Nord Stream 2: the project that will not die

The calls for Germany, specifically Chancellor Angela Merkel, to withdraw its support for Nord Stream 2 have increased following the poisoning of Russian opposition leader Alexei Navalny with the nerve agent Novichok. Merkel’s stance had so far been to ‘decouple’ both issues, insisting that Nord Stream 2 is ‘just a commercial project’1 , but more recently, she indicated that she does not rule out actions against Nord Stream 2.2  However, Navalny’s poisoning is unlikely to result in Merkel dropping her support for the project as the costs to abandon the project outweigh the benefits for Germany and herself.

The controversial Nord Stream 2 project has dominated much of the European Union’s (EU) energy discussions since it was first announced in June 2015. This 55 billion cubic meters (bcm) gas project runs from Russia to Germany, along the bottom of the Baltic Sea through the Exclusive Economic Zones (EEZ) of Finland, Sweden and Denmark. Nord Stream 2 is preceded by its sister pipeline Nord Stream 1, which became operational in 2012 and also has a capacity of 55 bcm.

The Nord Stream 2 project is expected to reroute some of the gas from the Ukraine transit route. Opponents of the project fear that the pipeline could have severe implications for the sovereignty of Ukraine, considering the annexation of the Crimea in 2014.

Additionally, the project could negatively impact (European) energy security and make Germany, in the words of President Donald Trump, ‘captive to Russia’.3  Therefore, the project has been opposed by Washington, Kyiv, Warsaw and Brussels. The construction of the pipeline is nearly finished, with a mere 160 km of the 1230 km long pipeline still needing to be constructed.

Nord Stream 2 crises
Germany has demonstrated unwavering support for the project in previous Nord Stream 2 crises. The Gazprom project – with investments from Shell, Österreichische Mineralölverwaltung (OMV), ENGIE, Uniper and Wintershall – has already managed to survive four major hurdles that threatened its construction.

The first hurdle was the objection by the Polish regulator authorities (UOKiK) in 2015. The UOKiK launched an antitrust investigation against the project, because of its original organisational structure, with Gazprom and the European companies as shareholders.

As a result, the Nord Stream 2 consortium changed its organisational structure, making the European companies investors rather than shareholders, thus leaving Gazprom as the sole owner of the project. This way, the first obstacle was overcome.

US sanctions have brought the construction works to a complete standstill

The second obstacle came in the guise of EU regulation. In 2016, the European Commission claimed that Nord Stream 2 did not comply with EU internal market law, notably the requirement of ‘ownership unbundling’ (that no single company can be the owner of both the pipeline and the transmitted gas) as stipulated in the Gas Directive.

However, the argument that the Gas Directive also applied to international pipelines rested on shaky grounds, and was even challenged by the European Commission’s own Legal Service.4

In response, the European Commission changed tack and proposed amendments to the Gas Directive, which, after a long battle in the European Council, were eventually accepted. These amendments forced Nord Stream 2 to comply with EU regulation, limiting the capacity that Gazprom could book and thus making the project less profitable.  

Following the amendments, the Nord Stream 2 consortium filed a case against the European Commission through the Energy Charter Treaty to have the amendments cancelled on discriminatory grounds. This case is still pending.

A third hurdle was Denmark dragging its feet to issue a construction permit for Nord Stream 2 through its EEZ. After the construction of Nord Stream 1, Denmark added a security assessment as a requirement for a construction permit. This slowed down the permitting process for Nord Stream 2. Eventually, the Danish permit was issued in October 2019.

But soon a fourth obstacle arose, and this time it came from across the Atlantic. In late 2019, the United States (US) imposed sanctions targeting Allseas, the pipe-laying company working on Nord Stream 2, which immediately ceased all activities on the project. The US had long objected to the project because of its geopolitical implications for Ukraine, the threat to European energy security and US national security. The US had hoped the sanctions would result in the cancellation of the project.

German support for the project infuriated some Eastern European and Baltic countries, who oppose the project because of its security implications for Europe

US sanctions, solely targeting pipe-laying vessels, have brought the construction works to a complete standstill. President Vladimir Putin, however, vowed to continue the project using Russian pipe-laying vessels.

This prompted US Congress to propose additional sanctions against the project in another attempt to cancel it. These new sanctions, targeting certification and insurance of the pipeline, are currently being handled in the US Congress and have been added to a “must-pass” bill. The consequences of these sanctions, if imposed, would be detrimental to the project.

