Nord Stream 2 financier Uniper 'profoundly unsettled' over Russia-Ukraine crisis

Executives at Uniper SE, the German independent power generator and gas trading giant, remain hopeful that the Nord Stream 2 gas pipeline from Russia will be certified and brought into service, but they accept that geopolitical risks are immense.

"The situation at the Russian-Ukrainian border leaves us at Uniper profoundly unsettled," CEO Klaus-Dieter Maubach said on a Feb. 23 call with analysts.

Uniper is a financing partner of the pipeline. German Chancellor Olaf Scholz halted the certification process for Nord Stream 2 after Russian President Vladimir Putin publicly recognized eastern Ukraine's Luhansk and Donetsk regions as breakaway states, then ordered Russian forces to provide "peacekeeping" functions in the separatist regions.

The German government's decision, while stopping short of being permanent, prohibits Nord Stream 2 from starting operations and raises the risk of impairments for Uniper. The pipeline is already completed and has been filled with gas for months.

Maubach said he remains optimistic that Nord Stream 2 will go onstream following a diplomatic resolution to the crisis, but he added that it is unclear if and how the certification process can be restarted.

"I have to admit that we are still trying to figure out what this would mean," the CEO said. Uniper, majority owned by Finland's Fortum Oyj, is one of several financial backers of the pipeline alongside Engie SA, OMV AG and Shell PLC, but it is not an equity investor.

"Of course we accept the decision," Maubach told journalists on a separate call. "It was not surprising for us that there was a swift reaction and that it was targeted to Nord Stream."

Maubach said Uniper would not pursue legal action against the German government or the European Union if the project is permanently dismissed.

"I would believe that if anyone would consider legal action against the German government or the [European] Commission, it would be [the PJSC Gazprom-owned project company] Nord Stream 2 AG. I have no reason to believe they are considering such kind of action," Maubach said.

Escalating tensions between Russia and Ukraine have weighed on Uniper's share price, which has declined nearly 10% in the past month. The company cut its dividend to the lowest permitted level in anticipation of a further liquidity squeeze due to a volatile commodity environment.

Germany is heavily reliant on gas from Russia, and Uniper draws the majority of its gas portfolio from Russian contracts with state-owned Gazprom. Uniper continues to receive its contractually agreed gas volumes from Gazprom, Maubach said. Uniper also operates a fleet of gas- and coal-fired power stations in Russia through its Russian subsidiary, PJSC Unipro.

No large-scale alternative to Russian gas

The German energy ministry is redrawing its assessment of security of supply, taking into account Russian action in Ukraine in the past few days, Scholz said Feb. 22. Other factors will play a part in the verdict over whether Nord Stream 2 will be canceled entirely, the chancellor said, urging Russia to stop its aggression.

German Chancellor Olaf Scholz, pictured Feb. 22 as he announced Nord Stream 2's certification process would be halted. Source: Pool/Getty Images Europe via Getty Images

Germany is also in the process of phasing out its coal-fired power generation by 2030, and its final nuclear reactors will be taken off the grid at the end of this year. Dmitry Medvedev, chair of Russia's Security Council, taunted Scholz following the decision to stop Nord Stream 2's certification, saying on Twitter, "Welcome to the brave new world where Europeans are very soon going to pay [€2,000] for [1,000] cubic meters of natural gas!"

According to Maubach, drawing a clear picture on security of supply without Nord Stream 2 could be difficult.

"The gas supply situation would then strongly depend on pipelines through Poland, Ukraine ... and the willingness of Russian gas suppliers to use that transport capacity into the European market," he told journalists. "In terms of capacity, those lines are sufficient, but it is of course not only a technical question."

It would be a risky move if Europe were to cut itself off from Russian gas, according to Katja Yafimava, senior research fellow on the Oxford Institute for Energy Studies Gas Research Program. Europe does not have any large-scale gas supply alternatives, Yafimava said on a Feb. 14 webinar.

Modeling by the Oxford Institute for Energy Studies shows that, depending on the extent of potential supply curbs, Europe's 2022/2023 winter could be anything between "disastrous," meaning industry and power plants are shut down, or a repeat of the expensive winter countries are already experiencing.

An invasion of Ukraine could affect flows in other ways. Russia could be cut off from the SWIFT international payment system, an option floated for retaliation. In that case, "European buyers simply would not be able to pay for their gas under their long-term supply contracts," Yafimava said.