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Trump’s European Gas Plans Are Delusional

Crunch the numbers Mr. POTUS

In the much-heralded meeting yesterday between President Donald Trump and Russian President Vladimir Putin in Helsinki, Trump said that the U.S. will “compete successfully” against Russia in Europe’s natural gas market.

“We’ll have to be competing with the pipeline, and I think we’ll compete successfully, although there is a little advantage locationally,” Trump said. “So, I just wish them luck.”

Trump’s statements come just a few days after his controversial meeting last week with NATO and EU members where he kicked off talks by taking Germany to task over its Nord Stream 2 gas pipeline deal with Russian energy giant Gazprom.

Talking tough

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The president told NATO members in front on rolling TV cameras last week that Germany was “a captive to Russia” over the Nord Stream 2 pipeline. Trump, which was meeting reporters with NATO Secretary-General Jens Stoltenberg, before a summit in Brussels, also said it was “very inappropriate” that the United States was paying for European defense against Russia while Germany, the biggest European economy, was supporting gas deals with Moscow.

“When Germany makes a massive oil and gas deal with Russia,” Trump said to Stoltenberg. “We’re supposed to be guarding against Russia and Germany goes out and pays billions and billions of dollars a year to Russia.”

“So we’re supposed to protect you against Russia and you pay billions of dollars to Russia and I think that’s very inappropriate,” Trump added.

The U.S. State Department repeated a warning that night to Western firms involved in the Nord Stream 2 deal, saying the project could divide Europe and they were at risk of sanctions. On cue, Germany countered. The chairman of the German Committee on Eastern European Economic Relations (Ostausschuss), Wolfgang Buechele said “threats of U.S. sanctions against European companies invested in Nord Stream 2 encroach on European energy policy.” Other across Europe are still claiming that Trump is using geopolitically charged concerns to drum up business for U.S. LNG exporters.

Russia for its part always counters U.S. talk over European gas security. Last week, Kremlin spokesman Dmitry Peskov said that Trump’s criticism of Nord Stream 2 was an “egregious example of unscrupulous competition and it worries Moscow.”

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Controversial pipeline

Nord Stream 2 is a 759 mile (1,222 km) natural gas pipeline running on the bed of the Baltic Sea from Russian gas fields to Germany, bypassing existing land routes over Ukraine, Poland and Belarus. It would double the existing Nord Stream pipeline’s current annual capacity to 110 bn cubic meters a year and is expected to become operational by the end of next year, enough to meet almost a quarter of total demand across the EU.

However, in the niceties displayed yesterday between Trump and Putin, which brought immediate political backlash in the U.S. from both sides of the political divide including withing Trump’s own ranks, Putin reassured Trump that Russia would continue to ship gas through Ukraine (a major point of contention over the Nord Stream 2 pipeline) after the Nord Stream 2 project was completed. Yet, given the complex relations between Russia and Ukraine both geopolitically and over gas contract issues, that promise could likely never materialize.

Crunch the numbers Mr. President

Geopolitical posturing and region politics aside, Trump’s comments that the U.S. can compete successfully with Russian gas needs further examination. First, in 2016 almost 90 percent of Russia’s 7.5 Tcf of natural gas exports were delivered to customers in Europe via pipeline, with Germany, Turkey, Italy, Belarus, and the UK receiving the bulk of these volumes, according to the EIA.

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Second, Russia already has an extensive network of pipelines in place. Third, piped gas is always cheaper than imported LNG. While it's true that the initial cost to put gas pipeline infrastructure in place can run into the billions of dollars, LNG project development is usually even more capital extensive. Russian piped gas, according to some analysts, can be at least 25 percent cheaper than imported LNG, a market reality perhaps lost on President Trump.

Moreover, American LNG is simply at a cost disadvantage compared to Russian piped gas. Using a Henry Hub gas price of $2.85/MMBtu as a base, Gazprom recently estimated that adding processing and transportation costs, the price of U.S.-sourced LNG in Europe would reach $6/MMBtu or higher – a steep markup.

Henry Hub gas prices are currently trading at $2.770. Over the last 52-week period U.S. gas has traded between $2.64/MMBtu and $3.82/MMBtu. Russian gas sells for around $5/MMBtu in European markets and could even trade at lower prices in the future as Gazprom removes the commodity’s oil price indexation. Given both the cost advantage of Russian gas, and the push back from many EU members against U.S. LNG, Trump’s statements in Helsinki could just be just another one of the president’s pipe dreams.

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