World Politics

Germany won't abandon its massive gas pipeline with Russia yet, analysts say

Key Points
  • Germany has come under increasing pressure to pull the plug on its controversial giant gas pipeline project with Russia.
  • Experts say Berlin is unlikely to do so for now, however, given the fact the project is almost complete.
  • German and other major European companies are involved in constructing the pipeline.
The Akademic Chersky pipe layer is seen in the Gulf of Gdansk in the Baltic Sea. According to Russia's energy minister Novak, Akademik Chersky could be involved in the construction of the Nord Stream 2 pipeline.
Vitaly Nevar | TASS | Getty Images

Germany has come under increasing pressure to pull the plug on its controversial giant gas pipeline project with Russia, following the suspected poisoning of Russian opposition politician Alexei Navalny.

Experts say Berlin is unlikely to do so for now, however, given the Nord Stream 2 project is over 94% completed after almost a decade's construction, involves major German and European companies, and is necessary for the region's current and future energy needs.

In this case, economic and commercial interests could trump political pressure to punish Russia.

"I don't see Germany pulling out of the project just yet," Carsten Brzeski, chief economist for the euro zone and global head of macro at ING, told CNBC Thursday.

"But the domestic debate of the last days has made it clear that patience is running low. Many are still in favor of it. But they will need Moscow to clearly demonstrate that pragmatic cooperation is possible and can actually bear fruit – for instance regarding managing the situation in Belarus," he said.

Germany's Foreign Minister Heiko Maas hinted last Sunday that Russia had to play its part during the investigation into the attack on Navalny.

A fierce critic of Russian President Vladimir Putin, Navalny was left critically ill after a suspected poisoning with a Novichok nerve agent.

"I hope the Russians won't force us to change our position regarding the Nord Stream 2" pipeline, Germany's Foreign Minister Heiko Maas told the Bild am Sonntag newspaper.

Germany has been reluctant to link the fate of its involvement with Nord Stream 2 to the Navalny incident so far, and Maas conceded that stopping the building of the pipeline would hurt not only Russia but German and European firms.

"Anyone calling for the project to be halted needs to be aware of the consequences. Nord Stream 2 involves over 100 companies from twelve European countries, and about half of them from Germany," he said.

Jane Rangel, a gas analyst at Energy Aspects, told CNBC Wednesday that she and her colleagues are "watching the situation because it's evolving" and noted that the Navalny poisoning "does put Germany in a tough position."

"It's another challenge for the project to be finished and it certainly raises the risk that Germany could take action, one of the most obvious solutions could be Germany refusing to grant regulatory approval" for the pipeline, she added.

German Chancellor Angela Merkel could opt to tell Bundesnetzagentur, the official body that's responsible for authorizing the pipeline, not to grant approval for the project, Rangel said. 

"At that point, we'd assume that Gazprom would bring it to court if it didn't get regulatory approval. Then the court could possibly overturn it and that means the German government scores its political point but the project eventually gets approved."

Politics vs. commerce

For its part, Russia, which denies any involvement in the Navalny incident, has played down any impact on the Nord Stream 2 project. Kremlin spokesman Dmitry Peskov said Tuesday that Russia didn't see a risk in Germany suspending the pipeline.

"There's no basis to consider this issue on the political level," he said, according to Bloomberg. "It's more a commercial international project. Why should we talk about any measures with a minus sign regarding the international project where German companies are also involved? It doesn't seem reasonable."

In a nutshell, Nord Stream 2 is a collaboration between Russian state gas firm Gazprom, and five major European energy companies, including E.ON, Shell and ENGIE, although Gazprom is the largest shareholder.

The pipeline, reportedly estimated to cost around 9.5 billion euros ($11.3 billion) to build, will double the amount of natural gas that can be transported to Germany under the Baltic Sea (to roughly 110 billion cubic meters per year) and will run parallel to an existing pipeline, Nord Stream 1, that was completed in 2011.

Russia was the largest supplier of natural gas to the EU, both in 2018 and 2019, according to the European Commission.

One of Russia's main aims with the new pipeline is to enable it to bypass Ukraine, a country with whom Russia has strained geopolitical and commercial relations, as it transports gas to Europe. Ukraine, like the U.S., vehemently opposes Nord Stream 2 as the country claims it strengthens Russia's energy influence in Europe and undermines the region's energy security, something that Russia and Germany deny.

Nonetheless, opposition to the project has affected its progress, most notably with U.S. sanctions announced last December against vessels laying underwater pipes for the project. It prompted a Swiss-Dutch offshore services group, Allseas, to suspend its part in the project.

U.S. lawmakers are considering further sanctions on the project although, with 2,300 out of 2,460 kilometers of the entire (Nord Stream 1 and 2) pipelines having already been laid, there is not much time for those to have a significant impact if they are approved.

A spokesman for Nord Stream 2 told CNBC that as a developer of a commercial investment it cannot comment on political debates.

"Our project is based on investments of six leading energy companies, five out of them from EU countries. Project implementation is based on construction permits from authorities in four EU countries and Russia in compliance with legal requirements from national legislation, EU law and international conventions," spokesman Jens Mueller said.

"Nord Stream 2 and the companies supporting our project remain convinced that the soonest possible commissioning of the pipeline is in the interest of Europe's energy security, climate objectives, competitiveness, and prosperity of European businesses and households."