Nord Stream 2 cost $11 billion to build. Now, the Russia-Europe gas pipeline is unused and abandoned

One of the early casualties of Russia’s invasion of Ukraine — and its continuing geopolitical and economic fallout — has been the Nord Stream 2 gas pipeline, a massive energy project that took several years to build and cost $11 billion.

Even before Russia’s unprovoked onslaught, the signs were not good for the 1,234-kilometer offshore pipeline — designed to double the flow of gas between Russia and Germany. Now, the major infrastructure project is looking like it has been “killed off,” as one analyst put it.

The laying of the pipeline started in 2018 but faced several stumbling blocks, becoming something of a geopolitical pinball in Europe and the U.S. before it was finally completed in September 2021.

By November last year, however, there were further signs of trouble brewing when the German energy regulator temporarily halted the certification process that would allow it to start operating the pipeline. The suspension came as Russia was amassing tens of thousands of troops along Ukraine’s border (although the regulator cited legalities as a reason for the suspension).

The final nail in Nord Stream 2’s coffin came in February following Russia’s fateful decision to formally recognize two pro-Russian, breakaway regions in eastern Ukraine. That prompted the German government under Chancellor Olaf Scholz to stop the certification process altogether.

As we all now know, Russia’s recognition of the breakaway republics in the Donbas was a precursor to its larger invasion of Ukraine that began on Feb. 24.

The war that has ensued has thrown Europe into a geopolitical crisis not seen in years and has put joint projects and business partnerships between (and in) Russia and Europe — like Nord Stream 2 — on a cliff-edge.

“Russia’s invasion of Ukraine has killed off the Nord Stream 2 project. In short, it would be unthinkable for Germany or any other European country to do a U-turn and authorize the pipeline after Russia’s behavior,” Kristine Berzina, senior fellow and head of the geopolitics team at the German Marshall Fund of the United States, told CNBC Wednesday.

“Even functioning pipelines have a shaky future in Europe,” Berzina noted, while for Nord Stream 2, “the pipeline is frozen in its inactive state. Besides ensuring the safety and stability of the structure, I do not anticipate other uses for it.”

Russia’s invasion has accelerated the EU’s shift away from Russian energy with the bloc saying it will slash Russian gas imports by two-thirds by the end of 2022, and that it plans to end its reliance on Russian fossil fuel imports by 2030.

Russia has responded by threatening to halt gas exports to perceived “unfriendly” countries if payments for gas are not made in rubles as opposed to euros or dollars. The Group of Seven industrialized nations has rejected this demand.

Against this backdrop of bitter geopolitical tensions, the future of the Nord Stream 2 pipeline is now very much in doubt, energy analysts say.

“We don’t believe Nord Stream 2 will ever be commissioned,” Kateryna Filippenko, principal analyst for European gas research at Wood Mackenzie, told CNBC Wednesday.

“Europe’s attitude to Russian gas has changed irreversibly, and it is now determined to diversify away from Russian gas. Meanwhile, Russia is threatening to halt gas flows to Europe if payments are not made in rubles. It’s hard to see a rapprochement between Europe and Russia that could facilitate a green light to Nord Stream 2, even years from now.”

The pipeline was developed and was to be operated by Nord Stream 2 AG, a Swiss-based subsidiary of Russia’s state-controlled gas giant Gazprom. However, it was co-financed by several other European companies including Germany’s Uniper, chemical company BASF’s subsidiary Wintershall Dea as well as Engie, OMV and Shell.

Amid the mass withdrawal of Western business from Russia, the energy companies involved in Nord Stream 2 have been forced to accept big losses on the project. Wintershall Dea announced in early March that it would write off its 1 billion euro ($1.1 billion) financing in the pipeline as have OMV and Uniper too. Shell has also withdrawn from the project.

Richard Gorry, managing director at JBC Energy Asia, described the project as being “dead in the water” when he spoke to CNBC in February, saying that “it was never really alive because it was always in some sort of limbo whether it was political or bureaucratic.”

CNBC has approached Gazprom and Nord Stream 2 (which is now under U.S. sanctions following the invasion and whose website is not working) for comment on what their plans are for the pipeline but is yet to receive a reply from either.

Meanwhile, Germany’s energy regulator, Bundesnetzagentur, told CNBC that the pipeline was far from being in a position where it could be certified either.

“A prerequisite for the certification of the Nord Stream 2 operator is a positive assessment from the Federal Ministry for Economic Affairs and Climate Action that security of supply is not jeopardised,” it told CNBC in a statement Tuesday.

