The day after the European Commission proposed an outright ban on Russian gas in the EU, a Swiss court threw a lifeline to Nord Stream 2. The ruling opens the door to a potential revival of the defunct Russia-Germany gas pipeline that was half destroyed in a dramatic subsea explosion in 2022. How should we square the circle of an EU ban on Russian gas with a possible revival of Nord Stream 2? How does the restructuring ruling affect the ownership of this contentious piece of infrastructure? Would any buyer really be interested in owning it? This episode of Energy Flux: On Air unpacks the legal ruling and weighs up the options in light of the EU’s push to outlaw Russian gas entirely, which I covered in last week’s EU LNG Chart Deck. I also discuss the historical purpose of Nord Stream 2, the role it played before and during the 2021-22 energy crisis, and how Gazprom’s actions have galvanised a European political consensus against a resumption of Russian gas dependency. The full transcript is included below. Thanks for listening, — Seb More from Energy Flux: Episode transcript: (00:00:19): Hi there, and welcome back to Energy Flux On Air. (00:00:23): I'm your host, (00:00:24): Seb Kennedy, (00:00:25): founding editor of Energy Flux, (00:00:27): the energy newsletter analyzing European natural gas and global energy markets (00:00:33): through the lens of Europe's energy transition and global geopolitics. (00:00:37): I'm doing something a bit different on this episode. (00:00:41): I'm going to dedicate almost the entire show to a single listener question. (00:00:46): It's such an interesting topic and doing it justice requires quite a lot of explaining, (00:00:52): especially in the current regulatory environment. (00:00:56): So without further ado, the question comes from Mark in Hertfordshire. (00:01:00): He says, Hi Seb, love the show. (00:01:02): Can you give us your take on the Nord Stream 2 insolvency proceedings? (00:01:07): How should we square the circle of the stay of execution granted by the Swiss (00:01:12): Bankruptcy Court with the EU's proposed Russian gas ban? (00:01:17): Well, thanks for the question, Mark. (00:01:19): Nord Stream 2's insolvency saga is like the latest chapter in an endless legal (00:01:26): thriller full of action and suspense with geopolitical twists. (00:01:31): The Russian gas ban proposed by the EU that you referred to adds a fresh layer of (00:01:36): complexity and uncertainty into an already fraught outlook for this piece of (00:01:41): critical infrastructure. (00:01:43): So I'm going to unpack the key elements of the legal situation before then going on (00:01:48): to look at the Russian gas ban itself and how the two fit together to understand (00:01:53): where the pipeline might be headed and what it all means for European energy markets. (00:01:59): But first, just some brief background facts on Nord Stream 2 for unfamiliar listeners. (00:02:07): So, (00:02:07): Nord Stream 2 is a twin undersea pipeline built to carry up to 55 billion cubic (00:02:14): metres of Russian gas per year directly from Russia to Germany under the Baltic Sea. (00:02:20): And it ran alongside an operational project called Nord Stream or Nord Stream 1. (00:02:26): It cost about 11 billion euros to build and was and is fully owned by Gazprom, (00:02:33): but financed by five Western lenders, (00:02:37): energy companies Uniper, (00:02:38): Wintershell, (00:02:39): Deo, (00:02:39): Shell... (00:02:40): OMV and ONGIE. (00:02:42): They financed about half of the construction costs through loans rather than equity, (00:02:46): and they ponied up about 700 billion euros each. (00:02:50): But Gazprom owns 100% of the share capital of Nord Stream 2 AG, (00:02:56): which is the Swiss incorporated holding company for the Nord Stream 2 project. (00:03:02): Nord Stream 2 has been a real political flashpoint. (00:03:05): Construction was completed in 2021, but it was never commissioned. (00:03:10): Germany halted its launch in February 2022 amid Russia's full land invasion of (00:03:15): Ukraine and Western sanctions. (00:03:18): One of its twin pipes was sabotaged in 2022, (00:03:21): of course, (00:03:22): alongside the two operational strings of Nord Stream 1 in that dramatic subsea (00:03:27): detonation that was worthy of a James Bond spy movie. (00:03:31): And the insolvency proceedings, (00:03:34): they relate to effectively the undamaged single string of Nord Stream 2, (00:03:40): because without operations and shrouded in sanctions, (00:03:44): then the holding company, (00:03:47): Nord Stream 2 AG, (00:03:49): was to all intents and purposes bankrupt, but not officially so. (00:03:54): So a court in the Swiss canton of Zug in Switzerland opened the restructuring (00:04:01): rather than liquidation proceedings in early 2023. (00:04:05): and granted successive moratoriums until the 9th of May last week, (00:04:11): when it approved a debt restructuring plan. (00:04:15): And that's a little