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Article | WTW Research Network Newsletter

A cautionary tale of Nord Stream 1 and Nord Stream 2

By Elisabeth Braw | April 27, 2023

With infrastructure now clearly a target in geopolitical tensions, infrastructure owners, operators, and underwriters will have to negotiate even more painstakingly than before.
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When news arrived from the governments of Denmark and Sweden last September that Nord Stream 1 and Nord Stream 2 had sprung leaks in Denmark and Sweden’s exclusive economic zones, both governments expressed their desire to examine the site as quickly as possible. After the head of the International Energy Agency, Fatih Birol, said it was “very obvious” who was behind the suspected sabotage, speculation ran wild as to who Birol was referring to and what motives the culprits may have had to cripple the crucial pipelines. But so far, both Denmark and Sweden have been circumspect in their investigations, failing to reach a verifiable conclusion. That puts Nord Stream’s owners and insurers in a bind – and portends looming dilemmas for all manner of infrastructure that may be harmed in geopolitically motivated acts.

In early October, as soon as the leaks from Nord Stream 1 and 2 had subsided to the point that it was safe to approach them, Danish and Swedish investigators began examining the leak sites. Both countries’ authorities soon concluded that the pipelines had been subjected to “severe sabotage”, but they didn’t say by whom. Then Russia conducted its own investigation, claiming that the pipelines had been blown up by Britain’s Royal Navy. By February 2023, Sweden, Germany, and Denmark’s blast inquiries were still ongoing and it remains unclear when they will conclude. “There is no evidence at this point that Russia was behind the sabotage,” a European official with insights into the investigation told the Washington Post, and other officials echoed this view. The only aspect of which officials seem certain is that the sabotage was so sophisticated that it was carried out by a nation-state rather than a terrorist group.

While governments and open source intelligence practitioners continue with their own investigations and speculations into the events of September 26, insurers, reinsurers, corporations, and lawyers must grapple with how to respond to hundreds of millions of dollars in potential claims. Nord Stream 1 is owned by Switzerland-based Nord Stream AG, in which Russia’s gas giant Gazprom has a 51 percent stake. The remaining shares are held by Germany’s E.ON and Wintershall Dea at 15.5 percent each, while France’s Engie and the Dutch firm Gasunie each hold stakes of nine percent. Nord Stream 2 AG, which owns the Nord Stream 2 pipeline, also based in Switzerland but is fully owned by Gazprom.

Who has underwritten the two pipelines, and what is in the insurance policies? Nobody except the concerned parties seems to know, though in October the Reuters news agency reported that Nord Stream 1’s underwriters include Munich Re and syndicates within the Lloyd’s of London market. The Kremlin, meanwhile, has suggested that the pipelines may be repaired, though this would be a lengthy and costly process. Nord Stream’s Western owners and underwriters face an unenviable dilemma. As long as there’s no clarity about who perpetrated the sabotage, they can’t settle any claims. Industry sources unsurprisingly highlighted that the underwriters could deny claims for property insurance policies on the grounds that the sabotage was an act of war. Insureds, in turn, would be likely to challenge that definition of war.

The reality is, of course, that companies can choose to be covered for war, and that is more expensive than the standard property insurance virtually every company buys. Until very recently, though, companies operating in seemingly safe parts of the world – such as the Baltic Sea -- didn’t worry a great deal about war insurance, political-risk insurance (which can include war options) and terrorism insurance (which can also include such options). So far, it is not known what kind of insurance policies Nord Stream 1’s Western European minority owners and Nord Stream 2’s Western European investors – which are mostly the same companies – bought. Nor it is known what kind of insurance Nord Stream AG itself has. While the company is majority-owned by Gazprom, it is based in Switzerland.

The demise of Nord Stream 1 and Nord Stream 2 is, in fact, a cautionary tale for all companies owning or operating critical infrastructure. With infrastructure being targeted as a potential leverage point in geopolitical rivalries, infrastructure owners, operators, and underwriters will have to negotiate even more painstakingly than before to ensure that every possible scenario is covered. Is grave sabotage against pipelines by a hostile country that may never be identified an act of war or merely an extremely severe business risk? There’s insurance for both war and business risks; insurers and insureds just have to make sure there are no gaps in the coverage. That would also minimize the risk of disputes when geopolitically motivated incidents occur.

As I have been highlighting in recent years, warfare is changing: military aggression is no longer the only – or even the primary – way in which countries assert themselves against rivals, and winning territory is usually not their objective. Instead they use a combination of subversive business practices, cyber aggression, gradual border changes, hostage diplomacy, and other practices below the threshold of war. But the law hasn’t kept up with the evolution of nation-state aggression. As a result, at least two disputes between companies harmed by the 2017 NotPetya cyber attack and their insurers have ended up in American courts, which have found themselves having to define war.

If Nord Stream AG, Nord Stream 2 AG, or both begin to repair the pipelines, it would throw a further spanner into the works. Indeed, aggression below the threshold of state-orchestrated actions is so cheap to perpetrate, and carries so little risk of retaliation, that countries may further expand their use of it. And the private sector will remain a key target.


Senior Fellow at American Enterprise Institute and a consultant with WTW Research Network
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