$11B Gazprom Pipeline Project Faces Nearly $8B Fine

(Bloomberg) -- Russia’s controversial effort to build a natural gas pipeline to Germany plunged into a deeper freeze with Poland’s decision to impose a $7.6 billion fine on its sponsor.

The move by the consumer protection regulator in Warsaw raises another hurdle holding up the Nord Stream 2 pipeline, which was weeks away from completion when U.S. sanctions stopped work last year. President Donald Trump and his Polish counterpart are concerned the link would deepen Europe’s reliance on Russia for energy supplies.

Poland’s intervention on Wednesday threatens to add years of litigation to the logistical hurdles the project is suffering. While the court move doesn’t have an immediate impact on the work, it cranks up the geopolitical tension and raises the risk it may never get finished.

“This is a purely political move that aims to frighten everyone off from this project,” said Fyodor Lukyanov, head of the Council on Foreign and Defense Policy, which advises the Kremlin. “It’s a signal that even if it does get finished, there will be various unpleasantness not only from the U.S. but its allies too.”

The 9.5 billion-euro ($11.2 billion) Nord Stream 2 link will run 2,460 kilometers under the Baltic Sea to Germany, where it will feed gas from Siberia into the continental European grid. All except 160 kilometers of the link were laid down when Trump imposed sanctions late last year.

The U.S. sanctions effectively halted work on the link on Dec. 20, forcing the Swiss company AllSeas Group Ltd. to withdraw the main vessel laying sections of pipe on the seabed. Other contractors and ports also stopped offering services to Gazprom to avoid being caught up in the dispute. Only a few ships in the world can do the job, and it’s unclear whether Gazprom has one in its fleet with the capabilities. The company hasn’t detailed any progress this year.

Poland’s move doesn’t affect the physical ability of Gazprom to lay pipe, but it does upend the political atmosphere permitting the project to continue.

Even though the pipeline is outside Polish territorial waters, the government in Warsaw has leverage over Gazprom through its stake in separate links, notably one carrying gas from giant fields in Siberia. Poland is the only transit country for Yamal gas, feeding about 30 billion cubic meters a year into Germany. EU rules in theory allow Polish authorities to ask other nations in the region to help them extract fines on their behalf.

Gazprom plans to appeal along with some of its financial backers -- Engie SA, Royal Dutch Shell Plc, Germany’s Uniper SE, Wintershall AG and Austria’s OMV AG. That hits pause on any fines needing to be paid but potentially wrapping the project in years of litigation. For now it’s a matter for the Polish courts -- that’s where the appeal will happen -- but there may be a chance it could eventually end up in European Union’s top court.

EU Competition Commissioner Margrethe Vestager reacted with surprise to Poland’s decision, telling reporters in Brussels the scale of the fine was rare. EU rules in theory allow Polish authorities to ask other nations in the region to help them extract fines on their behalf.

“It is inconceivable for the CJEU to reject the appeal and to uphold the Polish decision which has no legal legs to stand on,” said Katja Yafimava, senior research fellow at the Oxford Institute for Energy Studies.

The move is bound to put another wedge between the EU and Poland, which is already in an unprecedented standoff with the bloc. Poland’s judiciary overhaul has triggered censure from the EU and probes into whether the country of 38 million is adhering to the bloc’s democratic standards.

Political opposition to Nord Stream 2 deepened after the poisoning of Russian opposition leader Alexey Navalny. German Chancellor Angela Merkel is under pressure from members of her own party to scrap the pipeline. To date, she has allowed it as a commercial enterprise. Trump has threatened to expand sanctions if the link goes ahead, making it a major source of friction in Europe’s relations with the U.S.

Officials in Berlin sidestepped the issue on Wednesday. They’ve been keen to avoid attracting Trump’s anger during a vitriolic election campaign in the U.S. Merkel has shown no rush to respond to the latest political escalation and it’s unlikely a decision would be made just before a U.S. election.