European natural gas prices surged as much as 12% Tuesday after Germany's energy regulator unexpectedly suspended a key step in the approval process for the Nord Stream 2 pipeline. According to Bloomberg, the Federal Network Agency halted the Nord Stream certification process necessary to pump natgas directly from Russia into Germany. It was initially expected the certification would've been completed in early 2022, but that now appears to be unlikely.
The move comes as Nord Stream 2 AG, the operator of the pipeline, decided to set up a German subsidiary in a bid to meet European Union rules requiring gas producers to be legally separate from entities transporting the fuel. Russia’s Gazprom PJSC is the owner of Nord Stream 2.
The German regulator said the entity "must then meet the requirements of the Energy Industry Act for an independent transport network operator." It added, "the certification process remains suspended."
The announcement sent benchmark European gas prices surging as traders fear the decision means Europe won’t get much needed gas to ease tight supplies this winter. Dutch month-ahead gas, the European benchmark, soared as high as 12% to above 88 euros a megawatt-hour.
“If one believes that flows could only start after certification has been completed, this means that flows via Nord Stream 2 will be further delayed, with negative implications for European gas balance over winter,” said Katja Yafimava, a senior research fellow at the Oxford Institute for Energy Studies.
The timing of the suspension comes at the worst possible moment. Europe faces a massive energy crunch as natgas stockpiles are the lowest in a decade just as Europe faces its first cold winter blast. Widespread below-average temperatures continue to plague parts of the continent, as the following chart of NW Europe Heating Degree Days shows.
Meanwhile, Europe's natgas storage levels are the lowest since 2013.
The suspension deprives Europe of fresh supplies upwards of 55bn cubic meters of gas per year transited in an undersea pipeline across the Baltic Sea from Gazprom facilities in Russia to Germany then distributed throughout Europe, effectively bypassing pipelines running through Ukraine.
James Waddell at Energy Aspects, a consultancy, told FT, "any remaining hopes that this pipeline would be available for the winter are completely dashed now."
"Increasingly, it's looking like it may not start up until the second half of next year.
"The lack of gas in storage and the lack of Russian supplies mean we essentially have to cut into industrial demand in order to preserve crucial gas supplies for the power and heat networks. Europe is having to heavily reduce industrial gas demand in a way we haven't seen in decades," Waddell said.
Meanwhile, perhaps sensing that Europe's was going to make things complicated, late on Monday Goldman Sachs' Samantha Dart wrote that "today's auction of Yamal pipeline capacity for December points to no bookings from Gazprom, vs our 45 mcm/d expected." And while "booking volumes do not guarantee flow, as illustrated by Yamal flows for October and thus far in November at 14 mcm/d and 10 mcm/d, respectively, vs bookings at just over 30 mcm/d for both months" she added that the lack of bookings "keeps supply uncertainty elevated into the end of the year."
Delaying Nord Stream 2's certification indefinitely, especially if coupled with further Russian supply cuts, could be a disaster for Europe which is now facing the first cold blast of the season, as energy inflation and supply chain disruptions due to the energy crisis and pandemic could metastasis into a "winter of discontent," fueling socio-economic instabilities. As much as European officials oppose the pipeline and want energy independence from Russia, the continent desperately needs Gazprom to survive this winter.