Germany has taken steps to halt the process of certifying the Nord Stream 2 gas pipeline from Russia as the West started taking punitive measures against Moscow over the Ukraine crisis.
Chancellor Olaf Scholz said his government made the decision to halt the £7.4 billion pipeline in response to Russian President Vladimir Putin’s recognition of the independence of two breakaway regions in eastern Ukraine.
Scholz said the recognition of Donetsk and Luhansk marked a ‘serious break of international law’.
‘Now it’s up to the international community to react to this one-sided, incomprehensible and unjustified action by the Russian president,’ he told reporters in Berlin, adding that it was necessary to ‘send a clear signal to Moscow that such actions won’t remain without consequences’.
The decision is a significant move for the German government, which had long resisted pulling the plug on the pipeline – which has not begun operating yet – despite pressure from the United States and some European countries to do so.
With the announcement of the pipeline being frozen and after Moscow ordered troops into the breakaway regions on Monday, gas prices surged and oil prices rose to their highest since 2014 on Tuesday.
Ten thousand soldiers entered separatist-occupied areas overnight, a source with links to Ukrainian military intelligence told MailOnline, with 6,000 sent to Donetsk, 5,000 sent to Luhansk and 1,500 to the city of Horlivka.
In response to the crisis, gas prices jumped. The delivery of gas to the UK in April rose by 9 percent, and 10 percent in May – to 191p per therm, the BBC reported.
While the UK imports less than 2 percent of its gas from Russia, an increase in global gas prices will impact all households in the UK.
Should Russia decide to retaliate by restricting gas supply to Europe, it will add to the already rising costs of energy in UK households.
The crisis also added to already existing supply concerns that are pushing oil prices up towards $100 a barrel – their highest levels since 2014.
Scholz had refused to commit to halting the project in public until now, amid pressure from the international community as Russia ramped up tensions by increasing its military presence on Ukraine’s borders.
Washington has for years argued that building another pipeline bringing natural gas from Russia to Germany increases Europe’s reliance on Russian energy supplies.
US officials have also warned that Nord Stream 2 poses risks to Ukraine and Poland because it could allow Russia to stop pumping gas through those countries.
Scholz predecessor Angela Merkel had defended the project, as have prominent figures in Mr Scholz’s centre-left Social Democratic Party.
‘The situation now is fundamentally different,’ Mr Scholz said, explaining that the government had decided to withdraw a report on the impact that the pipeline would have on the security of Germany’s gas supplies.
‘That may sound technical, but it’s a necessary administrative step without which the certification of the pipeline cannot happen now,’ he said.
Mr Scholz added that Germany’s Economy Ministry would reassess the situation in light of the latest developments.
‘That will certainly take time, if I may say so,’ he added.
Germany meets about a quarter of its energy needs with natural gas, a share that will increase in the coming years as the country switches off its last three nuclear power plants and phases out the use of coal.
About half of the natural gas used in Germany comes from Russia.
The government aims to end the use of all fossil fuels in Germany by 2045.
Ukrainian foreign minister Dmytro Kuleba praised Germany for suspending certification of the pipeline.
‘This is a morally, politically and practically correct step in the current circumstances,’ he wrote on Twitter. ‘True leadership means tough decisions in difficult times. Germany’s move proves just that.’
Nord Stream 2 is a 764-mile-long natural gas pipeline under the Baltic Sea, running from Russia to Germany’s Baltic coast.
It runs parallel to an earlier Nord Stream pipeline and would double its capacity, to 110 billion cubic meters of gas a year.
It means Russian state-owned gas giant Gazprom can send gas to Europe’s pipeline system without using existing pipelines running through Ukraine and Poland.
The pipeline has been filled with gas but had been awaiting approval by Germany and the European Commission.
Germany’s utility regulator was reviewing the pipeline for compliance with European regulations on fair competition. It’s that approval process that Scholz said Tuesday that he was suspending.
Germany was required to submit a report on how the pipeline would affect energy security, and Scholz said that report was being withdrawn.
