Nord Stream 2: Who is paralyzing The Comission?

“Russian propaganda, regrettably followed by Western media, keeps reiterating that the fate of Nord Stream 2 has been sealed by the approval of Jean-Claude Juncker, President of the European Commission, and the opinion of the Commission’s lawyers, who claim that the controversial project need not be subject to the EU law. This is not true. The Commission is concealing documents on this issue” writes Wojciech Jakóbik, energy analyst from Poland.

The Nord Stream 2 project involves construction of another gas pipeline from Russia to Germany, under the Baltic, which will pose a threat to security of supply, internal energy market development and diversification in Central and Eastern Europe. This is why it is criticised by Poland, the Visegrád Group, Baltic states, Romania, and Croatia. Also, a clear legal assessment has been demanded by Denmark and Sweden, which in 2017 may have to make the decision on granting consent for the gas pipeline to run through their territorial waters.

The future of the project depends on whether Nord Stream 2 would be governed by the EU legislation.  If Gazprom needs to bring it into compliance with the EU law, its completion scheduled for 2019 may at least be delayed. For critics, Poland included, this would mean time for putting forward an alternative solution, such as the Norwegian Corridor. In this scenario, however, the political and economic cost of Nord Stream 2 might exceed the willingness of Moscow and Berlin to push forward with the venture.

Unofficial information has been spread in the media by, concerning Jean-Claude Juncker’s alleged support for the controversial gas pipeline. The éminence grise behind this described on the website is Martin Selmayr, the unofficial Berlin spokesperson in the EU Commission.
It is uncertain whether he exerted influence on Juncker and, if so, whether it was in the fulfilment of the declaration made by Sigmar Gabriel, German Vice-Chancellor, during his visit to Vladimir Putin, Russian President, in October 2015. On that occasion, the Vice-Chancellor assured Putin that he “would not allow the European Commission to interfere” with Nord Stream 2.

The Commission did interfere, but in fact it is struggling with an internal conflict between its fractions which represent diverging views on the project. It is carefully kept secret by Juncker. On Twitter, the leading role is played by the spokesperson of the Nord Stream 2 consortium, who is creating a reality trying to convince Polish commentators that the legal dispute over the project has already been resolved and all attempts to establish the truth aim at “politicising” it.  This is not the case. It is the policy of the project advocates, who might have gained influence on the Commission, that prevents transparency of debate on the issue.  Brussels has the goods on Nord Stream 2 but is not willing to reveal the facts. In this way, it defaults on its obligations as an institutional guardian of treaties and its inactivity is used by the constructors of Nord Stream 2 to pursue a policy of fait accomplis. Is it Germany that acts as the power behind?

Nord Stream 2 has to be governed by law …

On February 24th 2017, Dominique Ristori, Director General of the Directorate General for Energy (DG Energy) within the European Commission, sent a letter to the German energy market regulator, Bundesnetzagentur (BnetzA), in which he stated that the law of the European Union “clearly applies to any on-shore infrastructure”, and the Gas Directive, Security of Gas Supply (SoS) Regulation and the related Network Codes are applicable as well. The DG Energy’s lawyers and experts are involved in the development of EU regulations and draft documents in the area of energy.

Mr Ristori also emphasised that off-shore sections of new infrastructure “cannot” be, by way of an exception, built and operated under a third country’s law (the law of Russia in the case of Nord Stream 2) or in the “legal vacuum”. Director General Ristori recommends that a “specific legal regime” should be created for the subsea section of the Nord Stream 2 gas pipeline to remedy the problem.

In this context he expects that the transparency of the pipeline’s operation should be ensured, tariffs should be set in a non-discriminatory way (by an independent operator, definitely not Gazprom), appropriate third party access should be provided (Gazprom must not monopolise the transmission capacity), and the required unbundlingof ownership should be guaranteed (Gazprom must not be both a supplier and the operator). Dominique Ristori called on BnetzA toput in place appropriate regulatory framework for Nord Stream 2 in line with the guidelines described above.

Mr Ristori based his position on DG Energy lawyers’ opinion dated January 15th 2016, which was already discussed in Nevertheless, the opinion remains undisclosed by the Commission. It follows from the opinion that “the general guarantees under the Third Energy Package would apply to that section of Nord Stream 2 which is subject to the EU territorial jurisdiction”. The document enumerates the issues referred to above: third party access, independent tariff regulation, and ownership unbundling.

Importantly, DG Energy assessed potential conformity of Nord Stream 2 with the EU law based on information which is currently available, and which the Commission believed to be insufficient, as stated by Maroš Šefčovič, Vice-President of the European Commission. In the opinion of DG Energy lawyers, the currently suggested structure of Nord Stream 2 would not guarantee third party access to the transmission capacity and gives Gazprom monopolistic position in exports over the pipeline, with the prospective tariff regime unknown as well. What is known is that the Nord Stream 2 consortium could be the operator of the pipeline only if Gazprom and its European partners, if any, reduce their equity interest from the current 100 percent (held by Russians) to an “entirely passive” minority interest, which would guarantee independence, though still might be objected to by the Polish Office of Competition and Consumer Protection.

