Oil & Gas

24 Feb 2022

The US and Germany Have Now Both Targeted Nord Stream 2 to Punish Russia. Here's Why the Pipeline Is So Important

24 Feb 2022  by   

The Nord Stream 2 pipeline is not yet operational despite being completed and filled with gas.(AP: Michael Sohn)

In the wake of Germany suspending the Nord Stream 2 project, the United States has now imposed sanctions on the company in charge of the natural gas pipeline.

The undersea pipeline directly links Russian gas to Europe via Germany and is complete but not yet operating.

It has become a major target as Western governments try to exert leverage on Russia to deter further military moves after Moscow officially recognised the two separatist regions in Ukraine's east.

Here are the key things to understand about the project and its strategic importance.

What is Nord Stream 2?

Nord Stream 2 is a 1,230-kilometer-long natural gas pipeline under the Baltic Sea, running from Russia to Germany's Baltic coast.

It runs parallel to an earlier Nord Stream pipeline and would double its capacity, to 110 billion cubic meters of gas a year.

It means Russian state-owned energy firm Gazprom can send gas to Europe's pipeline system without using existing pipelines running through Ukraine and Poland.

The Nord Stream 2 pipelines travel from Russia to Germany under the Baltic Sea.(ABC News: Jarrod Fankhauser)

Combined, the two Nord Stream pipelines would be able to provide about a quarter of the gas used in European Union countries.

The $US11 billion ($15 billion) pipeline has been filled with gas but had been awaiting approval by Germany and the European Commission.

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.

German Chancellor Olaf Scholz ordered Nord Stream 2 to be suspended. (Reuters: Hannibal Hanschke)

How is Germany blocking the pipeline?

The German economy ministry on Tuesday withdrew an assessment submitted last year to the German energy regulator declaring that the pipeline posed no risk to the security of energy supplies.

The ministry is expected to submit a new assessment within three months, which would take into account Russia's recognition of two breakaway regions in eastern Ukraine and the threat of a Russian military invasion of its neighbour.

If, as expected, it declares the pipeline a risk to energy security, Germany's energy regulator would almost certainly not approve the project.

The regulator said on Tuesday after Mr Scholz suspended the project that it could not certify Nord Stream 2 and thus its operation would be illegal.

What sanctions have the US imposed?

In a statement on Wednesday, US President Joe Biden said his administration was imposing sanctions on Nord Stream 2 AG and its corporate officers.

Nord Stream 2 AG is a registered Swiss firm owned by Gazprom.

Mr Biden added: "These steps are another piece of our initial tranche of sanctions in response to Russia's actions in Ukraine. As I have made clear, we will not hesitate to take further steps if Russia continues to escalate."

The US Treasury Department issued a general license authorising the "wind down" of transactions with Nord Stream 2 AG until March 2.

The sanctions did not affect Gerhard Schroeder, a former German chancellor and a close friend of Russian President Vladimir Putin, who has headed the shareholders committee of Nord Stream since 2005.

What does the pipeline mean for Russia?

Gazprom says the pipeline will meet Europe's growing need for affordable natural gas and complement existing pipelines through Belarus and Ukraine.

Nord Stream 2 would offer an alternative to Ukraine's ageing system that Gazprom says needs refurbishment, lower costs by saving transit fees paid to Ukraine, and avoid episodes like the brief 2006 and 2009 gas cut-offs over price and payment disputes between Russia and Ukraine.

Europe is a key market for Gazprom, whose sales support the Russian government budget.

Europe needs gas because it's replacing decommissioned coal and nuclear plants before renewable energy sources such as wind and solar are sufficiently built up.

Nord Stream 2 is expected to save Gazprom billions in fees every year by circumventing Ukraine. (AP: Stefan Sauer/DPA)

Why is the US against Nord Stream 2?

The White House was in "close consultations with Germany" and welcomed their announcement, press secretary Jen Psaki tweeted on Tuesday.

The US, European NATO allies such as Poland, and Ukraine have opposed the project going back before the Biden administration, saying it increases Europe's dependence on Russian gas and gives Russia the possibility of using gas as a geopolitical weapon.

Europe imports most of its gas and gets roughly 40 per cent of its supply from Russia.

The pipeline, which went forward under Ms Merkel, has been an irritant in US-German relations.

Mr Biden waived sanctions against the pipeline's operator when it was almost complete in return for an agreement from Germany to take action against Russia if it used gas as a weapon or attacks Ukraine.

In Congress, Republicans and Democrats — in rare agreement — have long objected to Nord Stream 2.

Will suspending Nord Stream 2 leave European to freeze this winter?

No. Even before Mr Scholz's move, regulators made clear the approval process could not be completed in the first half of the year.

That means the pipeline was not going to help meet heating and electricity needs this winter as the continent faces a gas shortage.

The winter shortage has continued to feed concerns about relying on Russian gas.

Russia held back from short-term gas sales — even though it fulfilled long-term contracts with European customers — and failed to fill its underground storage in Europe.

Russian President Vladimir Putin has said the shortage underlines the need to quickly approve Nord Stream 2, increasing concerns about Russia using gas to gain leverage over Europe.

Could Russia cut off gas supplies to Europe in retaliation?

While Europe needs Russian gas, Gazprom also needs the European market. That interdependence is why many think Russia won't cut off supplies to Europe, and Russian officials have underlined they have no intention to do that.

Meanwhile, the Ukraine crisis, on top of the winter shortage, has already given European governments more reason to find their gas somewhere else, such as through liquefied natural gas, or LNG, brought by ship from the US, Algeria and other places.

Does Germany's decision mean Nord Stream 2 is over for good?

Asked by public broadcaster ARD if Nord Stream 2 could still go online one day, Mr Scholz said: "We are in a situation at the moment where no one should bet on that. We are very far from this at the moment."

Germany's Economy Minister Robert Habeck, whose Greens party always opposed the project, told ARD in a separate interview it could end up being entirely scrapped.

"It is absolutely still possible that sanctions will be imposed on Nord Stream 2," he said.

The Nord Stream 2 pipelines make landfall at Lubmin in Germany.(Reuters: Hannibal Hanschke)

However, the Kremlin and some of the companies backing the pipeline say they are holding out hope the decision to halt the certification could be reversed.

Nord Stream 2 could seek compensation from the government in a German court.

But it could also seek international arbitration under the Energy Charter Treaty (ECT), a pact that allows companies to sue countries over policies that affect their investments.


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