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US, Germany strike energy security pact to protect Ukraine after Nord Stream 2 startup

Highlights

Ukraine promised energy transition funds, EU sanctions muscle

Platts Analytics expects commercial gas supplies to flow in October

US remains opposed, will enforce sanctions on 'case-by-case' basis

The US and Germany have agreed to a number of measures to protect Ukraine's energy security and block any attempts by Russia to "use energy as a weapon" once the Nord Stream 2 gas pipeline starts up, the State Department said July 21.

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A joint statement issued by both countries contains funding commitments to reduce Ukraine's reliance on Russian energy imports and advance its energy transition; threats of European sanctions should Moscow try to cut off supply to Ukraine; and a promise to help Kyiv negotiate an extension of its five-year gas transit deal.

The agreement was hammered out after talks last week between US President Joe Biden and German Chancellor Angela Merkel and US consultations with Ukraine and Poland this week.

"We know that Russia does use pipeline and energy flows and other tools related to energy to pursue its political ends, and we're committed to pushing back against that," a senior State official said during a background briefing announcing the deal.

October flows

The 55 Bcm/year capacity Nord Stream 2 is expected to be completed by the end of August. S&P Global Platts Analytics estimates commercial flows will start in October.

The project's opponents say it will increase Europe's dependence on a single route and source of gas, and would potentially deprive Ukraine and Poland of strategic leverage in terms of Russian gas transit.

Russia's state-controlled Gazprom could divert much of the gas it currently transits via Ukraine into Nord Stream 2, while Warsaw fears it could also see Russian gas transit via Poland curtailed in the future.

Kyiv has also repeatedly expressed its fears of renewed military aggression by Russia if Moscow no longer relies on Ukraine for gas transit to Europe.

Gazprom has agreed to transit 40 Bcm/year of Russian gas via Ukraine from 2021 until 2024 — down from a recent peak of 94 Bcm in 2017 — as it looks to divert gas away from Ukraine into Nord Stream 2.

Putin response

Germany's Merkel discussed the pipeline and her White House visit with Russian president Vladimir Putin in a phone call July 21, according to a Kremlin statement.

"The Russian president noted the consistent commitment of the German side to implementation of this project, which has an exclusively commercial nature, and is aimed at strengthening the energy security of Germany and the European Union," the statement said.

Putin and Merkel also discussed the possibility of extending the agreement between Gazprom and Naftogaz Ukrayiny on gas transportation through Ukraine after 2024, the statement said.

The US remains "emphatically" opposed to Nord Stream 2, a senior State official said. She said the US would continue to monitor for any "potentially sanctionable activity" under current laws, weigh them on a "case-by-case basis" and meet the next deadline for reporting them to Congress, in mid-August.

"We think this is a bad deal for Ukraine and a bad deal for the rest of Europe," the State official said. "But we also are pragmatic, and with over 95% completed, our focus really is on ensuring that we are prepared to push back against Russia's use of energy as a weapon along with our partners and allies, and we're doing everything we can to reduce the risks this pipeline poses to Ukraine."

Congress opposition

Biden will discuss energy security with Ukrainian President Volodymyr Zelenskiy during a White House visit Aug 30, the Press Secretary Jen Psaki said July 21.

"The visit will affirm the United States' unwavering support for Ukraine's sovereignty and territorial integrity in the face of Russia's ongoing aggression in the Donbas and Crimea," she added.

The deal between the US and Germany drew ire from many US senators who want Biden to enforce existing sanctions against Russia to stop the pipeline.

"Not a single member of Congress supports the completion of this pipeline, and the administration's willingness to look the other way and let Russia and Germany complete this pipeline undermines the bipartisanship necessary on this important security issue," said Republican Senator Jim Risch of Idaho, ranking member of the Senate Foreign Relations Committee.

"Congress must act where the administration has failed, and I will continue working with colleagues on both sides of the aisle to impose meaningful costs on this malign Russian project before it becomes operational," he added.