Nord Stream 2 pipeline delays send European natural gas price soaring

Russia’s controversial Nord Stream 2 pipeline faces another delay after Germany suspended a key step in the approval process, sending European gas prices surging as much as 12%.

Germany’s energy regulator halted the certification process necessary before the new link from Russia can start. The suspension will allow Switzerland-based Nord Stream 2 AG, the operator of the pipeline owned by Gazprom PJSC, to set up a German subsidiary in an effort to meet European Union rules requiring gas producers to be legally separate from entities transporting the fuel.

The watchdog “concluded that it would only be possible to certify an operator of the Nord Stream 2 pipeline if that operator was organized in a legal form under German law,” it said in a statement on Tuesday.

The pipeline, which is slated to double the capacity of the existing undersea route from Russian gas fields to Europe, has been a major source of friction in trans-Atlantic relations for several years. Chancellor Angela Merkel’s government consistently supported the project in the face of criticism from EU member states and the U.S., which says Nord Stream 2 will only increase Europe’s dependence on Russian energy resources.

The announcement sent benchmark European gas prices surging as traders fear the decision means Europe won’t be able to get the supplies it needs to ease a shortage this winter. The continent is facing an energy crunch, with the lowest stockpiles in more than a decade, leaving the region vulnerable when cold spells hit.

“There is a real concern potentially, if we have a cold winter, we could have rolling blackouts in Europe,” Jeremy Weir, chief executive officer of trader Trafigura, said at the Financial Times’ Commodities Asia Summit on Tuesday.

What Our Analysts Say:

If Nord Stream 2 receives regulatory approval and becomes operational in January 2022, BloombergNEF estimates Europe’s storage at the end of March will be 17.2 billion cubic meters (Bcm), or 26% full. But if the pipeline is delayed beyond winter, inventories will be just 21% full, at 13.7Bcm.

— Nilushi Karunaratne, BloombergNEF

The certification process remains suspended until the transfer of essential assets and human resources to the subsidiary has been completed. If these requirements are met, Germany can continue its examination within the remainder of the four-month period provided by law. While that was scheduled to end on Jan. 8, the halt now means a delay until the regulator can start processing the request again.

But even that might not be enough. Poland’s PGNiG, which has been participating in the Nord Stream 2 regulatory process, said a German subsidiary of Nord Stream 2, still wouldn’t meet the legal criteria for certification, according to a statement by Chief Executive Officer Pawel Majewski.

While Poland has the right to participate in the discussion with the German regulator, it can’t block the regulator’s decisions.

“Gas prices have been clearly tied to the certification of Nord Stream 2, putting more pressure on the European side to hurry up and approve the launch of operations,” said Ronald Smith, senior oil and gas analyst at BCS Global Markets in Moscow. “I expect Germany to work extremely rapidly to catch up as soon as the new documents are submitted.”

The U.S. has claimed Nord Stream 2 could give Russia new leverage over Europe. While Germany has committed to retaliating with sanctions against Russia if President Vladimir Putin “weaponizes” the pipeline – for example by starving Ukraine of lucrative gas flows – the government in Berlin has stopped short of threatening to halt the Baltic Sea project.

The two smaller parties in talks to form a new German government, the Greens and the Free Democrats, have taken a harder line on the pipeline. Greens’ co-leader Robert Habeck said earlier this month he didn’t think the pipeline met European rules. Still, the Social Democrats under Olaf Scholz have backed the project throughout, making a more aggressive stance in the new government less likely.

Ukraine’s Naftogaz, which on Monday got approval to join the pipeline’s certification process, said that the creation of a new subsidiary amounts to “judicial tricks” by Gazprom. Chief Executive Officer Yuriy Vitrenko urged the U.S. to impose sanctions on the new subsidiary.

“These new sanctions must be in place at least until Russia stops using natural gas as a weapon and starts acting in line with European rules,” he said.

U.K. Warning

The U.S. has previously imposed sanctions targeting the project, but Joe Biden’s administration softened the U.S. stance, reaching a deal with Germany earlier this year to end a longstanding rift over the pipeline.

U.K. Prime Minister Boris Johnson on Monday urged European nations to oppose Nord Stream 2, warning that it risks undermining stability across the region. The warning comes as just as Russia builds up forces near the border with Ukraine.

“We hope that our friends may recognize that a choice is shortly coming — between mainlining ever more Russian hydrocarbons in giant new pipelines, and sticking up for Ukraine and championing the cause of peace and stability,” Johnson said in a speech in London.

Nord Stream 2 AG said it was creating the subsidiary to “ensure compliance with applicable rules and regulations.”

“We are not in the position to comment on details of the procedure, its possible duration and impacts on the timing of the start of the pipeline operations,” the operator said in response to Bloomberg questions.

“If one believes that flows could only start after certification has been completed, this means that flows via Nord Stream 2 will be further delayed, with negative implications for European gas balance over winter,” said Katja Yafimava, a senior research fellow at the Oxford Institute for Energy Studies.

–With assistance from Kateryna Choursina, Patrick Donahue, Elena Mazneva and Rachel Morison.