November 19 saw the completion of the offshore section of the 1,800-kilometer Turkish Stream pipeline to supply Russian natural gas to Turkey. Mentioning the project’s geopolitical significance in a speech during the completion ceremony, Russian President Vladimir Putin said that “Projects of this kind and this project in particular, are not directed against anyone’s interests. They are exclusively constructive in nature. They are aimed at developing relations between states, creating stable conditions for economic development and improving the well-being of our citizens. The implementation of such projects is a clear example of our ability to stand up for our national interests, because Turkish Stream serves the best economic interests of the Turkish Republic.”
When gas starts flowing through the Turkish Stream pipeline as scheduled in 2016, Ankara will no longer have to bother about transit risks for itself. Turkish Stream proves again that Russian-Turkish projects defy any third-country pressure, which is certainly there, but is effectively neutralized by Moscow and Ankara.
This situation comes in sharp contrast with the battles raging over the construction of the Nord Stream 2 pipeline, which is being actively opposed by the United States with President Donald Trump and other officials in Washington warning about Europe’s unacceptable economic and, therefore, political, dependence on energy supplies from Russia.
The Nord Stream 2 project is facing equally strong opposition also from Ukraine and Poland, which are eager to demonstrate their concern about safeguarding America’s interests. During a meeting with Donald Trump in September, Polish President Andrzej Duda, “expressed hope that Trump will stop the construction of the Nord Stream gas pipeline. The Polish president also said that he had discussed with his US counterpart how Washington could benefit from this since Russian energy supplies to Europe prevent the US from selling its LNG to the European market.”
Meanwhile, it looks like Ukraine and Poland are the only countries that welcome the hawkish statements made by US Energy Secretary Rick Perry. During a visit to Kiev earlier this month, Perry made a number of populist and illogical statements. “Thank you, President Petro Poroshenko, for your commitment to energy diversification. The US remains opposed to Nord Stream 2 and any energy source that can be held hostage by unstable state actors. The US stands ready to support our allies with abundant, affordable energy,” he said.
He also said that the “revolution of dignity” [in Ukraine] was a struggle for “economic freedom.” This is exactly the type of “freedom” the United States is forcing upon Ukraine by trying to raise gas prices for the people with the help of the IMF so that the cost of US-supplied LNG does not come as too much of a surprise to ordinary Ukrainians.
Natural gas supplies via the Nord Stream 2 pipeline are expected to begin in January 2020, and the Turkish Stream pipeline will go on-stream in 2019. This means that 80-85 percent of the natural gas transit via Ukraine will move elsewhere. According to the head of the Ukrainian Council on the Development of the Gas Industry and Natural Gas Market Leonid Unigovsky, “after the launch of the Turkish Stream gas pipeline, gas transit through Ukraine will decrease by 12–13 billion cubic meters a year.”
As a result, Ukraine will lose half of the 70-90 billion cubic meters of natural gas currently flowing through its territory.
Mindful of this prospect, Kiev representatives have repeatedly stated that Ukraine is counting on US and EU in thwarting the construction of the Nord Stream 2 gas pipeline. How come they haven’t they been saying the same about the Turkish Stream project?
Ukraine has always actively protested against the construction of the Nord Stream 2 pipeline, but has for most part ignored the Turkish Stream project, just acknowledging the mere fact of its existence and mentioning the possible consequences of its construction.
“The construction of the second half of the Turkish Stream pipe may be completed in 2018. It is almost 50 percent ready now and the rest will be completed next year,” the board chairman of Naftogaz of Ukraine, Andrei Kobolev, said in the fall of 2017.
“We expect that as early as late next year, the first leg Turkish Stream will take on a share of the [gas] transit through the territory of Ukraine,” he added.
The US position on the Turkish Stream project has never been as vocal and insistent as it has been on the North Stream 2. Kiev’s position has been the same, even despite the threat Turkish Stream poses to its economic interests. Just like that of the leaders of Mejlis (banned in Russia) who, despite their claim to have a special relationship with Ankara, have not protested against the construction of the Turkish Stream pipeline, realizing full well that kowtowing to Washington’s interests could cost them their more important relations with Ankara.
Why all this lack of attention towards the Turkish stream project? Washington wants Europeans to start buying its LNG, which, though expensive, brings democracy to the Old World, while simultaneously sticking to its anti-Russian policy. The US is also unwilling to antagonize a fellow NATO member, which plays an important role in the Middle East and the Syrian conflict.
Europe needs gas and doesn’t really care about where it comes from, provided that itkeeps non-commercial risks at a minimum [something Kiev worries so much about], and is available at an affordable price.