Scholz, who took the helm in Germany in December, backed the project as finance minister for his predecessor, Angela Merkel, and his Social Democratic Party supported it.
As Russia massed troops near Ukraine’s border, Scholz avoided referring to Nord Stream 2 specifically even as U.S. officials said it would not move forward if Russia invaded.
But Scholz warned that Russia would face ‘severe consequences’ and that sanctions must be ready ahead of time. Germany had earlier agreed with the U.S. to act against Nord Stream 2 if Russia used gas as a weapon or attacked Ukraine.
There are a number of benefits behind the pipeline for Russia.
Gazprom says it will meet Europe’s growing need for affordable natural gas and complement existing pipelines through Belarus and Ukraine.
Nord Stream 2 would offer an alternative to Ukraine’s aging system that Gazprom says needs refurbishment, lower costs by saving transit fees paid to Ukraine, and avoid episodes like brief 2006 and 2009 gas cutoffs over price and payment disputes between Russia and Ukraine.
Europe is a key market for Gazprom, whose sales support the Russian government budget. Europe needs gas because it’s replacing decommissioned coal and nuclear plants before renewable energy sources such as wind and solar are built up.
But the U.S., European NATO allies such as Poland, and Ukraine have opposed the project going back before the Biden administration, saying it increases Europe’s dependence on Russian gas and gives Russia the possibility of using gas as a geopolitical weapon.
Europe imports most of its gas and gets roughly 40 percent from Russia.
The pipeline, which went forward under Merkel, has been an irritant in U.S.-German relations. Biden waived sanctions against the pipeline’s operator when it was almost complete in return for an agreement from Germany to take action against Russia if it used gas as a weapon or attacks Ukraine.
In Congress, Republicans and Democrats – in a rare bit of agreement – have long objected to Nord Stream 2.
For Europeans concerned the cancellation of the project may result in a cold winter, the fears are unfounded.
Even before Scholz’s move, regulators made clear the approval process could not be completed in the first half of the year. That means the pipeline was not going to help meet heating and electricity needs this winter as the continent faces a gas shortage.
The winter shortage has continued to feed concerns about relying on Russian gas.
Russia held back from short-term gas sales – even though it fulfilled long-term contracts with European customers – and failed to fill its underground storage in Europe.
Russian President Vladimir Putin has said the shortage underlines the need to quickly approve Nord Stream 2, increasing concerns about Russia using gas to gain leverage over Europe.
And while while Europe needs Russian gas, Gazprom also needs the European market, which should mitigate fears Russian could turn off the taps.
Gazprom’s interdependence is why many think Russia won’t cut off supplies to Europe even if the Ukraine conflict escalates further, and Russian officials have underlined they have no intention to do that.
Meanwhile, the Ukraine crisis, on top of the winter shortage, is has already given European governments more reason to find their gas somewhere else, such as through liquefied gas brought by ship from the U.S., Algeria and other places.
European Commission said on Tuesday that Europe’s energy supply would not be affected if the Nord Stream 2 gas pipeline was halted.
‘Nord Stream 2 is not yet functioning, is not supplying energy to Europe. It’s not a different source of energy, it’s a different pipeline for an existing supplier… There’s no change in the current situation,’ a Commission spokesperson told a regular press briefing.
Analysts have said a disruption could push up European gas prices, which have soared in recent months and prompted most EU countries to roll out emergency measures to shield citizens from rising bills.
The UK’s business and Energy Secretary tweeted: ‘The UK is not dependent on Russian gas (~3% of imports). Our single largest source is within British waters. However, every country is vulnerable to prices set by global markets.’
As Germany put the certification of the pipeline on ice, oil prices rose to their highest since 2014.
‘The potential for a rally over $100 a barrel has received an enormous boost,’ said Tamas Varga of oil broker PVM. ‘Those who have bet on such a move anticipated the escalation of the conflict.’
Brent crude, the global benchmark, was up $2.24, or 2.4%, at $97.63 by 1250 GMT, having earlier reached its highest since September 2014 at $99.50.
