Australia could lose out on geopolitical machinations over global gas supplies

In August last year, Olaf Scholz, then German finance minister and now chancellor, tried to persuade the Trump administration to drop its proposed sanctions against companies building the Nord Stream 2 gas pipeline between Russia and Germany. under the Baltic Sea.

Betting on the transactional nature of Donald Trump’s regime, Scholz wrote to Treasury Secretary Steven Mnuchin promising that Germany would spend € 1 billion on facilities to import liquefied natural gas from the United States if the construction of the pipeline could proceed unhindered.

Because it was transactional, the Trump administration calculated that Germany would be more likely to increase its purchases of LNG from the United States if sanctions were applied. The mere threat of them halted construction of the pipeline.

It took the Biden administration to remove the shadow of sanctions, allowing the pipeline to be completed with the understanding that Germany would not allow Russia to use its gas supplies to Europe as a weapon against Ukraine.

Details of this deal were not disclosed, but with the US warning that Russia could plan a major attack on Ukraine, the security of gas supplies to Germany and the rest of Western Europe is stakes.

It is assumed that Germany has promised the United States that it will not import gas through the new pipeline if Russia takes military action against Ukraine or cuts off gas supply through the Trans-Ukrainian pipeline.

Russia supplies around half of the European Union’s gas imports and could not easily be replaced by other suppliers, such as pipelines from Norway or by LNG.

Demand for gas is partly driven by the phasing out of coal-fired power plants. As a fossil fuel, gas is targeted for disposal by climate activists along with coal, but policymakers see it as a transitional fuel due to its lower carbon emissions and responsiveness when sources renewable energy does not work.

As electricity storage technology develops, it is expected that gas requirements will decrease, but in the meantime gas supplies are essential for power generation, industry and heating. domestic and commercial.

Europe has already seen Russia use its control over gas supplies for geopolitical purposes. Russia turned off the taps in the dead of winter in January 2009, cutting off all gas supplies via pipelines that crossed Ukraine to Western Europe, apparently in a dispute over the costs of transit.

The Nord Stream 2 pipeline, built at a cost of around $ 11 billion and designed to transport around 55 billion cubic meters of gas per year (the equivalent of about half of Australia’s LNG exports), would reduce Ukraine’s strategic importance for Europe while increasing direct dependence on Russia.

The pipeline is complete but is not yet operational as regulatory approvals have not been granted. Russia has cut supplies to Europe via Ukraine, with speculation it is creating a price spike to force the hand of regulators.

It has been almost 50 years since OPEC countries put the security of energy supplies at the forefront of global geopolitics. Then it was oil; today it is gas.

Russia is using its vast reserves to capitalize on its return to superpower status. The United States sees its own reserves of fracking gas as an alternative to Russian supplies.

There are other important players in the global gas markets. Australia is the world’s largest exporter of LNG, with production now slightly above that of long-time dominant supplier Qatar. Taken together, however, Russia’s pipeline gas and LNG supplies are more than double the size of Australia’s shipments.

The United States is Russia’s most powerful counter-power because its exports are increasing very quickly. Data from the International Energy Agency shows that US gas exports will grow from less than 20 billion cubic meters in 2017 to 85 billion cubic meters this year and a forecast of 125 billion cubic meters by 2025. This will exceed both the Australia and Qatar, both of which export just over 100 billion cubic meters.

Russia’s LNG exports are also growing rapidly, but 85% of its exports are through pipelines. Gas is generally cheaper thanks to pipelines. Pipelines lock down customers and suppliers, without any of them being able to easily change.

The United States has expressed opposition to the Nord Stream 2 pipeline since the Obama administration, but its support in principle for Ukraine’s economic independence has always been backed by personal interests. As a rapidly growing exporter, the United States is keen to gain market share from anyone it can and has always viewed Europe’s need for imported gas as a valuable prize.

While seeking to increase Western Europe’s dependence on its gas, Russia is also working to reduce its dependence on Europe. The EU imposed sanctions on Russia following its seizure of Crimea in 2014, and Russia does not want to be locked into a single export market. It completed a major pipeline from Siberia to China in 2019, which reaches an annual capacity of around 38 billion cubic meters and increases its LNG export capacity.

While Europe is currently at the center of gas geopolitics, Asia and China in particular are driving global growth in gas markets, with its manufacturing sector driving demand.

Australia was a pioneer in the Chinese LNG market with an agreement to purchase supplies from Woodside negotiated by Prime Minister John Howard in 2002. Australia is by far the largest supplier to China, accounting for 43 % of its market in 2020.

A bloomberg report Earlier this year, he said two small Chinese LNG importers had received orders from government officials to avoid further purchases of Australian LNG, in line with China’s broad campaign of economic coercion from Australia. However, this has not spread to the large state-owned companies which are the main buyers of Australian LNG.

The Department of Industry, Science, Energy and Resources said the “alleged guidelines” had not significantly affected Australian LNG sales to China, although it is likely that the United States will capture most of the future growth in Chinese demand.

The Trump administration’s trade deal with Beijing at the start of last year required China to increase its purchases of US energy (mainly gas, but also coal and oil) from the 2017 level of $ 7 billion. to $ 41 billion in 2021.

Tracking by the Peterson Institute for International Economics shows that from January to October of this year, Energy exports from the United States to China fell short of target and accounted for only 37% of requirements for the year to date. Beijing’s coercive attempts and the Trump-era deal, which the Biden administration has said it will implement, will allow the United States to gain LNG market share in China at the expense of Australia.

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