The Nord Stream 2 export pipeline is so far the only oil and gas asset to be targeted by US and European sanctions in the wake of the Kremlin's decision to recognise the breakaway republics of Donetsk and Luhansk, but Tuesday’s decision by German Chancellor Olaf Scholz to suspend the certification of Nord Stream 2 gas pipeline has sparked a discussion on whether the second Baltic Sea pipeline from Russia will ever come into operation, and whether Europe may face more energy retaliation from Moscow.

Responding to Russia's decision to move directly against Ukraine after months of restricting gas supplies through that country, German Minister for Economic Affairs & Climate Action Robert Habeck told the country’s Tagesschau television programme that it would have been wiser not to build Nord Stream 2 in the first place.

“Europe needs a diverse energy landscape and not a bundle of risk from the Baltic Sea," he said.

Even if the Nord Stream 2 approval process has been stopped for the time being, the pipeline may still become operational, Habeck acknowledged, but he added that the unity shown by western allies was the correct response.

He argued that Europe and the US "should proceed as one" and that "neither should enter into a race to outbid or undercut sanctions".

Risk intelligence consultancy Verisk Maplecroft analyst Fabrizio Farina said he believes Nord Stream 2 is not likely to become operational anytime soon.

“It is hard to foresee a scenario whereby Berlin and Brussels would approve Nord Stream 2 given Russia’s ongoing military muscle flexing towards Ukraine,” he said.

Putin's ultimatum

In a press conference in Moscow on 22 February, Russian President Vladimir Putin demanded that Ukraine acknowledge Russia’s 2014 annexation of Crimea as a prerequisite for any return to normality involving the withdrawal of Russian troops from the country’s borders.

Other Russian conditions include Ukraine publicly dropping any plans to join the Nato alliance and proceeding toward a commitment to what Putin described as “de-militarisation”.

Putin’s latest demands dashed any hopes that Russia’s recognition of the breakaway eastern Ukraine regions of Donetsk and Luhansk might be the limit of the crisis.

Instead, Ukraine and independent observers reported what are described as ‘false flag’ provocations in the two republics, involving pro-Russian separatists reportedly shelling their own positions close to the separation line between the republics and Ukraine-controlled areas in the region.

Several western leaders continue to raise the possibility of a large-scale invasion by Russia into Ukraine, raising concerns about how much further the response to such action would go and possible moves by Russia to further undermine the flow of gas to Europe.

Gas wars

Pipeline shipments of Russian gas via Ukraine are currently running at a record low level of about 50 million cubic metres per day, about five times below Russian average gas flows via the country in February 2019.

Though the European Commission earlier suggested that the continent may survive this winter even if Russia fully halts gas supplies, some dismiss this as wishful thinking

“The EU will continue to be reliant on Russian gas given its limited ability to quickly replace Russian imports from alternative suppliers such as Algeria, Qatar, Norway, and the US,” said Farina.

“Russia’s invasion of Ukrainian territory has underscored that Moscow cannot be relied upon, meaning that Brussels will seek to diversify its gas imports and reduce its dependence on Russia,” he wrote.

Russian Energy Minister Nikolay Shulginov told a gas conference in Qatar earlier this week that his country would not use energy exports as a “weapon” and would continue to supply gas to Europe.

However, menacing pronouncements have emanated from Russia following Scholz’s statement on Nord Stream 2.

Russian Security Council Deputy Chairman Dmitry Medvedev sent an angry tweet addressed to European governments, warning them: “Welcome to a new world in which Europeans soon will pay €2000 per 1000 cubic metres of gas.”

Shulginov later called for five European investors in Nord Stream 2 — Uniper, Wintershall Dea, Engie, Shell and OMV — to appeal against Germany’s suspension of the project’s certification in court.

So far, European gas market hubs have reflected a relatively sanguine short term view of possible Russian gas supply disruptions, with a price for March spot supplies moving up just by over 4% to about $1100 per thousand cubic metres following Germany’s announcement on Nord Stream 2’s suspension.

Contracts for future gas deliveries in December and January 2023 — two months of intense winter energy demand — increased by a similar margin and have been trading at a level of about $1100 per thousand cubic metres, well below Medvedev’s expectations.

The Ukraine crisis is being felt particularly keenly in Germany, where it is not just a price issue but potentially a supply issue, with almost 50% of the nation’s gas coming from Russia, according to Statista, a German data and statistics firm.

“Stopping certification of NS2 (Nord Stream 2) is a big deal,” said Reinhard Butikofer, a member of the European Parliament for the German Greens, speaking to BBC Radio on Wednesday.

“Previous German governments held on to the project as if it were a holy grail of energy policy. There has been a fundamental change as the move away from fossil fuels to renewables has become recognised as a national security issue,” he added.

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