Germany on Tuesday halted the Nord Stream 2 Baltic Sea natural gas pipeline project designed to double the flow of Russian gas to Germany.
The move came after Moscow formally recognised the breakaway regions of Donetsk and Luhansk in eastern Ukraine as independent states.
The halting of the pipeline is by far the most dramatic measure yet to punish Moscow for its recognition of two separatist regions in Ukraine.
What is the Nord 2 project?
The 1,230-kilometre pipeline under the Baltic Sea will deliver gas from the Russian coast near St Petersburg to Lubmin in Germany. It runs parallel to an existing gas pipeline, Nord Stream, which has been operational since 2011.
Built at a cost of $11 billion, the pipeline was completed last September by Russian state-owned energy giant Gazprom and western energy firms such as Shell and ENGIE of France.
The construction for Nord Stream 2 began in May 2018 and was completed on 10 September 2021, a year-and-a-half behind schedule.
According to the BBC, the two pipelines could deliver 110 billion cubic metres of gas to 26 million homes in Europe every year, which is more than a quarter of all the gas the European Union countries use annually.
Those who supported Nord Stream 2
An operational Nord Stream 2 would benefit both Russia and Germany, and a significant part of Europe.
By increasing its gas supply through another undersea pipeline to Europe, Russia will be able to cut down on the high transit fees of $1.2 billion it has to pay to Ukraine for its land-based pipelines.
As per the BBC report, Germany currently imports 35 per cent of the gas it needs from Russia. Former German chancellor Angela Merkel thought Nord Stream 2 would be a way of getting much more Russian gas delivered directly to Germany.
The Nord Stream 1 has already been supplying most of Germany's gas demands since 2011.
The two pipelines are essential for Germany for its energy transition from coal and nuclear until it can build or import enough renewable energy.
The need for natural gas has become dire as the country closed down three of its last six nuclear power stations last month. The other three will be shut down in December.
According to Oxford Institute for Energy Studies (OIES), in 2021 Russia supplied about 35 per cent of the gas imported to Europe, which is defined as the UK and the 27 countries in the European Union, about 31 per cent as pipeline gas and 4 per cent as liquefied natural gas (LNG).
The same report says that the Russian government earns about 6 per cent of the tax revenue from its gas exports.
Opposition to the project in the past
The pipeline would adversely affect the economies of Ukraine and Poland and hence, these two countries opposed the project.
Why is this the case? As more and more gas is delivered through the undersea pipeline, Russia can decrease its reliance on the land-based pipelines in Ukraine, thus, affecting the country’s income.
Currently, Ukraine earns approximately $2 billion in transit fees from Russia to send gas through its territory.
The same is the case with Poland. Currently some of the gas to Germany passes through Poland, for which it is paid less than $200 million.
The Nord Stream 2 also faced international opposition for geopolitical reasons.
As per the BBC, Ukrainian president Volodymyr Zelensky has called Nord Stream 2 "a dangerous political weapon".
It is to be noted that in 2006, Russia had cut off gas supplies to Ukraine because of a financial quarrel between the two countries. It caused acute energy shortages during winter in central and eastern Europe.
Thus, the fear is not unfounded that Russia might again stop gas supplies in the future for other, political reasons.
It is believed in the US and Britain if the pipeline starts operating it would give Russia complete dominance over gas supplies to Europe.
The US has long been opposing the gas pipeline project and has earlier imposed sanctions on the Russian companies involved in the project.
As per Euronews, in November 2018, then-US ambassador to the EU Gordon Sondland had warned that “dependence on Russian gas for Europe is geopolitically wrong”.
The US does not want "gas to be turned off in the middle of winter when a political crisis erupts", Sondland stated at the time.
Long before the Nord Stream 2 became a bone of contention between Russia, the US, and some of the European countries, the Nord Stream 1 had already raised similar concerns in 2010.
The construction of Nord Stream 1 had also met with similar protests from transit countries like Ukraine, Belarus and Poland as it was seen to be Russia’s attempt to exert political influence on them by threatening their gas supplies and transit fees.
While Germany and Russia benefited from Nord Stream 1, transit countries, especially Ukraine, registered losses due to the gas pipeline project.
As per an estimate by Ukraine’s gas transit company Ukrtransgaz, the country lost up to $720 million in transit fees annually after Nord Stream 1 became functional.
Germany halts certification of Nord Stream 2
On Tuesday, Germany halted the Nord Stream 2 Baltic Sea gas pipeline project in response to Vladimir Putin's decision to recognise the regions of Donetsk and Luhansk as independent and send in troops as 'peacekeepers'.
“With regard to the latest developments, we need to reassess the situation also with regard to Nord Stream 2. It sounds very technocratic but it is the necessary administrative step in order to stop certification of the pipeline,” Chancellor Olaf Scholz said in Berlin.
“Now it's up to the international community to react to this one-sided, incomprehensible and unjustified action by the Russian president,” he told reporters in Berlin, adding that it was necessary to “send a clear signal to Moscow that such actions won't remain without consequences.”
US sanctions on Nord Stream 2 pipeline
The United States on Wednesday also imposed sanctions on the company in charge of building Russia's Nord Stream 2 gas pipeline.
Reuters reported that the sanctions were slapped on the Nord Stream 2 AG company and its CEO, Matthias Warnig.
"I have directed my administration to impose sanctions on Nord Stream 2 AG and its corporate officers," Biden said in a statement after Germany announced it was halting the project on Tuesday.
Uncertain future awaits
The decision to halt the gas project will definitely impact Europe, Germany in particular.
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.
There are many, many companies in Europe that stand to lose economically. Additionally, these stranded infrastructure investments could ultimately become a price burden on the gas consumers themselves.
There are renewed fears that the scrapping of the gas project will prompt Russia to retaliate by cutting off all supplies.
However, many expert observers believe Russia would not cut off supplies to Europe because Gazprom also needs the European market.
The immediate repercussions can already be seen in the oil market.
Oil prices rose Thursday, crossing the $100 per barrel mark.
Brent crude hit a high of $101.34 a barrel in early Asia trade, the highest since September 2014. US West Texas Intermediate (WTI) crude futures jumped $4.22, or 4.6 per cent, to $96.32 a barrel, after rising to as much as $96.51, also the highest since August 2014, according to a Reuters report.
With inputs from agencies
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