to ever be completed for Russia to "divide and conquer."

On the other hand, if EU members can build understanding—recognizing their different experiences with Russian gas delivery—they could design energy strategies that promote true diversification and security. Whether the pipeline is built or not, the continent could take better advantage of the deepening global natural gas market and make it less vulnerable to pressure from any one supplier, including Russia.

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Nord Stream 2 unearthed important issues that divide “old and new Europe.” While it could become an opportunity to “work out” the differences, it has become a political lightning rod that can significantly weaken the EU.

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Nord Stream 2 unearthed important issues that divide “old and new Europe.” While it could become an opportunity to “work out” the differences, it has become a political lightning rod that can significantly weaken the EU.

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Technological advances in the area of natural gas liquefaction and hydraulic fracturing that unleashed the shale revolution in the United States have irrevocably changed the rules of the natural gas market. From a regional resource, natural gas is on the way to become a global commodity. The ongoing transformation has been particularly consequential but also distinctive for the Central and Eastern European region, where new market entrants have challenged Russian dominance.

Natural gas has been increasingly popular, especially in power generation. Compared to coal or fuel oil, natural gas is much cleaner—emitting considerably less carbon dioxide and local pollutants. This advantage is coupled with comparable, if not superior, performance and efficiency.

But in its gaseous, low-density form, natural gas is difficult and expensive to transport. Pipeline transportation has been a traditional go-to method to move the fuel. Given the prohibitively high cost of liquefaction, liquefied natural gas (LNG) has been used only where pipeline infrastructure could not be built. This resulted in markets that are regional in nature—established by long-term investment in pipeline infrastructure and followed by long-term contracts. In areas where one or few regional suppliers exist, this creates dependency, and the commodity then becomes subject to potential political risk and interference.

Over the last decade or so, however, two relatively recent developments have been markedly changing these natural gas market dynamics. First, natural gas liquefaction (LNG) technology advanced to become efficient and cheap enough to provide a viable alternative to piped gas. Second, new supplies of natural gas have been unlocked around the world, including in Qatar, Australia, and the U.S., where new horizontal drilling technology initiated the “shale revolution.” As a result LNG trade tripled over the last 17 years, rendering a more global, liquid, and deep gas market. In this market, there are many new points of supply and demand as well as an increasing share of trades that are either short-term or spot-based. In addition, the geopolitical value of the resource has diminished for traditionally dominant regional providers—potentially allowing more geopolitical sway to non-traditional gas suppliers such as the U.S. or Australia.

These trends challenge in particular the traditional dependency of Central and Eastern European (CEE) countries on Russian gas.

Following the fall of the Iron Curtain and having lost the ability to politically influence countries in the region directly, Russia has used its natural gas resources to achieve geopolitical ends and profited economically from its dominance. But the advent of a more fungible LNG market and the end of many long-term contracts with Russia (expiring in the early to mid-2020s), change the region’s bargaining position vis-à-vis Russia. And at least some CEE countries are ready to take advantage of this opportunity.

Poland and Lithuania have already made the first steps—building and operating new LNG import terminals. Additional terminals to support the CEE region are planned in Croatia, Estonia, and Greece. New long-term contracts have also been signed. Most recently, this included 20-year contracts that Poland’s PGNiG signed for 5.4 billion cubic feet (bcm) of natural gas to be delivered starting 2023. Importantly, the contracts are FOB (free on board) allowing PGNiG freedom when it comes to the gas destination after purchasing the contracted volumes. The company can either deliver those volumes to Poland or decide to sell it elsewhere, if Poland’s demand is not high enough to absorb it or if there is a cheaper source of gas that can be accessed at that time.

This arbitrage opportunity underlies a distinctive wrinkle in LNG trade in Europe. Considering higher costs associated with unconventional gas extraction, liquefaction, and transportation, LNG prices will likely be higher than conventional Russian gas transported via an existing and extensive network of pipelines. As such, LNG is unlikely to replace Russian gas. But it can diversify the supply, provide a price floor and balance the market. And, importantly, the ability to import and distribute LNG by countries in the CEE provides a “credible threat” to current Russian geopolitical and pricing practices. In that role, LNG offers greater energy security not only by diversifying the supply source but also by changing the nature of Russian gas deliveries—allowing CEE to take advantage of cheaper Russian gas on more competitive terms. 

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Technological advances in the area of natural gas liquefaction and hydraulic fracturing that unleashed the shale revolution in the United States have irrevocably changed the rules of the natural gas market. From a regional resource, natural gas is on the way to become a global commodity. The ongoing transformation has been particularly consequential but also distinctive for the Central and Eastern European region, where new market entrants have challenged Russian dominance.

Natural gas has been increasingly popular, especially in power generation. Compared to coal or fuel oil, natural gas is much cleaner—emitting considerably less carbon dioxide and local pollutants. This advantage is coupled with comparable, if not superior, performance and efficiency.

But in its gaseous, low-density form, natural gas is difficult and expensive to transport. Pipeline transportation has been a traditional go-to method to move the fuel. Given the prohibitively high cost of liquefaction, liquefied natural gas (LNG) has been used only where pipeline infrastructure could not be built. This resulted in markets that are regional in nature—established by long-term investment in pipeline infrastructure and followed by long-term contracts. In areas where one or few regional suppliers exist, this creates dependency, and the commodity then becomes subject to potential political risk and interference.

Over the last decade or so, however, two relatively recent developments have been markedly changing these natural gas market dynamics. First, natural gas liquefaction (LNG) technology advanced to become efficient and cheap enough to provide a viable alternative to piped gas. Second, new supplies of natural gas have been unlocked around the world, including in Qatar, Australia, and the U.S., where new horizontal drilling technology initiated the “shale revolution.” As a result LNG trade tripled over the last 17 years, rendering a more global, liquid, and deep gas market. In this market, there are many new points of supply and demand as well as an increasing share of trades that are either short-term or spot-based. In addition, the geopolitical value of the resource has diminished for traditionally dominant regional providers—potentially allowing more geopolitical sway to non-traditional gas suppliers such as the U.S. or Australia.

These trends challenge in particular the traditional dependency of Central and Eastern European (CEE) countries on Russian gas.

Following the fall of the Iron Curtain and having lost the ability to politically influence countries in the region directly, Russia has used its natural gas resources to achieve geopolitical ends and profited economically from its dominance. But the advent of a more fungible LNG market and the end of many long-term contracts with Russia (expiring in the early to mid-2020s), change the region’s bargaining position vis-à-vis Russia. And at least some CEE countries are ready to take advantage of this opportunity.

Poland and Lithuania have already made the first steps—building and operating new LNG import terminals. Additional terminals to support the CEE region are planned in Croatia, Estonia, and Greece. New long-term contracts have also been signed. Most recently, this included 20-year contracts that Poland’s PGNiG signed for 5.4 billion cubic feet (bcm) of natural gas to be delivered starting 2023. Importantly, the contracts are FOB (free on board) allowing PGNiG freedom when it comes to the gas destination after purchasing the contracted volumes. The company can either deliver those volumes to Poland or decide to sell it elsewhere, if Poland’s demand is not high enough to absorb it or if there is a cheaper source of gas that can be accessed at that time.

This arbitrage opportunity underlies a distinctive wrinkle in LNG trade in Europe. Considering higher costs associated with unconventional gas extraction, liquefaction, and transportation, LNG prices will likely be higher than conventional Russian gas transported via an existing and extensive network of pipelines. As such, LNG is unlikely to replace Russian gas. But it can diversify the supply, provide a price floor and balance the market. And, importantly, the ability to import and distribute LNG by countries in the CEE provides a “credible threat” to current Russian geopolitical and pricing practices. In that role, LNG offers greater energy security not only by diversifying the supply source but also by changing the nature of Russian gas deliveries—allowing CEE to take advantage of cheaper Russian gas on more competitive terms. 

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Anna Mikulska is a nonresident scholar in energy studies at the Baker Institute. She joined the institute's Center for Energy Studies following her two-year postdoctoral appointment at Rice University’s Local Elections in America Project. Anna's research interests center around European energy markets and energy policy. She has presented papers at numerous national and international conferences and co-authored articles in the European Journal of Political Research and the Journal of Elections, Public Opinion and Parties, as well as a chapter in the “Introduction to American Government” textbook. She has served as a reviewer for numerous scholarly journals and was on the editorial board of the law review at Adam Mickiewicz University in Poland. She speaks Polish, English, German, Farsi, and Russian.

Mikulska earned a Ph.D. in political science from the University of Houston, a master's degree in international relations from the University of Windsor in Canada, and a law degree from Adam Mickiewicz University.

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Anna Mikulska is a nonresident scholar in energy studies at the Baker Institute. She joined the institute's Center for Energy Studies following her two-year postdoctoral appointment at Rice University’s Local Elections in America Project. Anna's research interests center around European energy markets and energy policy. She has presented papers at numerous national and international conferences and co-authored articles in the European Journal of Political Research and the Journal of Elections, Public Opinion and Parties, as well as a chapter in the “Introduction to American Government” textbook. She has served as a reviewer for numerous scholarly journals and was on the editorial board of the law review at Adam Mickiewicz University in Poland. She speaks Polish, English, German, Farsi, and Russian.

Mikulska earned a Ph.D. in political science from the University of Houston, a master's degree in international relations from the University of Windsor in Canada, and a law degree from Adam Mickiewicz University.

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is a senior fellow at the Kleinman Center for Energy Policy and a non-resident fellow with the Center for Energy Studies at Rice University's Baker Institute for Public Policy.

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is a senior fellow at the Kleinman Center for Energy Policy and a non-resident fellow with the Center for Energy Studies at Rice University's Baker Institute for Public Policy.

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LNG won't dominate conventional gas any time soon, but it is a major force in building energy security.

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LNG won't dominate conventional gas any time soon, but it is a major force in building energy security.

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In 2016 the first shipment of U.S. liquefied natural gas left by tanker from a terminal on the Gulf coast.  In the year since, U.S. LNG has made its way to customers around the globe, increasing competition in the gas market and threatening to loosen the grip of some suppliers on captive markets.

Guest Anna Mikulska, Senior Fellow at the Kleinman Center for Energy Policy, talks about the globalization of the natural gas market, the competitiveness of U.S. exports and their implications for relationships abroad.

 

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In 2016 the first shipment of U.S. liquefied natural gas left by tanker from a terminal on the Gulf coast.  In the year since, U.S. LNG has made its way to customers around the globe, increasing competition in the gas market and threatening to loosen the grip of some suppliers on captive markets.