U.S. West Texas Intermediate (WTI) crude jumped by $2.92, or 3.2%, from Friday to $93.99, with the market having been closed on Monday for a public holiday.
WTI also touched a seven-year high on Tuesday as it peaked at $96.
‘We see the oil market in a period of frothiness and nervousness, spiced up by geopolitical fears and emotions,’ said Julius Baer analyst Norbert Rucker.
‘Given the prevailing mood, oil prices may very likely climb into the triple digits in the near term.’
The Ukraine crisis has added further support to an oil market that has surged on tight supplies as demand recovers from the COVID-19 pandemic.
The Organization of the Petroleum Exporting Countries (OPEC) and allies, together known as OPEC+, have resisted calls to boost supply more rapidly.
A senior British minister on Tuesday said that Russia’s move into Ukraine has created a situation as grave as the 1962 Cuban missile crisis, when a confrontation between the United States and Soviet Union brought the world to the brink of nuclear war.
Nigeria’s minister of state for petroleum on Tuesday stuck to the OPEC+ view that more supply was not needed, citing the prospect of more production from Iran if its nuclear deal with world powers is revived.
Talks are ongoing on renewing Iran’s nuclear agreement with world powers, which could eventually boost Iran’s oil exports by more than 1 million barrels per day.
Meanwhile, the EU is close to agreeing sanctions on Russia that would put politicians and officials on blacklists, ban trading in Russian state bonds, and target imports and exports with separatist entities, senior EU officials said on Tuesday.
Responding to Russia’s formal recognition of two breakaway regions in eastern Ukraine, the EU said it was reacting ‘with robustness and speed to the illegal actions of Russia in close coordination with international partners’.
Russian President Vladimir Putin’s announcement on Monday, followed by his signing a decree on the deployment of Russian troops to Donetsk and Luhansk, is ‘illegal and unacceptable,’ European Council President Charles Michel and European Commission President Ursula von der Leyen said in a statement.
The EU had repeatedly said it was ready to impose ‘massive consequences’ on Russia’s economy if Moscow invaded Ukraine but has also cautioned that, given the EU’s close energy and trade ties to Russia, it wanted to increase sanctions in stages.
The package of sanctions, which EU foreign ministers will discuss in Paris from 1500 GMT and aim to finalise ‘without delay’, includes putting on an EU blacklist those who were involved in the decision to recognise the breakaway regions, the joint statement said.
That could involve all members of the lower house of the Russian parliament who voted in favour of the recognition, one EU official said.
The package of measures under discussion also aims ‘to target the ability of the Russian state and government to access the EU’s capital and financial markets and services, to limit the financing of escalatory and aggressive policies,’ the statement said
Banks involved in financing separatist activities in eastern Ukraine could also be targeted.
The two regions could also be removed from a free trade deal between the EU and Ukraine, ‘to ensure that those responsible clearly feel the economic consequences of their illegal and aggressive actions,’ the statement said.
EU officials and diplomats said some EU countries, including Austria, Hungary and Italy, Russia’s closest allies in the bloc, would prefer more limited sanctions in response to Putin’s move on eastern Ukraine.
Others want to see a fuller, tougher range of measures discussed in recent weeks for the event of a Russian invasion of Ukraine to be rolled out now. Baltic, central and eastern European states say tough sanctions should be imposed immediately as Russia is already showing military aggression towards Ukraine.
Italian Prime Minister Mario Draghi, whose country relies on Russian for much of its gas, told a news conference in Rome that any sanctions should not include energy imports.
‘How we react as European Union will define our character and indeed the future of Europe,’ Lithuanian vice minister of foreign affairs Arnoldas Pranckevicius said at a meeting in Brussels.
The sanctions ‘should not be symbolic. If we want to deter further actions from president Putin, if we want to stop the war from happening, we need to move ahead with serious measures.’
Irish EU affairs minister Thomas Byrne said earlier on Tuesday: ‘We’ve got to ensure that whatever happens, Russia will feel the pain … to make sure Russia has absolutely no incentive to go further.’
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