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You May Not Be Interested in Pipelines, But Pipelines Are Interested in You

Posted May 22, 2021

Byron King

By Byron King

You May Not Be Interested in Pipelines, But Pipelines Are Interested in You

Just as with copper the other day, I’m using the title to make a point about pipelines.

That is, the title is a riff on what Leon Trotsky once said about war. Meaning that unless you live next to a pipeline, you don’t think much about the subject. But of course, pipelines are important.

Indeed, your world is crisscrossed by pipelines. Water and sewer come to mind. Natural gas too, depending on where you live.

Meanwhile, how do you think oil and gas move from wellheads to processing centers or refineries? And how do fuels like gasoline, diesel or heating oil move from refineries to local terminals? Yes, pipelines.

In fact, we experienced a brass-knuckle lesson in the importance of pipelines just a couple of weeks ago. Colonial Pipeline was hacked and went down for a few days. That mess plunged the Southeast U.S. into energy chaos.

Meanwhile, speaking of pipelines, you may have missed a news item out of Washington this week. Namely, President Biden will lift sanctions against a group of Russian entities which are building a large gas pipeline called Nordstream 2.

This line runs from Russia, then beneath the Baltic Sea to Germany. And there’s much more to know, as I’ll explain in a moment.

At the outset, I’ll grant that this is exactly the kind of thing you may not be interested in. After all, it’s a pipeline. In Europe. Under the Baltic Sea. Far from where you live.

Who cares, right? But I assure you… This pipeline is interested in you.

Let’s dig in…

According to the Houston Chronicle, “A natural gas pipeline linking Russia and Germany edged closer to completion after the Biden administration loosened sanctions of the controversial project.”[1]

Here’s a map to help you visualize things.

map

Notice that there’s already a natural gas pipeline from Russia to Germany called Nordstream. It runs from Vyborg on the Russian border with Finland, under the Baltic Sea to Greifswald.

For the past eight years or so, Russia has been building a parallel line called (appropriately enough) Nordstream 2 to Germany. The only difference in the location of lines is the origin of No. 2, south of St. Petersburg, versus further north with the first line.

Both of the Nordstream lines are constructed to carry natural gas. Nothing fancy, just methane like what you burn in your furnace or with your stove.

And as you can imagine, this second gas line is welcome in Germany. Indeed, Germany desperately needs the energy supply.

Germany is a populous manufacturing powerhouse, but for “green” reasons it has shunned nuclear power. And Germany has gone full bore for allegedly renewable energy systems, wind and solar, but the inescapable fact is that they work intermittently in the best of times.

In short, Germany’s energy situation is a mess. Brownouts, blackouts, energy issues galore. The country needs more natural gas, and Russia is more than willing to sell it.

Right now, the actual Nordstream 2 line is over 90% laid on the seafloor and nearly completed.

Still, up to now, Nordstream 2 has faced massive opposition from the U.S. at high policy levels; it’s also faced opposition from institutional NATO and much of the European Union (EU) hierarchy.

Opponents of Nordstream 2 offer numerous reasons, ranging from petty and parochial self-interest to arm-waving geostrategic.

Along the way, many players have expended much credibility. President Trump, for example, opposed Nordstream 2, despite how he also wanted to “get along” with Russia. But Trump was trapped by the whole Russia-Russia-Russia political attack that he confronted every day of his administration.

Other political and military figures across Europe also oppose Nordstream 2. There’s concern about Germany having control over much of Europe’s gas supply and distribution system, as opposed to the way things are now (see below). Other reasons tend to focus on concerns over Germany by non-German nations. Plenty of history and culture at work here.

Now again, this all may seem a “European” thing to someone in the U.S. or Canada. Not our problem, right?

But Nordstream 2 illustrates much that has gone totally wrong with the entire Western approach to Russia.

Opposition to the pipeline illustrates a particular sense of Western hegemony and hubris, as well as political entitlement and foolish arrogance during an era of foundational change in the global correlation of forces.

In other words, things are happening that will not end well for the West. And Nordstream 2 helps frame the picture.

It’s worth keeping in mind that Russia is rich in energy, certainly in natural gas both from older fields discovered in Soviet days and massive new gas zones in Eastern Siberia and in the Arctic far north.

In short, Russia is an energy powerhouse, which we discussed here. And Russian gas (oil too, another aspect of this) is relatively low cost to produce.

One of Russia’s great geostrategic advantages is that its energy production is entirely an internal matter.

That is, Russian energy producers use Russian labor, equipment, machinery, steel, chemicals, energy, etc. In this sense, virtually all cost elements are calculated in Russian rubles, which are undervalued in world currency markets for a variety of reasons.

Then when Russian gas flows to the surface, it instantly becomes valued in terms of dollars or euros. So right away, the gas has become more valuable just via exchange rates.

Now, add the fact that Russia has a well-developed internal system of pipelines. Here’s another map to show this at a large scale.

map

As you can see, Russia can transport its gas and oil through the lines from production fields to burner tips and storage tanks across the land.

You can see from the map how energy flows from far north to far south and across the landscape into the industrialized regions of western Russia. Or the Russian energy industry can move it into pipelines that are fully dedicated to export.

In fact, Russia has exported significant gas to Western Europe since the 1970s, meaning the days of the Soviet Union.

One critical legacy of those Soviet-era exports is that the main trunk lines pass through Ukraine, formerly part of the USSR. Here’s that map.

map3

This map gives you a feel for how complex is the gas export system from Russia to Europe, passing through Ukraine. (Previously I discussed this, back in November 2019 here.

