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What will happen now to Nord Stream 2 and its investors?

Russia’s invasion of Ukraine dealt a lethal blow to Nord Stream 2, leaving European business leaders to grapple with issues around security of energy supply and alternative sources.

By Viola Caon

Two days before Russia’s invasion of Ukraine, German Chancellor Olaf Scholz announced that his economy minister had withdrawn the security of supply report from the gas pipeline Nord Stream 2.

This being the missing piece for the project to become operational, Scholz’s move essentially halted operations of the pipeline. Since then, there has been no official news on the future of Nord Stream 2, with many in the industry confident that it is fundamentally dead.

nord-stream-2
The cancellation of the Nord Stream 2 natural gas pipeline project has left Europe with an energy headache. (Photo by Fabrice Coffrini/AFP via Getty Images)

Nord Stream 2: the project

Nord Stream 2 is a Swiss-registered subsidiary of Russian state-owned company Gazprom and the twin project of Nord Stream, the 1,222km subsea pipeline taking natural gas from Vyborg in north-west Russia to Germany.

Nord Stream 2 was launched in 2015 and construction began in 2018. By the end of 2021, after a series of delays due to sanctions imposed by the US on some of the companies involved, the project was finished at an estimated cost of $11bn.

Gazprom paid half the cost, with the remainder financed by British oil and gas major Shell, Austria’s OMV, France’s Engie, and Germany’s Uniper and Wintershall DEA.

Apart from Gazprom, the other parties involved have taken steps to distance themselves from their business with Russia after the country’s invasion of Ukraine.

In early March, for instance, Shell apologised for its most recent purchase of Russian oil and announced its intent to withdraw from its involvement in all Russian hydrocarbons, including crude oil, petroleum products, gas and liquefied natural gas (LNG).

Insolvency rumours

Shortly after Germany denied its go-ahead for the project, rumours emerged that Nord Stream 2 was considering filing for insolvency.

At the time, anonymous sources told Reuters that the company had been working with a financial adviser on clearing some of its liabilities and was in the process of terminating workers’ contracts.

Some elements of the rumours were corroborated by Switzerland’s economy minister, Guy Parmelin, in an interview with Swiss radio where he claimed that all Nord Stream staff who worked for the company in the Swiss city of Zug, more than 140 employees, had been fired.

Should Nord Stream 2 file for insolvency, the parties involved would be exposed to a significant degree of credit risk.

A spokesperson from Engie told Investment Monitor: “Regarding the Nord Stream 2 project that Engie has helped finance since April 2017 alongside four other European investors, the group, as a lender, is exposed to €987m of credit risk, which could impact its accounts in the event of Nord Stream 2 filing for insolvency.”

Austria’s multinational oil, gas and petrochemical company OMV sounded less worried about the implications of Nord Stream 2’s failures on its books. “OMV is just a financing partner of Nord Stream 2,” a company spokesperson says. “Recently we impaired the involved receivable of approximately €1bn. Nord Stream 2 was planned for a transport capacity of 55 billion cubic metres per annum. That is a technical impact. On future developments or market impacts we cannot speculate.”

Security of supply concerns and the search for alternatives

The halting of Nord Stream 2 is not expected to have a strong knock-on effect on the gas sector in the short term as the pipeline had not yet begun operations. However, repercussions in broader terms are already being felt.

Senior managing director at advisory firm FTI Consulting Emmanuel Grand explains that security of supply has become the main concern in the industry as the Nord Stream 2 controversy has exposed the risk of energy reliance and geopolitical risk.

“There are two main consequences for the gas sector as a result of Nord Stream 2 not becoming operational,” he says. “The first one is that gas will be seen as a less reliable and more expensive source of energy. The second is that the security of supply issue is pushing the industry to diversify to other types of gas. LNG is the immediate choice that is being looked into.”

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While this is a pivotal moment for the gas market in Europe, Grand says that the shift to LNG cannot be an immediate one.

The main challenge to replacing Russian gas with LNG from other countries, either in Europe – such as Portugal or Spain – or the US, is that the infrastructure – LNG terminals – needs to be built.

“This infrastructure takes time to be built,” says Grand. “It takes about five years for the liquefaction process and two to three more years for the actual regasification.”

“Most gas players are discussing using green hydrogen as a vector to produce new sources of energy,” says Grand. “The EU’s strategic objective for 2024 is at least six gigawatts [GW] of renewable hydrogen electrolysers producing one million tonnes renewable hydrogen.”

More broadly, he argues that the fallout of the war in Ukraine for the energy sector will in the long term play in favour of renewables and new technology.

According to the EU’s report, the target will climb to 40GW in 2030 with ten million tonnes of renewable hydrogen production.

Nord Stream 2 might be dead with no possibility of resurrection, but the gap it leaves in the market could lead to more sustainable energy policies and more innovative thinking among those leading Europe’s energy strategies.

Editor’s note: This article first appeared on our sister site Investment Monitor.

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