Germany’s energy regulator said it had “temporarily suspended” certification of the Nord Stream 2 pipeline, defeating the Kremlin-backed gas project and pushing gas prices up in the UK and mainland Europe .
The regulator said it could not yet approve the project, led by Russian Gazprom, because its owners had chosen to create a German subsidiary that was not yet properly set up under German law.
The suspension comes at a critical time for European gas supplies, with prices soaring across the continent. Gazprom has been accused by some countries of restricting exports to Western Europe to increase pressure on Germany and speed up approval of the project.
UK gas contracts for December delivery rose 17.2% to Â£ 2.40 per therm on Tuesday’s news, while the European benchmark gained 15.2% to â¬ 94 per megawatt hour, both contracts trading near their highest level in a month. After dipping slightly in October in hopes of an increase in Russian supplies, gas prices have now gained more than 40% last week.
The Switzerland-based Nord Stream 2 project creates a German subsidiary to own and operate the German section of the pipeline in response to EU ‘unbundling’ regulations, which require companies producing, transporting and distributing gas within of the block are separate entities. The project’s request to be exempted from the rules was rejected by German courts in August.
âOur company is taking this step to ensure compliance with applicable rules and regulations,â Nord Stream 2 told the Financial Times.
German regulators said certification will be suspended until all affected assets and employees have been transferred to the subsidiary. He said that Nord Stream 2 would then be able to continue with the four-month certification process provided for by law.
Officials in Brussels have said that once the German authorities finalize their draft certification process, it could be submitted to the European Commission. Brussels has two months to assess the certificate.
Alan Riley, a senior researcher at the Atlantic Council think tank, argued that the attempt to create a territorial branch for the 33 km section of the pipeline in Germany was in fact an attempt to find a loophole in the rules .
Even if the commission accepted the plan, he said, a bloc member like Poland – which opposes Nord Stream 2, arguing it poses a threat to European energy security – would sue. He said that Nord Stream 2 “will have to test whether there really is a loophole in the European Court of Justice”.
Nord Stream 2 would send 55 billion cubic meters of gas per year under the Baltic Sea, allowing Gazprom to reach customers in Germany and elsewhere in Europe without using gas pipelines crossing Ukraine.
Ukrainian officials have warned that Russia is in fact blackmailing Europe by restricting gas supplies, and that reducing its dependence on Ukraine could make it easier for Moscow to launch an invasion.
Yuriy Vitrenko, managing director of the Ukrainian national gas company Naftogaz, warned that Gazprom “was using legal tricks” with the subsidiary. “It is a travesty of European rules,” he said.
Pawel Majewski, managing director of PGNiG, the state-controlled Polish gas company, hailed the German decision as a “good sign for Poland and for Europe”.
âIt is not possible to certify a subsidiary of Nord Stream 2 AG as an independent operator of the pipeline. It is also not possible to establish an operator applying EU law only in the territorial waters of Germany, âhe said. âWe see today’s decision as the first step towards law enforcement.
Gas traders are looking for signs that Russia will increase its exports to Western Europe, but have seen only fragmentary increases in recent weeks, with flows well below the level of a year ago.
Russian President Vladimir Putin has always linked the increase in exports to the approval of Nord Stream 2. Any delay is likely to increase fears that Russian flows will remain relatively low this winter.
“Any remaining hopes that this pipeline would be available for the winter are completely dashed,” said James Waddell of Energy Aspects, a consulting firm. “More and more, it looks like it might not start until the second half of next year.”
Waddell said Russia could increase supplies to Western Europe via the Ukrainian pipeline system that Russia had relied on since Soviet times, but said this was unlikely given Moscow’s insistence on the fact that Nord Stream 2 was the key to boosting exports.
Additional reporting by Roman Olearchyk in Kiev, James Shotter in Warsaw, Nastassia Astrasheuskaya in Moscow and Mehreen Khan in Brussels