U.S Department of State
December 11, 2018
Moderator: Greetings to everyone from the U.S.-European Media Hub in Brussels. I would like to welcome our participants dialing from across Europe and thank all of you for joining this discussion.
Today, we are pleased to be joined by the Bureau of Energy Resources Assistant Secretary Francis Fannon. Assistant Secretary Fannon will discuss European energy security and the Nord Stream 2 gas pipeline. He is just back from a trip to the Czech Republic, Croatia and Hungary, and has traveled widely this year throughout Europe including to Ukraine, Poland, Portugal and Greece on the key issue of mutually beneficial transatlantic energy security.
We will begin today’s call with opening remarks from Assistant Secretary Fannon, and then we will turn to your questions. We’ll try to get to as many as we can during the time that we have.
As a reminder, today’s call is on the record. With that, I will turn it over to Assistant Secretary Fannon.
A/S Fannon: Good morning. Thank you, Kathy, for your introduction. As you noted, I am just off of a trip. I had some very great positive engagements in Budapest, Prague and Zagreb, and then throughout the other locations that you mentioned. In each of these we discussed the critical importance of our shared values in the transatlantic alliance in the context of energy security.
I think that given Russia’s aggression in recent weeks, this is a good time to spotlight our diplomacy in this area. The energy security of our European partners and allies is a longstanding strategic priority of the United States. The United States strongly condemns recent Russian aggression in the Sea of Azov. The Russian Federation’s closure of the Kerch Strait is a clear violation of international law. Russia’s actions have strengthened the international consensus that Nord Stream 2 is a direct affront to the transatlantic energy security relationship and our shared national security goals.
So, I’d like to talk to you a little bit about some of the diplomatic work that we’ve been engaging with with respect to partners in Europe, who really recognize the centrality of energy diversity and achieving energy security. More European countries than ever are recognizing the importance of diversification as fundamental to energy security, and that’s in part why the European Union, the Commission, moved forward with the projects of common interest model, which seeks to open markets and encourage new key energy infrastructure to facilitate integration and support diversity. These projects include the Greece-Bulgaria Interconnector Pipeline and the synchronization of the Baltic States’ electricity grid with continental Europe. The Krk Island LNG project in Croatia is another project of common interest. I’ve had some very positive discussions with Prime Minister Plenkovic in Zagreb, where we discussed this project and its potential to support energy security and diversification.
This terminal could import LNG from a wide range of suppliers and allow for diversification in the region as well and in particular for Hungary. Once key energy infrastructure projects like Krk are built it provides optionality and introduces real market competition.
Russia dies not want options. It does not want a real transparent market. The important thing is the impact on optionality, once infrastructure is built is not a notional concept. We have a proof of concept. Take, for example, Lithuania’s floating storage and regassification unit, the Independence. It was built as a strategic investment, yet the FSRU introduced market competition and lowered Lithuania’s gas prices.
Diversification includes all sources of energy. And when we talk about energy sources we include renewable energy and nuclear energy as well, though of course much of the discussion on this call is about gas.
Things worth noting, the United States is the world’s second largest renewable energy producer, and it’s important to weigh in on that as my engagements throughout Europe have all included robust discussions on renewable energies, as well as nuclear.
America’s calling to diversify sources and delivery routes of natural gas in particular predates our relatively new role as a natural gas exporter. U.S. steadfast support for the $40 billion plus Southern Gas Corridor has spanned multiple administrations and continues today, despite the fact there’s no direct American investment in the project.
The United States will continue to support European energy diversification, including alternative sources of energy such as LNG.
I should also note that there are new sources of gas coming on-line all the time. In the Eastern Mediterranean where I was a few weeks prior, significant new volumes and integration in the region are allowing for new gas supplies to find their way on world markets and potentially certainly to Europe.
Regardless of where a country ultimately sources its gas, American-driven competition increases choices and reduces prices for European consumers regardless of the producer.
