Germany has alternatives if it abandons Nord Stream 2 over Russia tensions: Experts

Abandoning the nearly complete Nord Stream 2 gas pipeline from Russia to Germany could create a legal mess and nudge up energy costs for European households but Germany would cope with any disruption to supplies, economists say.

German Foreign Minister Heiko Maas at the weekend questioned the project -- thus far supported by Germany -- following the suspected poisoning of Kremlin critic Alexei Navalny.

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Chancellor Angela Merkel’s spokesman reinforced the shift in tone on Monday, saying she shared the view of Maas, who told newspaper Bild am Sonntag: “I certainly hope that the Russians will not force us to change our position on Nord Stream 2.”

Their comments cast doubt over the future of a project that is more than 90 percent complete, scheduled to operate from early 2021 and which would double the capacity of the existing Nord Stream 1 pipeline from Russia to Germany, Europe’s largest economy.

Knocking out that additional capacity would put upward pressure on gas prices. But reduced energy demand due to the COVID-19 pandemic, and slack in the German economy, would give Berlin time to work out alternative additional supply sources.

“Germany could easily afford it,” Berenberg Bank economist Holger Schmieding said of the possibility of axing the pipeline, describing the impact on economic output as “negligible.”

“We have time anyway, and now with GDP only to reach pre-pandemic levels in 2022, in a way we have more time to figure out how to grapple with it than we had before,” he said.

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Navalny was airlifted to Germany for hospital treatment after falling ill on a Russian domestic flight last month. The German government says he was poisoned with a Novichok nerve agent similar to the one used in an attempt to kill a former Russian spy in England two years ago.

Moscow says it has seen no evidence he was poisoned.

Merkel, who had until now been unwavering in her support for Nord Stream 2, wants to agree a response to the affair with Germany’s European Union partners and is first awaiting an explanation from Russia.

TRADE-OFFS

Merkel and the EU face a trade-off between the economic benefits of the pipeline and the firm political message that abandoning it would send to Russia, analysts say.

“Merkel’s perhaps deliberate opening of the domestic debate underlines that Berlin’s support for pragmatic dialogue with Putin is not for free,” said Carsten Nickel at Teneo, a consultancy.

Germany could use the threat of an exit from the project to try to get more engagement from Russian President Vladimir Putin on issues such as Ukraine or Belarus, he said.

But with 2,300 km of the 2,460 km twin-pipeline length completed, the commercial momentum behind the project may well carry it through.

A study undertaken in April by Cologne University’s energy economics institute (EWI) showed that consumers would benefit from a 5 percent gas price discount if Nord Stream 2 materialized.

There is strong commercial resistance to axing the project.

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Oliver Hermes, chairman of the Ost-Ausschuss, which represents German business interests in Russia, said abandoning it would damage Germany’s commercial reputation.

“This would place a considerable burden on the image of the EU and Germany as a safe investment location,” he said.

German gas stocks were filled to 93.2 percent capacity on Saturday, data from European infrastructure group GIE showed, more than enough to cope with the immediate challenge of heating Germans’ homes this winter.

But sourcing alternative energy supplies in the longer term - potentially from US fracking gas, liquid gas from Russia and Qatar, or additional pipeline gas - would cost “billions of euros per year, which European consumers in particular would then have to pay,” Hermes said.

The legal costs of abandoning Nord Stream 2 could also prove a major headache. The five Western partners in the 9.5-billion-euro project led by Russia’s Gazprom would suffer massive write-downs should it be axed.

Half a dozen people familiar with the industry said pulling the plug would provoke a backlash from among the 120 firms involved in the project. Two of the people, including a specialist energy lawyer, forecast a raft of lawsuits.