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What Nord Stream 2 Needs Before Gas Can Start Flowing

Sections of Nord Stream 2 gas pipeline at the Baltic port of Mukran on the island of Ruegen in Sassnitz, Germany, on Wednesday, Nov. 4, 2020.
Sections of Nord Stream 2 gas pipeline at the Baltic port of Mukran on the island of Ruegen in Sassnitz, Germany, on Wednesday, Nov. 4, 2020. (Bloomberg)
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The newly completed Nord Stream 2 pipeline under the Baltic Sea is tantalizingly close to being able to pump billions of cubic meters of Russian gas to the European Union. The link between Russia and Germany runs parallel to the existing Nord Stream pipeline -- fully operational since 2012 -- and has a ready-made market as looming winter cold threatens to deepen European fuel shortages. Yet deliveries can’t start without approval from the German regulator and a review by European authorities. That is taking longer than traders expected. 

1. What’s the holdup?

Russian gas producer Gazprom PJSC will need to restructure its Nord Stream 2 operations to comply with the requirements of the German energy watchdog BNetzA and EU law. Only then can the intricate approval process, which started in September and was suspended in mid-November, resume. The German regulator has up to four months to reach a preliminary conclusion and the EU, which has a more advisory role, can take another two to four months to express its opinion. BNetzA then has a further two months to make a final decision.

2. Why was Nord Stream 2 certification halted?

European rules require that the Nord Stream 2 operator is registered and functioning in the European Union. The current operator of the project, Nord Stream 2 AG, is based in Switzerland, which is not an EU member state, and thus does not meet the criteria. The Swiss company has now agreed to set up a separate German unit, although it’s unclear why it didn’t make that move earlier. BNetzA has suspended its review until the new entity is established and proves it meets all the legal requirements.

3. What does the German watchdog require?

Nord Stream 2’s German unit cannot be a mere mailbox company. It has to have its own staff, as well as physical premises and independent corporate services, including information technology and accountancy. It also has to own the assets it is running and function independently. Both Poland and Ukraine have concerns about whether a Gazprom subsidiary in the EU can be genuinely independent.

4. How long will it be until the gas arrives?

Setting up a company in Germany can be relatively quick. However, splitting off the operations and putting them into a German unit is more complex. With the necessary resources, the asset transfer could be completed within two weeks, according to Rainer Bierwagen, a Brussels-based lawyer at ADVANT Beiten. It’s the approval process that could delay the start of operations until the spring or even summer of 2022, if regulators use all the time allowed.

5. When will the German regulator resume deliberations?

Once the newly established German unit submits the application documents to BNetzA, the watchdog will pick up the approval process from where it left off. Since BNetzA has already been considering the Nord Stream 2 case for just over two months, it will have a similar amount of time to complete the study before the European Commission starts its review. 

6. How much control does the EU Commission have?

The EU Commission may decide to seek the opinion of the EU Agency for the Cooperation of Energy Regulators, a move that would extend its review to a total of four months. The German regulator is obliged to take into “utmost account” the opinion voiced by the EU Commission, but is not required to follow it entirely. 

7. How will the delay affect the gas market?

Participants in the European gas market had hoped Nord Stream 2 would provide Russian gas at some point during the northern hemisphere winter as the continent’s already depleted inventories run down. With the pipeline’s launch still a distant prospect, Europe remains vulnerable if a cold spell hits. The continent may face rolling blackouts if the winter is cold, according to Jeremy Weir, chief executive officer of trading giant Trafigura Group. Russia could pump more gas to Europe via existing routes, but it remains unclear whether Gazprom would be willing to do so. The Russian government has repeatedly said that Gazprom wants to see additional requests from its long-term European clients before hiking deliveries. 

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