FRANKFURT/BERLIN – Germany’s energy regulator announced Tuesday that it has suspended certification for Nord Stream 2 to transport Russian gas to Europe. It said that the Swiss-based consortium had to create a German company to obtain an operating license.

The United States, Ukraine and others have resisted Europe’s controversial energy project. It is headed by Gazprom (MCX): Russian giant of gas.

The rise in gas prices across Europe, caused by an increase in global demand after COVID-19 has led to some officials in government and the industry to request more Russian supply.

Before Tuesday’s decision, the German regulator asked Nord Stream 2 AG AG, a Swiss-based pipeline operator, to give assurances that it would comply with competition rules.

What is the Problem?

The Federal Network Agency of Germany – that regulates Germany’s electricity and gas telecommunications sectors – must make a recommendation by January 1st on whether or not it will approve the Baltic Sea pipeline from Russia to Germany.

Although all technical requirements are met, there is one question: Gazprom’s compliance with European unbundling regulations that requires pipeline owners to be independent from the suppliers of natural gas flowing through them in order for fair competition.

Nord Stream 2’s operator claims the rules are aimed to torpedo the pipeline. A top EU adviser recommended in October that Gazprom challenge EU rules.

Nord Stream 1, a sister project of the same size as this one, was exempted by unbundling rules from its opening in 2011, because it was not considered a direct supplier but an interconnector.

WHAT HAPPENS AFTER A RECOMMENDATION

A three-member, independent ruling committee from the network agency will make its recommendation. It then goes to European Commission. They have two additional months to answer.

Certification can be granted relatively quickly if both the regulatory bodies and the pipeline meet all requirements. However, if not they could delay the certification process.

Only two parties can give certification if they have resolved any disagreements. This means it may take until spring 2022 for the pipeline to be certified so that it can start operating.

IS THE AGENCY ABLE TO BLOCK THE PEPELINE?

Effectively, no. Gazprom can pump gas without certification, even though it is required.

The operator can be fined a maximum of 1,000,000 euros ($1.2 million) if the operation is not certified.

It can launch an investigation as a regulator, but it is not allowed to prevent gas flow in the short term.

Gazprom said in August it expects Nord Stream 2 https://www.reuters.com/article/nordstream-outlook-idUSL1N2PQ18X to deliver 5.6 billion cubic metres bcm, about a tenth of the pipeline’s annual capacity, already in 2021 if supplies start in October.

What’s going on behind the scenes?

According to two sources, Russian President Vladimir Putin has been made clear by Angela Merkel (German Chancellor) that it was vital for him to follow the rules to maintain political support for his pipeline project.

Merkel said openly that Nord Stream 2 had its political basis in Russia’s agreement to use Ukraine for gas transit routes.

One source said that Putin is intelligent enough to recognize the negative sentiments among German politicians about the project, and therefore he shouldn’t give any reason for operations to be endangered.

ISN’T THE NETWORK AGECY POLICIICALLY INDEPENDENT??

No. The agency requires a binding assessment of supply security from Germany’s Economy and Energy Ministry to make its recommendation.

A spokesperson for the agency stated that certification can only be granted by the Federal Ministry for Economic Affairs and Energy if it is determined that the granting of certification does not compromise the safety of gas supply to the Federal Republic of Germany and European Union.

The Economy Ministry stated last month that Nord Stream 2’s Russian gas pipeline to Germany will not pose a threat to supplies to the European Union.

GERMANY’S ELECTION GOES OFF WITH A CHANGE?

Germany’s Economy Ministry will continue to be led by Peter Altmaier. He is a member Merkel’s conservative party and has supported the pipeline.

Under Merkel, who is running the country until a new coalition is formed, Germany in July struck a deal https://www.reuters.com/article/usa-germany-nord-stream-2-idAFL1N2OX1W6 with Washington to allow the pipeline to go ahead.

According to two sources familiar with the matter, this makes it very difficult for any government to reverse the agreement.

Olaf Scholz was also a supporter of the pipeline, having led the Social Democrats’ victory in September’s general election.

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