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Friday, December 3, 2021

Julian Lee: When pipelines are political, everyone suffers

The location of energy pipelines has always been driven by political considerations, often at the expense of commercial considerations. But the exploitation of existing lines is also becoming more and more politicized. And it will hurt everyone.

There are many examples of pipeline route selection to achieve geopolitical goals.

The Baku-Tbilisi-Ceyhan pipeline from the Caspian Sea to an export terminal on the Mediterranean coast of Turkey was not an obvious commercial choice for bringing Azerbaijani oil to market, but it was chosen because it met the objectives of bypassing Iran (although it was cheaper to build there and get a better access to Asian markets) and be independent of transit through Russia.

And, as I wrote earlier, Russia’s construction of the Nord Stream 2 gas pipeline to Germany is the culmination of a 30-year strategy of abandoning legacy transit routes through the former Soviet republics and allied countries. But the use or shutdown of existing pipelines has recently become a more worrisome example of their politicization.

As Europe grapples with the looming winter energy crisis, it appears to be surrounded on all sides by suppliers and transit countries using pipelines for political ends.

While President Vladimir Putin has denied that there is any political motive behind Russia’s refusal to supply more gas to Europe, few in Europe believe him. And it’s not hard to see why. The Russian pipeline gas export monopoly PJSC Gazprom says it has met all of its customers’ supply requests, but prices have skyrocketed due to low storage levels and, at least in Germany, storage facilities close to empty are located under the control of Gazprom.

Gas prices in Europe have risen again in recent days on fears that Russia will continue to cut flows in response to delays in the certification of the new Nord Stream 2 pipeline, which will indeed impact winter supplies.

But it’s not just in northeastern Europe that pipeline policies are turning markets upside down. On the other side of the continent, Spain has found itself embroiled in a political dispute between the major gas supplier Algeria and the transit country Morocco. This increases the upward pressure on European energy prices as Spain joins the drive to secure LPG shipments in a market dominated by high-paying Asian consumers.

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Escalating tensions over energy supplies to Europe made the abrupt cessation of Russian oil supplies via Belarus to Poland at the beginning of last week even more worrisome.

The breach was due to unplanned line maintenance in Belarus, and after a few days the flows were restored. But against the backdrop of an artificially created migration crisis on the country’s borders with the European Union and previous threats by Belarusian President Alexander Lukashenko to cut off energy supplies to Europe, there were unbridled fears that the stop was something more ominous.

It may still be like this. The EU is threatening further sanctions against Belarus as its eastern neighbor continues to bring potential migrants to the EU from crisis-hit countries, including Iraq and Syria.

Putin, whose oil and gas flows through pipelines crossing Belarus, warned that “nothing good” will come out of Belarus, which would disrupt energy flows to Europe. He also has a lot to lose. Russia’s reputation as a reliable energy supplier to Europe has been severely undermined in recent months. While disruption to transit flows would reinforce his argument that the Nord Stream pipeline would directly link Russia to Germany, his close ties to Lukashenko would raise questions about his own complicity in any violations.

Meanwhile, on Europe’s southeastern border, Turkey’s withdrawal from its NATO allies raises concerns that gas supplies to Greece, the Balkan countries and Italy may soon become more unreliable as well.

Europe is becoming increasingly hostage to the politicization of pipelines. The energy transition from hydrocarbons cannot happen quickly enough for the continent as oil and gas supplies from the North Sea are dwindling.

While the immediate risks affect consumers more than energy suppliers in the region, these suppliers will also suffer in the long term as Europe accelerates its steps towards greater energy self-sufficiency in the post-hydrocarbon era.

Julian Lee is a Bloomberg oil strategist. He previously worked as a senior analyst at the Center for Global Energy Research.

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