Germany Suspends Nord Stream 2 Gas Pipeline

Germany has suspended the certification process required for the start-up of Gazprom's Nord Stream 2 natural gas pipeline after Russia formally recognized the independence of two breakaway republics in Ukraine.

European gas prices jumped as much as 14% in response to the news on Tuesday, ultimately settling with a gain of some 10% at their highest levels for a week.

Certification of Nord Stream 2, so that gas can start flowing to Germany, has been on pause since November after the regulatory agency Bundesnetzagenur told Gazprom it needed to set up a German subsidiary to operate it.

A new subsidiary, Gas for Europe, was set up in January but the process remained on hold until assets and employees were transferred to it.

However, with his announcement on Tuesday, German Chancellor Olaf Scholz made clear that under the current circumstances, certification will not be granted.

That means Russian gas exports to Europe are likely to remain limited at recent levels for the foreseeable future.

"The situation today is fundamentally different and therefore, in view of the latest developments, we must reassess this situation, also with regard to Nord Stream 2," Scholz told a press conference in Berlin.

He said he has tasked the ministry of economic affairs to draw up a new assessment of Germany's security of energy supply in light of the Ukraine crisis.

Economy and Climate Minister Robert Habeck said the "geopolitical situation makes a reassessment of Nord Stream 2 imperative."

Russia Pledges to Keep Gas Flowing

In a written address delivered on his behalf at the Gas Exporting Countries Forum summit in Doha on Tuesday, Russian President Vladimir Putin said "Russia intends to continue uninterrupted supplies [of gas], including LNG, to the world market."

Russia — Europe's biggest gas supplier by far — also intends to improve infrastructure and increase investment in the gas industry, he added.

Kremlin spokesman Dmitry Peskov said Moscow accepted Germany's decision "with regret" and hoped that certification faced only a temporary delay.

European natural gas prices opened higher on Tuesday amid concerns that escalation of the Ukraine conflict could affect gas transit flows to Europe via that country. They then strengthened further on the Nord Stream 2 news.

However, the month-ahead (March) Dutch TTF gas futures contract settled below the €80 per megawatt hour level last seen on Feb. 14. That could be seen as the market recognizing that the supply situation in Europe is unchanged from a fundamental perspective.

Physical flows of Russian gas to Europe remain unaffected despite the growing geopolitical tensions, and Putin's remarks to the summit in Doha indicate that Moscow plans to at least meet its contractual supply obligations.

Avoiding a Lose-Lose Outcome

The March TTF contract traded as high as €82/MWh ($27.22 per million Btu) on Tuesday but settled lower at €79/MWh — €7 higher than Monday.

Gas prices did not spike even higher on the Nord Stream 2 news because the market had not been expecting the pipeline to start operations this year, an analyst at a European oil and gas major told Energy Intelligence.

The gas market still does not believe that Russian gas supplies to Europe will be interrupted because it would be a "lose-lose situation" for Russia and its largest gas customer, the analyst said.

He added that higher European gas prices would continue to draw LNG supplies to the region during the second quarter of 2022, although prices were not expected to be as high as in the first quarter of the year.

The status of Nord Stream 2 would mostly affect pricing for the next winter period starting in October 2022, as that was the earliest date that deliveries of gas could have started, before Scholz announced the suspension of certification on Tuesday.

The TTF Winter 2022 futures contract settled €6.50 higher at €78/MWh on Tuesday — its highest settlement since Feb. 14.

The European Commission believes Europe's energy supplies won't be affected by the suspension of Nord Stream 2's certification because the pipeline had not been operating and so does not affect the current state of the market, a commission spokesperson said.