Europe’s Nord Stream: Will an Extended Shutdown Usher in a Long, Cold Winter?

The Nord Stream, a key natural gas pipeline into Germany, shut down for 10 days of scheduled maintenance on July 11. Normally, this would pass without notice. But this year, amid major unforeseen disruptions within global energy markets, this raises concerns of a long, cold winter for Germany and other European countries.

It’s hard to overstate the importance of the Nord Stream, a pair of pipelines that run from Vyborg in northwest Russia to Lubmin, Germany. Natural gas makes up 26% of Germany’s total energy needs and 25% of Europe’s. Last year, Europe’s pipeline imports were 232.8 billion cubic meters (bcm). The Nord Stream transported 59.2 bcm in 2021, suggesting that it provided a quarter of Europe’s imports last year.

Germany and Europe have focused on cutting dependence on Russian energy in the near term, and countries around the world have imposed economic sanctions against Russia. This tension raises the real possibility that Nord Stream’s routine summer shutdown could extend far longer than planned and may even signal the start of a permanent closure.

Germany, Italy, Austria, France and Poland have the largest exposure to Russian gas contracts. Those countries want to reduce liquid natural gas (LNG) demand from the industrial sector. If the pipeline doesn’t return to service on time, it may affect Europe’s ability to get through winter without price hikes, reduced industrial activity, and energy access issues affecting lower-income populations.

While it’s difficult to predict the outcome, Germany and Europe face four potential scenarios:

1.      The pipeline reopens promptly on July 21 and returns to service as scheduled.

2.      Maintenance extends by days or a few weeks beyond schedule.

3.      Maintenance extends beyond schedule into the early days of the heating season. In Frankfurt, Germany, heating degree days (below 65°F/18°C) generally reach double digits in late September.

4.      The pipeline does not return to service.

Energy markets reflect this uncertainty. German gas hub prices have risen to ~170€/MWh. Europe’s industrial natural gas demand is down 15-20% on higher prices. Over time, higher prices will force industries to become more efficient, switch to other energy sources, and/or shut down. Longer term, Europe may risk deindustrialization as companies move facilities to lower-cost regions.

Germany, which already cut its 2022 economic growth forecast earlier this year, faces unique risks. On average, German households spend about 9% of monthly income on energy. Higher prices could sharply inflate that amount, potentially reaching the levels of Greece (20%) and Bulgaria (25%). Germany also relies on several energy-intensive sectors such as chemicals, pharmaceuticals, steel, and industrial goods. Without sufficient gas, Germany may experience further industrial reductions.

While Germany and other European countries continue to pursue renewable energy sources and additional LNG imports, those options will take time.

BCG will continue to monitor the situation and provide timely updates and insights.