Guest Anna Mikulska, Senior Fellow at the Kleinman Center for Energy Policy, talks about the globalization of the natural gas market, the competitiveness of U.S. exports and their implications for relationships abroad.

 

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U.S. natural gas exports are helping to globalize the gas market, putting traditional buyer-seller relationships to the test and raising the possibility of far-reaching geopolitical consequences.

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U.S. natural gas exports are helping to globalize the gas market, putting traditional buyer-seller relationships to the test and raising the possibility of far-reaching geopolitical consequences.

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In October 2012 in Portovaya Bay, Russia, a gathering of heads of state and top industry leaders from Russia, Germany, France, and the Netherlands celebrated the commissioning of the second string of Nord Stream 1. Approximately three years later, a shareholder agreement was signed between Gazprom and Western European firms: E.ON, BASF/Wintershall, OMV, Engie, and Royal Dutch Shell to form a new consortium that would execute the plan and complete Nord Stream 2 (NS2) by the end of 2019. Once completed, NS2 would allow Gazprom to sharply reduce—if not eliminate completely—Ukrainian transit where disagreements had resulted in multiple shutoffs of Russian gas flows to Europe.

Following successful completion of the first two strings of the Nord Stream pipeline, it is unlikely that those in attendance at either event anticipated the difficult work ahead of them. Nord Stream 2 (NS2) would become arguably one of the most divisive and contested projects in European natural gas infrastructure.

The project has been subject to deep disagreements, particularly between the countries of Western Europe and their Central and Eastern European (CEE) counterparts. As I have written here before, both sides display dramatically different views of NS2. The West shares Gazprom’s official perspective that underscores unreliability of Ukrainian transit. On the other hand, CEE countries argue that the company is an instrument of the Russian state and would use the new pipeline to perpetuate Russian gas domination and potential influence, especially in CEE. According to this perspective, the new delivery route could also discourage investment in other infrastructure projects in CEE and/or Europe that otherwise would be pursued and provide greater diversification of natural gas supply and energy security.

As often happens, there are merits to the positions of both sides.

To begin, Western utilities have worked with Gazprom for decades, even during the Cold War. The relationship has been based on market rather than political considerations. This resulted in strong commercial ties and a level of trust between the companies that influences their support for NS2 and informs their governments’ positions. On the other hand, the CEE experience has been diametrically different, with Gazprom often using CEE’s heavy dependence on its gas to further Russia’s political goals. Thus, it should not come as a surprise that a new pipeline promising to expand Russian natural gas delivery to Europe has ruffled feathers and raised serious concerns.

The two EU sides are adamant about their positions, engaging in lobbying activities to further their interests. But both sides seem also to be unwilling to consider the basis of each other’s arguments. The West is too fast in dismissing CEE concerns, unwilling to look deeper into the issues and use of Russian gas supplies to further Russia’s influence in that region. At the same time, CEE countries have not fully acknowledged that the increasing liquidity and depth of the global natural gas market combined with ongoing infrastructure additions in the region are likely to prevent the type of influence Gazprom was able to yield in the past.

In effect, parties are talking past each other. The disagreement has created a rift that runs directly against the common interest of both groups, weakening the EU and creating the possibility that the conflict could spill into other areas in a tit-for-tat fashion. This should give a pause to all EU members. EU's strength is in its unity and this particularly related to the power to withstand any type of political or economic pressure from outside forces.

NS2 has unearthed important issues that divide the “old and new Europe” but should become an opportunity to “work out” the differences and increase understanding between the member states. Instead it has become a political lightning rod that can significantly weaken the EU. If the latter is Russia's goal then NS2 does not need to ever be completed for Russia to "divide and conquer."

On the other hand, if EU members can build understanding—recognizing their different experiences with Russian gas delivery—they could design energy strategies that promote true diversification and security. Whether the pipeline is built or not, the continent could take better advantage of the deepening global natural gas market and make it less vulnerable to pressure from any one supplier, including Russia.

[summary] => [format] => full_html [safe_value] =>

In October 2012 in Portovaya Bay, Russia, a gathering of heads of state and top industry leaders from Russia, Germany, France, and the Netherlands celebrated the commissioning of the second string of Nord Stream 1. Approximately three years later, a shareholder agreement was signed between Gazprom and Western European firms: E.ON, BASF/Wintershall, OMV, Engie, and Royal Dutch Shell to form a new consortium that would execute the plan and complete Nord Stream 2 (NS2) by the end of 2019. Once completed, NS2 would allow Gazprom to sharply reduce—if not eliminate completely—Ukrainian transit where disagreements had resulted in multiple shutoffs of Russian gas flows to Europe.

Following successful completion of the first two strings of the Nord Stream pipeline, it is unlikely that those in attendance at either event anticipated the difficult work ahead of them. Nord Stream 2 (NS2) would become arguably one of the most divisive and contested projects in European natural gas infrastructure.

The project has been subject to deep disagreements, particularly between the countries of Western Europe and their Central and Eastern European (CEE) counterparts. As I have written here before, both sides display dramatically different views of NS2. The West shares Gazprom’s official perspective that underscores unreliability of Ukrainian transit. On the other hand, CEE countries argue that the company is an instrument of the Russian state and would use the new pipeline to perpetuate Russian gas domination and potential influence, especially in CEE. According to this perspective, the new delivery route could also discourage investment in other infrastructure projects in CEE and/or Europe that otherwise would be pursued and provide greater diversification of natural gas supply and energy security.

As often happens, there are merits to the positions of both sides.

To begin, Western utilities have worked with Gazprom for decades, even during the Cold War. The relationship has been based on market rather than political considerations. This resulted in strong commercial ties and a level of trust between the companies that influences their support for NS2 and informs their governments’ positions. On the other hand, the CEE experience has been diametrically different, with Gazprom often using CEE’s heavy dependence on its gas to further Russia’s political goals. Thus, it should not come as a surprise that a new pipeline promising to expand Russian natural gas delivery to Europe has ruffled feathers and raised serious concerns.

The two EU sides are adamant about their positions, engaging in lobbying activities to further their interests. But both sides seem also to be unwilling to consider the basis of each other’s arguments. The West is too fast in dismissing CEE concerns, unwilling to look deeper into the issues and use of Russian gas supplies to further Russia’s influence in that region. At the same time, CEE countries have not fully acknowledged that the increasing liquidity and depth of the global natural gas market combined with ongoing infrastructure additions in the region are likely to prevent the type of influence Gazprom was able to yield in the past.

In effect, parties are talking past each other. The disagreement has created a rift that runs directly against the common interest of both groups, weakening the EU and creating the possibility that the conflict could spill into other areas in a tit-for-tat fashion. This should give a pause to all EU members. EU's strength is in its unity and this particularly related to the power to withstand any type of political or economic pressure from outside forces.

NS2 has unearthed important issues that divide the “old and new Europe” but should become an opportunity to “work out” the differences and increase understanding between the member states. Instead it has become a political lightning rod that can significantly weaken the EU. If the latter is Russia's goal then NS2 does not need to ever be completed for Russia to "divide and conquer."

On the other hand, if EU members can build understanding—recognizing their different experiences with Russian gas delivery—they could design energy strategies that promote true diversification and security. Whether the pipeline is built or not, the continent could take better advantage of the deepening global natural gas market and make it less vulnerable to pressure from any one supplier, including Russia.

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Nord Stream 2 unearthed important issues that divide “old and new Europe.” While it could become an opportunity to “work out” the differences, it has become a political lightning rod that can significantly weaken the EU.

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Nord Stream 2 unearthed important issues that divide “old and new Europe.” While it could become an opportunity to “work out” the differences, it has become a political lightning rod that can significantly weaken the EU.

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Technological advances in the area of natural gas liquefaction and hydraulic fracturing that unleashed the shale revolution in the United States have irrevocably changed the rules of the natural gas market. From a regional resource, natural gas is on the way to become a global commodity. The ongoing transformation has been particularly consequential but also distinctive for the Central and Eastern European region, where new market entrants have challenged Russian dominance.

Natural gas has been increasingly popular, especially in power generation. Compared to coal or fuel oil, natural gas is much cleaner—emitting considerably less carbon dioxide and local pollutants. This advantage is coupled with comparable, if not superior, performance and efficiency.

But in its gaseous, low-density form, natural gas is difficult and expensive to transport. Pipeline transportation has been a traditional go-to method to move the fuel. Given the prohibitively high cost of liquefaction, liquefied natural gas (LNG) has been used only where pipeline infrastructure could not be built. This resulted in markets that are regional in nature—established by long-term investment in pipeline infrastructure and followed by long-term contracts. In areas where one or few regional suppliers exist, this creates dependency, and the commodity then becomes subject to potential political risk and interference.

Over the last decade or so, however, two relatively recent developments have been markedly changing these natural gas market dynamics. First, natural gas liquefaction (LNG) technology advanced to become efficient and cheap enough to provide a viable alternative to piped gas. Second, new supplies of natural gas have been unlocked around the world, including in Qatar, Australia, and the U.S., where new horizontal drilling technology initiated the “shale revolution.” As a result LNG trade tripled over the last 17 years, rendering a more global, liquid, and deep gas market. In this market, there are many new points of supply and demand as well as an increasing share of trades that are either short-term or spot-based. In addition, the geopolitical value of the resource has diminished for traditionally dominant regional providers—potentially allowing more geopolitical sway to non-traditional gas suppliers such as the U.S. or Australia.

These trends challenge in particular the traditional dependency of Central and Eastern European (CEE) countries on Russian gas.

Following the fall of the Iron Curtain and having lost the ability to politically influence countries in the region directly, Russia has used its natural gas resources to achieve geopolitical ends and profited economically from its dominance. But the advent of a more fungible LNG market and the end of many long-term contracts with Russia (expiring in the early to mid-2020s), change the region’s bargaining position vis-à-vis Russia. And at least some CEE countries are ready to take advantage of this opportunity.

Poland and Lithuania have already made the first steps—building and operating new LNG import terminals. Additional terminals to support the CEE region are planned in Croatia, Estonia, and Greece. New long-term contracts have also been signed. Most recently, this included 20-year contracts that Poland’s PGNiG signed for 5.4 billion cubic feet (bcm) of natural gas to be delivered starting 2023. Importantly, the contracts are FOB (free on board) allowing PGNiG freedom when it comes to the gas destination after purchasing the contracted volumes. The company can either deliver those volumes to Poland or decide to sell it elsewhere, if Poland’s demand is not high enough to absorb it or if there is a cheaper source of gas that can be accessed at that time.

