Russia’s Contentious Nord Stream 2 Gas Pipeline Is Dead for Now

(Bloomberg) — Russia’s controversial Nord Stream 2 gas pipeline is all but dead. At least for now.

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German Chancellor Olaf Scholz effectively froze the $11-billion link’s approval process by having the Economic Ministry withdraw its assessment that the project doesn’t pose a threat to security of supply. Without that, the operator of the pipeline connecting Russia to Germany bypassing Ukraine cannot obtain the certification needed to start operations.

Germany has long argued the pipeline is a commercial project, but it changed course after President Vladimir Putin announced he’s recognizing two self-proclaimed separatist republics in eastern Ukraine. He also signed an order to send what he called “peacekeeping forces” to the two breakaway areas, a dramatic escalation in Russia’s standoff with the West over Ukraine.

“The situation today is a fundamentally different one,” Scholz told reporters in Berlin on Tuesday. “So we have to reassess the situation given the latest developments, also regarding Nord Stream 2.”

Nord Stream 2 has divided European countries, with eastern nations voicing concerns it would give Russia even more political leverage over the region and starve Ukraine of gas-transit revenues. Russia is Europe’s top gas supplier, with typically about a third of flows traveling through Ukrainian pipelines.

The pipeline, which took a decade to build and faced several delays due to U.S. sanctions, is currently built and filled with gas, just awaiting certification process to start. The approval process was first halted at the end of last year as the German energy regulator asked the pipeline operator, a Swiss company, to set up an entity in the country to comply with European Union regulations.

The company has now set up Gas for Europe GmbH, but it still needs to transfer the main assets and human resources to the Schwerin-based unit. Even then, approval wouldn’t happen.

Certification Process

“A certification of the operator of the Nord Stream 2 requires a positive assessment by the Federal Ministry of Economics that supply security is not jeopardized,” the Bundesnetzagentur said in a statement to Bloomberg. “This is no longer the case.”

“The Federal Network Agency at the moment can’t certify the company,” it said. “Operating the pipeline without certification would be illegal.”

Europe is grappling with an energy crunch, with Russia keeping flows capped since the summer and curbing sales in the spot market. Gazprom PJSC also failed to fill its storage sites in the EU before the winter, and without Nord Stream 2, the bloc may struggle to build inventories again.

All of that is already being priced in the market, with the price gap between gas for delivery in the summer and supplies for next winter all but vanishing. Without that, there’s no incentives for energy companies to stash away gas in the summer as they are unlikely to be able to sell at higher prices later.

Storage Risk

“Without Nord Stream 2, there’s a risk that Europe can’t fill its storage sites again,” said Scott Shelton, an energy analyst at ICAP in Durham, North Carolina. “There are also general risks to Russian supplies, the U.S. looks to be shipping at its maximum, while Qatar and Libya can’t be of much help.”

To be sure, Germany hasn’t sanctioned the project and the halt to the approval process could be reversed, said Simone Tagliapietra, a researcher at the Bruegel think tank in Brussels. Germany is “buying time here, and getting an important bargaining chip for eventual negotiations.”

The Economic Ministry now has to produce a new analysis of the pipeline’s security of supply, which will be done under the leadership of Robert Habeck. The assessment will be made in light of the recent political developments, and could take a long time.

“Nord Stream 2 has to be assessed in light of the security of energy supply for the whole of Europe,” said European Commission President Ursula von der Leyen. “This crisis shows that Europe is still too dependent on Russian gas.”