London (CNN Business): The West showed Tuesday it was ready to target Russia’s huge energy industry — even at the risk of hurting itself — after Moscow ordered troops into parts of eastern Ukraine.
Germany said it was halting certification of the Nord Stream 2 gas pipeline following Moscow’s actions in eastern Ukraine on Monday.
“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.
The 750-mile pipeline was completed in September but has not yet received final certification from German regulators. Without that, natural gas cannot flow through the Baltic Sea pipeline from Russia to Germany.
The United States, the United Kingdom, Ukraine and several EU countries have opposed the pipeline since it was announced in 2015, warning the project would increase Moscow’s influence in Europe.
Nord Stream 2 could deliver 55 billion cubic meters of gas per year. That’s more than 50% of Germany’s annual consumption and could be worth as much as $15 billion to Gazprom, the Russian state owned company that controls the pipeline.
As Russia’s biggest gas customer, Germany had tried to keep Nord Stream 2 out of global politics. But Berlin found it ever harder to defend the project as its allies debated how to punish Moscow should it order an invasion of Ukraine.
Russian President Vladimir Putin’s decision to order troops into eastern Ukraine put the German government in a difficult position. US officials have made clear that they would move to suspend Nord Stream 2 in the event of a Russian invasion, without offering specifics on how that would be accomplished.
Gazprom is the sole shareholder in Nord Stream 2 but 50% of the finance was provided by five European energy companies, including Wintershall and Uniper of Germany. The other financial backers are Britain’s Shell (RDSA), Engie (EGIEY) of France and OMV (OMVJF) of Austria.
Gas prices are jumping. What happens next?
Energy is a major political issue in central and eastern Europe, where gas supplies from Russia play an essential role in power generation and home heating. Natural gas prices have set new records this winter in Europe, and a conflict in Ukraine could bring more pain to consumers.
On Tuesday, the benchmark price of natural gas for delivery in Europe next month leaped to about €79 ($89.54) per megawatt hour, up from €71.50 ($81.04) at Monday’s close, according to data from Independent Commodity Intelligence Services.
Prices have dropped from record highs hit just before Christmas. Still, they remain significantly above where they stood one year ago, when gas traded at €16.30 ($18.47) per megawatt hour.
Analysts said the fight over Nord Stream 2 shouldn’t dramatically change the price outlook for this winter. The pipeline hadn’t been expected to come online until the second half of the year, noted Tom Marzec-Manser, head of gas analytics at ICIS.
Still, Dmitry Medvedev, deputy chairman of Russia’s Security Council, warned after Germany’s announcement that prices in Europe would skyrocket.
“Welcome to the brave new world where Europeans are very soon going to pay €2,000 for 1,000 cubic meters of natural gas,” he tweeted.
Marzec-Manser said that would be equivalent to approximately €215 ($243.75) per megawatt hour, roughly 20% above the record high reached in December.
Europe is in better shape than it was a few months ago after ramping up imports of liquefied natural gas, or LNG, in January and early February, according to Henning Gloystein, director of energy, climate and resources at Eurasia Group. Weather has also been relatively mild.
Yet a lot rides on what happens next.
LNG from the United States and Qatar will help the bloc withstand any disruptions to gas flows though Ukraine, which account for about 10% of total supply to the European Union, should pipelines be damaged in fighting.
But if Moscow, which has already reduced its gas exports to Europe, decides to choke them off further in response to Western sanctions, it could dramatically escalate the situation.
“If Russia stops sending any gas to Europe, there isn’t enough LNG to cope with that,” Gloystein said.
He said Russia is not expected to take such a drastic step since it would also hurt Gazprom, but it remains a possibility given Putin’s recent aggression.