This arbitrage opportunity underlies a distinctive wrinkle in LNG trade in Europe. Considering higher costs associated with unconventional gas extraction, liquefaction, and transportation, LNG prices will likely be higher than conventional Russian gas transported via an existing and extensive network of pipelines. As such, LNG is unlikely to replace Russian gas. But it can diversify the supply, provide a price floor and balance the market. And, importantly, the ability to import and distribute LNG by countries in the CEE provides a “credible threat” to current Russian geopolitical and pricing practices. In that role, LNG offers greater energy security not only by diversifying the supply source but also by changing the nature of Russian gas deliveries—allowing CEE to take advantage of cheaper Russian gas on more competitive terms. 

[summary] => [format] => full_html [safe_value] =>

Technological advances in the area of natural gas liquefaction and hydraulic fracturing that unleashed the shale revolution in the United States have irrevocably changed the rules of the natural gas market. From a regional resource, natural gas is on the way to become a global commodity. The ongoing transformation has been particularly consequential but also distinctive for the Central and Eastern European region, where new market entrants have challenged Russian dominance.

Natural gas has been increasingly popular, especially in power generation. Compared to coal or fuel oil, natural gas is much cleaner—emitting considerably less carbon dioxide and local pollutants. This advantage is coupled with comparable, if not superior, performance and efficiency.

But in its gaseous, low-density form, natural gas is difficult and expensive to transport. Pipeline transportation has been a traditional go-to method to move the fuel. Given the prohibitively high cost of liquefaction, liquefied natural gas (LNG) has been used only where pipeline infrastructure could not be built. This resulted in markets that are regional in nature—established by long-term investment in pipeline infrastructure and followed by long-term contracts. In areas where one or few regional suppliers exist, this creates dependency, and the commodity then becomes subject to potential political risk and interference.

Over the last decade or so, however, two relatively recent developments have been markedly changing these natural gas market dynamics. First, natural gas liquefaction (LNG) technology advanced to become efficient and cheap enough to provide a viable alternative to piped gas. Second, new supplies of natural gas have been unlocked around the world, including in Qatar, Australia, and the U.S., where new horizontal drilling technology initiated the “shale revolution.” As a result LNG trade tripled over the last 17 years, rendering a more global, liquid, and deep gas market. In this market, there are many new points of supply and demand as well as an increasing share of trades that are either short-term or spot-based. In addition, the geopolitical value of the resource has diminished for traditionally dominant regional providers—potentially allowing more geopolitical sway to non-traditional gas suppliers such as the U.S. or Australia.

These trends challenge in particular the traditional dependency of Central and Eastern European (CEE) countries on Russian gas.

Following the fall of the Iron Curtain and having lost the ability to politically influence countries in the region directly, Russia has used its natural gas resources to achieve geopolitical ends and profited economically from its dominance. But the advent of a more fungible LNG market and the end of many long-term contracts with Russia (expiring in the early to mid-2020s), change the region’s bargaining position vis-à-vis Russia. And at least some CEE countries are ready to take advantage of this opportunity.

Poland and Lithuania have already made the first steps—building and operating new LNG import terminals. Additional terminals to support the CEE region are planned in Croatia, Estonia, and Greece. New long-term contracts have also been signed. Most recently, this included 20-year contracts that Poland’s PGNiG signed for 5.4 billion cubic feet (bcm) of natural gas to be delivered starting 2023. Importantly, the contracts are FOB (free on board) allowing PGNiG freedom when it comes to the gas destination after purchasing the contracted volumes. The company can either deliver those volumes to Poland or decide to sell it elsewhere, if Poland’s demand is not high enough to absorb it or if there is a cheaper source of gas that can be accessed at that time.

This arbitrage opportunity underlies a distinctive wrinkle in LNG trade in Europe. Considering higher costs associated with unconventional gas extraction, liquefaction, and transportation, LNG prices will likely be higher than conventional Russian gas transported via an existing and extensive network of pipelines. As such, LNG is unlikely to replace Russian gas. But it can diversify the supply, provide a price floor and balance the market. And, importantly, the ability to import and distribute LNG by countries in the CEE provides a “credible threat” to current Russian geopolitical and pricing practices. In that role, LNG offers greater energy security not only by diversifying the supply source but also by changing the nature of Russian gas deliveries—allowing CEE to take advantage of cheaper Russian gas on more competitive terms. 

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Anna Mikulska is a nonresident scholar in energy studies at the Baker Institute. She joined the institute's Center for Energy Studies following her two-year postdoctoral appointment at Rice University’s Local Elections in America Project. Anna's research interests center around European energy markets and energy policy. She has presented papers at numerous national and international conferences and co-authored articles in the European Journal of Political Research and the Journal of Elections, Public Opinion and Parties, as well as a chapter in the “Introduction to American Government” textbook. She has served as a reviewer for numerous scholarly journals and was on the editorial board of the law review at Adam Mickiewicz University in Poland. She speaks Polish, English, German, Farsi, and Russian.

Mikulska earned a Ph.D. in political science from the University of Houston, a master's degree in international relations from the University of Windsor in Canada, and a law degree from Adam Mickiewicz University.

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Anna Mikulska is a nonresident scholar in energy studies at the Baker Institute. She joined the institute's Center for Energy Studies following her two-year postdoctoral appointment at Rice University’s Local Elections in America Project. Anna's research interests center around European energy markets and energy policy. She has presented papers at numerous national and international conferences and co-authored articles in the European Journal of Political Research and the Journal of Elections, Public Opinion and Parties, as well as a chapter in the “Introduction to American Government” textbook. She has served as a reviewer for numerous scholarly journals and was on the editorial board of the law review at Adam Mickiewicz University in Poland. She speaks Polish, English, German, Farsi, and Russian.

Mikulska earned a Ph.D. in political science from the University of Houston, a master's degree in international relations from the University of Windsor in Canada, and a law degree from Adam Mickiewicz University.

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is a senior fellow at the Kleinman Center for Energy Policy and a non-resident fellow with the Center for Energy Studies at Rice University's Baker Institute for Public Policy.

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is a senior fellow at the Kleinman Center for Energy Policy and a non-resident fellow with the Center for Energy Studies at Rice University's Baker Institute for Public Policy.

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LNG won't dominate conventional gas any time soon, but it is a major force in building energy security.

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LNG won't dominate conventional gas any time soon, but it is a major force in building energy security.

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In 2016 the first shipment of U.S. liquefied natural gas left by tanker from a terminal on the Gulf coast.  In the year since, U.S. LNG has made its way to customers around the globe, increasing competition in the gas market and threatening to loosen the grip of some suppliers on captive markets.

Guest Anna Mikulska, Senior Fellow at the Kleinman Center for Energy Policy, talks about the globalization of the natural gas market, the competitiveness of U.S. exports and their implications for relationships abroad.

 

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In 2016 the first shipment of U.S. liquefied natural gas left by tanker from a terminal on the Gulf coast.  In the year since, U.S. LNG has made its way to customers around the globe, increasing competition in the gas market and threatening to loosen the grip of some suppliers on captive markets.

Guest Anna Mikulska, Senior Fellow at the Kleinman Center for Energy Policy, talks about the globalization of the natural gas market, the competitiveness of U.S. exports and their implications for relationships abroad.

 

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U.S. natural gas exports are helping to globalize the gas market, putting traditional buyer-seller relationships to the test and raising the possibility of far-reaching geopolitical consequences.

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U.S. natural gas exports are helping to globalize the gas market, putting traditional buyer-seller relationships to the test and raising the possibility of far-reaching geopolitical consequences.

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In October 2012 in Portovaya Bay, Russia, a gathering of heads of state and top industry leaders from Russia, Germany, France, and the Netherlands celebrated the commissioning of the second string of Nord Stream 1. Approximately three years later, a shareholder agreement was signed between Gazprom and Western European firms: E.ON, BASF/Wintershall, OMV, Engie, and Royal Dutch Shell to form a new consortium that would execute the plan and complete Nord Stream 2 (NS2) by the end of 2019. Once completed, NS2 would allow Gazprom to sharply reduce—if not eliminate completely—Ukrainian transit where disagreements had resulted in multiple shutoffs of Russian gas flows to Europe.

Following successful completion of the first two strings of the Nord Stream pipeline, it is unlikely that those in attendance at either event anticipated the difficult work ahead of them. Nord Stream 2 (NS2) would become arguably one of the most divisive and contested projects in European natural gas infrastructure.

The project has been subject to deep disagreements, particularly between the countries of Western Europe and their Central and Eastern European (CEE) counterparts. As I have written here before, both sides display dramatically different views of NS2. The West shares Gazprom’s official perspective that underscores unreliability of Ukrainian transit. On the other hand, CEE countries argue that the company is an instrument of the Russian state and would use the new pipeline to perpetuate Russian gas domination and potential influence, especially in CEE. According to this perspective, the new delivery route could also discourage investment in other infrastructure projects in CEE and/or Europe that otherwise would be pursued and provide greater diversification of natural gas supply and energy security.

As often happens, there are merits to the positions of both sides.

To begin, Western utilities have worked with Gazprom for decades, even during the Cold War. The relationship has been based on market rather than political considerations. This resulted in strong commercial ties and a level of trust between the companies that influences their support for NS2 and informs their governments’ positions. On the other hand, the CEE experience has been diametrically different, with Gazprom often using CEE’s heavy dependence on its gas to further Russia’s political goals. Thus, it should not come as a surprise that a new pipeline promising to expand Russian natural gas delivery to Europe has ruffled feathers and raised serious concerns.

The two EU sides are adamant about their positions, engaging in lobbying activities to further their interests. But both sides seem also to be unwilling to consider the basis of each other’s arguments. The West is too fast in dismissing CEE concerns, unwilling to look deeper into the issues and use of Russian gas supplies to further Russia’s influence in that region. At the same time, CEE countries have not fully acknowledged that the increasing liquidity and depth of the global natural gas market combined with ongoing infrastructure additions in the region are likely to prevent the type of influence Gazprom was able to yield in the past.

In effect, parties are talking past each other. The disagreement has created a rift that runs directly against the common interest of both groups, weakening the EU and creating the possibility that the conflict could spill into other areas in a tit-for-tat fashion. This should give a pause to all EU members. EU's strength is in its unity and this particularly related to the power to withstand any type of political or economic pressure from outside forces.

NS2 has unearthed important issues that divide the “old and new Europe” but should become an opportunity to “work out” the differences and increase understanding between the member states. Instead it has become a political lightning rod that can significantly weaken the EU. If the latter is Russia's goal then NS2 does not need to ever be completed for Russia to "divide and conquer."

