Billions in lending at risk after Navalny poisoning heightens calls for project to be blocked

Eighty kilometres of open water does not seem far in the 3,100km journey that Russian gas must make from fields in the Siberian Arctic to consumers in northern Germany.
But closing the last gap in the Nord Stream 2 pipeline under the Baltic Sea is becoming an increasingly painful and potentially expensive problem for six of Europe’s biggest gas companies, which have pledged billions of euros in funding.
Mired in controversy since inception and condemned by critics as a political project that will deepen Europe’s energy reliance on the Kremlin, the poisoning of Russian opposition activist Alexei Navalny last month has intensified calls for EU governments to find a way to prevent it being finished.
Russian state group Gazprom is building the pipeline, with half of the €9.5bn cost funded by loans from Royal Dutch Shell, Austria’s OMV, Engie of France and German groups Uniper and Wintershall. All have found their investment imperilled by political woes and controversy.
In December, Washington imposed sanctions against companies involved in the pipeline’s construction, forcing Swiss pipe-layer Allseas to suspend its work with just 6 per cent left to install. In July, the sanctions were extended to all entities that have assisted the project, threatening the five co-financing companies.
Now, the poisoning of Mr Navalny with Soviet-developed military nerve agent novichok has led to demands from German politicians for chancellor Angela Merkel, the pipeline’s most important European backer, to end her support for the project.
James Henderson, head of the natural gas programme at the Oxford Institute for Energy Studies, said sanctions were the EU’s only available means to stop the project because it had already given regulatory clearance. “To go back on that would cause significant legal ramifications,” he said.
“For the companies that have provided the financing, that’s awkward — quite how you get your money back if the pipeline doesn’t operate is an interesting negotiation with Gazprom,” he added.
Even before the attack on Mr Navalny, who was airlifted to a Berlin hospital from Siberia and awoke from a 19-day coma on Monday, concerns about the project’s viability were mounting.
Nord Stream 2 would double the capacity of Russian gas pumped direct to Germany to 110bn cubic metres per year but has been controversial from the outset. Detractors, mainly in eastern EU states such as Poland, say it is designed to deprive Kyiv of transit fees by avoiding the existing pipeline network that runs from Russia through Ukraine into the EU.
The US has also claimed that it would make Germany and the EU more beholden to the Kremlin, and increase the amount of money Moscow earns from European consumers.
Uniper said last month that it may have to write off its loan to the project because of the increased US sanctions threat.
Andreas Schierenbeck, chief executive, said that while he believed the project would eventually be completed and Uniper would not be sanctioned: “We can’t exclude [the possibility of] such an extreme scenario. We can’t exclude that we could have further delays and that the pipeline might not be finished . . . We are worried about these sanctions.”
Anglo-Dutch energy major Shell said it had a “limited role in NS2 as a financial lender to the project. We don’t have a view on the possibility of sanctions but . . . Shell always complies with applicable sanctions and trade control measures”.
However, Wintershall chief executive Mario Mehren said last month he believed that the pipeline would be “commissioned in the near future, and we are also confident that all our loans will be repaid as contractually agreed”. As of April, Wintershall had contributed €730m of its pledged €950m to the project.
OMW declined to comment, while Engie did not respond to a request for comment.
“As a developer of a commercial investment, Nord Stream 2 AG cannot comment on political debates,” the pipeline’s development company told the Financial Times, adding that it “and the companies supporting our project remain convinced that the soonest possible commissioning of the pipeline is in the interest of Europe’s energy security”.
Aside from the sanctions threat, analysts have questioned the commercial rationale of the pipeline, which will add additional supply capacity to Europe’s gas market at a time of historically low prices and large oversupply caused by the pandemic’s hit to demand and the rise of liquefied natural gas production from countries such as the US.
Gazprom expects its gas sales to Europe and Turkey to fall by about 16 per cent this year to roughly 165 bcm, given lower consumption and higher supplies from rivals. Its existing pipelines to these markets have a total capacity of 219 bcm per year.
“For the moment, the asset isn’t an urgent priority in an operational sense because of the LNG glut that has flooded the market, the fall in demand, a warm winter, etc,” said Ronald Smith, executive director of BCS Global Markets in Moscow. “Right now there is more than enough capacity in the existing pipelines.”
Russian Minister of Energy Alexander Novak said that the pipeline would be finished and still made business sense © John Thys/AFP/Getty
However, that could mean a potential delay to the project enforced by European governments in retaliation for Mr Navalny’s poisoning would have less of a material impact on the companies paying for it.
Most forecasts predict that within three years, growth in Asian gas demand will eliminate excess LNG supplies and falling domestic gas production in Europe will increase the need for imports.
“Right now there are unlikely to be any consequences for European or German politicians who may decide to delay Nord Stream 2 for short-term political considerations,” Mr Smith said. “But no European government will want to turn off the heating in schools because the project didn’t get built.”
Gazprom, which has previously vowed to build the pipeline on its own if it has to, did not respond to a request for comment.
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Russia’s energy minister Alexander Novak, who also sits on Gazprom’s board of directors, said last Monday that the pipeline would be finished and still made business sense. “This is a long-term project for many decades,” he told reporters. “Of course, the project is still relevant.”
Moscow has consistently said Nord Stream 2 is a commercial venture that would allow it to avoid supply disruptions such as those caused by political disputes between Russia and Ukraine that have sharply pushed up prices for European customers.
“It’s been one of those bizarre pipelines,” said Mr Henderson, adding: “Many people have said, why build this thing? What’s the economic case for Nord Stream 2, it’s surplus capacity? If tomorrow you said Nord Stream 2 is not happening, I’m not sure many traders would bat an eyelid.”