US Sanctions on Nord Stream 2 Natural Gas Pipeline Could Easily Backfire

The House and Senate have two bad bills proposing to sanction Nord Stream 2 natural gas pipeline project that connects Russia to Germany: S.1441 Cruz-Shaheen Russia Sanctions bill / HR.3206 Kinzinger companion bill. To illustrate, the Cruz-Shaheen bill would freeze the assets of any foreign individuals who facilitate the use of vessels for underwater construction of Nord Stream 2.

The bills, however, could have a number of unintended consequences without even achieving their desired results. Such multi-lateral sanctions can cause collateral damage, hamper many international oil and gas companies, and erode U.S. energy companies’ competitiveness abroad. By relying on more and more sanctions, we could be making U.S. oil and gas companies appear as unreliable partners, ever more dangerous since energy markets are becoming more integrated, not less.

But beyond that, sanctioning Nord Stream 2 would create even more tension between the U.S. and our European allies. This could dangerously work to disrupt the energy security of the entire European Union. The 5.3 Bcf/d pipeline is Germany’s project with Russia, and by targeting the pipeline we are working against our allies’ own interests.

Overall, the pipeline is already 60-70% built, so U.S. sanctions are unlikely to have a major impact on the project’s completion, stunting their overall intent. And the bills do not make room for an exit route, with no end date or clear condition to lift the sanctions even if new conditions call for it.

U.S. LNG exports to Europe are already enhancing the EU’s energy supply security. This will continue to lower’s Russia ability to use Nord Stream 2 as political leverage. Energy Secretary Perry was just in Europe touting the “freedom gas” of U.S. LNG. Importantly, it has been Europe that has compensated as a buyer of U.S. LNG since China has now put a 25% tariff on our shipments.

Further, the sanctions on Nord Stream 2 would come at a time when public opinion polls in France, German, and other critical European allies have showed a sharp fall in U.S. standing. The Europeans remain upset about the fallout of 2017 U.S. sanctions on aluminum giant Rusal, a firm owned by a Russian oligarch with close ties to Russian President Vladimir Putin: “EU diplomats back move to ease sanctions on Russian firms.” More U.S. sanctions being considered against new energy projects with Russia surely have our European partners even more worried about damage to their economies.

Indeed, the ongoing overuse of U.S. sanctions could easily backfire. We could now be forcing powerful third parties like the Chinese government to construct even more systematic workarounds to circumvent the U.S. financial system, cutting our economic leverage around the world. Sanctions are also increasing concerns in the private sector, which is becoming more uncertain about what Congress will want to sanction next – hampering U.S. investment globally.

This is all making it far more difficult for our companies to build long-term compliance programs. The sanctions against Russia, for instance, are highly complex, and some rightfully worry about Russian retribution: “Exxon quits some Russian joint ventures citing sanctions.” Our sanctions could also insidiously solidify an even broader energy reliance between Russia and China that is already an issue for Western energy security.

Ultimately, by sanctioning an endless stream of economic activities, we are upping the cost of doing business with the U.S. economy and threatening the primacy of the U.S. dollar. All of this of course is being exacerbated by our trade war: “China trade war already hurting U.S. energy industry.” 

Jude Clemente is the Editor at RealClearEnergy.

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