Page 5 - FSUOGM Week 32 2021

FSUOGM COMMENTARY FSUOGM
customers with the option of hub-based pricing, limiting its ability to charge exorbitant prices.
Furthermore, and regardless of Russia’s intentions, the country cannot expand its mar- ket share on the continent simply by building another pipeline. If it is serious about expanding its share, it will have to entice buyers with com- petitive pricing.
“Russia’s intentions in building the double pipeline have always been clear: they want to dominate European gas supply,” E&C CEO Ben- edict De Meulemeester explains. “That was their plan when they built Nord Stream 1 but that plan failed. You can’t push other suppliers out of the market by simply building a bigger pipeline than the others have.”
“Let them build that last stretch of Nord Stream 2,” he says. “Adding 55bn cubic metres of extra import capacity increases massively the chances of oversupply and low natural gas prices for European customers.”
Gazprom will be able to lower its prices as Nord Stream 2 will save the company some $1.3bn in transportation expenses each year, which is equivalent to 3-4% of its EBITDA, ana- lysts at VTB Capital estimate.
Political pluses
Politically, the agreement between Germany and the US is also good in terms of Western unity. While Nord Stream 2 will increase Germany’s economic relationship with Russia, letting the project go ahead also removes a major point of contention between Berlin and Washington.
It has also been clear for some time that the US efforts alone were not enough to bring the project to a halt. Washington’s sanctions suc- ceeded in forcing Swiss contractor Allseas to abandon work on the pipeline in December 2019, but Russia was able to bring in its own pipelaying vessels to finish the job.
The US therefore decided it was better to try and save face by permitting the project to go ahead, rather than continue its opposition and display impotence.
The next question is where all this leaves Ukraine, which has condemned the German-US deal. Berlin and Washington committed to using “all available leverage to facilitate an extension of up to ten years to Ukraine’s gas transit agree- ment with Russia” when it expires in 2024. This would give Kyiv sufficient time to prepare for the subsequent loss of billions of dollars of transit revenues.
In the worst-case scenario, if these efforts fail, the EU will have to help Ukraine recoup the lost revenues as well as the 10bn cubic metres (bcm) of gas that it currently gets from Russia. The agreement notably provides for the creation of a Green Fund for Ukraine to support its energy transition with investments and technical assistance, and this could serve as the means for compensating Ukraine. At the same time, the end of Russian gas transit will sever the largest remaining economic tie between Russia and Ukraine, which would help the country re-pivot its economy towards the EU.™
The gas pipeline system of Ukraine. Source: Gazprom.
Week 32 11•August•2021 w w w . N E W S B A S E . c o m
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