Germany freezes Nord Stream 2 gas project as Ukraine crisis deepens

Nord Stream 2 Baltic Sea pipeline

Germany on Tuesday halted the Nord Stream 2 Baltic Sea gas pipeline project, designed to double the flow of Russian gas direct to Germany, after Russia formally recognised two breakaway regions in eastern Ukraine.

Europe's most divisive energy project, worth $11 billion, was finished in September, but has stood idle pending certification by Germany and the European Union.

The pipeline had been set to ease the pressure on European consumers facing record energy prices amid a wider post-pandemic cost of living crisis, and on governments that have already forked out billions to try to cushion the impact on consumers.

But on Tuesday the European benchmark gas price, currently the Dutch March contract , was up 9.8% at 78.95 euros per megawatt hour (MWh) at 1607 GMT, much like the price for the fourth quarter , when Nord Stream 2 had been expected to start.

Dmitry Medvedev, Russia's former president and now deputy chairman of its Security Council, tried to rub salt in that wound.

"Welcome to the new world where Europeans will soon have to pay 2,000 euros per thousand cubic metres!" he tweeted - suggesting prices were set to double.

President Vladimir Putin did pledge, however, that Russia would not interrupt any of its existing gas supplies.

The Kremlin hoped the delay of Nord Stream 2 would be temporary, Interfax news agency reported, citing Kremlin spokesperson Dmitry Peskov.

Germany gets half its gas from Russia and had argued that Nord Stream 2 was primarily a commercial project to diversify energy supplies for Europe.

But despite the potential benefits, the pipeline had faced opposition within the European Union and from the United States on the grounds that it would increase Europe's energy dependence on Russia as well as denying transit fees to Ukraine, host to another Russian gas pipeline, and making it more vulnerable to Russian invasion.

"This is a huge change for German foreign policy with massive implications for energy security and Berlin's broader position towards Moscow," said Marcel Dirsus, non-resident fellow at Kiel University's Institute for Security Policy.

"It suggests that Germany is actually serious about imposing tough costs on Russia."

'TRUE LEADERSHIP'

Washington welcomed Scholz's announcement, saying it had been in close consultation with the German government overnight.

Ukrainian Foreign Minister Dmytro Kuleba tweeted his approval.

"This is a morally, politically and practically correct step in the current circumstances," he said. "True leadership means tough decisions in difficult times. Germany's move proves just that."

German Chancellor Olaf Scholz said he had asked the economy ministry to make sure certification could not take place now.

"The appropriate departments ... will make a new assessment of the security of our supply in light of what has changed in last few days," he said.

Economy Minister Robert Habeck said Germany's gas supply was secured even without Nord Stream 2. But he told journalists in Duesseldorf that prices were indeed likely to rise further in the short term.

The Russian state-owned gas giant Gazprom owns the entire pipeline but paid half the costs, with the rest shared by Shell (SHEL.L), Austria's OMV (OMVV.VI), France's Engie and Germany's Uniper (UN01.DE) and Wintershall DEA (WINT.UL).

OMV said it did not currently see a need for write-downs over Nord Stream 2 and had already started receiving a return on its financing.

The Federal Network Agency - which regulates Germany's electricity, gas, telecommunications, post and railway sectors - had suspended the certification process in November, saying Nord Stream 2 must register as a legal entity in Germany.

Analysts had expected it to pick up the procedure in mid-year after the operator did as requested.

Reporting by Sarah Marsh and Madeline Chambers; Additional Reporting by Joseph Nasr, Andreas Rinke, Christoph Steitz and Reuters TV in Germany and Susanna Twidale in London; Editing by Kevin Liffey and Nick Macfie

REUTERS