Ukraine wants to remain a transiter of Russian gas while simultaneously switching to LNG imports from the US and convincing the European Union of the importance of such an arrangement. Kiev’s fears are reflected in concrete figures: “… the implementation by the Russian Gazprom of the Nord Stream 2 gas pipeline project poses a major fiscal risk for Ukraine, which will lose up to 3 percent of GDP.”
Speaking of strange logic, Ukraine’s Foreign Minister Pavel Klimkin insists on the extension of the gas transit contract with Russia beyond 2020, which he believes could facilitate his country’s early EU integration. However, there are certain undercurrents here too. Ukrainian energy officials planned to minimize transit risks through the sale of the country’s gas transmission system (GTS).
“The Ukrainian GTS costs about $14 billion. Ernst & Young estimated it at 329 billion hryvnia ($11.9 billion), and so Ukraine will be looking for buyers of its ‘pipe’ outside the EU,’” in a thinly-veiled hint that there is only one buyer outside the European Union – the United States.
Washington wants to wrest Ukraine from the peaceful context of interstate relations by keeping it in a state of tension and conflict with Russia. However, this goal is fully shared by Kiev, which entertains illusions that America really cares much about Ukraine’s economic wellbeing. In fact, the US is more interested in the European market than it is in Ukraine’s, so the former Soviet republic is only instrumental in Washington’s ongoing war with Brussels for the EU market.
Turkey is a NATO member playing a significant role in the Middle East and serving a buffer between Europe and refugees. Ankara has a real sway over the political processes unfolding both in Europe and the Middle East. This allows President Recep Tayyip Erdogan to play his game defending his country’s interests.
By contrast, Ukraine, which neither has an own game to play, nor any political weight to lean on, just can’t afford antagonizing Turkey, which, otherwise, might stop reckoning with Kiev’s interests in the Black Sea region. Meanwhile, as Russia’s President Vladimir Putin said, the gas transit via Ukraine will continue only if its economic feasibility is fully proved by Kiev.
First published in our partner International Affairs
China’s Unorthodox Intervention in the Global Oil Market
Apparently, China has been the talk of the town for quite some time. While the entire yesteryear passed in a flurry of blame game over the pandemic, this year has been nothing short of a blessing for Xi’s regime. However, while China rapidly compensated for the drastic slump last year, the bustling economy has now cooled down – though a bit prematurely. Due to the expansive outbreak of the delta variant, China – like most countries around the world – now faces surging inflation and a crippling shortage of raw materials. However, while one might get a bolder vibe from China’s recent crackdown on industrial giants, the supposed ‘Second Cultural Revolution’ seems on a divergent path from the government’s latest aspirations for the domestic industry.
China seems to be on a path to harness growth that appears to be slowing down as the global economy battles uncertainty. However, while many expected China to take orthodox measures to prolong growth, hardly anyone expected a drastic change of strategy: intervening in a close-knitted global market like never before.
China recently posted its most robust trade surplus in history, with a record rise in exports jumping 25.6% from last year to stand at $294.3; $10 billion more than any previous month. However, while the glowing figures imply sturdiness, the underlying fragility of the Chinese economy is not disguised. In the past few months, China’s production engine has taken a toll as surging energy costs have inhibited production capacity. The factory-gate inflation stands at a 13-year-high which has forced factories to cut output. Amid declining domestic demand due to covid restrictions, manufacturing surveys show that China’s export orders are eroding as supply bottlenecks coupled with energy costs have weighed heavily on the production function. To counter the problem, China recently supplied its reserves into the domestic market; undercutting the surging global price tag dictated by the petroleum giants.
Last Thursday, China’s National Food and Strategic Reserves Administrator made a press release, confirming that the world’s second-largest economy tapped into its crude reserves – estimated at 220 million barrels – to “ease the pressure of rising raw material prices.” While China is known to intervene in commodity markets by using its strategic reserves, for example, Copper, Aluminium, or even grains.
Recently, China tapped into its national reserves to intervene in the global commodity market of industrial metals for the first time since 2010. The intervention was situated as a release to normalize surging metal prices and retain domestic manufacturers’ margins. However, it is a novelty that a national agency confirmed an active supply of petroleum buffer via an official press conference. And while no additional details were offered, it is presumed by global strategists that the press release referred to the 20-30 million barrels allegedly poured into the domestic industry around mid-July: when Xi’s government offered to supply crude to the OPEC.