On the other hand, if EU members can build understanding—recognizing their different experiences with Russian gas delivery—they could design energy strategies that promote true diversification and security. Whether the pipeline is built or not, the continent could take better advantage of the deepening global natural gas market and make it less vulnerable to pressure from any one supplier, including Russia.

[summary] => [format] => full_html [safe_value] =>

In October 2012 in Portovaya Bay, Russia, a gathering of heads of state and top industry leaders from Russia, Germany, France, and the Netherlands celebrated the commissioning of the second string of Nord Stream 1. Approximately three years later, a shareholder agreement was signed between Gazprom and Western European firms: E.ON, BASF/Wintershall, OMV, Engie, and Royal Dutch Shell to form a new consortium that would execute the plan and complete Nord Stream 2 (NS2) by the end of 2019. Once completed, NS2 would allow Gazprom to sharply reduce—if not eliminate completely—Ukrainian transit where disagreements had resulted in multiple shutoffs of Russian gas flows to Europe.

Following successful completion of the first two strings of the Nord Stream pipeline, it is unlikely that those in attendance at either event anticipated the difficult work ahead of them. Nord Stream 2 (NS2) would become arguably one of the most divisive and contested projects in European natural gas infrastructure.

The project has been subject to deep disagreements, particularly between the countries of Western Europe and their Central and Eastern European (CEE) counterparts. As I have written here before, both sides display dramatically different views of NS2. The West shares Gazprom’s official perspective that underscores unreliability of Ukrainian transit. On the other hand, CEE countries argue that the company is an instrument of the Russian state and would use the new pipeline to perpetuate Russian gas domination and potential influence, especially in CEE. According to this perspective, the new delivery route could also discourage investment in other infrastructure projects in CEE and/or Europe that otherwise would be pursued and provide greater diversification of natural gas supply and energy security.

As often happens, there are merits to the positions of both sides.

To begin, Western utilities have worked with Gazprom for decades, even during the Cold War. The relationship has been based on market rather than political considerations. This resulted in strong commercial ties and a level of trust between the companies that influences their support for NS2 and informs their governments’ positions. On the other hand, the CEE experience has been diametrically different, with Gazprom often using CEE’s heavy dependence on its gas to further Russia’s political goals. Thus, it should not come as a surprise that a new pipeline promising to expand Russian natural gas delivery to Europe has ruffled feathers and raised serious concerns.

The two EU sides are adamant about their positions, engaging in lobbying activities to further their interests. But both sides seem also to be unwilling to consider the basis of each other’s arguments. The West is too fast in dismissing CEE concerns, unwilling to look deeper into the issues and use of Russian gas supplies to further Russia’s influence in that region. At the same time, CEE countries have not fully acknowledged that the increasing liquidity and depth of the global natural gas market combined with ongoing infrastructure additions in the region are likely to prevent the type of influence Gazprom was able to yield in the past.

In effect, parties are talking past each other. The disagreement has created a rift that runs directly against the common interest of both groups, weakening the EU and creating the possibility that the conflict could spill into other areas in a tit-for-tat fashion. This should give a pause to all EU members. EU's strength is in its unity and this particularly related to the power to withstand any type of political or economic pressure from outside forces.

NS2 has unearthed important issues that divide the “old and new Europe” but should become an opportunity to “work out” the differences and increase understanding between the member states. Instead it has become a political lightning rod that can significantly weaken the EU. If the latter is Russia's goal then NS2 does not need to ever be completed for Russia to "divide and conquer."

On the other hand, if EU members can build understanding—recognizing their different experiences with Russian gas delivery—they could design energy strategies that promote true diversification and security. Whether the pipeline is built or not, the continent could take better advantage of the deepening global natural gas market and make it less vulnerable to pressure from any one supplier, including Russia.

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Nord Stream 2 unearthed important issues that divide “old and new Europe.” While it could become an opportunity to “work out” the differences, it has become a political lightning rod that can significantly weaken the EU.

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Nord Stream 2 unearthed important issues that divide “old and new Europe.” While it could become an opportunity to “work out” the differences, it has become a political lightning rod that can significantly weaken the EU.

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Technological advances in the area of natural gas liquefaction and hydraulic fracturing that unleashed the shale revolution in the United States have irrevocably changed the rules of the natural gas market. From a regional resource, natural gas is on the way to become a global commodity. The ongoing transformation has been particularly consequential but also distinctive for the Central and Eastern European region, where new market entrants have challenged Russian dominance.

Natural gas has been increasingly popular, especially in power generation. Compared to coal or fuel oil, natural gas is much cleaner—emitting considerably less carbon dioxide and local pollutants. This advantage is coupled with comparable, if not superior, performance and efficiency.

But in its gaseous, low-density form, natural gas is difficult and expensive to transport. Pipeline transportation has been a traditional go-to method to move the fuel. Given the prohibitively high cost of liquefaction, liquefied natural gas (LNG) has been used only where pipeline infrastructure could not be built. This resulted in markets that are regional in nature—established by long-term investment in pipeline infrastructure and followed by long-term contracts. In areas where one or few regional suppliers exist, this creates dependency, and the commodity then becomes subject to potential political risk and interference.

Over the last decade or so, however, two relatively recent developments have been markedly changing these natural gas market dynamics. First, natural gas liquefaction (LNG) technology advanced to become efficient and cheap enough to provide a viable alternative to piped gas. Second, new supplies of natural gas have been unlocked around the world, including in Qatar, Australia, and the U.S., where new horizontal drilling technology initiated the “shale revolution.” As a result LNG trade tripled over the last 17 years, rendering a more global, liquid, and deep gas market. In this market, there are many new points of supply and demand as well as an increasing share of trades that are either short-term or spot-based. In addition, the geopolitical value of the resource has diminished for traditionally dominant regional providers—potentially allowing more geopolitical sway to non-traditional gas suppliers such as the U.S. or Australia.

These trends challenge in particular the traditional dependency of Central and Eastern European (CEE) countries on Russian gas.

Following the fall of the Iron Curtain and having lost the ability to politically influence countries in the region directly, Russia has used its natural gas resources to achieve geopolitical ends and profited economically from its dominance. But the advent of a more fungible LNG market and the end of many long-term contracts with Russia (expiring in the early to mid-2020s), change the region’s bargaining position vis-à-vis Russia. And at least some CEE countries are ready to take advantage of this opportunity.

Poland and Lithuania have already made the first steps—building and operating new LNG import terminals. Additional terminals to support the CEE region are planned in Croatia, Estonia, and Greece. New long-term contracts have also been signed. Most recently, this included 20-year contracts that Poland’s PGNiG signed for 5.4 billion cubic feet (bcm) of natural gas to be delivered starting 2023. Importantly, the contracts are FOB (free on board) allowing PGNiG freedom when it comes to the gas destination after purchasing the contracted volumes. The company can either deliver those volumes to Poland or decide to sell it elsewhere, if Poland’s demand is not high enough to absorb it or if there is a cheaper source of gas that can be accessed at that time.

This arbitrage opportunity underlies a distinctive wrinkle in LNG trade in Europe. Considering higher costs associated with unconventional gas extraction, liquefaction, and transportation, LNG prices will likely be higher than conventional Russian gas transported via an existing and extensive network of pipelines. As such, LNG is unlikely to replace Russian gas. But it can diversify the supply, provide a price floor and balance the market. And, importantly, the ability to import and distribute LNG by countries in the CEE provides a “credible threat” to current Russian geopolitical and pricing practices. In that role, LNG offers greater energy security not only by diversifying the supply source but also by changing the nature of Russian gas deliveries—allowing CEE to take advantage of cheaper Russian gas on more competitive terms. 

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Technological advances in the area of natural gas liquefaction and hydraulic fracturing that unleashed the shale revolution in the United States have irrevocably changed the rules of the natural gas market. From a regional resource, natural gas is on the way to become a global commodity. The ongoing transformation has been particularly consequential but also distinctive for the Central and Eastern European region, where new market entrants have challenged Russian dominance.

Natural gas has been increasingly popular, especially in power generation. Compared to coal or fuel oil, natural gas is much cleaner—emitting considerably less carbon dioxide and local pollutants. This advantage is coupled with comparable, if not superior, performance and efficiency.

But in its gaseous, low-density form, natural gas is difficult and expensive to transport. Pipeline transportation has been a traditional go-to method to move the fuel. Given the prohibitively high cost of liquefaction, liquefied natural gas (LNG) has been used only where pipeline infrastructure could not be built. This resulted in markets that are regional in nature—established by long-term investment in pipeline infrastructure and followed by long-term contracts. In areas where one or few regional suppliers exist, this creates dependency, and the commodity then becomes subject to potential political risk and interference.

Over the last decade or so, however, two relatively recent developments have been markedly changing these natural gas market dynamics. First, natural gas liquefaction (LNG) technology advanced to become efficient and cheap enough to provide a viable alternative to piped gas. Second, new supplies of natural gas have been unlocked around the world, including in Qatar, Australia, and the U.S., where new horizontal drilling technology initiated the “shale revolution.” As a result LNG trade tripled over the last 17 years, rendering a more global, liquid, and deep gas market. In this market, there are many new points of supply and demand as well as an increasing share of trades that are either short-term or spot-based. In addition, the geopolitical value of the resource has diminished for traditionally dominant regional providers—potentially allowing more geopolitical sway to non-traditional gas suppliers such as the U.S. or Australia.

These trends challenge in particular the traditional dependency of Central and Eastern European (CEE) countries on Russian gas.

Following the fall of the Iron Curtain and having lost the ability to politically influence countries in the region directly, Russia has used its natural gas resources to achieve geopolitical ends and profited economically from its dominance. But the advent of a more fungible LNG market and the end of many long-term contracts with Russia (expiring in the early to mid-2020s), change the region’s bargaining position vis-à-vis Russia. And at least some CEE countries are ready to take advantage of this opportunity.

Poland and Lithuania have already made the first steps—building and operating new LNG import terminals. Additional terminals to support the CEE region are planned in Croatia, Estonia, and Greece. New long-term contracts have also been signed. Most recently, this included 20-year contracts that Poland’s PGNiG signed for 5.4 billion cubic feet (bcm) of natural gas to be delivered starting 2023. Importantly, the contracts are FOB (free on board) allowing PGNiG freedom when it comes to the gas destination after purchasing the contracted volumes. The company can either deliver those volumes to Poland or decide to sell it elsewhere, if Poland’s demand is not high enough to absorb it or if there is a cheaper source of gas that can be accessed at that time.

