October 5, 2023

The long way for gas to flow

The long way for gas to flow

The Nord Stream 2 pipeline has been completed and ready to pump Russian gas to Europe, but nothing is flowing yet as approval from Germany’s energy regulator is pending.

Europe’s most controversial energy project under the leadership of Russian gas giant Gazprom (GAZP.MM) is facing opposition from the United States and Ukraine, among others.

A decision by the German regulator last week to require the pipeline operator, Swiss Nord Stream 2 AG, with assurances that it will not violate competition rules, suggests that it could take several months for the 1,200-kilometre pipeline to get the green light.

What is deactivation?

Germany’s Federal Network Agency, which regulates the country’s electricity, gas, telecommunications, post and railway sectors, has a recommendation by early January to certify the pipeline connecting Russia to Germany under the Baltic Sea.

Although the technical requirements are met, the main question that arises is whether Gazprom will comply with European dismantling rules, which require that owners of gas pipelines differ from the suppliers of gas they pass through to ensure fair competition.

Operator Nord Stream 2 claims the rules are intended to blow up the pipeline and scored a partial victory last week when an EU Supreme Court adviser recommended Gazprom defy EU rules.

The project’s twin pipeline, Nord Stream 1, has been exempted from dismantling rules since it opened in 2011 as it was treated as an internal link rather than a direct supplier.

What happens after the recommendation?

After a three-member independent steering committee from the network agency makes its recommendation, it is referred to the European Commission, which has two months to respond.

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If the two authorities agree that the pipeline meets all regulatory requirements, certification can be issued relatively quickly, but if this is not done, the process may be delayed further.

The certification can only be issued if the two iron out the differences, so it could take until the spring of 2022 for the pipeline to be certified and officially open for operation.

Can the agency really cut the pipeline?

actually no. Although certification is required, the network agency can only prevent Gazprom from immediately starting gas production to a very limited extent.

The most difficult tool is a one-time fine of 1 million euros ($1.2 million) imposed on the operator if he begins work without a certificate.

As a regulator, he can also initiate an investigation, but any legal process must be lengthy and not lead to short-term obstruction of gas flows.

Gazprom said in August that Nord Stream 2 will transport 5.6 billion cubic metres, or about a tenth of the pipeline’s annual capacity, by 2021 when deliveries begin in October.

What happens behind the scenes?

Two informed government sources said that Chancellor Angela Merkel has made clear in recent months to Russian President Vladimir Putin that compliance with the rules is necessary to ensure continued political support for the pipeline.

Merkel has openly stated that the political basis for the operation of Nord Stream 2 is Russia’s commitment to continue to use Ukraine as a gas transit route in the future.

“Putin is smart enough to know that the mood of German politicians on the project has become very problematic, so he should not give any reason to jeopardize operations,” one of the sources said.

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Is the network agency politically independent?

No. For its own recommendation, the agency requires a security binding evaluation of the supply by the Federal Department of Economic Affairs and Energy, with which it is involved.

A spokesperson for the authority said: “The certificate can only be granted if the Federal Ministry for Economic Affairs and Energy determines that the issuance of the certificate does not endanger the security of gas supplies to the Federal Republic of Germany and the European Union.” .

The Ministry of Economic Affairs said it was currently working on this assessment, but did not specify a timeline for its completion. If you decide that the operation of Nord Stream 2 threatens the gas supply, the authority cannot certify this.

Does the elections in Germany have an effect?

Until there is a new government, the Federal Ministry for the Economy will be headed by Peter Altmaier, a member of Merkel’s conservative party, who has backed the pipeline.

Under Merkel, who continues to rule the country until a new alliance is formed, Germany recently reached an agreement with Washington to move the controversial pipeline forward.

As a result, the threshold for the next government’s resignation is very high, even in the event that the Green Party, who have vehemently rejected the project, is likely to be part of the next government coalition, two people familiar with the matter said. .

Olaf Schulz, who led the Social Democrats to victory in last month’s election and has a good chance of succeeding Merkel as chancellor, also spoke in favor of the pipeline.

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