Germany freezes key Russian pipeline project Nord Stream 2 as Ukraine crisis deepens

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BERLIN (REUTERS) - Germany on Tuesday (Feb 22) halted the Nord Stream 2 Baltic Sea gas pipeline project, designed to double the flow of Russian gas direct to Germany, after Russia formally recognised two breakaway regions in eastern Ukraine.

Europe’s most divisive energy project, worth US$11 billion (S$14.8 billion), was finished in September, but has stood idle pending certification by Germany and the European Union.

The pipeline had been set to ease the pressure on European consumers facing record energy prices amid a wider post-pandemic cost of living crisis, and on governments that have already forked out billions to try to cushion the impact on consumers.

Europe secures some 40 per cent of its gas needs from Russia, and that proportion rises to about 50 per cent for Germany. 

On Tuesday the European benchmark gas price, currently the Dutch March contract, was up 10 per cent to 79.28 euros per megawatt hour (MWh) at 1416 GMT, much like the price for the fourth quarter, when Nord Stream 2 had been expected to start.

Mr Dmitry Medvedev, Russia’s former president and now deputy chairman of its Security Council, tried to rub salt in that wound.

“Welcome to the new world where Europeans will soon have to pay 2,000 euros per thousand cubic metres!” he tweeted - suggesting prices were set to double.

President Vladimir Putin did pledge, however, that Russia would not interrupt any of its existing gas supplies.

Germany had argued that Nord Stream 2 was primarily a commercial project to diversify energy supplies for Europe.

But despite the potential benefits, it had faced opposition within the European Union and from the United States on the grounds that it would increase Europe’s energy dependence on Russia as well as denying transit fees to Ukraine, host to another Russian gas pipeline, and making it more vulnerable to Russian invasion.

“This a huge change for German foreign policy with massive implications for energy security and Berlin’s broader position towards Moscow,” said Mr Marcel Dirsus, non-resident fellow at Kiel University’s Institute for Security Policy. “It suggests that Germany is actually serious about imposing tough costs on Russia.”

Ukrainian Foreign Minister Dmytro Kuleba tweeted his approval. 

“This is a morally, politically and practically correct step in the current circumstances,” he said. “True leadership means tough decisions in difficult times. Germany’s move proves just that.”

Chancellor Olaf Scholz said he had asked the economy ministry to make sure certification could not take place at the moment. 

“The appropriate departments... will make a new assessment of the security of our supply in light of what has changed in last few days,” he said. 

Economy Minister Robert Habeck said Germany’s gas supply was secured even without Nord Stream 2. But he told journalists in Duesseldorf that gas prices were indeed likely to rise further in the short term.

The Russian state-owned gas giant Gazprom owns the entire pipeline but paid half the costs, with the rest shared by Shell, Austria’s OMV, France’s Engie and Germany’s Uniper and Wintershall DEA .

The Federal Network Agency – which regulates Germany’s electricity, gas, telecommunications, post and railway sectors - suspended the certification process in November, saying Nord Stream 2 must register a legal entity in Germany.

Analysts had expected it to pick up the procedure in mid-year after the operator did as requested. But the regulator said on Tuesday that the required positive assessment by the economy ministry was no longer available. The Nord Stream 2 operating company said it was waiting to be properly notified of the halt.

The two onshore pipe exits of the Baltic Sea pipeline Nord Stream 2, pictured at the landfall facility in Lubmin, Germany, in September 2020. PHOTO: REUTERS

Russian response

Russian President Vladimir Putin, meanwhile, said Russia would continue uninterrupted natural gas supplies to world markets. 

“Russia aims to continue uninterrupted (gas) supplies, including liquefied natural gas, to the world markets, improve related infrastructure and increase investments in the gas sector,” Mr Putin said written remarks for a gas summit in Qatar on Tuesday.

A deputy Russian foreign minister brushed off Germany's decision to halt the pipeline's certification, saying that Moscow feared nothing and “doesn’t believe in tears”, the TASS news agency reported.

Europe would not be able to replace large volumes of Russian gas with LNG from elsewhere, Russian energy minister Nikolai Shulginov reiterated on Tuesday.

Moscow’s own options to re-route gas from Europe, which comes via pipelines not connected with Asia, are limited.

Russian gas supplies had been in the spotlight long before the Ukraine crisis amid increased global demand for the fuel which pushed up European spot gas prices.

As customers relied on stockpiles while waiting for prices to cool down, the Yamal gas pipeline, which usually brings Russian gas westwards to Germany via Poland, was switched eastwards, sending gas back to Poland instead.

Eastward flows from Germany back to Poland continued for the tenth week on Tuesday. Gazprom says it is meeting its contractual obligations while not adding gas for the spot markets.

Austria’s OMV, another big Gazprom’s customer and a financial partner in the Nord Stream 2 gas pipeline, said on Tuesday that Russian gas supplies continued as usual and in accordance with the contract.

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