German support
Despite external pressure, German support for the project has been strong since its announcement. The German government has maintained from the outset that the project was a ‘commercial’ endeavour, a questionable assumption at best given the clear geopolitical aspects of the project.  

In April 2018, Merkel stated that Nord Stream 2 would only become operational if the Ukraine transit route was preserved.5  This already represented a minor change in Germany’s previous stance that the project was solely commercial.

However, since this statement, German support for the project gas remained solid. Germany spearheaded the opposition to the Gas Directive amendments in the European Council in 2018 and 2019. This German support for the project infuriated some Eastern European and Baltic countries, who oppose the project because of its security implications for Europe. As a consequence, German relations with these countries have become more strained.

US opposition to the project and questions about Germany’s role in the project were disparaged by German claims that the US attempted to sell its liquefied natural gas (LNG) to Europe.6  US-German relations had already come under pressure, following President Trump’s comments on Germany’s NATO spending.

Even within Merkel’s own party there has been opposition to the project

Conversely, following the 2019 amendments to the Gas Directive, the German gas regulator denied the project’s consortium requests for exemptions to EU rules. This marks a break with the accommodating approach Germany took to the case of Nord Stream 1 and the OPAL (Ostsee-Pipeline-Anbindungsleitung) gas pipeline, which connects to Nord Stream 1.

The denial meant that Nord Stream 2 needs to adhere to the rules of the Gas Directive and the pipeline cannot operate at full capacity. Despite this, Merkel has continued to support Nord Stream 2.

In Germany
Within Germany, there is also criticism of the government’s support for the project since its announcement. For example Reinhard Bütikofer, a member of the Greens in the European Parliament, has long voiced his concern for the geopolitical implications of the project and supported the calls to stop it.

Even within Merkel’s own party, the Christlich Demokratische Union (CDU), there has been opposition to the project. For example, CDU’s Norbert Röttgen already asked for the cancellation of Nord Stream 2 in 2016.7  Also, Merkel’s CDU successor, Annegret Kramp-Karrenbauer, has indicated that the project is not ‘close to her heart’ and that she would merely inherit the pipeline.

In 2020, calls to cancel German support for the project became stronger following the April 2020 conclusions that the Kremlin was responsible for a 2015 hack on the Bundestag’s computer system8  and Russian non-cooperation in an assassination investigation of a former Chechen rebel in Berlin.9

However, none of these issues proved sufficient to stop German support, as Merkel said she is ‘striving every day for a better relationship with Russia’.9

The abandonment of the project could result in the SPD to drop its support for the coalition and force new elections

Moreover, the future political costs for Merkel to stop supporting Nord Stream 2 are marginal. In 2018, Merkel announced her intention to not seek re-election in 2021. This means her unpopular stance on Nord Stream 2 would not complicate her political career in the future.

In fact, the current political costs of abandoning the project are higher. The German governing coalition party Sozialdemokratische Partei Deutschlands (SPD) has continued to support the project.

The SPD is the former party of Merkel’s predecessor, Gerhard Schröder, who now sits on the board of the Nord Stream 2 consortium. The SPD’s spokesperson for foreign affairs, Nils Schmid, has therefore attempted to deflect attention from Nord Stream 2.

The abandonment of the project could result in the SPD to drop its support for the coalition and force new elections. Next to this, companies involved in the project have continued to support its construction.10

Navalny
The poisoning of Navalny has resuscitated the debate on Nord Stream 2 in Germany and beyond. Initially, Merkel asked to ‘decouple’ the poisoning of Navalny from Nord Stream 2, but her position slightly changed in the following days.11  The conclusion that he was poisoned using a Soviet-era nerve agent, resulted in Merkel stating that Russia needed to explain itself before countermeasures were taken. Merkel has not ruled out targeting Nord Stream 2.

Decoupling Russian malign acts abroad has been a German favoured strategy in the case of Nord Stream 2. Despite a long list of questionable Russian acts in other sovereign states, the project has managed to stay in Germany’s grace.

Cancellation of this project would incur costs for German and other European investors

Some of these acts even predate the project and include Russian support for rebels in eastern Ukraine, the annexation of Crimea, the poisoning of the former Russian spy Sergei Skripal and his daughter in Salisbury, involvement in the Brexit elections and the US presidential elections, its involvement in the Syrian conflict and the aforementioned acts on German territory. However, the act of poisoning Navalny is different from the previous acts as it happened in Russia.

