Merkel Scrapping Nord Stream Would Unravel German Gas Strategy

  • Date: 12/09/20
  • Bloomberg

As Angela Merkel weighs up the arguments for scrapping a Russian pipeline project, a cornerstone of the German chancellor’s carefully crafted energy strategy is at stake.

Merkel is coming under increasing pressure to ditch the Nord Stream 2 pipeline after the poisoning of Russian opposition politician Alexey Navalny. Members of her own party have questioned the project and Polish Prime Minister Mateusz Morawiecki said the decision should be a “no brainer.”

But cancellation would mean unwinding years of government strategy to turn Germany into a lucrative gas hub as it boosts supplies of the fossil fuel during the green energy shift. It’ll also unravel the plans of corporate giants like BASF SE, for which the pipeline is crucial.

Germany wants to boost gas imports and distribution this decade, securing a backstop fuel in move away from the dirtiest fossil fuels, its 2020-2030 strategy plan shows. Nord Stream 2 is central to that. The country also stands to make significant income from spreading the fuel around its grids and across its nine borders.

If Nord Stream 2 collapses “Germany’s gas strategy would have to be rewritten,” said Timm Kehler, who heads the Zukunft Erdgas natural gas lobby in Berlin. “Writedowns on the projects investments would follow and a jump in gas prices in ascramble to find alternative imports.”

Critics of the German plan — including the EU Commission — say that the country doesn’t need so much gas. And the move to more renewables accelerated by the pandemic makes all calculations about future demand difficult. Plunging prices in the global gas markets have made the case against the project even more compelling.

For years, the biggest glut the world has ever seen has sent fuel to the continent through other pipelines and on tankers from as far away as the U.S. and Qatar. European benchmark prices have more than halved since the peak in 2018.

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At the same time, there is growing environmental opposition to building new gas infrastructure, especially when Europe is aiming to be climate neutral by 2050. That itself raises questions over whether the project would have been approved if it were pitched more recently.

But weighing on any decision in Berlin now is also the issue of sunk costs in a nearly finished project with a total investment of 9.5 billion euros ($11.2 billion). The thorny problem of compensation would also need to be addressed.

Industry is now counting on the final 6% of pipe-laying being completed this year, having invested billions that they now stand to lose.

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