Approval for the Nord Stream 2 gas pipeline has been put on hold, and the European Commission will scrutinise the project’s compliance with the trading bloc’s energy policy, revealed the commission’s vice president Valdis Dombrovkis yesterday.
He argued the European Union (EU) will do everything it can to ensure Russia is unable to use natural gas as a weapon.
Dombrovkis said: “It is important that the United States, NATO and all EU Member States continue to cooperate closely, supporting Ukraine in response to Russian escalation. We are united in sending a clear message to Russia: any further aggressive action would bring it severe political and economic consequences.”
The developments will be a huge blow to the Kremlin, and follow deepening tensions between Russia and the West over the fate of Ukraine.
Russia has positioned over 100,000 troops within close proximity of Ukraine’s borders over the past month, and has sought extensive talks with the White House concerning perceived NATO expansionism.
German Chancellor Olaf Scholz has threatened to place sanctions on the pipeline if Russia instigates conflict in the region, while the US has said the pipeline will not be greenlit if Ukraine is invaded.
The £8.4bn Nord Stream 2 project was completed last September, with its certification held up last year amid governance concerns from German regulators.
Meanwhile, Dombrovskis also said the commission plans to approve a €1.2bn financial aid package to Ukraine today.
No decision on the pipeline from the domestic authorities was expected until this summer, but the pipeline also needs to be approved by the European Commission.
It has the right to examine whatever position Germany takes, with a possibility to extend the period by another two months under certain conditions, and it can also pause the process unilaterally.
The German regulator, Bundesnetzagentur, initially raised concerns over Nord Stream AG’s independence from Kremlin-backed gas giant Gazprom and laid down requirements last November for Gazprom to set up a separate company to oversee the German section of the pipeline.
However, worries over its political influence have only grown since then, with the International Energy Agency accusing Russia of throttling supplies into Europe, and of trying to minimise the role of Ukraine by reducing its transit fees from pipes flowing through the country.
Russian President Vladimir Putin has dismissed such accusations as ‘politically motivated blather’, while Gazprom has insisted it has fulfilled every contract it has brokered in Europe.
Nevertheless, the gas titan failed to reach its fully-year export targets for Europe and Germany last year, and cut its export growth into the continent to five per cent over the last three months of the year.
Another aggravating factor is the Yamal-Europe pipeline, which typically supplies Europe with around a sixth of its gas imports.
It has flowed eastwards away from Germany for over a month and Gazprom currently has no exports planned via the pipeline this month.
Could Europe survive without Russian gas?
Any call to reject Nord Stream 2 would not come without costs however, as the trading bloc currently relies on Russia for around 40 per cent of its natural gas imports.
Not only would the decision infuriate Moscow, but Nord Stream 2 would alleviate deepening worries over future energy crunches closer to home.
The pipeline would double Russia’s exports with Germany, pumping 55 billion cubic metres (bcm) per year into the continent via the Baltic sea floor.
Wholesale prices rose five-fold over the course of 2021, and while prices have effectively halved since Christmas they remain historically high with fears that elevated costs could effectively be baked into the market.
In his latest gas update, Henri Patricot, associate director at UBS, said: “We expect the global gas market to remain tight in 2022 and prices to remain very volatile because of low European storage utilisation and geopolitical tensions likely taking until 2023 to normalise.”
The continent scarcely escaped serious difficulties this winter, effectively bailed out by a flotilla of US tankers last month, after growing fears of blackouts across Europe. In the end, only Moldova and Kosovo suffered from power outages.
It is unlikely that new deals with non-Russian gas suppliers would sustainably replace both the potential gains in supplies Nord Stream 2 could provide, and Russia’s current gas offerings to the continent.
Investment notes from Stifel suggested that gas prices could to £10 per therm in the UK, if Europe was cut off from Russian supplies due to sanctions or conflict-driven disruption.
EU-focused think tank Bruegel has also recently suggested that the trading bloc would only be able to temporarily keep up with consumption demand if there were severe shortages.
Platts Analytics suggest European storage stocks are around 19 bcm below the five-year seasonal average.
It expects that even if Russian flows continue, European stocks will still be near record lows at the end of winter, leaving little scope to absorb a further supply shock.
Over the past few weeks, the US has been scrambling to procure deals with non-Russian gas suppliers such as Qatar, while EU energy chief Kadri Simson is set to attend conferences in Azerbaijan and Washington to negotiate potential energy settlements.
Ron Smith, senior oil and gas analyst at BCS Global Markets argued the current crisis could provide new partners with previously unexpected opportunities.
Speaking to City A.M, he explained: “In gas markets, the unexpected and deep shortage that has developed on both global LNG markets and, more specifically, in the European gas market point to some market opportunities for producers. In particular, those that can bring new, long-term, non-Russian gas supply to the region are likely to find high interest in those volumes. This may allow new pipeline projects from Central Asia or the Mediterranean region, new fields in the North Sea, or new LNG projects (especially in the US) to lock in volumes at prices that would have been difficult to negotiate just 12 months ago.
However, while Qatar could provide the EU with liquefied natural gas (LNG), it does have contracts to fulfil across the world amid rebounding demand in Asia, with Europe just one of many players in a global gas supply crisis.
The country typically favours long-term contracts over spot deals, most of which exist outside the continent, and according to Reuters, Qatar has also attached strings to any future arrangements.
It has told the EU that the trading bloc would need to restrict the resale of gas outside the EU, so major suppliers can provide gas in case of a Russia-Ukraine conflict and prevent a short-term crisis.
The news agency also revealed that European LNG imports hit a record high last month, at 11.8 bcm, compared with a previous record in November 2019 of around 9 bcm.
Nearly 45 per cent of the LNG imports were from the United States.
While this is encouraging in contrast to the shortening supplies of natural gas, LNG has to be converted to usable supplies through an extensive storage process.
With supplies rising from 51 per cent to 75 per cent of capacity in Western and Southern Europe, this means the continent only has limited capabilities to absorb further flows of LNG.