Costs
Nord Stream 2 is nearing completion, and is expected to be operational by the end of 2020 or early 2021. The final 160 km of Nord Stream 2 needs to be built in the Danish EEZ. The 9.5 billion euros investment of the European companies and Gazprom has already been spent. Cancellation of the project due to Germany’s position could therefore result in Gazprom demanding compensation. Whether such claims would bear success is debated among lawyers.

Next to this, German companies would lose their investment, something that Uniper had already warned its shareholders about after the US sanctions.12  Consequently, cancellation of this project would incur costs for German and other European investors.

Message in a pipeline
Germany dropping support for the pipeline would send a message to Putin. Natural gas is one of the main sources of income for Russia and the project, serving as a large infrastructure development that will assist in circumventing Ukraine, holds a symbolic meaning because of the many obstacles it has overcome. By losing German support, after which the project will be cancelled, this objective cannot be reached.

For the next five years, Russia can continue to transit gas through the Ukraine route, as the European Commission has helped to broker a deal between Ukraine and Russia in December 2019. This route has sufficient capacity to compensate for the loss of Nord Stream 2. Russia can thus maintain its lucrative business of gas supplies to Europe.

Germany stopping its support for the project could backfire

Targeting the gas sector and exports, in general, would be a more effective sanction measure. However, this would have severe consequences for the European energy supply. Europe is dependent on Russian energy and substituting the Russian supply is not an easy feat, as the European Commission has noticed through its promotion of LNG terminals and other pipelines.

Furthermore, following the Crimea annexation in 2014, the EU and the US have ‘punished’ Russia through sanctions. Unfortunately, these sanctions have yet to have an effect on Russian behaviour. If anything, assertive or aggressive Russian acts in other countries seem to have increased instead of stopped. Fears for a Russian annexation of Belarus seem realistic, despite EU and US efforts to contain Russia. Therefore, Germany rejecting Nord Stream 2 seems unlikely to change Russian behaviour.

In fact, Germany stopping its support for the project could backfire. Russia could use this in its propaganda by indicating that Germany uses the project to obtain political objectives. Russia’s relations with Germany and Europe could deteriorate and the dialogue that Germany has tried to maintain with Russia since 2014 could come to an end. It could also be framed as Germany ‘giving in’ to US pressure.

The future of Nord Stream 2
Concluding, the recent calls on Germany to drop its support for the project are nothing new. The political and economic costs to keep supporting Nord Stream 2 are lower than the costs to drop its support.

Furthermore, Russian malign actions within and outside of Russia will probably not stop by dropping support for the project. Therefore, it is unlikely that Merkel will stop supporting the project at this time.

Despite this, the future of Nord Stream 2 looks bleak, as additional US sanctions against the project would make completion of the project nearly impossible.

• 1Frédéric Simon, ‘Germany approves Russia gas pipeline amid growing tensions with Moscow’, EURACTIV, 28 March 2018.
• 2Andreas Rinke, 'Merkel doesn’t rule out Nord Stream fallout over Navalny', Reuters, 7 September 2020.
• 3Jeff Mason, Robin Emmott, Alissa de Carbonnel, ‘Trump calls Germany 'captive' of Russia; demands higher defense spending’, Reuters, 11 July 2018.
• 4Moniek de Jong & Thijs Van de Graaf, ‘Lost in Regulation: Nord Stream 2 and the Limits of the European Commission’s Geo-Economic Power’, Journal of European Integration, 2020.
• 5Frédéric Simon, ’By Merkel: No Nord Stream 2 without guarantee for Ukraine’s gas transit role’, EURACTIV, 10 April 2018.
• 6Federal Foreign Office, ‘Foreign Minister Gabriel and Austrian Federal Chancellor Kern on the imposition of Russia sanctions by the US Senate’, 15 June 2017.
• 7Markus Wehner and Reinhard Veser, ‘Widerstand gegen Putins Pipeline wächst’, Frankfurter Allgemeine, 1 November 2016.
• 8Guy Chazan, ’Merkel claims Russia behind 2015 Bundestag hack’, Financial Times, 13 May 2020.
• 9 a b Ibid.
• 10Guy Chazan, ‘Merkel faces calls to scrap Nord Stream 2 after Navalny poisoning’, Financial Times, 3 September 2020.
• 11Ibid.
• 12Erika Solomon, ‘Germany’s Uniper warns of possible Nord Stream 2 loan write-off’, Financial Times, 11 August 2020.