By Brett Forrest

WASHINGTON -- Secretary of State Mike Pompeo said a sanctions exemption will be removed for a Russian natural gas pipeline to Germany, paving the way for new penalties to be imposed on the contentious project.

Mr. Pompeo said Wednesday that the State Department will lift a proviso that exempted the pipeline, known as Nord Stream 2, from a 2017 sanctions measure.

The U.S. has been trying to stop the pipeline, which will deliver natural gas to Germany and is nearing completion. While German and Russian officials have characterized the pipeline as a commercial venture, U.S. officials worry that Nord Stream 2 would increase Moscow's economic and political sway across Europe.

Wednesday's measure allows the U.S. to deploy a wider range of punishments against Nord Stream 2 as Washington tries to thwart the project and the company behind it, owned by Russia's gas export monopoly Gazprom, which is racing to finish it.

A previous sanctions measure that went into effect in December halted construction of the pipeline in the Baltic Sea in Danish waters about 93 miles shy of completion. Denmark this month approved a petition that gave Nord Stream 2 AG, the company building the pipeline, a technical workaround to those sanctions, allowing work to restart as early as next month.

The pipeline would allow Gazprom to all but abandon the Ukrainian pipeline system that has handled the bulk of Russian gas deliveries to Europe for decades and diminish Ukraine's geopolitical leverage with Russia. Germany is in the midst of phasing out coal and nuclear energy, prioritizing natural-gas supply for its own use and further sale.

Mr. Pompeo's announcement doesn't immediately result in sanctions. It sets in motion discussion within the administration, which has often debated sanctions for the past three years without reaching consensus.

At issue is the 2017 bill, known as the Countering America's Adversaries Through Sanctions Act, or CAATSA, that imposed sanctions on Iran, North Korea and Russia, targeting, among various activities, Russian energy export pipeline projects.

These sanctions were intended to punish the Kremlin for military intervention in Syria and Ukraine and election interference in the U.S.

At the time, then-Secretary of State Rex Tillerson issued guidance that exempted Russian energy export pipeline projects under way before CAATSA's passage from some of the measure's toughest sanctions.

This "Tillerson amendment," as it came to be called within the administration, effectively grandfathered in Nord Stream 2, which had begun collecting investment and making loan agreements a few months before the bill's passage that August.

Wednesday's announcement potentially makes Nord Stream 2 subject to CAATSA's section 232, which allows the U.S. to sanction individuals who invest $1 million, or $5 million over one year, or contribute technology, services and other support that "directly and significantly" contributes to Russia's ability to construct energy export pipelines.

Sanctions tools include property seizures, visa restrictions and exclusion from a broad range of banking and financial services.

December's sanction measure, passed by Congress and folded into an annual military spending authorization act, targeted companies supplying technical assistance to Nord Stream 2's construction. The measure prompted a Swiss company that supplied the main pipe-laying vessel to abandon the project, stalling construction.

Congress is expected to pass an expansion of December's Nord Stream 2 sanctions bill later this year, targeting companies that provide certification, port facilities, tethering services or insurance to the project.

Write to Brett Forrest at brett.forrest@wsj.com