Russia’s Nord Stream 2 gas pipeline dodged new U.S. sanctions, but it’s not home free yet

The highly controversial Nord Stream 2 natural-gas project, which involves an almost completed, 750-mile pipeline under the Baltic Sea between Russia and Germany, has hit a snag.

In a Wednesday ruling that would force Russian energy giant Gazprom to auction off half the capacity in the $11 billion pipeline to third parties, a German regional court said Nord Stream 2 is not exempt from EU gas-market rules. Lead project backer Gazprom, which may appeal the decision to Germany’s supreme court, claims it’s being unfairly targeted.

The Russian project is bitterly opposed by many EU countries and by the U.S., largely due to its geopolitical implications. The new pipeline essentially doubles the capacity of an existing route (Nord Stream 1) that rivals the main route Russia uses for supplying gas to Europe: through Ukraine. Nord Stream 2 critics say the scheme will increase European dependency on Russian gas and increase the likelihood that Russia will wind down the Ukrainian route—thus starving Ukraine, a country with which Russia is sort of at war, of much-needed transit fees.

Gazprom, a Russian state-owned energy giant, is so far only committed to using the Ukrainian route through 2024, but claims it will continue doing so if it remains economically and environmentally viable. The company says Nord Stream’s shorter length makes it cheaper and more environmentally friendly to use.

The route’s cheapness may now be diminished, thanks to Wednesday’s court decision.

The ruling is about a 2019 revision to the EU’s Gas Directive, the law that governs the union’s internal gas market. In a rushed-through move that many saw as being about hindering Nord Stream 2, the EU amended the law so that it also applied to import pipelines. The law in question obliges pipeline operators to be “unbundled”—as in, separate companies—from the producers whose gas they are transporting, so as to stop companies monopolizing capacity.

In Nord Stream’s case, Gazprom is both the producer of the gas and the owner of the pipeline project company (financial investors include Germany’s Wintershall Dea and Uniper, Austria’s OMV, France’s Engie, and the Anglo-Dutch Shell).

“Understanding of the term ‘completion’”

The amendment gave space for the decade-old Nord Stream 1 to keep avoiding the rules, by allowing exemptions for pipelines that were already completed by May 23, 2019. Nord Stream 2, however, is still around nine miles short of being fully built, more than two years after that cutoff date.

Undeterred by this physical reality, Gazprom tried to argue that Nord Stream 2 was in fact completed by the 2019 deadline because it was fully funded at that point. Germany’s energy regulator didn’t buy that argument in May 2020, when it declined to grant Nord Stream 2 a waiver, and now the Düsseldorf Higher Regional Court has backed it up.

The court’s antitrust division said Wednesday that it had “confirmed the structural and technical understanding of the term ‘completion,’ which is decisive here: The pipeline was not completely built and therefore not completed in accordance with the law.”

The Nord Stream 2 consortium responded by saying the ruling “demonstrates the discriminatory impact of the amended EU Gas Directive.” The Russian government said the matter was a “corporate issue.”

Although the ruling limits Gazprom to using just half of its pipeline’s capacity, it does not stop the project itself. The U.S., which used to be dead set on killing Nord Stream 2, last month struck a deal with Germany that will allow it to be completed without the threat of new sanctions.

However, as part of that deal, Germany agreed to hit Russia in the pocket if it tries to weaponize Nord Stream 2 against Ukraine. Outgoing Chancellor Angela Merkel reiterated that threat Sunday following a meeting with Ukrainian President Volodymyr Zelensky, saying, “We are for new sanctions if Russia uses this gas pipeline as a weapon.”