Obviously, much of Russia’s export gas now enters Europe via Slovakia and Romania, versus Germany. And many Europeans like it that way.

The main point in all of this is that you can’t look at Nordstream 2 in the Baltic without considering the gas dynamics of Ukraine.

Here are some ways to help tie it all together…

Western opposition to Nordstream 2 is grounded at three core levels:

  • There’s longstanding concern in Washington and Brussels/NATO that increased German use of Russian gas will somehow decrease Germany’s political and/or military reliability. Russia could close the valves in an emergency and the Germans would buckle, right? Of course, Germans appear not to think this is a key risk to their nation, or why else would they make the gas deal in the first place?
  • At the same time, more Russian gas moving to Germany/Western Europe via Nordstream 2 will likely mean less gas flowing through the Ukraine system. This will cut into what are called “transit fees” that Ukraine collects for allowing Russian gas to move across its territory to markets further west. It also may mean less gas available for Ukrainian energy needs. And as mentioned above, many non-Germans are worried that Germany might hold excessive levels of control over gas distribution in Europe.
  • There’s also a U.S.-focused economic angle. That is, Germany’s increased use of Russian gas will foreclose future markets in Europe for U.S.-produced liquefied natural gas (LNG). The roots of this go back 15 years with fracking in the U.S., when large amounts of new gas became available. This created a strong U.S. political effort to export LNG from North America to Europe, where Germany is a large potential customer.

Each of these points make for complex issues. And this isn’t even the entire list.

But the summary is that opposition to Nordstream 2 ranges from raw U.S. self-interest (the immediate economic benefits of exporting LNG) up to strategic levels of keeping NATO tied together, and as a side-measure backing Ukraine against Russia.

All of which brings us back to recent news, President Biden’s decision not to oppose Nordstream 2. Until that moment, blocking the line was the long-term U.S. stance under both Presidents Obama and Trump, and the firm position of the Washington Deep State.

Now, in essence, after an abrupt change in policy the line will be soon completed, likely this summer. By next year, more and more Russian gas will flow straight to Germany, bypassing Ukraine.

And this makes the case for why pipelines are interested in you.

Biden’s reversal of longstanding U.S. opposition to Nordstream 2 ought to resonate in the U.S. and Canada. Clearly, the Biden administration is viscerally anti-carbon. And Biden himself has opposed building pipelines from the beginning of his career. Indeed, Biden canceled the Keystone XL Canada-US line on his first day in office.

Yet in this instance Biden made a determination that directly benefits Russia and Russian hydrocarbons.

In contrast, one can only imagine the howls of Russia-Russia-Russia that would have erupted had Trump done this. But with Biden? The news is buried.

Meanwhile, here’s what’s going on.

Biden’s advisers likely looked at recent political developments in Germany and became concerned, particularly with the rise of the Green Party in elections. A political upheaval in Germany, particularly one that changes the entire philosophy of governance, likely will not benefit the U.S.

Thus one reason for Biden to reverse course on Nordstream 2 is to acknowledge the obvious. Germany is in trouble with energy, and the country’s power plants and heating furnaces require new supplies of natural gas. If this gas comes from Russia, at least the present government will be able to take credit for the deal.

Another angle is that U.S. policymakers have apparently awakened to the ongoing shift of Russian geopolitical interest from Europe towards Asia, namely China. We discussed that not long ago, here. It’s not unreasonable to think that the Biden administration is trying to — and borrowing the phrase from Trump — “work with Russia.”

At the level of parochial politics, looking ahead Biden wants a summit meeting with Russia’s leader Vladimir Putin. And frankly, Putin doesn’t need that. In fact, Putin can take Biden or leave him. Right now, there’s little or nothing that the U.S. can offer to Russia via a summit. But the optics of a meet-and-greet may be beneficial.

I can almost hear the back-channel discussions. The U.S. rep begins talking about Biden and Putin meeting. The Russian on the other side listens for a moment and then says something like, “Okay, we can do this but you have to quit jerking us around over that Nordstream 2 line. It’s 90% built, so stop blocking it. There’s a lot of money in play.”

And voila, the Biden administration finds enough of a loophole in the anti-Russian sanctions to permit a Russian consortium to finish the project.

All in all, completing the pipeline is probably the correct decision. The U.S. was never really going to stop it, just delay the project and annoy a lot of German interests who need more natural gas. That, and play the role of a thorn in the side of Russia.

The Ukraine issue is already off the table as well. Russia holds overwhelming military superiority in its own backyard. The U.S./NATO isn’t going to support Ukraine in any major confrontation with Russia because of unacceptable war risk. Looking ahead, Ukraine will keep spiraling down into an economic abyss.

Meanwhile, U.S.-sourced LNG is not, and was never going to be price-competitive in Europe. U.S. gas may come from wells at relatively low cost. But LNG logistics are prohibitive. The processing, handling, transoceanic shipping, unloading and storage just drive the end price above anything close to the Russian price, delivered via pipeline.

All in all, we see what passes anymore for American geostrategy at work here. If you get the feeling that the U.S. has, over many years, painted itself into one strategic corner after another, you’re right. And occasionally the U.S. even manages to stumble out. But there’s nothing too impressive about the process.

On that note, I rest my case.

That’s all for now… Thank you for subscribing and reading.

Best wishes,

Byron King

Byron King
Managing Editor, Rich Retirement Letter
WhiskeyAndGunpowderFeedback@StPaulResearch.com

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[1] Biden Shift Brings Nord Stream 2 Closer, But Hurdles Remain, Houston Chronicle

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