bit like Chapter 11, the US bankruptcy protection process. (00:04:20): This is a key asset that's been a focal point, (00:04:23): a flashpoint for political arguments across the EU and the rest of Europe for many years. (00:04:30): And the reigning line, (00:04:32): single line, (00:04:32): that can carry up to about 27 billion cubic metres of gas per year is essentially (00:04:38): the principal asset that's being the subject of potentially being auctioned or (00:04:43): refinanced or restructured or sold under the supervision of that Swiss court. (00:04:49): So the court itself approved this debt restructuring deal, (00:04:55): and that essentially spared Nord Stream 2 AG, (00:04:58): the Gazprom-owned holding company, (00:05:00): from official bankruptcy. (00:05:01): Small creditors were paid off in full, (00:05:03): and the claims of those major European lenders like Shell and Winter Shaldea (00:05:09): they were effectively elevated above the claims of Gazprom. (00:05:13): And this is a really interesting point, (00:05:15): because apparently the shareholder voting rights that Gazprom held in Nord Stream 2 AG, (00:05:22): they have, (00:05:22): to all intents and purposes, (00:05:24): been suspended, (00:05:25): which means that if the pipeline is sold, (00:05:29): then Gazprom, (00:05:31): as an equity holder and a debtor to those European lenders, (00:05:35): will only get anything after all the creditor claims are paid off. (00:05:40): And that's really important because, (00:05:42): you know, (00:05:42): if it cost them $11 billion to build and that was for two strings, (00:05:47): then, (00:05:47): you know, (00:05:49): how much can you realistically expect to get for one string in the context that I'm (00:05:53): about to describe where Russian gas is... (00:05:57): facing immense hurdles and is not entirely likely to return to the European markets, (00:06:03): potentially ever, (00:06:04): or at least for many years. (00:06:07): So these Western creditors have about 700 million euros each claim over Nord Stream (00:06:12): 2 AG and the infrastructure that it owns. (00:06:16): And they're very much now in the driving seat. (00:06:19): So this restructuring procedure has really kind of turned the tables over the power (00:06:25): and control over the fate of Nord Stream 2. (00:06:30): Because before Gazprom really called the shots as the sole shareholder, (00:06:34): but now it seems that the Western creditors have a bit more of the upper hand. (00:06:37): That said, they do have an aligned interest. (00:06:40): I think that both sides would like to kind of get something back from this, (00:06:45): you know, (00:06:46): immensely expensive white elephant that's been half blown up on the bed of the (00:06:51): Baltic Sea. (00:06:52): But quite how they go about doing that could soon see their interests diverge. (00:06:56): And that's when the power play could come into effect because we've seen... (00:07:00): interest from a US investor, (00:07:02): this kind of mysterious chap called Stephen Lynch, (00:07:05): who cropped up last year, (00:07:07): said he wants to buy the pipeline for quote-unquote pennies on the dollar, (00:07:10): which would flip control over this critical asset to Western Australia. (00:07:15): into Western hands, (00:07:16): allow Washington to essentially hold a stranglehold over Russian gas flows into Europe, (00:07:24): which is kind of an interesting geopolitical twist on the future energy and (00:07:29): security arrangements for Europe. (00:07:32): i think it's a bit fanciful really because you know like nordstrom 2 it never (00:07:36): received german certification so it wasn't allowed to start up and the eu's gas (00:07:43): directive which is an important regulation that adds a hurdle to operating (00:07:49): nordstrom 2 and so like pipelines that enter the the eu single energy market they (00:07:55): must separate (00:07:57): the legal ownership of the pipeline from the physical gas supply of the gas that (00:08:02): the pipeline is carrying. (00:08:03): So you can't own the pipeline and the gas supply entirely. (00:08:06): And that's actually why the Western energy companies opted for a financing role (00:08:12): rather than taking shareholder stakes. (00:08:14): They all wanted (00:08:15): rights on Nord Stream 2 and to own the molecules flowing through the pipe. (00:08:19): And they couldn't have that if they owned stakes in the Nord Stream 2 AG operating (00:08:25): company as well. (00:08:26): So that's why we're in this situation now. (00:08:31): So what's going to happen? (00:08:33): Well, it's worth recalling at this stage that Gazprom has a lot of legal baggage. (00:08:38): There's about 13 billion euros in unsettled arbitration claims. (00:08:44): from Uniper, (00:08:45): which is one of the creditors, (00:08:46): to Nord Stream 2 AG for non-delivery of gas under their previous long-term contract. (00:08:52): So you can imagine a third-party buyer wa
