What is the effect of the Russia-Ukraine crisis on the Nord Stream 2 project?

Germany has halted the clearance process of Russia’s natural gas supply pipeline that cost almost $11 billion to build.

The story so far: Russia’s continuing military operation in Ukraine has raised fresh concerns about the future of the Nord Stream 2 pipeline and a potential shortage of natural gas in Europe.

Prior to Russia’s invasion of Ukraine, U.S. President Joe Biden had vowed that the Nord Stream 2 gas pipeline will be blocked if Vladimir Putin invaded Ukraine. In a statement, Mr. Biden said Mr. Putin has given the world an “overwhelming incentive” to move away from Russian natural gas and explore other forms of energy. During a media briefing on February 23, 2022, White House Press Secretary Jen Psaki had said the Nord Stream 2 is “currently dead at the bottom of the sea”.

After Mr. Putin recognised the independence of Ukraine’s separatist-led Donetsk and Luhansk regions on February 21, 2022, German Chancellor Olaf Scholz halted the certification of Nord Stream 2.

Germany has a GDP of $3.85 trillion, making it the largest economy in Europe. 65% of Germany’s natural gas requirements are met by Russia, and the decision by Mr. Scholz is likely to have an impact on the natural gas supply from Russia, and subsequently on Germany’s economy.

Russia currently supplies around 35% of Europe’s natural gas demands. With the dependence on energy from Russia, fear of a repeat of the 2006 energy crisis in Europe is also looming large.

In 2006, Russia had cut off gas supply to Ukraine after a dispute, resulting in an energy crisis in Europe in the middle of winter. Russia and Ukraine were embroiled in a tussle over the prices of gas and the Kremlin also accused Ukraine of stealing some of the supply meant for other European countries. At the time, the majority of Russia’s gas supply to European countries passed through Ukraine.

Even before Russia invaded Ukraine, the country had already reduced its natural gas supply to Europe in late 2021, but was still meeting its contractual obligations. The reduction in supply had caused a spike in the prices of natural gas on account of low storage levels within the continent and higher prices of coal. The cost of natural gas went up almost five times from 19 euros per megawatt-hour to 95 euros per megawatt-hour. Over the years, European countries have made an effort to switch from coal to natural gas for production of electricity as part of their shift towards cleaner energy. This has also led to a decrease in the continent’s natural gas reserves. Many countries have also shut down production fields over environmental concerns.