In contrast, Nord Stream 2 and expanded Turkish Stream Pipeline seek to deepen dependency on Russian gas rather than strengthen security. They’re not commercial projects. They are political tools.
Unlike the United States, Russia’s energy companies are an extension of the state and the Russian state uses energy for coercive geopolitical aims. Through Nord Stream 2 Russia seeks to increase its leverage over the West while severing Ukraine from Europe.
The U.S. and Europe share Western values. We look at commerce as mutually beneficial and reciprocal. But doing business with Nord Stream 2 is just not consistent with those shared transatlantic values. Nord Stream 2 threatens to directly undermine Ukraine’s security.
Earlier this month when Secretary Pompeo hosted Ukrainian Foreign Minister Klimkin, he reiterated how we will “keep working together to stop the Nord Stream 2 project that undermines Ukraine’s economic and strategic security and risks further compromising the sovereignty of European nations who depend on Russian gas.”
U.S. opposition to Nord Stream 2 is rooted in our abiding concern that the pipeline presents broad geostrategic threats to our transatlantic energy security, a point that we’ve consistently conveyed to leaders across the continent. The Secretary reminds us that: “We do not want our European friends to fall prey to the kind of political and economic manipulation Russia has attempted in Ukraine since it cast off its Soviet shackles.”
With this, I welcome your questions. Thank you.
Moderator: Thank you for those remarks. We will now begin the question and answer portion of today’s call.
Our first question comes to us from David Sheppard from the Financial Times.
Question: Hi, there. Thank you for doing this call today and for taking questions afterwards.
I just want to look specifically about what you’ve been seeing in the Kerch Sea, and can you relate how that impacts on European energy security at this time as regards to the Nord Stream 2 Pipeline, please?
A/S Fannon: Thank you for the question. I opened my comments with reference to this. What I think it speaks directly to, is that even under clear international law, clear consensus, it calls to question the entire notion of the relative reliability of Russia as a responsible actor and as a part of this international community.
We spoke about shared values, shared transatlantic values. And this is another illustration that Russia does not just share those values, but they reject them entirely.
I think we have to consider these hostilities as we consider, as countries consider entering into relative partnership with such an actor. Thank you.
Question: Can I just follow up quickly, just in terms of for Ukraine itself. At the moment they rely on a certain amount of revenue that they get from Russian as supplies bypassing the country. Long term, that doesn’t seem particularly sustainable, based on the arguments you’re making around the intentions of Russia. What suggestions do you have for the long-term future of Ukraine and energy security?
A/S Fannon: Thank you.
We mentioned earlier, Kathy mentioned that I spent some time in Kyiv and I both engage with officials there as well as in Washington and Brussels. The issue in our support for Ukraine and EU’s support for Ukraine is steadfast. I think the point about gas transit it an important one. It’s an important source of revenue. But also it’s a physical linkage to the West proper. Yes, it’s a pipeline, and it’s a means of transit revenues, but it’s also much more than that. As we see Russia seeking to effectively carve up Ukraine, the pipeline has an even greater significance. Which is why we’re very concerned about Nord Stream 2 and Multi-Line Turkish Stream which would divert gas transit away from Ukraine and effectively starve Ukraine from being able to not just collect the transit revenues but maintain that critical linkage to the West.
In terms of Ukraine’s, the relative sustainability of Ukraine, it’s an important question. It’s something we at the State Department have been focused on for a considerable amount of time in terms of enabling Ukraine, supporting the ongoing reform efforts. And other countries, I should note, have supported that in terms of in particular Slovakia, Poland, Hungary, they’ve all engaged in meaningful agreements with Ukraine for reverse flow to help Ukraine be free of having to contract with Russia gas. Obviously, Ukraine knows better than most that Russia is not a reliable supplier.
