The Danish energy regulator has upended Nord Stream 2’s plan to complete the undersea pipeline running from Russia to Germany by the end of this year.

The Danish Energy Agency on Wednesday requested that the company look into a completely new route to pass its pipeline through the country’s waters. Denmark is the last country that needs to approve a construction permit for Nord Stream 2 — a 1,200-kilometer pipeline already under construction.

As well as undermining Gazprom’s hopes to start shipping gas by the end of the year, it also complicates ongoing negotiations between Russia, Ukraine and the European Commission on the future of gas transit across Ukraine.

Fighting the Danish decision “may take years,” the CEO of Nord Stream 2, Matthias Warnig, told the company’s partners in a letter obtained by Polish publication Biznesalert. Nord Stream 2 would not comment on the report about Warnig’s letter.

The project is backed by five West European companies — Austria’s OMV, Anglo-Dutch company Shell, France’s Engie and Germany’s Uniper and Wintershall.

The pipeline, meant to carry 55 billion cubic meters of gas a year, already has two applications pending with the Danish Energy Agency.

The original application was for a route crossing Denmark’s territorial waters — which run 12 nautical miles off the coast — but that option is complicated by a new Danish law that allows the foreign minister to veto such projects on national security grounds.

A second option shifts the route north of the Danish island of Bornholm. It can’t be killed by the foreign minister as it crosses through Denmark’s offshore exclusive economic zone — a zone up to 200 nautical miles from the coast. Nord Stream 2 applied for a permit for that route in August and just a few days ago remained optimistic it would get approval.

Instead, the Danish agency asked Nord Stream 2 to carry out an environmental impact assessment for a third route south of Bornholm. Denmark and Poland recently agreed on how to manage the so-called banana area between their borders, which for the first time allowed for pipelines to be laid in that zone.

“We think a route going more south would be more optimal,” said Ture Falbe-Hansen, spokesman for the Danish Energy Agency, adding that environmental and safety issues were the main considerations for its request.

The new process would kick off a whole new set of consultations with neighboring countries and interested parties, likely delaying the project. The Danish Energy Agency did not estimate how long its assessment would take.

In his letter, Warnig said the company had warned the Danish Energy Agency before it made its request that “an additional [environmental impact assessment including] public participation and a respective significant delay is unfounded for several legal reasons and the Northern Route application is to be permitted.”

The agency’s decision “is, unfortunately, against our opinion,” he added.

Appealing options

Warnig said the deadline for Nord Stream 2 to appeal the Danish decision was April 23. “This proceeding already will take several months and can be appealed again (two possible court proceedings). All in all it may take years. During such proceedings the DEA could put a parallel southern route permit application on hold.”

Sebastian Sass, EU representative for Nord Stream 2, said the company “will now carefully evaluate” the agency’s request and “then decide what steps should be taken,” adding that the agency “has not rejected either of the two pending permit applications by Nord Stream 2.”

But it’s clear that the decision is a problem for the pipeline.

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Marco Giuli, policy analyst at the European Policy Center, a think tank, said “it is no surprise that mounting regulatory hurdles may cause delay to the construction and operation of Nord Stream 2.”

The permitting drama may also affect negotiations on a future Ukrainian gas transit contract. The current one expires at the end of this year and the Russians have been leery of committing to continue to send large volumes of gas to the EU across Ukraine.

But a big delay in the completion of the undersea pipeline could force Moscow to continue relying on Ukrainian transit.

“A delay of Nord Stream 2 will change the dynamics in the negotiations of a new gas transit contract through Ukraine,” said Georg Zachmann, senior fellow at Bruegel, a Brussels think tank. “Gazprom hoped to be able to get very good conditions for this new contract, as Nord Stream 2 would have allowed Gazprom to be largely independent of Ukraine’s gas transit system. A delay might force Gazprom to enter into a more long-term and higher volume agreement than envisaged.”

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