This arbitrage opportunity underlies a distinctive wrinkle in LNG trade in Europe. Considering higher costs associated with unconventional gas extraction, liquefaction, and transportation, LNG prices will likely be higher than conventional Russian gas transported via an existing and extensive network of pipelines. As such, LNG is unlikely to replace Russian gas. But it can diversify the supply, provide a price floor and balance the market. And, importantly, the ability to import and distribute LNG by countries in the CEE provides a “credible threat” to current Russian geopolitical and pricing practices. In that role, LNG offers greater energy security not only by diversifying the supply source but also by changing the nature of Russian gas deliveries—allowing CEE to take advantage of cheaper Russian gas on more competitive terms. 

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Technological advances in the area of natural gas liquefaction and hydraulic fracturing that unleashed the shale revolution in the United States have irrevocably changed the rules of the natural gas market. From a regional resource, natural gas is on the way to become a global commodity. The ongoing transformation has been particularly consequential but also distinctive for the Central and Eastern European region, where new market entrants have challenged Russian dominance.

Natural gas has been increasingly popular, especially in power generation. Compared to coal or fuel oil, natural gas is much cleaner—emitting considerably less carbon dioxide and local pollutants. This advantage is coupled with comparable, if not superior, performance and efficiency.

But in its gaseous, low-density form, natural gas is difficult and expensive to transport. Pipeline transportation has been a traditional go-to method to move the fuel. Given the prohibitively high cost of liquefaction, liquefied natural gas (LNG) has been used only where pipeline infrastructure could not be built. This resulted in markets that are regional in nature—established by long-term investment in pipeline infrastructure and followed by long-term contracts. In areas where one or few regional suppliers exist, this creates dependency, and the commodity then becomes subject to potential political risk and interference.

Over the last decade or so, however, two relatively recent developments have been markedly changing these natural gas market dynamics. First, natural gas liquefaction (LNG) technology advanced to become efficient and cheap enough to provide a viable alternative to piped gas. Second, new supplies of natural gas have been unlocked around the world, including in Qatar, Australia, and the U.S., where new horizontal drilling technology initiated the “shale revolution.” As a result LNG trade tripled over the last 17 years, rendering a more global, liquid, and deep gas market. In this market, there are many new points of supply and demand as well as an increasing share of trades that are either short-term or spot-based. In addition, the geopolitical value of the resource has diminished for traditionally dominant regional providers—potentially allowing more geopolitical sway to non-traditional gas suppliers such as the U.S. or Australia.

These trends challenge in particular the traditional dependency of Central and Eastern European (CEE) countries on Russian gas.

Following the fall of the Iron Curtain and having lost the ability to politically influence countries in the region directly, Russia has used its natural gas resources to achieve geopolitical ends and profited economically from its dominance. But the advent of a more fungible LNG market and the end of many long-term contracts with Russia (expiring in the early to mid-2020s), change the region’s bargaining position vis-à-vis Russia. And at least some CEE countries are ready to take advantage of this opportunity.

Poland and Lithuania have already made the first steps—building and operating new LNG import terminals. Additional terminals to support the CEE region are planned in Croatia, Estonia, and Greece. New long-term contracts have also been signed. Most recently, this included 20-year contracts that Poland’s PGNiG signed for 5.4 billion cubic feet (bcm) of natural gas to be delivered starting 2023. Importantly, the contracts are FOB (free on board) allowing PGNiG freedom when it comes to the gas destination after purchasing the contracted volumes. The company can either deliver those volumes to Poland or decide to sell it elsewhere, if Poland’s demand is not high enough to absorb it or if there is a cheaper source of gas that can be accessed at that time.

This arbitrage opportunity underlies a distinctive wrinkle in LNG trade in Europe. Considering higher costs associated with unconventional gas extraction, liquefaction, and transportation, LNG prices will likely be higher than conventional Russian gas transported via an existing and extensive network of pipelines. As such, LNG is unlikely to replace Russian gas. But it can diversify the supply, provide a price floor and balance the market. And, importantly, the ability to import and distribute LNG by countries in the CEE provides a “credible threat” to current Russian geopolitical and pricing practices. In that role, LNG offers greater energy security not only by diversifying the supply source but also by changing the nature of Russian gas deliveries—allowing CEE to take advantage of cheaper Russian gas on more competitive terms. 

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Technological advances in the area of natural gas liquefaction and hydraulic fracturing that unleashed the shale revolution in the United States have irrevocably changed the rules of the natural gas market. From a regional resource, natural gas is on the way to become a global commodity. The ongoing transformation has been particularly consequential but also distinctive for the Central and Eastern European region, where new market entrants have challenged Russian dominance.

Natural gas has been increasingly popular, especially in power generation. Compared to coal or fuel oil, natural gas is much cleaner—emitting considerably less carbon dioxide and local pollutants. This advantage is coupled with comparable, if not superior, performance and efficiency.

But in its gaseous, low-density form, natural gas is difficult and expensive to transport. Pipeline transportation has been a traditional go-to method to move the fuel. Given the prohibitively high cost of liquefaction, liquefied natural gas (LNG) has been used only where pipeline infrastructure could not be built. This resulted in markets that are regional in nature—established by long-term investment in pipeline infrastructure and followed by long-term contracts. In areas where one or few regional suppliers exist, this creates dependency, and the commodity then becomes subject to potential political risk and interference.

Over the last decade or so, however, two relatively recent developments have been markedly changing these natural gas market dynamics. First, natural gas liquefaction (LNG) technology advanced to become efficient and cheap enough to provide a viable alternative to piped gas. Second, new supplies of natural gas have been unlocked around the world, including in Qatar, Australia, and the U.S., where new horizontal drilling technology initiated the “shale revolution.” As a result LNG trade tripled over the last 17 years, rendering a more global, liquid, and deep gas market. In this market, there are many new points of supply and demand as well as an increasing share of trades that are either short-term or spot-based. In addition, the geopolitical value of the resource has diminished for traditionally dominant regional providers—potentially allowing more geopolitical sway to non-traditional gas suppliers such as the U.S. or Australia.

These trends challenge in particular the traditional dependency of Central and Eastern European (CEE) countries on Russian gas.

Following the fall of the Iron Curtain and having lost the ability to politically influence countries in the region directly, Russia has used its natural gas resources to achieve geopolitical ends and profited economically from its dominance. But the advent of a more fungible LNG market and the end of many long-term contracts with Russia (expiring in the early to mid-2020s), change the region’s bargaining position vis-à-vis Russia. And at least some CEE countries are ready to take advantage of this opportunity.

Poland and Lithuania have already made the first steps—building and operating new LNG import terminals. Additional terminals to support the CEE region are planned in Croatia, Estonia, and Greece. New long-term contracts have also been signed. Most recently, this included 20-year contracts that Poland’s PGNiG signed for 5.4 billion cubic feet (bcm) of natural gas to be delivered starting 2023. Importantly, the contracts are FOB (free on board) allowing PGNiG freedom when it comes to the gas destination after purchasing the contracted volumes. The company can either deliver those volumes to Poland or decide to sell it elsewhere, if Poland’s demand is not high enough to absorb it or if there is a cheaper source of gas that can be accessed at that time.

This arbitrage opportunity underlies a distinctive wrinkle in LNG trade in Europe. Considering higher costs associated with unconventional gas extraction, liquefaction, and transportation, LNG prices will likely be higher than conventional Russian gas transported via an existing and extensive network of pipelines. As such, LNG is unlikely to replace Russian gas. But it can diversify the supply, provide a price floor and balance the market. And, importantly, the ability to import and distribute LNG by countries in the CEE provides a “credible threat” to current Russian geopolitical and pricing practices. In that role, LNG offers greater energy security not only by diversifying the supply source but also by changing the nature of Russian gas deliveries—allowing CEE to take advantage of cheaper Russian gas on more competitive terms. 

[summary] => [format] => full_html [safe_value] =>

Technological advances in the area of natural gas liquefaction and hydraulic fracturing that unleashed the shale revolution in the United States have irrevocably changed the rules of the natural gas market. From a regional resource, natural gas is on the way to become a global commodity. The ongoing transformation has been particularly consequential but also distinctive for the Central and Eastern European region, where new market entrants have challenged Russian dominance.

Natural gas has been increasingly popular, especially in power generation. Compared to coal or fuel oil, natural gas is much cleaner—emitting considerably less carbon dioxide and local pollutants. This advantage is coupled with comparable, if not superior, performance and efficiency.

But in its gaseous, low-density form, natural gas is difficult and expensive to transport. Pipeline transportation has been a traditional go-to method to move the fuel. Given the prohibitively high cost of liquefaction, liquefied natural gas (LNG) has been used only where pipeline infrastructure could not be built. This resulted in markets that are regional in nature—established by long-term investment in pipeline infrastructure and followed by long-term contracts. In areas where one or few regional suppliers exist, this creates dependency, and the commodity then becomes subject to potential political risk and interference.

Over the last decade or so, however, two relatively recent developments have been markedly changing these natural gas market dynamics. First, natural gas liquefaction (LNG) technology advanced to become efficient and cheap enough to provide a viable alternative to piped gas. Second, new supplies of natural gas have been unlocked around the world, including in Qatar, Australia, and the U.S., where new horizontal drilling technology initiated the “shale revolution.” As a result LNG trade tripled over the last 17 years, rendering a more global, liquid, and deep gas market. In this market, there are many new points of supply and demand as well as an increasing share of trades that are either short-term or spot-based. In addition, the geopolitical value of the resource has diminished for traditionally dominant regional providers—potentially allowing more geopolitical sway to non-traditional gas suppliers such as the U.S. or Australia.

These trends challenge in particular the traditional dependency of Central and Eastern European (CEE) countries on Russian gas.

Following the fall of the Iron Curtain and having lost the ability to politically influence countries in the region directly, Russia has used its natural gas resources to achieve geopolitical ends and profited economically from its dominance. But the advent of a more fungible LNG market and the end of many long-term contracts with Russia (expiring in the early to mid-2020s), change the region’s bargaining position vis-à-vis Russia. And at least some CEE countries are ready to take advantage of this opportunity.

Poland and Lithuania have already made the first steps—building and operating new LNG import terminals. Additional terminals to support the CEE region are planned in Croatia, Estonia, and Greece. New long-term contracts have also been signed. Most recently, this included 20-year contracts that Poland’s PGNiG signed for 5.4 billion cubic feet (bcm) of natural gas to be delivered starting 2023. Importantly, the contracts are FOB (free on board) allowing PGNiG freedom when it comes to the gas destination after purchasing the contracted volumes. The company can either deliver those volumes to Poland or decide to sell it elsewhere, if Poland’s demand is not high enough to absorb it or if there is a cheaper source of gas that can be accessed at that time.

