Russian Gas Link Extension May Face EU Law Compliance Risk

  • EU analyzes application of energy law to Nord Stream 2 project
  • Lawyers say project wouldn't meet EU rules without changes

Russia’s plan to expand a natural-gas pipeline to the European Union may face hurdles as EU lawyers signaled the undersea project in its current form would not comply with a set of laws on energy-market liberalization.

The EU law applies not only to the onshore part of the Nord Stream 2 venture but also to the offshore section that falls under the territorial jurisdiction of Finland, Sweden, Denmark and Germany, according to a legal opinion by the European Commission’s Directorate General for Energy. That view contradicts the position of Russian export monopoly Gazprom PJSC, which has said it would only need approvals from the governments of those member states to lay the pipe, which is to run under the Baltic Sea.

The project, which Gazprom is pursuing with western European companies ranging from Germany’s EON AG to Paris-based Engie, includes an onshore section in Germany. At the heart of the relevant EU law, the so-called third energy package, is a provision preventing a gas provider from controlling the transmission business, known as ownership unbundling.

“It could be concluded that, assuming EU energy law applies to the part of Nord Stream 2 under EU territorial jurisdiction, the applicable requirements on ownership unbundling, tariff regulation and third-party access would not be met without changes to the project,” the energy directorate’s lawyers said in the opinion, which was obtained by Bloomberg.

EU Rules

The requirement for Nord Stream 2 to comply with the EU rules on the offshore part of the pipeline would be another blow to Gazprom, which the commission accused last year of market-power abuse. In 2014, a conflict over the third energy package led to the scrapping by Russia of the South Stream project that would have piped gas under the Black Sea to Europe. Russian President Vladimir Putin declared the pipeline canceled following calls by the EU regulatory arm on national governments not to continue the project until it is compatible with rules on public procurement and unbundling.

If it is assumed that the Nord Stream 2 consortium located in Switzerland is designated as the owner and operator of the pipeline, such a set-up would be incompatible with EU rules, according to the EU internal document.

“As both Gazprom and the EU shareholders control companies active in the production/supply they could have only purely passive minority rights in the transmission system operator,” according to the Directorate General for Energy. Its opinion is not binding but it can influence the commission’s policy line.

While the EU could adopt a flexible approach to allow for a project-specific regulatory framework for Nord Stream 2, a step that would reduce the degree of changes necessary to the infrastructure, such options are not easy to apply and largely untested in case law, according to the document.

“Whether existing flexibilities should be interpreted in a broad manner and/or deviations from the full application of EU energy rules to the project should be sought, or whether the EU should insist on full respect of EU energy law, is thus rather a political and not a legal matter,” according to the EU document. “It should also be noted that whatever approach for regulating Nord Stream 2 is formulated, it would need to be applied also as regards other similar import pipelines with third countries, to the very least for offshore sections.”

New Pipeline

Gazprom, EON, Engie, Royal Dutch Shell Plc, OMV AG and BASF SE signed an agreement in September to expand Nord Stream by 55 billion cubic meters a year, which would double its capacity to almost 30 percent of current EU demand. The new pipeline would circumvent Ukraine, which is struggling to avoid a default amid a conflict with Moscow-backed separatists in the country’s east, and would deprive it of transit fees.

While Nord Stream 2 argues a new pipeline is needed to ensure safe supplies in the coming decades amid the projected rise in gas demand, opponents of the project say it hurts EU cohesion and weakens the bloc’s Energy Union strategy aimed at integrating the region’s gas and power markets and improving security.

EU Climate and Energy Commissioner Miguel Arias Canete said on Wednesday that the bloc’s regulatory arm was assessing the application of the third package to the offshore part of Nord Stream 2.

“It’s not a commercial project only; it has huge political implications,” Arias Canete said.

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