Easwaran Kanason

Co - founder of NrgEdge
Last Updated: September 15, 2020
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Business Trends
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It was an innocuous set of words published in a newspaper in Germany on Sunday. “I hope the Russian do not force us to change our position on Nord Stream 2”, the German Foreign Minister Heiko Maas was quoted as saying. A day after that, Angela Merkel also issued a single sentence: “The German Chancellor agrees with the Foreign Minister’s comments from the weekend.” Simple words with a bold message. And potentially devastating consequences.

The incident that hardened the hearts of Germany , which had become increasingly isolated over the issue of the Nord Stream 2 natural gas pipeline that connects Russia to Germany through the Baltic Sea, was the hospitalisation of Russian opposition leader Alexei Navalny. Airlifted to Berlin following a medically-induced coma, German doctors concluded that Navalny, who is no stranger to intimidation tactics by the Putin government, was the victim of the Novichok nerve agent. If that name sounds familiar, that’s because it made headlines in 2018 over the attempted assassination of former Russian spy Sergei Skripal and his daughter Yulia in Salisbury, UK. A lethal nerve agent developed in the 1970s in Soviet Russia, Novichok is among the deadliest poisons ever developed and is banned under the Organisation for the Prohibition of Chemical Weapons. The Kremlin, predictably, denies involvement in the alleged poisoning, dismissing the German allegations as untrue.

That this could be the straw that broke the Nord Stream 2 back is perhaps surprising. The Nord Stream 2 natural gas pipeline has survived many obstacles. Many, many obstacles. The sequel to the original 1,222km Nord Stream that was inaugurated in November 2011, Nord Stream 2 will add 1,230km more pipeline between Vyborg in Russia and Lubin in Germany, with nearly all of the entire 2,452km length already being laid. Championed by former German Chancellor Gerhard Schröder and inherited by Merkel, the Nord Stream pipelines were developed to meet Germany’s growing energy demand, as it moved away from burning coal and nuclear fission. However, it has attracted criticism from many quarters. From Germany’s neighbours including Poland, Denmark and Estonia concerned over the pipeline that passes through their waters. From the EU, concerned about making Germany too energy dependent from a ‘politically unreliable’ country. From the US, which has threatened and, indeed, imposed sanctions on companies involved in the project. Some would argue that the vociferous US involvement, championed by President Donald Trump is self-serving, meant to allow US energy exports to muscle in, but it still fits neatly into Germany’s Russian dependence issue.

Throughout all this drama, Angela Merkel has stood firm. She, and her centre-right party CDU, have supported Nord Stream somewhat unenthusiastically with the primary concerns being the business element. It will unravel Germany’s plans to become a natural gas hub, as it tries to drive an EU movement towards cleaner energy. Many of Germany’s largest companies,  include petrochemicals giant BASF and its energy arm Wintershall are also heavily invested in Nord Stream and the raw gas it will bring. It would also be a reputational risk to pull the plug on a project that is almost complete and set to be launched by the year’s end, and still leaves the critical question on how Germany will be able to address its energy deficit.

The business argument has overridden political concerns so far. But now a moral imperative has arisen through the attempted murder of Alexei Navalny, with his subsequent medical treatment in Berlin. This resonates in Germany particularly, since the country understands the historical consequences of authoritarian governments and the dangers it bring. The shifting of the political landscape, especially the rise of the Green Party has triggered a ferocious debate with high-ranking politicians from both the left and right calling for the project to be scrapped. Some are even arguing that Nord Stream 2 gas supply is no longer necessary, as the country’s energy requirements are now fundamentally shifting in a post-Covid 19 world.

If, and that is a very big if, the Nord Stream 2 is scrapped, that is at least US$9.4 billion down the drain and plenty more in collateral damage from peripheral activities. It will rock the boat when the usual Merkel instinct is to steady it. But the furore over an attempted assassination by one of the world’s deadliest methods no less, might be a stand that Germany is willing to take. After all, it knows first-hand the effects of an iron fist. Berlin has so far stood alone in advancing Nord Stream 2, even after the chorus of critics surrounding it grow louder and louder. If it were to kill the project, Germany could find plenty of supporters for that move and would be more than happy to offer themselves up as a role to scupper this ship. The options are varied, but one question remains that will influence the whole issue: how is Angela Merkel willing to go to take a stand over democratic ideals or business reality?

Market Outlook:

  • Crude price trading range: Brent – US$39-41/b, WTI – US$36-38/b
  • A second global acceleration in Covid-19 cases is hampering hopes that the worldwide economy will be able to return to normality by the year’s end, delaying the time it will take for crude demand to return to its pre-crisis level
  • With the summer driving season in the northern hemisphere coming to a close, US crude stockpiles are rising, driving down prices even though the US EIA raised its forecasts for 2020 to US$38.99 for WTI and US$41.90 for Brent
  • The downturn in prices was also driven by Saudi Arabia cutting its crude pricing for October sales by a larger-than-expected amount, especially for Asian shipments

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