This arbitrage opportunity underlies a distinctive wrinkle in LNG trade in Europe. Considering higher costs associated with unconventional gas extraction, liquefaction, and transportation, LNG prices will likely be higher than conventional Russian gas transported via an existing and extensive network of pipelines. As such, LNG is unlikely to replace Russian gas. But it can diversify the supply, provide a price floor and balance the market. And, importantly, the ability to import and distribute LNG by countries in the CEE provides a “credible threat” to current Russian geopolitical and pricing practices. In that role, LNG offers greater energy security not only by diversifying the supply source but also by changing the nature of Russian gas deliveries—allowing CEE to take advantage of cheaper Russian gas on more competitive terms. 

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Anna Mikulska is a nonresident scholar in energy studies at the Baker Institute. She joined the institute's Center for Energy Studies following her two-year postdoctoral appointment at Rice University’s Local Elections in America Project. Anna's research interests center around European energy markets and energy policy. She has presented papers at numerous national and international conferences and co-authored articles in the European Journal of Political Research and the Journal of Elections, Public Opinion and Parties, as well as a chapter in the “Introduction to American Government” textbook. She has served as a reviewer for numerous scholarly journals and was on the editorial board of the law review at Adam Mickiewicz University in Poland. She speaks Polish, English, German, Farsi, and Russian.

Mikulska earned a Ph.D. in political science from the University of Houston, a master's degree in international relations from the University of Windsor in Canada, and a law degree from Adam Mickiewicz University.

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Anna Mikulska is a nonresident scholar in energy studies at the Baker Institute. She joined the institute's Center for Energy Studies following her two-year postdoctoral appointment at Rice University’s Local Elections in America Project. Anna's research interests center around European energy markets and energy policy. She has presented papers at numerous national and international conferences and co-authored articles in the European Journal of Political Research and the Journal of Elections, Public Opinion and Parties, as well as a chapter in the “Introduction to American Government” textbook. She has served as a reviewer for numerous scholarly journals and was on the editorial board of the law review at Adam Mickiewicz University in Poland. She speaks Polish, English, German, Farsi, and Russian.

Mikulska earned a Ph.D. in political science from the University of Houston, a master's degree in international relations from the University of Windsor in Canada, and a law degree from Adam Mickiewicz University.

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is a senior fellow at the Kleinman Center for Energy Policy and a non-resident fellow with the Center for Energy Studies at Rice University's Baker Institute for Public Policy.

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is a senior fellow at the Kleinman Center for Energy Policy and a non-resident fellow with the Center for Energy Studies at Rice University's Baker Institute for Public Policy.

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LNG won't dominate conventional gas any time soon, but it is a major force in building energy security.

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LNG won't dominate conventional gas any time soon, but it is a major force in building energy security.

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In 2016 the first shipment of U.S. liquefied natural gas left by tanker from a terminal on the Gulf coast.  In the year since, U.S. LNG has made its way to customers around the globe, increasing competition in the gas market and threatening to loosen the grip of some suppliers on captive markets.

Guest Anna Mikulska, Senior Fellow at the Kleinman Center for Energy Policy, talks about the globalization of the natural gas market, the competitiveness of U.S. exports and their implications for relationships abroad.

 

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In 2016 the first shipment of U.S. liquefied natural gas left by tanker from a terminal on the Gulf coast.  In the year since, U.S. LNG has made its way to customers around the globe, increasing competition in the gas market and threatening to loosen the grip of some suppliers on captive markets.

Guest Anna Mikulska, Senior Fellow at the Kleinman Center for Energy Policy, talks about the globalization of the natural gas market, the competitiveness of U.S. exports and their implications for relationships abroad.

 

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U.S. natural gas exports are helping to globalize the gas market, putting traditional buyer-seller relationships to the test and raising the possibility of far-reaching geopolitical consequences.

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U.S. natural gas exports are helping to globalize the gas market, putting traditional buyer-seller relationships to the test and raising the possibility of far-reaching geopolitical consequences.

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In October 2012 in Portovaya Bay, Russia, a gathering of heads of state and top industry leaders from Russia, Germany, France, and the Netherlands celebrated the commissioning of the second string of Nord Stream 1. Approximately three years later, a shareholder agreement was signed between Gazprom and Western European firms: E.ON, BASF/Wintershall, OMV, Engie, and Royal Dutch Shell to form a new consortium that would execute the plan and complete Nord Stream 2 (NS2) by the end of 2019. Once completed, NS2 would allow Gazprom to sharply reduce—if not eliminate completely—Ukrainian transit where disagreements had resulted in multiple shutoffs of Russian gas flows to Europe.

Following successful completion of the first two strings of the Nord Stream pipeline, it is unlikely that those in attendance at either event anticipated the difficult work ahead of them. Nord Stream 2 (NS2) would become arguably one of the most divisive and contested projects in European natural gas infrastructure.

The project has been subject to deep disagreements, particularly between the countries of Western Europe and their Central and Eastern European (CEE) counterparts. As I have written here before, both sides display dramatically different views of NS2. The West shares Gazprom’s official perspective that underscores unreliability of Ukrainian transit. On the other hand, CEE countries argue that the company is an instrument of the Russian state and would use the new pipeline to perpetuate Russian gas domination and potential influence, especially in CEE. According to this perspective, the new delivery route could also discourage investment in other infrastructure projects in CEE and/or Europe that otherwise would be pursued and provide greater diversification of natural gas supply and energy security.

As often happens, there are merits to the positions of both sides.

To begin, Western utilities have worked with Gazprom for decades, even during the Cold War. The relationship has been based on market rather than political considerations. This resulted in strong commercial ties and a level of trust between the companies that influences their support for NS2 and informs their governments’ positions. On the other hand, the CEE experience has been diametrically different, with Gazprom often using CEE’s heavy dependence on its gas to further Russia’s political goals. Thus, it should not come as a surprise that a new pipeline promising to expand Russian natural gas delivery to Europe has ruffled feathers and raised serious concerns.

The two EU sides are adamant about their positions, engaging in lobbying activities to further their interests. But both sides seem also to be unwilling to consider the basis of each other’s arguments. The West is too fast in dismissing CEE concerns, unwilling to look deeper into the issues and use of Russian gas supplies to further Russia’s influence in that region. At the same time, CEE countries have not fully acknowledged that the increasing liquidity and depth of the global natural gas market combined with ongoing infrastructure additions in the region are likely to prevent the type of influence Gazprom was able to yield in the past.

In effect, parties are talking past each other. The disagreement has created a rift that runs directly against the common interest of both groups, weakening the EU and creating the possibility that the conflict could spill into other areas in a tit-for-tat fashion. This should give a pause to all EU members. EU's strength is in its unity and this particularly related to the power to withstand any type of political or economic pressure from outside forces.

NS2 has unearthed important issues that divide the “old and new Europe” but should become an opportunity to “work out” the differences and increase understanding between the member states. Instead it has become a political lightning rod that can significantly weaken the EU. If the latter is Russia's goal then NS2 does not need to ever be completed for Russia to "divide and conquer."

On the other hand, if EU members can build understanding—recognizing their different experiences with Russian gas delivery—they could design energy strategies that promote true diversification and security. Whether the pipeline is built or not, the continent could take better advantage of the deepening global natural gas market and make it less vulnerable to pressure from any one supplier, including Russia.

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In October 2012 in Portovaya Bay, Russia, a gathering of heads of state and top industry leaders from Russia, Germany, France, and the Netherlands celebrated the commissioning of the second string of Nord Stream 1. Approximately three years later, a shareholder agreement was signed between Gazprom and Western European firms: E.ON, BASF/Wintershall, OMV, Engie, and Royal Dutch Shell to form a new consortium that would execute the plan and complete Nord Stream 2 (NS2) by the end of 2019. Once completed, NS2 would allow Gazprom to sharply reduce—if not eliminate completely—Ukrainian transit where disagreements had resulted in multiple shutoffs of Russian gas flows to Europe.

Following successful completion of the first two strings of the Nord Stream pipeline, it is unlikely that those in attendance at either event anticipated the difficult work ahead of them. Nord Stream 2 (NS2) would become arguably one of the most divisive and contested projects in European natural gas infrastructure.

The project has been subject to deep disagreements, particularly between the countries of Western Europe and their Central and Eastern European (CEE) counterparts. As I have written here before, both sides display dramatically different views of NS2. The West shares Gazprom’s official perspective that underscores unreliability of Ukrainian transit. On the other hand, CEE countries argue that the company is an instrument of the Russian state and would use the new pipeline to perpetuate Russian gas domination and potential influence, especially in CEE. According to this perspective, the new delivery route could also discourage investment in other infrastructure projects in CEE and/or Europe that otherwise would be pursued and provide greater diversification of natural gas supply and energy security.

As often happens, there are merits to the positions of both sides.

To begin, Western utilities have worked with Gazprom for decades, even during the Cold War. The relationship has been based on market rather than political considerations. This resulted in strong commercial ties and a level of trust between the companies that influences their support for NS2 and informs their governments’ positions. On the other hand, the CEE experience has been diametrically different, with Gazprom often using CEE’s heavy dependence on its gas to further Russia’s political goals. Thus, it should not come as a surprise that a new pipeline promising to expand Russian natural gas delivery to Europe has ruffled feathers and raised serious concerns.

The two EU sides are adamant about their positions, engaging in lobbying activities to further their interests. But both sides seem also to be unwilling to consider the basis of each other’s arguments. The West is too fast in dismissing CEE concerns, unwilling to look deeper into the issues and use of Russian gas supplies to further Russia’s influence in that region. At the same time, CEE countries have not fully acknowledged that the increasing liquidity and depth of the global natural gas market combined with ongoing infrastructure additions in the region are likely to prevent the type of influence Gazprom was able to yield in the past.

In effect, parties are talking past each other. The disagreement has created a rift that runs directly against the common interest of both groups, weakening the EU and creating the possibility that the conflict could spill into other areas in a tit-for-tat fashion. This should give a pause to all EU members. EU's strength is in its unity and this particularly related to the power to withstand any type of political or economic pressure from outside forces.

NS2 has unearthed important issues that divide the “old and new Europe” but should become an opportunity to “work out” the differences and increase understanding between the member states. Instead it has become a political lightning rod that can significantly weaken the EU. If the latter is Russia's goal then NS2 does not need to ever be completed for Russia to "divide and conquer."

