ICIS EXPLAINS: Nord Stream 2 delays

LONDON (ICIS)–Before Russian gas can flow to Germany via the new 55 billion cubic metres (bcm)/year Nord Stream 2 pipe, the section of the pipeline located in German territorial waters needs to be certified compliant with EU and German legislation.

ICIS explains what is at stake in this procedure and how commissioning is increasingly likely to be delayed beyond this winter.

CERTIFICATION PROCESS

The German regulator BNetzA put the certification procedure on hold since 16 November because more administrative work and documents are required.

The section of the pipeline in German territorial waters is to be owned and operated by a Germany-based subsidiary of the entity that owns and operates the rest (and majority) of the pipeline.

When suspending the certification, BNetzA said that the new subsidiary must fulfil the unbundling requirements of an independent transmission operator (ITO) set out in the German Energy Industry Act.

According to this act, vertically integrated energy supply companies can name an independent transport network operator for a network connected to a third country for the section in German territorial waters, if the network was owned by the vertically integrated energy supply company on 23 May 2019.

Senior fellow at the Centre for Eastern Studies Agata Loskot-Strachota said there may be a chance that BNetzA finds out that it cannot grant ITO status to the new subsidiary as neither the pipeline nor this subsidiary existed prior to 23 May 2019.

The certification procedure will resume once the creation of this subsidiary is complete and all required documents for this new entity have been submitted to BNetzA.

The suspension of the certification procedure could last from several weeks to several months, according to industry experts. BNetzA said on 16 December that the procedure is likely not to be completed in the first half of next year, confirming previous expectations that the pipeline would not flow gas this winter.

“BNetzA will not rush and will process all required documents so that later it will be more difficult for Poland to dispute the decision in court,” said Igor Yushkov, an expert of the National Energy Security Fund and the Financial University under the government of the Russian Federation.

According to a document sent by the German embassy in Washington to Congress in late November, the procedure will be suspended presumably for two months. The document has a timeline showing BNetzA submitting its preliminary decision to the European Commission in March, the commission issuing its opinion between May and July and BNetzA making a final decision between July and September.

BNetzA told ICIS in mid-November that when the main assets and human resources have been transferred to the subsidiary and BNetzA is able to check whether the documentation resubmitted by the subsidiary is complete, it will resume its examination in the remainder of the four-month period. The procedure officially started on 8 September, was suspended on 16 November, meaning BNetzA has roughly six weeks left to make a preliminary decision once it resumes the procedure. The European Commission will then have up to four months to issue an opinion, after which BNetzA will have two months to make a final decision.

POLITICAL TENSIONS

Tensions between Ukraine and Russia worsened amid a recent military build-up near their common border.

On 16 December, the European Parliament passed a resolution with a vast majority condemning the Russian military build-up and urging that Nord Stream 2 should not be made operational, regardless of whether it complies with EU legislation at some point.

On 7 December, the US president’s national security adviser Jake Sullivan said in a White House press briefing that “the future of Nord Stream 2, in the context of an invasion of Ukraine by Russia in the coming weeks, is a topic of utmost priority.”

During the G7 summit, on 12 December, Canada, France, Germany, Italy, Japan, the UK and the US said in a joint statement that “Russia should be in no doubt that further military aggression against Ukraine would have massive consequences and severe cost in response,” without further details.

On the same day, Germany’s new foreign minister Annalena Baerbock clearly indicated one possible consequence saying on German TV that in the event of further escalation, the Nord Stream 2 pipeline would not be able to proceed.

But there is no consensus on this among EU member states, as Austrian foreign minister Alexander Schallenberg indicated ahead of the EU Council meeting of 13 December saying the pipeline is finished and we should start using it. Austrian utility OMV is one of the six investors in Nord Stream 2, Germany’s Uniper and Wintershall also invested in the project.

Baerbock and her party – the Greens – criticised the pipeline in the past. Now the Greens are in the new German coalition and occupy key government positions like the foreign ministry (Baerbock) and the energy and economy ministry (Robert Habeck). These positions could affect the future of the pipeline. BNetzA is supposed to be independent of government in its certification decision, but foreign policy can dictate what is bought from whom through the use of sanctions, said Michael Grossmann, managing partner at Paris-based energy consultancy Tumbleweed Partners.

A source in German government circles told ICIS that the Greens will probably do their best to prevent the pipeline’s commissioning, and that even if the certification was approved once all requirements are met, the pipeline’s launch may still be postponed because of the situation in Ukraine or elsewhere.

RUSSIA/UKRAINE TRANSIT DEAL

Nord Stream 2’s delayed launch might be linked to Germany’s July commitment to use all available leverage to facilitate an extension of up to 10 years of the Ukraine transit agreement with Russia.

Under the current transit deal Russia has committed to purchase 65 billion cubic metres (bcm) of transit capacity via Ukraine in 2020 and 40bcm/year in 2021-2024.

Sending more volumes via Ukraine is not commercially beneficial for Russia, Putin said in early October. In any case, the volumes and duration of any future transit deal would depend on several factors including

– EU gas demand, which is uncertain in the context of the energy transition

– EU companies’ readiness to renew long-term contracts with Russia

– the competitiveness of transit tariffs proposed by Ukraine beyond 2024

ICIS calculated that Russia’s long-term pipeline supply contracts with its 20 largest EU customers were set to fall to around 130bcm by 2030, down from around 176bcm in 2021.

If Europe wants Ukrainian transit to continue, then Europe must buy more Russian gas, more than what can be transported via the routes bypassing Ukraine, then Russia will be forced to send gas via Ukraine, Yushkov said. Since Germany pledged in July to help preserve transit in every possible way Russia will now say “you have pledged to help preserve transit, so buy more of our gas, this will be your contribution to preserving transit,” Yushkov said adding that this is how he sees Russia’s position.

The option of booking only via quarterly, monthly and daily auctions like for the Polish transit route may be attractive to Russia as it gives more flexibility, but less so for Ukraine which has a more extensive and older transit network to maintain than Poland and so might prefer longer-term guarantees of revenues.

Meanwhile, Wolfgang Peters, managing director at consultancy The Gas Value Chain, said Germany’s July pledge is a best endeavour clause at best.

The European Commission’s recent proposal to reform the EU gas sector to align it with the bloc’s energy transition targets is, according to Peters, “another aspect which may make the respective politicians perhaps think twice” about promoting Ukrainian transit extensions.

A ban on long-term supply contracts for unabated fossil gas lasting beyond 2049 is included in the reform proposed by the commission on 15 December. According to Gazprom, sending 55bcm via Nord Stream 2 will save almost 9 million tons of CO2 emissions/year compared to sending the same volume via Ukraine, while an independent study from DBI shows it will save 11 million tons of CO2/year.

Additional reporting by Amjad Khashman