Furthermore, China’s Stockpile Agency claimed that through open auctions, China’s reserve crude was intended to “better stabilize the domestic demand and supply.” It was apparent that as China ventured through a supply crunch when Brent Crude – Global Crude Index/Benchmark – breached the $76 bpd mark, the country instead resorted to utilizing its own stockpile instead of relying on expensive imported petroleum. Thus, it shapes a clear picture of how China managed to clock a phenomenal trade surplus despite not importing its usual crude quota.
While it is common knowledge that economies like the US and Europe maintain strategic petroleum reserves, the buffers held by China were utilized to actively manipulate the price in a ‘normalized’ oil market instead of their designated usage in supply crunches or wars. The situation today is anything but critical for the oil market to warrant such an intervention. As OPEC+ has boosted its output by 400,000 bpd starting August, output has bloomed beyond its peak since the price war back in April 2020. While the oil market is still well below the output capacity, mutually curbed by the OPEC+ alliance, the demand is still shaky and an equilibrium seems set. Yet, when we observe China – the world’s largest oil importer – we extricate reason that despite a growing economy, China continues to experience massive shortages: primarily in terms of oil, gas, coal, and electricity.
Furthermore, with the ensue of Hurricane Ida, massive US crude reserves have been wiped which has majorly impacted China as well. The US and China rarely stand on the same page on any front. However, even the White House recently asked OPEC to pump more crude into the market due to the rising gasoline prices in America. The same scenario is panning in China as energy shortages have led to surging costs while domestic demand is diminishing. The brunt is thus falling on the national exchequer: something China is not willing to haggle. While it is highly unorthodox of China to explicitly announce its intervention, many economists believe that it was a deliberate move on part of China’s communist brass to amplify the impact on the market. The plan seemingly worked as Brent fell by $1.36 to stand at $71.24 on Thursday.
If China’s commitment to normalize domestic energy prices is this significant, it is highly likely that another intervention could be pegged later in the fourth quarter. Primarily to counteract the contraction in export orders by cutting imports further to maintain a healthy trade surplus. In my opinion, it is clear that both the US and China are not willing to let Brent (and WTI) breach the $70-$75 bracket as key industries are at stake. However, while one takes a passive approach, the other is touted to go as far as pouring another 10-15 million barrels of crude by the end of 2021. Yet revered global commodity strategists believe that the downturn in prices is “short-lived” just like any other Chinese intervention in a variety of other commodity markets globally. And thus, experts believe that the pump is simply “not enough physical supply” to quite strike a permanent dent in an inherently flawed market mechanism.
Energy Forum Seeks To Analyze Africa’s Energy Potentials And Utilization
African Energy Week (AEW) 2021 in Cape Town, fully endorsed by the Government of South Africa, is committed to accelerating Africa’s energy growth with the aim of establishing a secure and sustainable energy future for every individual on the continent. Accordingly, AEW 2021 firmly believes in the role that oil and gas will continue to play in Africa and will emphasise the continent’s upstream market through a collaborative, International Oil Company (IOC) forum. Led by IOC executives, as well as government representatives from notable energy markets in Africa, the IOC forum aims to address the upstream challenges faced in Africa, providing solutions and strategies to drive exploration and make Africa more competitive for investment.
With the discovery of sizeable oil and gas reserves across the continent in recent years, regional and international explorers are turning an eye to the world’s final frontier market – Africa. Nigeria’s 200 trillion cubic feet (tcf) of gas reserves and 37.2 billion barrels of oil (bbl); Mozambique’s 11 tcf of gas; Senegal’s 450 billion cubic meters of gas; Libya’s 48 billion bbl and 53.1 tcf; and Egypt’s 77.2 tcf of gas have all made Africa the ideal destination for hydrocarbon exploration. What’s more, with many African countries making significant steps to enhance their regulatory environments, implementing legislation to create an enabling environment for investment, the continent has become a highly competitive market for exploration and production. Nigeria’s recently implemented Petroleum Industry Bill, Gabon’s new Hydrocarbon Code, and Angola’s inclusive petroleum regulation, to name a few, have all ensured a competitive and highly attractive market.
With the world’s six oil ‘supermajors’ – BP, Chevron, Eni, ExxonMobil, Royal Dutch Shell and TotalEnergies – all actively present in mature and emerging markets across Africa, the continent has become an upstream hotspot. AEW 2021 aims to accelerate this trend, promoting new upstream opportunities and ensuring both National Oil Companies (NOC) and IOCs drive the continent into a new era of energy and economic success. Accordingly, Africa’s premier energy event will host an upstream-dedicated IOC forum in Cape Town, led by IOC executives and government representatives. The IOC forum aims to address key challenges in Africa’s upstream market, whereby the diverse speaker panel will offer up solutions to expand exploration and production, while ensuring the continent remains competitive for investment in a post-COVID-19, energy transition era.