In terms of ourselves, the department, we’ve been providing technical support and assistance to NAFTAGAS and its subsidiaries to strengthen corporate governance and align operations with international best practice. We’re very pleased that NAFTAGAS has moved forward with a framework for unbundling which is a requirement under EU law, and we very much are supportive of these reform efforts.
NAFTAGAS and Ukraine has done quite a bit. We’re encouraged by the momentum, but the work certainly isn’t over. And we will continue in our steadfast support as they continue on to these reform efforts.
Moderator: Thank you. For our next question, we will turn to Siobhan Hall from S&P Global Platts based in Brussels.
Question: Thank you for taking my question.
We hear that you are very critical of Russia and its position as an energy supplier. We know the U.S. President has the power to sanction companies involved in Nord Stream 2. So why hasn’t the U.S. President sanctioned companies in Nord Stream 2?
And are the companies providing the pipe-laying services for Nord Stream 2 Pipeline, are they the companies most at risk? Because Russia can afford to finance the pipeline itself but it can’t lay the pipes itself.
A/S Fannon: Thank you. As you rightly point, the U.S. government has the ability to sanction Russia energy export pipelines under Section 232 of the Counter-Americas Adversaries Through Sanctions Act. We also have a longstanding policy to not comment on potential future sanctions, future sanction actions.
But we have been very clear, and I will reiterate it now, that firms working the Russian energy export pipeline sector are engaging in a line of business that carries sanctions risk. We continue to review potential sanctions actions and encourage governments or companies to contact us if they have questions about this process.
I think what we seek to do, and we continue to do at all levels, is encourage all parties to stop the project. Germany can certainly remove their political support from the project. Support the update of the gas directive. That policy has been languishing for over a year and a half. That would be a positive step in advancing energy security. And then have a review on national and energy security grounds under EU law.
These are things we are encouraging and we’ve had some very fruitful discussions and we continue to engage to this day. Thank you.
Moderator: Thank you. For our next question we will turn to Martin Kaae from Jyllands-Posten in Denmark.
Question: Yes, and thank you for taking this.
Regarding the, of course you know Denmark has sort of a special position in this given that the government can make a rejection of the pipeline through Danish territorial waters. If the Danish government decides to do that, reject the application, I mean if the government decides to approve the project, will it affect the U.S. administration’s view upon Denmark in that case?
And another question is that Germany has underlined the importance of Ukraine still being a transit country after the establishment of the pipeline. Do you think such a guarantee, in case it should be established, would have any effect? And what do you think about this idea?
A/S Fannon: We have, thank you. With respect to our position in Denmark, the U.S. has encouraged Denmark to not approve, continue to reject the routing. So our position is quite clear on that.
In terms of maintaining some gas transit through Ukraine, in part we think, I guess I see that in two ways. One, it’s a question of mass. Assuming the total volumes that are transiting Ukraine versus the volumes that would be transited via Nord Stream 2 and Multi-Line Turkish Stream, there would be some delta left over. So I suspect that that is in part how they would be able to maintain some gas transit through Ukraine.
But there’s a problem with that. One, the volumes are relatively insignificant. Insignificant such that it would over time degrade the integrity of the pipeline because sufficient pressure would not be maintained.
But more broadly there’s a problem because you’re expecting to trust Russia to maintain and not cut off that gas. And I think, as I started my comments with the Kerch Strait closure and other incidents, it’s hard for anyone to rely on and trust that. And in fact Mr. Putin, when this idea was raised, said that, and I’m paraphrasing now, that they would consider it only if it makes commercial sense to Russia.
So we do not see the maintaining of gas transit volumes, however modest, as a real proposal. Thank you.
Moderator: Thank you. For our next question, we’ll go to a question submitted in advance from Konstantin Vasilkevitch from 2000 Weekly Newspaper in Ukraine who asks:
Question: Ukraine considers Nord Stream 2 a purely political project and a real threat to security to both Ukraine and Europe. Not everyone in Europe shares this view. What are the incentives you are going to use to persuade European leaders to block the pipeline deal?
