Nord Stream 2: An Energy Project Between Economic Interests, Climate Goals and Geopolitics

In July this year, Germany and the United States settled their dispute over the Nord Stream 2 pipeline that connects Russia with Germany via the Baltic Sea and thus bypasses the gas transit country Ukraine. Two months later in September, the construction of the project has been completed. But the agreement is continuing to attract criticism from various sides and the pipeline is not being commissioned for operation. But what does this project mean for economic recovery and businesses in Europe? What was the dispute of Nord Stream 2 all about in the first place? And what’s next for the project?

Europe’s dilemma: between economic interests, climate goals and energy security

The pipeline through the Baltic Sea is intended to facilitate gas imports from Russia to Germany. The argument goes that the pipeline has the potential to ease Europe’s gas crisis, make gas imports cheaper, increase supply and lower gas prices accordingly. Critics, however, argue the pipeline is not compatible with European climate goals and will most likely weaken Europe’s energy security.

For the energy companies in the European Union and their gas consumers in millions of homes and factories across the continent, the completion of Nord Stream 2 comes just in a crucial time. For one thing, gas prices are at an all-time high. Also, stocks are low as Europe heads into winter. Higher gas and electricity prices put pressure on households and businesses and could ultimately slow down the economic recovery that has taken shape in recent months. As a result, countries in Europe are under pressure to take measures to mitigate the impact.

Moreover, the German government also attaches importance to the German business involved in the pipeline project, including the companies Wintershall and Uniper. Not keeping promises would undermine the trust of business in politics and there is a threat of lawsuits for damages by the involved companies.

A geopolitical project

But that is not what the dispute about Nord Stream 2 is mainly about. The United States opposed the project because of security concerns. U.S. Republicans as well as Democrats fear that Russia will secure political influence in Europe by making the continent dependent on its gas, which in turn contradicts U.S. security interests. Moreover, the United States itself exports gas to Europe and would like to supply more. Several liquid natural gas (LNG) terminals are planned on the German North Sea coast, where U.S. tankers are to dock. However, this gas is more expensive than the Russian gas that is to flow through Nord Stream 2.

Another player is the Ukraine. As the gas pipeline bypasses the country, it fears that it will become unimportant for Russian natural gas exports. If Ukraine were to lose the transit function, it would lose billions in revenue and a geostrategic advantage that is important for its security. With the settlement of the dispute, the United States and Germany agreed on a green fund of one billion dollars. It is supposed to ensure that Ukraine is to remain a partner country for European energy supply in the long term and help businesses from the renewable energy sector to thrive. As a potential supplier of green hydrogen, Ukraine also has a place to supply the European Union with green hydrogen.

What’s next for the project?

The pipeline is now completed and is scheduled to go into operation already this year. But it is not certain that gas will soon flow through the pipeline. Several environmental organizations have taken legal action against the project. But more importantly, the pipeline has not been commissioned so far.  Nord Stream 2 is awaiting clearance from Germany’s energy regulator.

The Greens, who are set to become part of the next government, could delay the commissioning of the pipeline. However, even for the Green party a late exit from a completed and approved project would be difficult to justify. It is questionable whether the Greens really want to snub the companies involved, weaken business confidence in the party and risk claims for damages. A further dampening factor is the action of the Russian government. If the West feels angered by Russia for example by the suppression of the opposition in its own country or perceived provocations in foreign policy, the pipeline could be moved to the center of discussions again.

The EU is unsure about what to do. Increasing gas imports from Russia could provide some short-term relief for businesses and households. Economic benefits are likely to arise for companies from the presence of competitively priced gas in the European economy and lower decarbonization costs as a result of lower gas prices competing with oil and coal. But there are tough questions about what to do in the medium and long term. There are efforts across the EU to reach carbon neutrality in the coming years. This raises the question about what sort of energy mix European countries want to have in the medium to long term.