In addition to the discussion on upstream activities, the forum aims to highlight the role of IOCs in enhancing capacity building, whereby emphasis will be placed on IOC-NOC collaboration. IOCs have a critical role to play in Africa, not only regarding resource development, but human capital and local business development. In order for the continent to become truly sustainable and competitive, NOCs require support from IOCs. Accordingly, the forum aims to identify strategies to enhance cooperation and partnerships, with IOCs taking the lead in Africa’s energy development.
“AEW 2021 in Cape Town will offer a real discussion on Africa. Oil and gas are critical in Africa’s development and the African Energy Chamber (AEC) will not succumb to the misguided narrative that Africa should abandon its potential. The IOCs in Africa have demonstrated the continent’s potential, and by sharing strategies to enhance growth, address challenges, and accelerate upstream activities, they will be key drivers in Africa’s energy future. The IOC forum will not only offer a description of African reserves, but will provide clear, attainable solutions to exploitation, exploration and production with the aim of using energy to enact stronger economic growth. By coming to Cape Town, attending the IOC forum, and interacting with African ministers from across the continent, you will be able to be a part of Africa’s energy transformation,” stated NJ Ayuk, Executive Chairman of the AEC.
Nord Stream 2: A Geopolitical Tension between Russia and Ukraine and the European Dependence
Nord Stream 2 gas pipeline is a 1,230-kilometer direct linkage between the Russian natural gas producers and the consumer market of Europe. The model was made keeping in mind the successful operation of the existing Nord Stream pipeline after a thorough analysis by Nord Stream AG. The main aim of NS2 is said to be the increase in the annual capacity of the existing pipeline up to 110 billion m³. The pipeline starts from the Russian region of Ust-Luga then stretches through the Baltic Sea and ends at the area of Greifswald in Germany. It is due to this route that the project is mainly considered to be controversial. Bypassing directly through the Baltic Sea, the importance of Ukraine for Russia for exporting natural gas to the European market would reduce significantly which will end the $3 billion transit fees gained by the Ukrainian government in the year 2018 alone, causing a sudden and huge strain on the GDP of the country.
This project worth $11 billion would double the market of Russia in Germany which is the largest market in Europe, possessing a key position in international politics. It is said by the Russian officials that the pipeline has almost been completed and it may get operational by the end of August in the year 2021. Some analysts and International Relations experts have considered this as a geopolitical weapon that gives leverage to Russia to influence future events in the region particularly the ones related to the Crimean annexation.
Threat to Ukraine
Recently in a meeting with German Chancellor Angela Merkel, the President of Ukraine appeared to be displeased by the Western recognition of the NS2 pipeline. He called it a “dangerous political weapon” in the hands of the authoritative regime of Russia which has already annexed an integral part of their country to fulfill their geopolitical and economic desires. The desperate opposition of this project by the Ukrainian government has several underlying factors which are very important to discuss.
Firstly, the transit fees earned by Ukraine just by giving passage to the gas going from Russia to Europe make up a fine amount of the GDP of the country. If projects like NS2 get operational then the importance of Ukraine will decline, causing an end to the $3 billion transit fee. Although Russia has ensured to still use Ukrainian passage for the export of their gas, this does not seem to be happening in the future. States are after their national interests and Russia would prefer the direct linkage with the European market instead of paying billions to the Ukrainian government. Currently, out of the quarter of natural gas transported to Europe, around 80% has to pass through the Ukrainian territory.
Secondly, after the expiry of the transit deal between Russia and Ukraine in 2024, it would depend upon the negotiations between the two parties to revive the fate of this deal. Although Kremlin’s Spokespersons have ensured the revival of this deal after its expiry in 2024, debates still exist about the prospects. No one can claim with certitude about the future of this deal between the two states.
Thirdly, Ukraine is intimidated by the future of the country if the Russian gas pipeline bypasses its territory. There already exist many gas-related disputes between the two states which resulted in the cut-off of the gas supply in 2014 and later on in 2015. Russia can pressurize Ukraine for accepting their demands to get their gas supplies back. Recently, Ukraine has started to reduce its dependence on Russian natural gas by switching back to European gas. But this would not be beneficial in any sense if the Russian monopoly over the gas market increases through the NS2 pipeline.
And lastly, the dependence of European markets on Russian gas can undermine the Crimean cause. Once a state has to depend on the other state for the necessities, it has to let go of many important causes and decisions. As Angela Merkel has repeatedly called the NS2 pipeline a geo-economic project rather than a geopolitical “weapon” that can be used by the Russian government as a decisive tool at times of disputes and crises, this already shows the drowning picture of the cause. In addition to this, previously the US administration was very aggressive towards the pipeline but the current government despite its opposition, is unable to do much for stopping the project which can get operational very soon.
