Note: This article about Gazprom was initially rejected by Seeking Alpha editors (so I published this article on SA instead), though nothing restricts me from publishing this unreleased material in my personal blog. Enjoy!
Gazprom has been unfortunate to be heavily affected by politics. The stock's news turned into the chronicles of sanctioning Nord Stream 2, and the comments section under each portion of Gazprom-related news become a place for hot debates.
In this article, I will discuss the historical perspective of natural gas projects developed by the USSR together with European countries in times of Gazprom's progenitor, the Ministry of Gas Industry of USSR (or Mingazprom).
I believe that this analysis will shed light on the fate of the Nord Stream 2 project, which may seem to be full of uncertainty due to sanctions. In fact, I don't see anything out of ordinary given in what conditions many of Gazprom's and Mingazprom's pipeline projects were developed, so investors may stay calm and enjoy another episode of the sanctions drama later this year.
Also, I would like to share my opinion on the current state of the NS2 and present my arguments on why the controversy around the project is essentially about commercial, not abstract political concerns.
Pipeline Diplomacy
The "gas bridge" between USSR/Russia and Europe has over a half-century history that still continues to be written. It all started in the post-WWII period, which was full of harsh geopolitical and ideological confrontation between the democratic West and communistic East, so we have good historical material to work with.
The first negotiations on natural gas supplies from the USSR to Western Europe started in 1966 with the Italian company Eni (E) but ended due to political reasons. In 1967, after the launch of the Brotherhood pipeline (Dolina–Uzhgorod–USSR Western Border), Soviet gas began to flow to Czechoslovakia. A year later, in 1968, the Soviet enterprise "Soyuznefteexport" and the Osterreichische Mineralolverwaltung company signed an agreement to supply natural gas from the USSR to Austria. The initial volume of annual gas supplies was 142 million cubic meters.
Source: Gazprom
Negotiations went pretty smoothly, but just a month later after signing the gas contract, this happened:
Source: The New York Times
The Warsaw Pact forces were sent to Czechoslovakia to stop liberalization reforms performed by the Czechoslovak government of that time. Unlike modern poisonings of Russian opposition leaders, this was a way stronger incentive for Western European countries to revise their trade relations with the Soviet Union. However, these unfortunate events didn't alienate Western partners from trading with the USSR.
In 1969, the Soviets offered West Germany to exchange pipes and equipment for gas supplies, and the so-called "gas-for-pipes" deal was concluded in 1970. In 1973, the Soviet Union started to supply natural gas to West and East Germany. The first buyers were Ruhrgas and Verbundnetz Gas.
From 1970 to 1980, the Soviet gas exports to Western Europe increased significantly, from 1 billion cubic meters (bcm) to 26.5 bcm per year.
Source: Verbundnetz Gas
Trade flows between the USSR and Western Europe, especially in the O&G industry, were a subject of close attention for the United States since Harry Truman, but the most notable attempt to hamper Russian-European trade was made by Ronald Reagan in the early 1980s.
At the end of 1981, a few weeks after the state of emergency was declared in Poland, Ronald Reagan announced harsh sanctions against the USSR for alleged involvement of the Soviets in the Polish events.
Despite that the initial sanctions were close to a full economic embargo of the Soviet Union by the United States, in June 1982, the US tightened sanctions even further, extending the ban not only to the products of American firms but also to equipment manufactured by their branches abroad and foreign companies under US licenses.
One of the key goals of these sanctions, as you can guess, was to sabotage the construction of a Euro-Siberian pipeline, widely known today as the Urengoy-Pomary-Uzhgorod pipeline.
Source: The New York Times, May 30, 1982 issue; image made by Author
Initially, the project of the new pipeline envisaged laying two gas pipeline lines using only western tech, equipment, and large-diameter pipes (1420 mm). However, after the imposition of the embargo on the supply of high-tech American equipment to the USSR and the pressure exerted by Washington on Western European manufacturers that used components of American technology, the Urengoy-Pomary-Uzhgorod project was revised. As a result, only one of its lines was laid, partially using Soviet pipes and equipment.
The sanctions led to a conflict between the United States and its Western European allies. In July-August 1982, West German, French, British, Italian governments supported their producers and declared American sanctions illegal. After European companies supplied O&G equipment to the USSR in August 1982, the United States imposed special sanctions against them.
As a result of further negotiations with representatives of European governments, Ronald Reagan announced on November 13, 1982, the lifting of the embargo on the supply of O&G equipment to the USSR.
Then and now, sanctions proved to have a limited effect on the cooperation of Russia and Europe, at least in the gas trade. The vast network of pipelines speaks for itself as the product of a collaborative effort between the two sides.
