European Commission “attacks” Nord Streams: no bans, but more complications

European Commission has put the things right concerning both Nord Stream-2 and even the existing Baltic gas pipeline running from Russia to Germany. The Commission proposed amending the Gas Directive (Directive 2009/73/EC), which may affect both the projects. Brussels suggests applying The Third Energy Package to all the gas pipelines entering EU gas market from third countries.

“The Commission wants to ensure that all major pipelines in the EU and entering the EU territory are operated under the same degree of transparency, are accessible to other operators and are operated efficiently. The Third Energy package aims at maximizing competition between gas companies, avoiding conflict of interests between infrastructure operators and shippers and finally, to provide security of supply,” European Commission says in a press release. The amendments will come into effect after European Parliament and the Council.

In a Q/A press release on the Commission’s proposal to amend the Gas Directive, the Commission insists that the amendments are not directed against Nord Stream-2, as the existing gas pipelines that enter the Union from Norway, Algeria, Libya, Tunisia, Morocco will also be impacted by this proposal. “The proposal may also have an impact – post-Brexit – on pipelines connecting the UK with EU Member States,” the Commission says. “Gas imports to the EU are expected to remain stable by 2030, due to declining domestic production and consumption. With the existing well-developed import infrastructures and the expected competitiveness of LNG supplies after 2020, the Commission sees no need for new infrastructure of the magnitude of Nord Stream 2. In addition, the EU will continue supporting Russian gas imports transiting through Ukraine.”

Southern Gas Corridor running from Azerbaijan is an alternative to the Russian gas supplies and the Commission admits that the project meets the scales of Nord Stream-2. “Other than Nord Stream 2, only the Trans-Adriatic pipeline (TAP) project is similarly advanced. However, TAP already has an exemption pursuant to Article 36 Gas Directive, and would, hence, not be affected by this legal change,” the Commission says in the press release.

Nord Stream-2 like Nord Stream-1 will run through maritime economic zones of EU countries in the Baltic Sea. Therefore, it will not be crossing into the EU jurisdiction across a sea border and will need just environmental agreements with the countries in the Baltic Sea. If the Commission-proposed amendments to the Gas Directive (Directive 2009/73/EC) are approved, Nord Stream-2 will have to meet The Third Energy Package requirements. For instance, a gas supplier cannot be the gas pipeline operator. This will pose serious threats to the Nord Stream-2 project. Gazprom is the sole owner of Nord Stream 2 AG that is implementing the project. Besides, if signed into the law, EC’s proposed amendments may affect the operating Nord Stream too. Germany shall decide the issue. Until recently, that country used to support Baltic pipeline projects.

“For existing pipelines which cross multiple Member States (such as Nord Stream 1), it will be the Member State where the first interconnection point is located that shall decide on a derogation. This will ensure a coherent regulatory framework for each pipeline,” the EC’s press release says.

Germany and Austria support Nord Stream 2 unlike the U.S.-backed Poland and Baltic States that oppose the project. The EC has requested a mandate to launch negotiations with Russia on the Baltic pipeline, but has not received any yet. This prompted the proposals to amend the European gas legislation.

According to Russian Foreign Minister Sergey Lavrov, by introducing new legal standards for this project only, EU will discriminate against investors for political reasons.

“Brussels has taken an anti-European and anti-legal stance,” says Alexei Grivach, deputy director of the National Energy Security Fund (FNEB). “So far it is hard to say what effect it will have. If the countries that realize the importance of the economic and energy cooperation with Russia and the principles of a legal state manage to kill that discriminative initiative, the effect will not be negative. If they fail to or do not want to do it, it will mean another failure for Europe as a competitive and sovereign actor in the global system.”

Last year, Russia satisfied Europe’s need in gas by one-third. This, Russian gas export has increased by another 9%. Nord Stream 2 pipeline’s capacity is 55 billion cubic meters, which will enable reducing gas transit via Ukraine almost by two-third.

“I think Nord Stream 2 will be built irrespective of whether European Commission will receive the mandate…and amend the Gas Directive. However, the mandate and amendments to the Directive may influence the exploitation process,” Dr. Katja Yafimava, a senior research fellow on the Oxford Institute for Energy Studies Natural Gas Research Program, told RIA Novosti.

Igor Yushkov, a senior analyst at the National Energy Security Fund, shares her views saying: “Possible amendments to the Gas Directive cannot stop construction of Nord Stream 2. If they come into force, it will happen after commencement of the construction. Submitting requests to the countries via maritime economic zones which the pipeline will run through is deemed as a start of construction,” the expert says. “A different matter on what conditions it can operate.”

Gazprom can agree with an independent operator from a partner company and transfer management of the gas pipeline to it. However, there is another problem: Nord Stream 2 shall be underloaded by 50% for independent operators to be able to use it. And there will not be any. This is a direct hint at Gazprom’s partners that the cost value will increase and Nord Stream 2 will not be profitable. This is an attempt to press investors to make them refuse from Nord Stream 2,” Yushkov says. The expert assumes that by proposing amendments to the Gas Directive the European Commission blackmails not only Russia but also the Council of EU that has not authorized EC to hold talks with Russia.

European Commission does not conceal this either. In its Q/A press release, the European Commission says “…this modification of the Gas Directive will create legal clarity for all third-country projects, by filling a legal gap.” However, these amendments are still pending approval. “Nevertheless, the Commission remains available to engage in negotiations on the operating conditions of Nord Stream 2. The Commission will therefore not withdraw its proposal for a negotiation mandate and awaits the Council's decision on its earlier recommendation to authorize negotiations with Russia,” the Commission says.

According to Yushkov, in such situation, Gazprom has several options: to sit at a negotiating table with EC or wait for the Council’s decision and changes in the European policy by 2019, when the gas pipeline is built. The expert believes that EC is so far trying to use EU laws as an instrument of political pressure. “Well, The Third Energy Package helps boosting competition, but applicable to the Russian pipelines, it is used in the wrong way, since inside Russia, only Gazprom is authorized to export gas through pipelines,” Yushkov says.