“This condition is no longer fulfilled,” the regulator said, adding that it “cannot certify the company at this time” and that operating the pipeline without certification would be unlawful.

With Germany turning its back on Russian gas, it’s abundantly clear that Nord Stream 2 is now clearly at odds with EU energy policy, Warren Patterson, head of commodities strategy at ING, told CNBC on Tuesday.

“The EU’s plan to be independent from Russian energy before 2030 suggests that it is unlikely that we will ever see natural gas flowing through the pipeline,” he said.

Patterson expected that the Nord Stream 2 operator would want to wait and see if there is any possible future for the pipeline once the war is over: “If there isn’t, they will need to make a decision to either abandon the pipeline or retrieve it. However, the latter would obviously be a costly operation,” Patterson said.

Russia has had a severe range of sanctions imposed upon it for the invasion and has become a pariah for the West which has tried to hit Russia, a major oil and gas exporter, where it hurts by sanctioning its energy sector.

The U.S. has banned imports of Russian-origin oil, liquified natural gas and coal while the EU has banned new investments in the Russian energy sector and the U.K. has sanctioned the leaders of Russian energy companies.

Nord Stream 2’s fate will largely be decided by how Russia’s invasion of Ukraine is concluded, and this itself depends on a number of factors, essentially, whether President Vladimir Putin concedes that his forces have not, and will not, achieve his territorial objectives on the ground and looks for a ceasefire, or whether he intensifies the conflict. How well Ukraine’s forces and defenses can repel and counter-attack Russia is also a large factor in the equation.

There are concerns the conflict is looking increasingly like a war of attrition where no one wins. In the meantime, talks between the two sides to find a ceasefire and peace deal remains fraught with difficulty.

There is a slim chance, one analyst noted, that Nord Stream 2’s fortunes could be turned around.

Nord Stream 2 “will not be re-launched or approved unless the Ukraine war comes to a conclusion that ensures Ukrainian territory and peace in a way that future Russian aggression is perceived as having been eradicated,” Henning Gloystein, director of energy, climate and resources at Eurasia Group, told CNBC Wednesday.

“Even in case of a ceasefire or some form of settled conclusion, it seems unlikely that a peace would be seen as so stable that no Russian threat existed anymore, especially while President Vladimir Putin is in power,” he said.

Given Putin seems pretty safe in his position, Henning noted, the German government does not expect a revival of Nord Stream 2.

“The only conceivable scenario for revival – and probably why NS2 is officially suspended, not canceled – seems to be under a totally reformed Russian government. Even then, I suspect Germany would be reluctant to just revive NS2 in its past form. I suspect Germany would probably seek to transform it into a hydrogen pipeline. But that all seems a bit farfetched at this stage,” Gloystein noted. CNBC has asked for further comment from the German government and is awaiting a response.

Kristine Berzina, from the German Marshall Fund of the United States, said that for a number of years there has been speculation about whether the Nord Stream pipelines and others could be used to transport hydrogen in the future, and that Russia is a potential future supplier of hydrogen.

“For those who wish not to fall into old patterns of dependence on Russia, it will be important to watch whether there are old-timers in Germany who would want to eventually revive the energy relationship with Russia with next generation fuels under a decarbonization flag. But would Europe really subjugate itself to Russia again? This would again enrich Russia,” she cautioned.

The Nord Stream 2 gas pipeline has always been controversial since Gazprom and several European energy companies agreed in 2015 to construct it.

Russia and Germany, under former Chancellor Angela Merkel, insisted that the gas pipeline was a purely commercial venture and that it would lower gas prices for European consumers. Nonetheless, the fact the project got the green light a year after Russia had annexed Crimea from Ukraine prompted criticism of Berlin.

“In hindsight, we’re all smarter, but we should have never signed this Nord Stream 2 [agreement],” Wolfgang Ischinger, president of the Munich Security Conference’s Foundation Council and a former diplomat, told CNBC. “But that’s what happened.”

Ischinger said it continues to be “a huge effort” for Germany to wean itself off a well-established Russian-German economic relationship, one that brought about the Nord Stream 2 partnership, and that Germany was now waking up to the fact that “Russia is now our adversary.”

That the pipeline project was a bad idea and had the potential to go spectacularly wrong was not without warning from several quarters, notably the U.S. and eastern European countries, including Poland and Ukraine.

They all said the pipeline would only increase Europe’s reliance on Russian gas imports and reduce the region’s energy security as a result. Ukraine stood to lose billions of dollars worth of gas transit fees that Russia paid it to transfer gas via the country whereas the U.S. has long had an eye on increasing its own LNG exports to Europe.