FRANKFURT/BERLIN, Nov 16 (Reuters) - Germany's energy regulator said on Tuesday it had suspended the certification process for the Nord Stream 2 pipeline to carry Russian gas to Europe and said the Swiss-based consortium needed to form a company under German law to get an operating licence.
Europe's most controversial energy project, which is led by Russian gas giant Gazprom (GAZP.MM), has faced resistance from the United States and Ukraine amongst others.
Surging gas prices in Europe caused by a jump in global demand as the economy recovers from COVID-19, has led some government officials and industry to demand more Russian supplies.
Prior to Tuesday's decision, the German regulator last month asked the pipeline operator, Swiss-based Nord Stream 2 AG, for assurances it would not break competition rules. read more
WHAT'S THE PROBLEM?
Germany's Federal Network Agency - which regulates the country's electricity, gas, telecommunications, post and railway sectors - has until early January to come up with a recommendation on whether it will certify the pipeline that runs from Russia to Germany under the Baltic Sea.
While technical requirements have been met, the sticking point is whether Gazprom will comply with European unbundling rules that require pipeline owners to be different from suppliers of gas flowing in them to ensure fair competition.
The Nord Stream 2 operator says the rules are aimed at torpedoing the pipeline and in October scored a partial victory when an adviser to the European Union's top court recommended that Gazprom could challenge the EU rules. read more
The project's identically-sized sister pipeline, Nord Stream 1, has been exempt from unbundling rules since opening in 2011 because it was treated as an interconnector rather than as direct supplier.
WHAT HAPPENS AFTER THE RECOMMENDATION?
Once a three-member independent ruling committee at the network agency has made its recommendation it goes to the European Commission, which has another two months to respond.
If both bodies are in agreement that the pipeline fulfils all regulatory requirements then certification can be issued relatively quickly, but if they aren't the process could be further delayed.
Certification can be only given if both have worked out any differences that may arise, which means that it could take until spring 2022 before the pipeline gets certified and can officially start operation.
CAN THE AGENCY BLOCK THE PIPELINE?
Effectively, no. Even though certification is a requirement the network agency is limited in how it can prevent Gazprom from simply starting to pump gas right away.
Its toughest tool is a one-time 1 million euro ($1.2 million) fine on the operator if it starts operation without certification.
As a regulator it can also launch an investigation but any legal process is expected to be lengthy and will not result in a short-term prevention of gas flows.
Gazprom said in August it expects Nord Stream 2 to deliver 5.6 billion cubic metres bcm, about a tenth of the pipeline's annual capacity, already in 2021 if supplies start in October.
WHAT'S GOING ON BEHIND THE SCENES?
German Chancellor Angela Merkel has made it clear to Russian President Vladimir Putin that playing by the rules is vital to ensuring ongoing political support for the pipeline, two government sources familiar with the matter have said.
Merkel openly said that the political basis for operating Nord Stream 2 was Russia's commitment to continue to use Ukraine as a gas transit route in the future as well.
"Putin is smart enough to know that the sentiment among German politicians regarding the project will become rather problematic, so he should not provide any reason to endanger operations," one of the sources said.
IS THE NETWORK AGENCY POLITICALLY INDEPENDENT?
No. For its own recommendation the agency needs a binding assessment on supply security by Germany's Economy and Energy Ministry, of which it is a part.
"Certification can only be granted if the Federal Ministry for Economic Affairs and Energy determines that granting certification will not jeopardise the security of gas supply of the Federal Republic of Germany and the European Union," a spokesperson for the agency said.
Last month, the Economy Ministry said allowing Nord Stream 2 to pump Russian gas to Germany would not threaten supplies to the European Union. read more
WILL GERMANY'S ELECTION HAVE AN IMPACT?
Until a new government is in place, Germany's Economy Ministry is led by Peter Altmaier, a member of Merkel's conservative party, which has backed the pipeline.
As a result, the threshold for the next government to reverse the deal is very high, even in the likely event that the Greens - which have fiercely opposed the project - become part of the next ruling coalition, two people familiar with the matter said.
In addition, Olaf Scholz, who led the Social Democrats to victory in September's election and stands a good chance of succeeding Merkel as chancellor, has been in favour of the pipeline.
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