Role of US and NS2 Pipeline
The United States of America is well aware of the changing dynamics of the region and the intentions of resurgent Russia. The Republican government under Trump proved to be very destructive for the project. The US did not only oppose the gas pipeline openly but also imposed sanctions on entities aiding Russia in the development of this gas pipeline. In January 2021, Trump imposed sanctions on the gas-pipeline laying ship, “Fortuna” and its owner under the Counter American’s Adversaries Through Sanctions Act (CAATSA). Previously, work on the pipeline had to be suspended as the US imposed sanctions on the main company, Allseas. President Biden was one of the many policy-makers who opposed this pipeline and considered it dangerous for the US and its allies. Although it was not clear what Biden’s policies would be, Blinken ensured to use “persuasive tools” against the pipeline, after acquiring the office. President Biden indeed imposed sanctions on the Russian ships and other companies involved in the laying of pipeline, but analysts think this would not cause any impact on the project as it is almost running towards completion. Rather, anti-sanction policy-makers consider it more important to waive off these sanctions and get into formal negotiation talks with the Russian government.
In May 2021, the President of the US and the Chancellor of Germany gave a joint statement for the agreement signed between the two countries related to the NS2 project. Some of the main features incorporated in the agreement are the announcement of sanctions on Russia in case it violates the peaceful use of the pipeline and utilizes it as a weapon against Ukraine. Germany would not only oppose such a step but would also press on the EU to take counter-measures. Similarly, it was decided to revolutionize the energy sector of Ukraine by the creation of a Green Fund for Ukraine by Germany worth $1 billion. Initially, it was decided that Germany would contribute an amount of $175 million. Also, it is said that Germany would use all its leverage to ensure an extension of the current transit agreement (which is going to expire in 2024) between Russia and Ukraine for at least up to 10 years. This would continue the role played by Ukraine as a transit state, helping its GDP and putting off the security threat over it. There is a sharp criticism on the Biden administration over this agreement which did not involve Poland and Ukraine while deciding their future. Also, the deal does not put any process of hindering the pipeline which is against the aspirations of all Americans and most of its allies.
In addition to limiting the role and influence of Russia in the European continent, the US is also looking forward to the opportunities of fulfilling its national interest. If the US becomes successful in hindering the operation of NS2, it can expand its gas buyers in the European countries. This way, like the post-war era the US can get a strategic and decisive role in this part of the world which can ultimately help it to counter the threats related to the rise of China and the Sino-Russian nexus. We can say that the US cannot only use this as an economic incentive but also utilize its importance in the future of great power rivalry.
Why states are against this Pipeline Project?
Along with the direct impacts of this project on Ukraine and Poland (to some extent). The major concerns of the states which oppose the NS2 pipeline include the additional leverage which Russia will gain when its national gas firm would directly export gas supplies between Russia and the European continent. This may result in a sudden disruption of the supplies, influenced by the changing dynamics of the region. The Russian authorities had cut off the gas supplies of Europe in the winters of 2006 and 2009, leaving millions without gas for days. Similarly, the increased dependence of Europe on Russian gas can be counter-productive and may hinder the interests of the states and the US soon. This situation can be utilized by both Russia and China to exploit the bonding between the US and its allies.
From the security perspective, the presence of Russia and its naval forces can cause a security threat to the states surrounding the Baltic Sea. The unsettled conditions may lead to chaos and problems in the region.
If Russia was to get a high stake in the energy market of Europe, this would also allow it to exploit the situation and create a monopoly over the market. This may not also lead to political outcomes and consequences but can also end the game of local and international gas market players in the continent. This is the biggest threat that is encouraging the US to make NS2 a security threat for itself and its allies.
Keeping in view the nature of international politics and changing economic dimensions to the project, the only possible way forward is an agreement between Russia and the US related to the pipeline and the future of Ukraine. If developments can be made over the existing US-Germany agreement then concerns of the states can be mitigated to a huge degree. The options of imposing sanctions on the pipeline are no more practical and can be counter-productive for the US concerning its allies especially Germany.
The Nord Stream 2 Pipeline despite its economic benefits cannot be separated from its geopolitical aspects and consequences. In international politics, the hardest thing to do is to trust the intentions of the other state, especially when it was a superpower previously and has several examples of violating the sovereignty and rights of neighboring states. But presently, all those who oppose the pipeline have no other option than to allow its proper functioning under certain terms and conditions.
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