bne IntelliNews – UPDATE: German Government Removes Key Document, Kills Nord Stream 2 Gas Pipeline

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The German government has withdrawn a key document needed to certify the Nord Stream 2 gas pipeline, making it impossible to complete the process, AP reported on Feb. 22.

The document is part of a set of documents that enabled the construction and use of the pipeline. However, now that this document has been withdrawn, the package of documents is incomplete, making regulatory approval impossible, according to reports.

German Chancellor Olaf Scholz said Nord Stream 2 could not be certified because “the situation has fundamentally changed”, Interfax and Bloomberg reported.

This decision follows Russian President Vladimir Putin’s decision to recognize the separatist republics of Donetsk and Luhansk February 21.

The Kremlin has pushed for certification of the pipeline, which was completed in September, but still requires German authorities to give regulatory permission for it to go into service.

Kiev has actively lobbied against the pipeline that would allow Russia to completely bypass the country. Ukraine earns around $2 billion a year in transit fees from Russia – money it desperately needs.

Following Russia’s recognition of the breakaway republics of Ukraine, Ukrainian President Volodymyr Zelenskiy reiterated his calls for the international community to immediately impose severe sanctions.

He said Kiev believes Russia is trying to create a legal basis for further aggression against Ukraine. “Sanctions should include a complete shutdown of Nord Stream 2,” Zelenskiy added.

Chancellor Angela Merkel oversaw construction of the pipeline, which she said was an “economic project” and not a political one. While the closure of the pipeline has long been discussed as a possible penalty, analysts had assumed it would be one of the last and toughest penalties to be imposed, not the first.

According to previous remarks, Nord Stream 2 was to be shut down in the event of a full-scale Russian invasion of Ukraine. Yesterday the Kremlin ordered the dispatch of peacekeepers to Donbass as part of Putin’s decision, which is not an invasion, but it was the first time the Kremlin had openly moved its military to this which is still considered Ukrainian territory by the rest of the world.

The EU and US are considering their response to Putin’s decision and further sanctions are expected to be announced today, including possible sanctions against Russia’s financial system and its ability to issue bonds.

Germany also resisted calls to ban Russia’s SWIFT messaging service. This remains unlikely, as analysts say it could trigger a financial crisis because the volume of money involved is so large.

Muted market reaction

Analysts were disappointed by the announcement saying it would affect the results of Russian gas giant Gazprom, but not much.

“We view this development as negative but not overtly for Gazprom. According to the company, the benefit of Nord Stream 2 is that it is expected to bring Gazprom c. $1 billion in EBITDA savings per year, equivalent to to around 2% of our 2021 EBITDA guidance and 2-3% of our guidance through 2026. We had these savings in our model starting in 2024,” Sova Capital said in a note.

“If approved, Nord Stream 2 would likely have faced capacity constraints anyway, as the OPAL pipeline (Nord Stream’s onshore pipeline) is operating at limited capacity due to an EU decision. This means that it used EUGAL (the offtake pipeline of Nord Stream 2) to keep Nord Stream running at full capacity, according to our understanding,” added Sova Capital analyst Mitch Jennings.

The permanent shutdown of Nord Stream 2 will also not affect Gazprom’s trade with Europe, as there is a large spare capacity via Ukraine to export the 200 billion m3 to Europe per year that Russia sells to Europe.

“However, if Ukraine, with which Gazprom has a prepayment contract, were taken out of the equation, we calculate the total capacity via other routes to Europe at 190 billion cubic meters per year, based on data from Gazprom. The problem, however, could be the transport of gas to continental Europe if there is no supply to Hungary and Slovakia via Ukraine,” says Sova Capital.

Russia is not expected to retaliate by cutting off or reducing gas supplies to Europe to punish the German decision. Since the company was founded in the 1970s, Gazprom has strived to present itself as a reliable energy supplier. Even after Scholz’s announcement, President Vladimir Putin said later the same day that Russia would continue its uninterrupted supply of gas to the international market, Interfax reported.

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