Ukraine crisis: Germany puts Russian gas pipeline on hold

Germany puts a major natural-gas pipeline on hold and traders grow concerned Moscow will withhold gas in retaliation.

The receiving station of the Nord Stream 2 gas pipeline near Lubmin, Germany. Nord Stream 2, which is owned by Russian energy company Gazprom, was to transport Russian natural gas from Russia to Germany along over 1200km of twin pipeline stretching across the bottom of the Baltic Sea.

Russia’s troop deployment to two breakaway regions of Ukraine threatens to extend Europe’s energy crisis, after Germany put a major natural-gas pipeline on hold and traders grew concerned Moscow would withhold gas in retaliation.

In Europe, natural-gas prices rose 11 per cent to €80.58 a megawatt-hour, equivalent to $US91.40, after the German announcement. Prices of oil - another big Russian export to Europe -- rose more than 2 per cent, with futures for Brent crude moving as high as $US99.50 a barrel, their highest level since 2014. US natural-gas prices also rose on Tuesday night, though the move was less pronounced than in Europe. Futures gained 3.8 per cent to $US4.60 per million British thermal units. Prices for aluminum, nickel and wheat, all produced in large quantities in Russia or Ukraine, rose too.

Germany froze the Russian-German Nord Stream 2 gas pipeline on Tuesday, a day after Russian President Vladimir Putin recognised the independence of two Russian-controlled breakaway regions of Ukraine and sent troops there as part of what Russian authorities called a peacekeeping mission.

The submarine pipeline, which was nearing operability but awaiting the final green light from Berlin, was expected to double direct Russian gas exports to Germany. The U.S. and some of Germany’s allies have argued the project, costing €10bn, would act to increase Russia’s leverage over European gas supplies. The Trump administration imposed sanctions on the project, though the Biden White House removed them. Germany has argued the pipeline is a private, and not political, endeavor that is critical to boost Germany’s gas supply.

German certification wasn’t expected until later this year, so Tuesday’s announcement doesn’t affect current gas supplies. European Union chief Ursula von der Leyen said Saturday that the bloc had secured enough shipments of liquefied natural gas that, together with existing reserves, would allow it to get through the winter.

Germany had until now held back on threatening the future of the project in recent weeks as tensions between Moscow and the West rose over Ukraine. The decision by German Chancellor Olaf Scholz surprised some project observers.

“There will be a new assessment of the security of our energy supply considering what has happened in the last days,” Mr Scholz said.

Russian Foreign Ministry spokeswoman Maria Zakharova said that the West’s stance over the pipeline runs counter to what she described as principles long proclaimed by Western countries. Dmitry Medvedev, deputy chairman of Russia’s Security Council and a former Russian president, said that any suspension of the pipeline would cause gas prices in Europe to skyrocket.

“Welcome to the brave new world where Europeans are very soon going to pay EUR2.000 for 1.000 cubic meters of natural gas!” he wrote on Twitter.

There were no interruptions to Russian gas flows through separate pipelines into Europe on Tuesday, traders and analysts said. The worry, they said, is that Russia will withhold gas in the coming months now that Nord Stream 2 is on hold.

In recent months, Russian state gas giant Gazprom PJSC has met its contractual commitments in Europe but gone no further, constricting supplies and helping to push prices to record highs. Traders say Europe will struggle to build up adequate supplies of gas before next winter if the state supplier sticks with that strategy.

European gas prices began to shoot up in the fall and are almost five times as high as they were a year ago, a rally that is feeding into higher bills for consumers and leading companies in energy-intensive industries such as fertilizers and aluminum to cut production.

Some traders girded for retaliatory action by Russia, which could turn off taps on other pipelines to Europe. Mr. Putin, though, told an energy conference Tuesday that Russia wouldn’t turn off gas supplies to Europe.

Nord Stream 2 illustrates Europe’s growing dependence on Russian natural gas over the past decade, as governments closed coal-fired power stations and wound down domestic gas production amid a broad push toward renewables. Rising hostilities in Ukraine -- a major gas crossroads itself -- threaten huge economic damage if they snag supplies of a fuel widely used to generate electricity, heat homes and fire factories. More broadly, if European gas prices stay high, that can affect markets farther afield, by diverting supplies and driving up prices elsewhere.

Russia is Europe’s biggest supplier of gas, crude oil and coal. Delivered through a sprawling pipeline network and on vessels carrying supercooled gas, Russian gas exports met about 38% of European Union demand in 2020, according to the most recent official data.

In any military escalation by Russia, pipelines carrying Russian gas through Ukraine to Eastern Europe and beyond are the most likely flashpoint.

Yuriy Vitrenko, chief executive of Ukraine’s state gas company, Naftogaz, said in the weeks before Moscow’s mobilization of troops into the Ukrainian provinces that the government would likely have to close parts or even all of the network for safety reasons if hostilities break out. In a war zone, high-pressure gas pipes could cause explosions that destroy entire towns, he said in an interview.

Sanctions imposed by the West against Moscow could also make it difficult to finance, pay for and transport Russian oil and gas in the coming months. The U.K. on Tuesday froze assets of five banks, though none of them are major funders of the oil-and-gas industry. Lawyers say the sanctions regime is likely to evolve over time. The US and EU are preparing to lay out specific measures later Tuesday.

US and European officials have scrambled in recent weeks to shore up supplies. If Russian flows were cut off, Europe could import large amounts of liquefied natural gas, or LNG, as well as fuel from pipelines linking the continent to Norway, Azerbaijan and Algeria. It also could release gas held in a strategic reserve in Italy.

However, analysts say making up for lost Russian supplies would prove all but impossible and come at huge expense. The uneven distribution of LNG terminals in Europe poses an additional complication. A third of Europe’s LNG-import capacity sits in Spain and Portugal, analysts at S&P Global Platts say. A further 24 per cent is in the UK.

Nord Stream 2 AG, the Switzerland-based company behind the pipeline, is owned by Gazprom. In turn, the Russian government owns more than 50 per cent of shares in the gas producer and exporter. Jens Mueller, a spokesman for Nord Stream 2, said Tuesday that the German gas regulator hadn’t contacted the company about the suspension of the approval process. He declined to comment on Mr Scholz’s decision.

Five Western energy companies -- Shell PLC, France’s Engie SA, Austria’s OMV AG and Germany’s Uniper SE and Wintershall Holding GmbH -- helped finance the 1,230-kilometer pipeline. Each stumped up as much as €950 million, according to Nord Stream 2 AG, which doesn’t provide further details about the nature of the funding. Four of the companies declined to comment on the suspension while Wintershall didn’t respond to questions.

The Wall Street Journal