Source: The Warsaw Institute
This good map by not especially friendly towards Gazprom Warsaw Institute provides an informative snapshot of the existing pipeline capacities that Gazprom uses for supplying gas. Some parts of this infrastructure may be abandoned in the future, and here lies the root of controversy around Nord Stream 2.
The Swan Song Of Politics In The EU-Russia Gas Trade
As we can see from a historical perspective, there's nothing new in the current rhetoric of Nord Stream 2 critics: "a mistake from the beginning", "a fledgling economic weapon", "a potential political tool", and so on.
Just as 40 years ago, opponents of another Russian-European pipeline project see Russia and its energy policy as a way of political leverage over European countries. The plain facts tell us a bit different story: during the multi-decade history of Russian gas supplies to Europe, there were only two cut-offs in 2006 and 2009 because of trade disputes between Russia and Ukraine.
Considering that at the end of 2019 Gazprom did sign a new 5-year gas transit agreement with Ukrainian Naftogaz and paid $2.9 bn to Ukraine to comply with a Stockholm arbitration decision, the Russian gas monopoly doesn't seem to be willing to put its reputation at risk anymore.
Even though the political dimension of the European gas market continues to exist, it continues to not affect EU-Russia gas trade most of the time, and it may finally become obsolete in the upcoming decade due to fundamental changes in the core mechanisms of the European gas market.
The major forces of these dramatic changes are the rising availability of LNG and the ongoing transition from long-term contracts to spot gas trade at hubs. Germany, the main beneficiary of Nord Stream 2, continues to diversify its natural gas supplies by developing its LNG infrastructure, though sometimes it's a quite complicated process.
Source: Petroleum Economist
This infrastructure will certainly come in handy to Qatar, one of the biggest LNG producers in the world, and Russian Novatek, which is actively catching up by building the largest Arctic LNG-powered icebreaker fleet. The American LNG will play its role in the European market too unless the free market decides whether the US LNG producers are capable of staying profitable and ecologically clean enough in such a competitive environment. Gazprom, by the way, is building its own LNG capacities, which may cannibalize pipeline exports to a certain extent in certain circumstances (in case of a structural market oversupply, for example).
Thus, at least for a decade or two, LNG, together with the transformed pricing mechanism of gas trade, will neighbor Gazprom's pipeline gas in Europe, naturally disarming Gazprom as a potential geopolitical tool.
Another point that makes political arguments against Nord Stream 2 look even more unconvincing is the fact that the Ukrainian gas transmission system, as well as the whole Urengoy–Pomary–Uzhgorod pipeline, is getting too old to be used in the future, so there may be not any alternatives for Gazprom rather than to rely on NS2 in the longer term.
In this regard, the growing concern over the Nord Stream 2 ultimately comes down to money, not geopolitics:
For Poland, transit fees through the Yamal-Europe pipeline are at stake, as Gazprom may drop gas supplies through this pipe. Poland, in my humble opinion, takes the strangest stance in this whole conflict: on the one hand, it plans to completely get rid of Russian gas by 2022; on the other hand, the Polish antimonopoly watchdog imposes multi-billion fines on Gazprom and NS2 financial investors and states that "the companies actions had negatively impacted competition on Poland's gas market and that the launch of Nord Stream 2 would threaten the continuity of gas supplies to Poland and raise gas prices on the Polish market." Given that Schrödinger's natural gas doesn't exist, Poland needs to elaborate a more unambiguous view on the future of its gas trade with Russia.
For Ukraine, the suspension of the gas transit means that it won't get transit fees as well, and it will have to repair its pipelines on its own, without the help of Gazprom as it could happen back in the early 2010s when Russia and Ukraine discussed the merger of Gazprom and Naftogaz. There're different opinions of how bad things are with the Ukrainian GTS: Russian experts say that the Ukrainian gas infrastructure is in awful condition, and Ukrainian experts say that the condition is not that awful, but it still won't last long without necessary capital expenditures.
For the United States, Nord Stream 2 means that its LNG producers will have to deal with an incomparably cheaper source of natural gas, suitable for supplying hydrogen later to satisfy European obsession with clean energy.
The Bottom Line
One of the best books on topics I covered in this article, in my opinion, is "The Bridge: Natural Gas in a Redivided Europe" by Thane Gustafson, a notable expert on Russian O&G and a professor of political science at Georgetown University.
Source: "The Bridge: Natural Gas in a Redivided Europe"
In this book, Gustafson discusses numerous aspects of the Russian-European gas trade that turned out to be surprisingly sustainable amid the long-term confrontation between Russia and the West. You can read a decent review of the book here.