On the other hand, if EU members can build understanding—recognizing their different experiences with Russian gas delivery—they could design energy strategies that promote true diversification and security. Whether the pipeline is built or not, the continent could take better advantage of the deepening global natural gas market and make it less vulnerable to pressure from any one supplier, including Russia.

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Nord Stream 2 unearthed important issues that divide “old and new Europe.” While it could become an opportunity to “work out” the differences, it has become a political lightning rod that can significantly weaken the EU.

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Nord Stream 2 unearthed important issues that divide “old and new Europe.” While it could become an opportunity to “work out” the differences, it has become a political lightning rod that can significantly weaken the EU.

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In 2016 the first shipment of U.S. liquefied natural gas left by tanker from a terminal on the Gulf coast.  In the year since, U.S. LNG has made its way to customers around the globe, increasing competition in the gas market and threatening to loosen the grip of some suppliers on captive markets.

Guest Anna Mikulska, Senior Fellow at the Kleinman Center for Energy Policy, talks about the globalization of the natural gas market, the competitiveness of U.S. exports and their implications for relationships abroad.

 

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In 2016 the first shipment of U.S. liquefied natural gas left by tanker from a terminal on the Gulf coast.  In the year since, U.S. LNG has made its way to customers around the globe, increasing competition in the gas market and threatening to loosen the grip of some suppliers on captive markets.

Guest Anna Mikulska, Senior Fellow at the Kleinman Center for Energy Policy, talks about the globalization of the natural gas market, the competitiveness of U.S. exports and their implications for relationships abroad.

 

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U.S. natural gas exports are helping to globalize the gas market, putting traditional buyer-seller relationships to the test and raising the possibility of far-reaching geopolitical consequences.

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U.S. natural gas exports are helping to globalize the gas market, putting traditional buyer-seller relationships to the test and raising the possibility of far-reaching geopolitical consequences.

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In October 2012 in Portovaya Bay, Russia, a gathering of heads of state and top industry leaders from Russia, Germany, France, and the Netherlands celebrated the commissioning of the second string of Nord Stream 1. Approximately three years later, a shareholder agreement was signed between Gazprom and Western European firms: E.ON, BASF/Wintershall, OMV, Engie, and Royal Dutch Shell to form a new consortium that would execute the plan and complete Nord Stream 2 (NS2) by the end of 2019. Once completed, NS2 would allow Gazprom to sharply reduce—if not eliminate completely—Ukrainian transit where disagreements had resulted in multiple shutoffs of Russian gas flows to Europe.

Following successful completion of the first two strings of the Nord Stream pipeline, it is unlikely that those in attendance at either event anticipated the difficult work ahead of them. Nord Stream 2 (NS2) would become arguably one of the most divisive and contested projects in European natural gas infrastructure.

The project has been subject to deep disagreements, particularly between the countries of Western Europe and their Central and Eastern European (CEE) counterparts. As I have written here before, both sides display dramatically different views of NS2. The West shares Gazprom’s official perspective that underscores unreliability of Ukrainian transit. On the other hand, CEE countries argue that the company is an instrument of the Russian state and would use the new pipeline to perpetuate Russian gas domination and potential influence, especially in CEE. According to this perspective, the new delivery route could also discourage investment in other infrastructure projects in CEE and/or Europe that otherwise would be pursued and provide greater diversification of natural gas supply and energy security.

As often happens, there are merits to the positions of both sides.

To begin, Western utilities have worked with Gazprom for decades, even during the Cold War. The relationship has been based on market rather than political considerations. This resulted in strong commercial ties and a level of trust between the companies that influences their support for NS2 and informs their governments’ positions. On the other hand, the CEE experience has been diametrically different, with Gazprom often using CEE’s heavy dependence on its gas to further Russia’s political goals. Thus, it should not come as a surprise that a new pipeline promising to expand Russian natural gas delivery to Europe has ruffled feathers and raised serious concerns.

The two EU sides are adamant about their positions, engaging in lobbying activities to further their interests. But both sides seem also to be unwilling to consider the basis of each other’s arguments. The West is too fast in dismissing CEE concerns, unwilling to look deeper into the issues and use of Russian gas supplies to further Russia’s influence in that region. At the same time, CEE countries have not fully acknowledged that the increasing liquidity and depth of the global natural gas market combined with ongoing infrastructure additions in the region are likely to prevent the type of influence Gazprom was able to yield in the past.

In effect, parties are talking past each other. The disagreement has created a rift that runs directly against the common interest of both groups, weakening the EU and creating the possibility that the conflict could spill into other areas in a tit-for-tat fashion. This should give a pause to all EU members. EU's strength is in its unity and this particularly related to the power to withstand any type of political or economic pressure from outside forces.

NS2 has unearthed important issues that divide the “old and new Europe” but should become an opportunity to “work out” the differences and increase understanding between the member states. Instead it has become a political lightning rod that can significantly weaken the EU. If the latter is Russia's goal then NS2 does not need to ever be completed for Russia to "divide and conquer."

On the other hand, if EU members can build understanding—recognizing their different experiences with Russian gas delivery—they could design energy strategies that promote true diversification and security. Whether the pipeline is built or not, the continent could take better advantage of the deepening global natural gas market and make it less vulnerable to pressure from any one supplier, including Russia.

[summary] => [format] => full_html [safe_value] =>

In October 2012 in Portovaya Bay, Russia, a gathering of heads of state and top industry leaders from Russia, Germany, France, and the Netherlands celebrated the commissioning of the second string of Nord Stream 1. Approximately three years later, a shareholder agreement was signed between Gazprom and Western European firms: E.ON, BASF/Wintershall, OMV, Engie, and Royal Dutch Shell to form a new consortium that would execute the plan and complete Nord Stream 2 (NS2) by the end of 2019. Once completed, NS2 would allow Gazprom to sharply reduce—if not eliminate completely—Ukrainian transit where disagreements had resulted in multiple shutoffs of Russian gas flows to Europe.

Following successful completion of the first two strings of the Nord Stream pipeline, it is unlikely that those in attendance at either event anticipated the difficult work ahead of them. Nord Stream 2 (NS2) would become arguably one of the most divisive and contested projects in European natural gas infrastructure.

The project has been subject to deep disagreements, particularly between the countries of Western Europe and their Central and Eastern European (CEE) counterparts. As I have written here before, both sides display dramatically different views of NS2. The West shares Gazprom’s official perspective that underscores unreliability of Ukrainian transit. On the other hand, CEE countries argue that the company is an instrument of the Russian state and would use the new pipeline to perpetuate Russian gas domination and potential influence, especially in CEE. According to this perspective, the new delivery route could also discourage investment in other infrastructure projects in CEE and/or Europe that otherwise would be pursued and provide greater diversification of natural gas supply and energy security.

As often happens, there are merits to the positions of both sides.

To begin, Western utilities have worked with Gazprom for decades, even during the Cold War. The relationship has been based on market rather than political considerations. This resulted in strong commercial ties and a level of trust between the companies that influences their support for NS2 and informs their governments’ positions. On the other hand, the CEE experience has been diametrically different, with Gazprom often using CEE’s heavy dependence on its gas to further Russia’s political goals. Thus, it should not come as a surprise that a new pipeline promising to expand Russian natural gas delivery to Europe has ruffled feathers and raised serious concerns.

The two EU sides are adamant about their positions, engaging in lobbying activities to further their interests. But both sides seem also to be unwilling to consider the basis of each other’s arguments. The West is too fast in dismissing CEE concerns, unwilling to look deeper into the issues and use of Russian gas supplies to further Russia’s influence in that region. At the same time, CEE countries have not fully acknowledged that the increasing liquidity and depth of the global natural gas market combined with ongoing infrastructure additions in the region are likely to prevent the type of influence Gazprom was able to yield in the past.

In effect, parties are talking past each other. The disagreement has created a rift that runs directly against the common interest of both groups, weakening the EU and creating the possibility that the conflict could spill into other areas in a tit-for-tat fashion. This should give a pause to all EU members. EU's strength is in its unity and this particularly related to the power to withstand any type of political or economic pressure from outside forces.

NS2 has unearthed important issues that divide the “old and new Europe” but should become an opportunity to “work out” the differences and increase understanding between the member states. Instead it has become a political lightning rod that can significantly weaken the EU. If the latter is Russia's goal then NS2 does not need to ever be completed for Russia to "divide and conquer."

On the other hand, if EU members can build understanding—recognizing their different experiences with Russian gas delivery—they could design energy strategies that promote true diversification and security. Whether the pipeline is built or not, the continent could take better advantage of the deepening global natural gas market and make it less vulnerable to pressure from any one supplier, including Russia.

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Nord Stream 2 unearthed important issues that divide “old and new Europe.” While it could become an opportunity to “work out” the differences, it has become a political lightning rod that can significantly weaken the EU.

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Nord Stream 2 unearthed important issues that divide “old and new Europe.” While it could become an opportunity to “work out” the differences, it has become a political lightning rod that can significantly weaken the EU.

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In 2016 the first shipment of U.S. liquefied natural gas left by tanker from a terminal on the Gulf coast.  In the year since, U.S. LNG has made its way to customers around the globe, increasing competition in the gas market and threatening to loosen the grip of some suppliers on captive markets.

Guest Anna Mikulska, Senior Fellow at the Kleinman Center for Energy Policy, talks about the globalization of the natural gas market, the competitiveness of U.S. exports and their implications for relationships abroad.

 

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In 2016 the first shipment of U.S. liquefied natural gas left by tanker from a terminal on the Gulf coast.  In the year since, U.S. LNG has made its way to customers around the globe, increasing competition in the gas market and threatening to loosen the grip of some suppliers on captive markets.

Guest Anna Mikulska, Senior Fellow at the Kleinman Center for Energy Policy, talks about the globalization of the natural gas market, the competitiveness of U.S. exports and their implications for relationships abroad.

 

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U.S. natural gas exports are helping to globalize the gas market, putting traditional buyer-seller relationships to the test and raising the possibility of far-reaching geopolitical consequences.

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U.S. natural gas exports are helping to globalize the gas market, putting traditional buyer-seller relationships to the test and raising the possibility of far-reaching geopolitical consequences.

