Clouds Darkening Over Nord Stream Two Pipeline

After a 13-month pause, construction of the Nord Stream Two natural gas pipeline reportedly resumed in late January, near Denmark’s Bornholm Island (TASS, January 24). Despite United States sanctions, the Russian pipelaying barge Fortuna arrived in Danish waters to build the remaining 160 kilometers (100 miles) of Nord Stream Two in the Baltic Sea. Most of the outstanding pipeline segment is located in Danish waters, with a small portion in the German exclusive economic zone (EEZ). A dozen other Russian ships or assist vessels sailing under the Russian flag are also in the vicinity. But clouds are darkening over the project; and Russian state-controlled energy giant Gazprom, the sole owner of Nord Stream Two, is growing increasingly concerned the pipeline may be canceled. To top it all, France called today (February 1) for abandoning the pipeline as the Kremlin expands its crackdown on supporters of detained Russian opposition leader Alexei Navalny (Spglobal.com, February 1).

Nord Stream Two pipelaying work was suspended in December 2019, when the Switzerland-based Allseas Group S.A. departed the project under the threat of US sanctions included in the 2019 Protecting European Energy Security Act (PEESA), a part of the US National Defense Authorization Act (NDAA) for fiscal year 2020 (Allseas.com, December 21, 2019; Congress.gov, December 20, 2019). The law, which targeted pipelaying vessels engaged in building Nord Stream Two as well as Russia’s TurkStream pipeline (in Southeastern Europe and Anatolia), was subsequently expanded to include any entity, private or public, assisting in constructing, underwriting, testing, inspecting and certifying the pipelines, or providing port and storage facilities (Congress.gov, January 1, 2021).

Both sets of sanctions, which passed overwhelmingly on a bipartisan basis, are mandatory and not discretionary, which means that the US Executive Branch is obliged to implement them. President Joseph Biden’s administration evidently shares its predecessors’ view that the pipeline is a “bad deal” for Europe. The new US Secretary of State Anthony Blinken stated during his confirmation hearings: “I am determined to do whatever I can to prevent that completion” (TASS, January 19).

For over a year, Gazprom was unable to employ another vessel to complete the pipeline, because only a few pipelayers in the world are equipped with the necessary modern technology and none of them belong to Russia. After long negotiations with the Danish Energy Agency, Nord Stream 2 AG, the project’s operator, finally obtained a permit to complete the work using pipelaying vessels with anchors, either independently or in combination with dynamic positioning pipelaying vessels (Ens.dk, July 6, 2020). Anchors, however, present a security and environmental danger, as an estimated 300,000 tons of World War II ammunition is still scattered on the Baltic Sea floor (Deutsche Welle, February 7, 2019). Fortuna will need at least five months to complete the job as it is only capable of laying down one kilometer of pipeline per day (Deutsche Welle—Russian service, January 15, 2021; South China Morning Post, September 18, 2010)

In December 2020, Gazprom tested international reaction by using the Fortuna to complete a small 2.6 km pipe segment in shallow waters off the coast of Germany. But as soon as the Russian pipelayer headed out to sea to start work in deep waters, the US Department of State sanctioned both the Fortuna and its Russian-based owner, KVT-RUS, for engaging in Nord Stream Two pipe-laying activities (TASS, January 18; Lexology, January 26).

The small KVT-RUS, however, appears to be a shell company with no resources to acquire the $140 million pipe-laying barge. In 2019, it had only one employee, no revenue, and reported just 1,000 rubles ($13) in cash (RBC, December 18, 2020). Before ending up on KVT-RUS’s books, the Fortuna was transferred by its Hong Kong-based owner, Strategic Mileage Limited, to the Russian Universal Transport Group, Ltd. This rail and auto transport services company has just two employees. In 2019, its revenue was $1.38 million, but it reported $30,000 in business losses (Zachestnyibiznes.ru, accessed February 1, 2021).

The sanctions against Fortuna and KVT-RUS are pursuant to section 232 of the 2017 Countering America’s Adversaries Through Sanctions Act (CAATSA). These were the first sanctions imposed by the US government in relation to Nord Stream Two and the first time CAATSA was used against Russian energy projects. This was made possible after exemptions on Russian energy export pipeline projects, which commenced before CAATSA came into effect, were lifted in July 2020 (Natural Gas World, July 16, 2020).

The Fortuna’s designation under US sanctions prompted Gazprom to acknowledge, for the first time, in a Eurobond prospectus for investors, that “the risks associated with a change in the political situation” may “lead to the suspension or cancelation of the project” (TASS, January 19, 2021). The US administration could also use CAATSA to impose secondary sanctions against any company involved in Russian energy projects, including Nord Stream’s Western partners—Germany’s Uniper and Wintershall Dea (owned by BASF), Anglo-Dutch oil major Shell, Austria’s OMV, and French energy company Engie.

Furthermore, the head of Gazprom Export, Elena Burmistrova, reiterated that investments in the gas sector are also subject to political pressure, especially in the European Union (TASS, January 19). Thus, the Nord Stream Two pipeline now faces major challenges related to both expanded US sanctions and the changed attitude within the EU due to Moscow’s arrest of Navalny. The European Parliament has called for stricter sanctions on Russia and stopping of Nord Stream Two (Europarl.europa.eu, January 21).

Since the beginning of the year, an avalanche of problems has piled up for Nord Stream Two: Zurich Insurance Group departed the project, following earlier warnings by the International Group of P&I Clubs, the world’s largest association of ship insurers, that it would not provide coverage to vessels involved in the pipeline project (Unian, September 24, 2020). Denmark’s Ramboll engineering firm and Norway’s DNV GL certifying agency have also exited (Handelsblatt, January 17, 2021). Finding a Western insurer and another certifier will be extremely difficult for Gazprom. Additionally, major German construction and engineering group Bilfinger SE ceased its relationship with Nord Stream 2 AG and exited the project fearing US sanctions. Bilfinger forfeited contracts worth 15 million euros ($20 million) for security systems development and the supply of a heat-generating unit (TASS, January 19).

Although German Chancellor Angela Merkel claims that the arrest and jailing of Navalny has not yet changed her basic attitude “to the point where I say that the project should not exist,” the escalating retreat of German and other European companies from the Kremlin-backed pipeline may ultimately decide the fate of the project (New Europe, January 21).