A/S Fannon: Thank you. We have a full, whole-of-government diplomatic approach on this, and I think our friends in Ukraine and throughout the continent have seen that and will continue to see it. We’re engaging bilaterally, we’re engaging through multilateral fora, and we’re engaging in foras like this, publicly.
One of the things that I think is important for our European friends to consider also is these projects are long-term in nature like Nord Stream 2, and what they effectively do is lock in kind of an old way of doing business, and they’re ignoring this near-term energy abundance that we’re seeing.
We’re really at a turning point in that energy abundance, not just in the United States, but globally. Of course in the United States we’ve seen that and we’re proud of our record. In a decade, we’ve nearly doubled our gas production from 570 bcm in 2008 to 900 today.
But in the U.S. we are still nascent in this journey. We only have two LNG export facilities. We expect to double that export capacity in the next five years. We anticipate doubling recovery rates of gas and oil along the same time horizon within some of our key, most prolific basins. Our industry continues to innovate new and more flexible contracting models. U.S. production and market innovations will drive down prices globally.
At the same time we’re seeing new and sizeable finds in locations which didn’t exist as gas supply just ten years ago. Places like the Eastern Mediterranean, which I mentioned earlier. Mozambique has huge gas that will be coming on-line. Qatar and Australia are both increasing their capacities.
And on the nuclear side, we expect to see new, safe nuclear in the form of small modular reactors to be commercially available in the relatively near term.
So what we see here is a new form of energy abundance that can be a real win/win for all of us, which is all the more reason why it’s incumbent for European partners to consider the long-term relationship and energy dependency on Russia. And by locking that in, they’re losing the opportunity that stands before us to have free, transparent, very real markets, to improve energy diversification and energy security. Thank you.
Moderator: Thank you. For our next question, we will turn to Barry Hatton who is the AP correspondent in Portugal.
Question: Hello. I actually did send this question earlier by email, but I wanted to talk to you about the Portuguese port of Sines, the deep-water Atlantic port south of Lisbon. The Portuguese government was very keen on using that port to import American LNG and to make it an entry point into Central Europe by having a pipeline crossing Spain and into France. France was not very keen on that idea, however, and it seems to have fallen off the radar.
Can you tell us what’s happening there?
A/S Fannon: Thanks. We certainly support Midcat and continue to call on it as an important project that supports the broader energy diversification in Portugal, given its proximity, geographic benefit, it makes all the sense that they should be an important import location.
In terms of the specifics on the political questions at issue, as you mentioned France, I leave that to the discussion within the European political context. Thank you.
Moderator: Thank you. For our next question, we will go to Karol Tokarcyzk from Polish Radio News.
Question: Hello. My question, a short question, I would like to ask how the United States will support Ukrainian energy diversity, and I would like to ask your opinion about outlook of the central-eastern European countries on the Nord Stream 2 Gas Pipeline, especially Czech Republic and Hungary. Thank you.
A/S Fannon: Thank you. With respect to Ukraine, we have longstanding support for Ukraine in really helping to improve their governance structure to bring their state companies in to international best practice standards. And in particular I mentioned the unbundling of NAFTAGAS. That’s a critical step and we’re very pleased to support that. Of course it’s a big firm. It takes some time. But we have a framework agreement in place. They do, they have an MOU which will initiate unbundling in January of 2020.
Moderator: Thank you.
Unfortunately, that was the last question we have time for. Assistant Secretary Fannon, do you have any closing words that you would like to offer?
A/S Fannon: Thank you very much, Kathy.
We have shared transatlantic values. We have a shared view of energy security through diversification. A project that’s intended to support a free Europe should not be a project that divides it.
We have to stand together, and we very much support the continued energy diversification and energy security goals that advance our shared transatlantic values.
Moderator: I want to thank you Assistant Secretary Fannon for joining us, and thank all of our participants for joining as well and for your questions.