How Nord Stream 2 Got Stuck in Russia-Ukraine Limbo

(Bloomberg) -- The newly completed Nord Stream 2 pipeline under the Baltic Sea has come tantalizingly close to being able to pump billions of cubic meters of Russian gas to the European Union. Now its future is in limbo amid tougher sanctions from the U.S. and Europe. The link between Russia and Germany runs parallel to the existing Nord Stream pipeline that’s been fully operational since 2012. The launch of the new link was already delayed by earlier U.S. efforts to block its completion. Russia’s invasion of Ukraine further complicates matters, and the new pipeline may lie dormant on the Baltic seabed for years.

1. What’s halted it for now? 

U.S. President Joe Biden expanded sanctions against Russia on Feb. 23, with new penalties targeting the builder of the pipeline and its corporate leadership. The U.S. sanctions hit Nord Stream 2 AG. German Chancellor Olaf Scholz said just before the Russian attacks that President Vladimir Putin’s recognition of two separatist republics in the east of Ukraine had materially changed the situation so that “no certification of the pipeline can happen right now.” Without it, he told reporters, the gas link “cannot go into operation.” Scholz effectively froze the approval process by having the Economy Ministry withdraw its assessment that the project doesn’t pose a threat to security of supply. Economy Minister Robert Habeck said the pipeline is unlikely to start up in the medium term. 

2. Was Germany’s action separate from sanctions? 

Yes. “It’s not a sanction in the classic sense, it’s a political decision that Nord Stream 2 cannot come,” Habeck told Deutschlandfunk radio in an interview on Feb. 23. The EU separately proposed a package of sanctions on Russia for its moves relating to the Donetsk and Luhansk regions of Ukraine, targeting those behind the decision, as well as banks that finance Russian operations in the territories. 

3. What was holding it up before?

Russian gas producer Gazprom PJSC needed to restructure its Nord Stream 2 operations to comply with the requirements of the German energy watchdog BNetzA and EU law. Only then would the intricate approval process, which started in September and was suspended in mid-November, be able to resume. The German regulator would have as long as four months to reach a preliminary conclusion and the EU, which has a more advisory role, could take another two to four months to express its opinion. BNetzA then would have a further two months to make a final ruling. Its president already said in December that a decision wouldn’t be made in the first half of 2022. 

4. Why was certification halted?

The approval process was first halted at the end of 2021 as the German energy regulator asked Nord Stream 2 AG, a Swiss company, to set up an entity in the country to comply with EU regulations. The company has now set up Gas for Europe GmbH as operator in Germany, but it still needs to transfer the main assets and human resources to the Schwerin-based unit. BNetzA suspended its review until the new entity was established and could prove it met all the legal requirements. 

5. When could Nord Stream 2 become operational?

If the German government rescinds its objection at some point in the future, then once the new unit submits the application documents to BNetzA, the watchdog could potentially pick up the approval process from where it left off. Since the regulator has already been considering the Nord Stream 2 case for just over two months, it would have a similar amount of time left to complete the study before the European Commission, the EU’s executive arm, starts its own review. The German regulator is obliged to take into “utmost account” the opinion voiced by the Commission, but is not required to follow it entirely. But Gas for Europe would still need to comply with any applicable U.S. sanctions remaining in force.

The Reference Shelf

• A Bloomberg story on how Russia’s dirty gas has been keeping Europe from freezing over.
• BloombergNEF research on European gas and the Russia conundrum.
• Related QuickTakes on how Europe became so dependent on Putin for gas, and the history of Nord Stream 2.

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