On November 21, the first shipment of U.S. liquefied natural gas (LNG) destined for Ukraine arrived at the Polish terminal at Świnoujście in the Baltic Sea. The shipment marks the execution of the trilateral agreement between the United States, Poland, and Ukraine reached on September 2 to secure Polish and Ukrainian gas supplies. By 2021, Poland will move roughly 6 billion cubic meters (bcm) per year to Ukraine, marking another important shift in the ever-evolving map of European natural gas politics.
The Ukrainian gas question faces an inflection point this winter, and EU-brokered talks to forge a new gas-transit agreement between Russia and Ukraine, which expires at the end of this month, are coming down to the wire. Europe relies on Russian gas through Ukraine’s pipelines for 30% of its imports, and a disruption would place Italy, Hungary, and others in Eastern Europe at particular risk. France announced last week that it would host a summit with Russia, Germany, and Ukraine on December 9. Yet Ukraine and Russia held surprise talks on Friday that aimed at reaching a deal that would satisfy European requirements. Russia demands that Ukraine restart direct imports, which it ceased in 2015.
The opening of the U.S.-Polish-Ukraine connection bolsters Ukraine’s gas-supply security and opens up a new artery in Europe. The target of 6 bcm to Ukraine by 2021 may sound small, but would represent roughly half of Ukraine’s imports, which actually fell from 14.1 bcm in 2017 to 10.6 bcm in 2018. Imports from Poland were minuscule in 2018, at 0.2 bcm, but U.S. imports will push these steadily higher. The U.S.-Polish-Ukraine connection further fragments Europe’s gas map, but competition will only fortify the continent’s gas-supply security.
Washington wins over Warsaw
The LNG shipment two weeks ago was not the first from the United States into Poland. The first arrived in July 2019, marking the launch of the November 2018 agreement for the U.S. company Cheniere Energy to supply the Polish Oil and Gas Company with 39 bcm over 24 years.
U.S.-Polish energy diplomacy has flourished over the past year. After the gas-supply agreement, the U.S. Congress passed the Protecting Europe’s Energy Security Act, which sanctions the use of vessels used to construct Russian export pipelines. The United States plans to move an additional 1,000 troops from Germany to Poland, where 4,500 troops already reside. Poland, meanwhile, will not renew its own gas-supply contract with Russia when it expires in 2022. It will rely instead on Norwegian pipeline gas through the Denmark-transiting Baltic Pipe Project, which will start operating in October 2022, and U.S. LNG.
Ukrainian state-owned Naftogaz’s CEO Andriy Kobolyev touted the arrival of the U.S. LNG shipment. The move signals that the EU’s market-based strategy to facilitate reverse pipeline flows from Poland, Hungary, and Slovakia, as well as LNG imports from the United States and elsewhere, are increasingly filling the void.
The Moscow counter
U.S. LNG flows give Ukraine increased leverage and independence, but a gas-transit closure would create a European-wide problem.
Russia has not sat idly by and watched its markets disappear since 2014. It will complete two new large-scale pipelines to Turkey (TurkStream) and China (Power of Siberia) very soon. A third to Germany (Nord Stream II) also seems likely, despite the United States and its European allies throwing up new roadblocks at every turn. Russia is also growing into a veritable LNG power. Russian President Vladimir Putin visited Hungarian Prime Minister Viktor Orban in Budapest last week to convince him to import gas from TurkStream.
Price has always been Russia’s competitive advantage in Europe. Gazprom has intermittently dropped prices over the last five years to maintain market share on the continent. Gazprom even increased market share in 2017 and 2018 partly due to this strategy. But the Polish-Ukraine pipeline and other LNG inroads in Europe have defanged this strategy. The completion of Balticconnector, which will carry Norwegian gas to Finland, Estonia, and possibly to other Baltic states, could force Russia to drop prices further by 2022.
Russia may well be tempted to remind Europe that it needs its gas, not least because Europe is so well supplied heading into what is expected to be a warm winter. It will ultimately be loathe, however, to intentionally disrupt supplies, lest it imperil its own gas-demand security. Customers for Nord Stream II and TurkStream would immediately reconsider relying on these new pipelines in such a scenario. A series of short-term transit deals between Russia, Ukraine, and the EU, therefore, remains the likeliest outcome of this month’s talks.
Competitive fragmentation of gas
Poland has been essential geography for those wishing to control Europe over the last 100 years. The Germans and Russians battled for it during both world wars, and are now squeezing it on gas with Nord Stream II. The U.S.-Polish-Ukrainian alliance is a logical counter for all three countries, and was entirely unforeseen five years ago.
LNG is producing a “competitive fragmentation of power,” a phrase employed by Walter Scheidel in his fantastic new book, Escape from Rome: The Failure of Empire and the Road to Prosperity (Princeton University Press, 2019). Scheidel attributes Europe’s rise, and ability to harness fossil fuels before the rest of the world after roughly 1800, to its “numerous fractures” that were allowed to play out after Rome’s fall. “Nothing like the Roman emperor ever returned to Europe,” like it did in Asia, allowing national, social, and economic forces to compete and flourish.
The U.S.-Polish-Ukrainian connection enhances European gas-supply security by further decoupling politics from energy and forcing traditional players to reorient and improve their strategies. Europe is fragmenting across many different fault lines, but fragmentation is proving an under-appreciated strength in energy.
Photo credit: Wikimedia Commons.