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In October 2012 in Portovaya Bay, Russia, a gathering of heads of state and top industry leaders from Russia, Germany, France, and the Netherlands celebrated the commissioning of the second string of Nord Stream 1. Approximately three years later, a shareholder agreement was signed between Gazprom and Western European firms: E.ON, BASF/Wintershall, OMV, Engie, and Royal Dutch Shell to form a new consortium that would execute the plan and complete Nord Stream 2 (NS2) by the end of 2019. Once completed, NS2 would allow Gazprom to sharply reduce—if not eliminate completely—Ukrainian transit where disagreements had resulted in multiple shutoffs of Russian gas flows to Europe.

Following successful completion of the first two strings of the Nord Stream pipeline, it is unlikely that those in attendance at either event anticipated the difficult work ahead of them. Nord Stream 2 (NS2) would become arguably one of the most divisive and contested projects in European natural gas infrastructure.

The project has been subject to deep disagreements, particularly between the countries of Western Europe and their Central and Eastern European (CEE) counterparts. As I have written here before, both sides display dramatically different views of NS2. The West shares Gazprom’s official perspective that underscores unreliability of Ukrainian transit. On the other hand, CEE countries argue that the company is an instrument of the Russian state and would use the new pipeline to perpetuate Russian gas domination and potential influence, especially in CEE. According to this perspective, the new delivery route could also discourage investment in other infrastructure projects in CEE and/or Europe that otherwise would be pursued and provide greater diversification of natural gas supply and energy security.

As often happens, there are merits to the positions of both sides.

To begin, Western utilities have worked with Gazprom for decades, even during the Cold War. The relationship has been based on market rather than political considerations. This resulted in strong commercial ties and a level of trust between the companies that influences their support for NS2 and informs their governments’ positions. On the other hand, the CEE experience has been diametrically different, with Gazprom often using CEE’s heavy dependence on its gas to further Russia’s political goals. Thus, it should not come as a surprise that a new pipeline promising to expand Russian natural gas delivery to Europe has ruffled feathers and raised serious concerns.

The two EU sides are adamant about their positions, engaging in lobbying activities to further their interests. But both sides seem also to be unwilling to consider the basis of each other’s arguments. The West is too fast in dismissing CEE concerns, unwilling to look deeper into the issues and use of Russian gas supplies to further Russia’s influence in that region. At the same time, CEE countries have not fully acknowledged that the increasing liquidity and depth of the global natural gas market combined with ongoing infrastructure additions in the region are likely to prevent the type of influence Gazprom was able to yield in the past.

In effect, parties are talking past each other. The disagreement has created a rift that runs directly against the common interest of both groups, weakening the EU and creating the possibility that the conflict could spill into other areas in a tit-for-tat fashion. This should give a pause to all EU members. EU's strength is in its unity and this particularly related to the power to withstand any type of political or economic pressure from outside forces.

NS2 has unearthed important issues that divide the “old and new Europe” but should become an opportunity to “work out” the differences and increase understanding between the member states. Instead it has become a political lightning rod that can significantly weaken the EU. If the latter is Russia's goal then NS2 does not need to ever be completed for Russia to "divide and conquer."

On the other hand, if EU members can build understanding—recognizing their different experiences with Russian gas delivery—they could design energy strategies that promote true diversification and security. Whether the pipeline is built or not, the continent could take better advantage of the deepening global natural gas market and make it less vulnerable to pressure from any one supplier, including Russia.

[summary] => [format] => full_html [safe_value] =>

In October 2012 in Portovaya Bay, Russia, a gathering of heads of state and top industry leaders from Russia, Germany, France, and the Netherlands celebrated the commissioning of the second string of Nord Stream 1. Approximately three years later, a shareholder agreement was signed between Gazprom and Western European firms: E.ON, BASF/Wintershall, OMV, Engie, and Royal Dutch Shell to form a new consortium that would execute the plan and complete Nord Stream 2 (NS2) by the end of 2019. Once completed, NS2 would allow Gazprom to sharply reduce—if not eliminate completely—Ukrainian transit where disagreements had resulted in multiple shutoffs of Russian gas flows to Europe.

Following successful completion of the first two strings of the Nord Stream pipeline, it is unlikely that those in attendance at either event anticipated the difficult work ahead of them. Nord Stream 2 (NS2) would become arguably one of the most divisive and contested projects in European natural gas infrastructure.

The project has been subject to deep disagreements, particularly between the countries of Western Europe and their Central and Eastern European (CEE) counterparts. As I have written here before, both sides display dramatically different views of NS2. The West shares Gazprom’s official perspective that underscores unreliability of Ukrainian transit. On the other hand, CEE countries argue that the company is an instrument of the Russian state and would use the new pipeline to perpetuate Russian gas domination and potential influence, especially in CEE. According to this perspective, the new delivery route could also discourage investment in other infrastructure projects in CEE and/or Europe that otherwise would be pursued and provide greater diversification of natural gas supply and energy security.

As often happens, there are merits to the positions of both sides.

To begin, Western utilities have worked with Gazprom for decades, even during the Cold War. The relationship has been based on market rather than political considerations. This resulted in strong commercial ties and a level of trust between the companies that influences their support for NS2 and informs their governments’ positions. On the other hand, the CEE experience has been diametrically different, with Gazprom often using CEE’s heavy dependence on its gas to further Russia’s political goals. Thus, it should not come as a surprise that a new pipeline promising to expand Russian natural gas delivery to Europe has ruffled feathers and raised serious concerns.

The two EU sides are adamant about their positions, engaging in lobbying activities to further their interests. But both sides seem also to be unwilling to consider the basis of each other’s arguments. The West is too fast in dismissing CEE concerns, unwilling to look deeper into the issues and use of Russian gas supplies to further Russia’s influence in that region. At the same time, CEE countries have not fully acknowledged that the increasing liquidity and depth of the global natural gas market combined with ongoing infrastructure additions in the region are likely to prevent the type of influence Gazprom was able to yield in the past.

In effect, parties are talking past each other. The disagreement has created a rift that runs directly against the common interest of both groups, weakening the EU and creating the possibility that the conflict could spill into other areas in a tit-for-tat fashion. This should give a pause to all EU members. EU's strength is in its unity and this particularly related to the power to withstand any type of political or economic pressure from outside forces.

NS2 has unearthed important issues that divide the “old and new Europe” but should become an opportunity to “work out” the differences and increase understanding between the member states. Instead it has become a political lightning rod that can significantly weaken the EU. If the latter is Russia's goal then NS2 does not need to ever be completed for Russia to "divide and conquer."

On the other hand, if EU members can build understanding—recognizing their different experiences with Russian gas delivery—they could design energy strategies that promote true diversification and security. Whether the pipeline is built or not, the continent could take better advantage of the deepening global natural gas market and make it less vulnerable to pressure from any one supplier, including Russia.

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Nord Stream 2 unearthed important issues that divide “old and new Europe.” While it could become an opportunity to “work out” the differences, it has become a political lightning rod that can significantly weaken the EU.

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Nord Stream 2 unearthed important issues that divide “old and new Europe.” While it could become an opportunity to “work out” the differences, it has become a political lightning rod that can significantly weaken the EU.

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Wikimedia
September 6, 2018

Technological advances in the area of natural gas liquefaction and hydraulic fracturing that unleashed the shale revolution in the United States have irrevocably changed the rules of the natural gas market. From a regional resource, natural gas is on the way to become a global commodity. The ongoing transformation has been particularly consequential but also distinctive for the Central and Eastern European region, where new market entrants have challenged Russian dominance.

Natural gas has been increasingly popular, especially in power generation. Compared to coal or fuel oil, natural gas is much cleaner—emitting considerably less carbon dioxide and local pollutants. This advantage is coupled with comparable, if not superior, performance and efficiency.

But in its gaseous, low-density form, natural gas is difficult and expensive to transport. Pipeline transportation has been a traditional go-to method to move the fuel. Given the prohibitively high cost of liquefaction, liquefied natural gas (LNG) has been used only where pipeline infrastructure could not be built. This resulted in markets that are regional in nature—established by long-term investment in pipeline infrastructure and followed by long-term contracts. In areas where one or few regional suppliers exist, this creates dependency, and the commodity then becomes subject to potential political risk and interference.

Over the last decade or so, however, two relatively recent developments have been markedly changing these natural gas market dynamics. First, natural gas liquefaction (LNG) technology advanced to become efficient and cheap enough to provide a viable alternative to piped gas. Second, new supplies of natural gas have been unlocked around the world, including in Qatar, Australia, and the U.S., where new horizontal drilling technology initiated the “shale revolution.” As a result LNG trade tripled over the last 17 years, rendering a more global, liquid, and deep gas market. In this market, there are many new points of supply and demand as well as an increasing share of trades that are either short-term or spot-based. In addition, the geopolitical value of the resource has diminished for traditionally dominant regional providers—potentially allowing more geopolitical sway to non-traditional gas suppliers such as the U.S. or Australia.

These trends challenge in particular the traditional dependency of Central and Eastern European (CEE) countries on Russian gas.

Following the fall of the Iron Curtain and having lost the ability to politically influence countries in the region directly, Russia has used its natural gas resources to achieve geopolitical ends and profited economically from its dominance. But the advent of a more fungible LNG market and the end of many long-term contracts with Russia (expiring in the early to mid-2020s), change the region’s bargaining position vis-à-vis Russia. And at least some CEE countries are ready to take advantage of this opportunity.

Poland and Lithuania have already made the first steps—building and operating new LNG import terminals. Additional terminals to support the CEE region are planned in Croatia, Estonia, and Greece. New long-term contracts have also been signed. Most recently, this included 20-year contracts that Poland’s PGNiG signed for 5.4 billion cubic feet (bcm) of natural gas to be delivered starting 2023. Importantly, the contracts are FOB (free on board) allowing PGNiG freedom when it comes to the gas destination after purchasing the contracted volumes. The company can either deliver those volumes to Poland or decide to sell it elsewhere, if Poland’s demand is not high enough to absorb it or if there is a cheaper source of gas that can be accessed at that time.

This arbitrage opportunity underlies a distinctive wrinkle in LNG trade in Europe. Considering higher costs associated with unconventional gas extraction, liquefaction, and transportation, LNG prices will likely be higher than conventional Russian gas transported via an existing and extensive network of pipelines. As such, LNG is unlikely to replace Russian gas. But it can diversify the supply, provide a price floor and balance the market. And, importantly, the ability to import and distribute LNG by countries in the CEE provides a “credible threat” to current Russian geopolitical and pricing practices. In that role, LNG offers greater energy security not only by diversifying the supply source but also by changing the nature of Russian gas deliveries—allowing CEE to take advantage of cheaper Russian gas on more competitive terms. 

Our blog highlights the research, opinions, and insights of individual authors. It does not represent the voice of the Kleinman Center.

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