Nord Stream 2 gas pipeline dealt potentially fatal blows

The Nord Stream 2 gas pipeline appears, now, to really be dead in the water without ever having started commercial operations.

After Germany on Feb. 22 suspended the certification process in order to review its position toward the project in terms of supply security, US President Joe Biden followed up by imposing sanctions against operator Nord Stream 2 AG on Feb. 23.

With Russia now having launched a military offensive against Ukraine on Feb. 24, any way back for the controversial project seems extremely unlikely.

Billed by Moscow as offering much-needed additional gas supply infrastructure to Europe, the 55 Bcm/year pipeline was opposed by Ukraine, the US and most of eastern Europe from the beginning.

They argued it would mean increased European dependence on one route of gas under the control of the Kremlin -- Nord Stream 2 doubles the capacity of the Baltic Sea route to 110 Bcm/year on top of the existing first Nord Stream system.

And, they said, it could lead to the role of Ukraine as a transit country for Russian gas being entirely eliminated.

Ukrainian officials said that Ukraine could even become a target for a Russian invasion if Moscow no longer needed its western neighbor for gas transit.

As it happened, Russia has now moved into Ukraine anyway, even though state-controlled Gazprom needs Ukrainian transit to meet its European customer obligations.

Learn more about the history of the Nord Stream 2 project:

'Irrevocable'

It is hard to imagine Nord Stream 2 ever becoming operational under these new geopolitical circumstances.

Ukrainian President Volodymr Zelenskiy called Feb. 23 for the project to be permanently halted, urging Berlin to make its suspension of the certification process "irrevocable."

After all, Germany's move is, in effect, only temporary, with Chancellor Olaf Scholz pledging only to reassess whether Nord Stream 2 could pose a threat to German gas supply security.

It is not entirely out of the question that at some point in the future, Berlin could revisit the subject.

White House spokesperson Jen Psaki would not be drawn Feb. 23 on whether the project could ever begin operations.

"It's currently dead at the bottom of the sea," she said, according to a transcript of a briefing posted to the White House website.

"I'm not going to get ahead of where we are in the process. It is not happening. It's not moving forward," she said.

Ukraine has welcomed both the German and US moves to halt the project, but the head of state-owned Naftogaz Ukrayiny has called for further action against the first Nord Stream pipeline.

"We have said this before and we are emphasizing now that in the case of further aggression, sanctions should also be imposed on Nord Stream 1," Naftogaz Ukrayiny CEO Yuriy Vitrenko said on his official Facebook page on Feb. 23 before the invasion began.

When it was launched in 2011, Nord Stream was broadly welcomed in Europe following the Russia-Ukraine gas crises in 2006 and 2009. A direct line to Germany meant no issues with problematic transit countries.

Nord Stream's capacity of 55 Bcm/year could be compensated for by increased transit via Ukraine, which has a technical transit capacity of as much as 140 Bcm/year.

Just 41.6 Bcm of Russian gas transited Ukraine in 2021.

Further response

It remains to be seen what further measures the US and the EU could take to punish Russia over its military escalation, though policymakers will be keen to avoid a worsening of the current gas price crisis.

European gas prices made huge gains in early trade Feb. 24 after Ukraine said Russia had launched the invasion, with TTF March prices rising by as much as 35% to Eur120/MWh.

That is still some way below the record highs of over Eur180/MWh in late December, but any disruption to Russian gas flows in the coming days could change the picture significantly.

S&P Global Platts Analytics, which previously expected Nord Stream 2 to start service in October 2022, has now removed the project from its forecasts altogether.

The volume that Nord Stream 2 would have provided will instead have to be replaced by LNG, Platts Analytics' managing analyst James Huckstepp said.

"In Europe, we will also need to see continued fuel switching in power and refining, with coal generation capacity returning and having its lifespan extended, along with the ongoing prioritization of gas over oil exports in Norway, which will all require higher gas prices," he said.

It could have been so different for Nord Stream 2 -- it was on track to come online in December 2019, but delays in obtaining a construction permit in Denmark followed by US sanctions again pipelayers meant work was delayed.

It was finally completed in September 2021 and is now filled with gas ready to flow. But barring any major geopolitical changes, Nord Stream 2 may well sit unused indefinitely.