…but Russia would have to create the law

To change this situation, Russia would have to amend its legislation to remove its inconsistencies with the EU regulations. DG Energy stresses that this is not a legal problem; however, from the political perspective, the demand that Russia should amend its law in order to respect the EU regulations “adds sensitivity to the issue”. Thus DG Energy admits that Russia may not be willing to subject itself to the EU legislation. “An international agreement between the EU and Russia would be the best solution” to establish the legal regime for Nord Stream 2.

However, the Directorate states that such agreement can be perceived as politically impossible. Therefore, a compromise is also suggested in the form of a treaty between Russia and the countries whose territorial waters would be crossed by the pipeline (Germany, Denmark, Sweden and Finland). It is emphasised that any compromise excluding the full application of the EU law would be legally disputable.

Importantly, DG Energy refutes Nord Stream 2 supporters’ argument that the project is just an extension of Nord Stream 1 and if the first gas pipeline connecting Russia with Germany is not subject to the Third Package, than its subsequent legs do not have to, either. In the case of Nord Stream 1 westward extension, the vertical integration model was used, under which an entity related to suppliers was able to remain the operator, with the competencies separated through a system solution rather than ownership unbundling. However, DG Energy points out that this solution was subsequently criticised by the European Commission, and BnetzA’s suggestion that a similar structure should be used for Nord Stream 2 is yet to be responded to by Brussels.

Germany: It is not possible to make Nord Stream 2 subject to the regulations

BNetzA responded to Dominique Ristori’s letter on March 3rd this year. It expressed an opinion that Nord Stream 2 would be governed by “German regulations of general application” and that it is not necessary to create a separate legal regime for the pipeline. Furthermore, the Germans stated they believed that Nord Stream 2 should not be subject to the Third Energy Package in whole because its onshore section is only a small, a few kilometres-long part of the project. In BNetzA’s opinion “offshore gas import pipelines are not subject to the Third Energy Package.” The authority cited Nord Stream 1, Green Stream and MEDGAZ as precedents, in the case of which the Third Energy Package regulations were not applied and referred to a relevant opinion given by lawyers from the European Commission’s Legal Service.

In practice, the Germans passed the buck to Brussels. According to BNetzA, the operator is not competent to develop the “quasi-regulation” and it is the responsibility of the European legislation. At the same time, BNetzA emphasised that it hoped to have legal clarity regarding Nord Stream 2 as soon as possible.

The conflict of laws could be remedied by an EU-Russia arrangement

Germans of BNetzA made reference to an internal opinion by the European Commission’s Legal Service of December 2015 which for unknown reasons has not been revealed to the public by the office of the President of the European Commission. It remains unclear whether that was the effect of an action taken by Mr Juncker or Mr Selmayr, but there are concerns that attempts might have been made to hush up the dispute concerning Nord Stream 2 in order to push the project ahead by means of a policy of accomplished facts.

Employees of the Commission’s Legal Service are of a different opinion than those from DG Energy. From their point of view, Nord Stream 2 should be classified as a “transmission line”. Since its purpose is to connect the Russian and the German gas transmission systems, the lawyers say that the pipeline is an “interconnector” as defined in Article 2 item (17) of the Gas Directive. They note that according to DG Energy, Article 36 provides the basis for exempting new infrastructure from the regulations of the Third Energy Package (subject to a number of conditions), if the infrastructure comprises interconnectors.

However, in their opinion, failure to exempt Nord Stream 2 from the requirements of the EU law leaves it in a worse position compared with the gas pipelines connecting gas systems inside the European Union, and “there is no objective rationale” why this should be so. For this reason, advocates of Nord Stream 2 claim that any attempts to apply restrictions following from the EU law to the pipeline are designed to turn the dispute into a political issue.

Employees of the Commission emphasise that the Gas Directive contains no provisions which would impose an obligation on a national regulator (in the case at hand – BNetzA) to apply any specific legal regime to interconnectors. In accordance with Article 11 such regime should be introduced in a third country over which the “German authorities” have no jurisdiction. Authors of the opinion concede that in view of the fact that the Gas Directive does not include the requirement to implement the Third Energy Package with respect to gas pipelines connecting member states with third countries, the EU law does not provide any mechanism to achieve this goal in the analysed case. For this reason it will be difficult to impose the EU legal regime with respect to Nord Stream 2. In their opinion, we are dealing with a “conflict of laws”, which should be resolved by means of “international negotiations”. The document was signed by Luis Romero Requena, Director General of the European Commission’s Legal Service.

One-sided media coverage and Commission’s concealed documents

Ever since the article describing a dispute within the European Commission over possible application of EU laws to Nord Stream 2 was published in the Financial Times, the overwhelming majority of media reports suggest that the pipeline status has already been decided.  Attempts are being made to convince the public that the project’s rationale is purely economic, but for unclear reasons it seems to paralyse the Commission and divide the European Union, which in itself proves its political underside.  Critics of the project, on the other hand, are accused of politicising it merely by demanding information.

Meanwhile, the European Commission has not adopted any official stance on the issue, which remains a bone of contention, and the only information leaked to the public tends to support the Russian side of the story.  However, the documents presented above do not admit of any straightforward conclusions. This lack of clarity provides a case for rigorous legal assessment of Nord Stream 2, as demanded by its critics.
Based on the European Commission’s documents, full application of EU law in relation to Nord Stream 2 is possible, but would require a political deal with Russia, which is hardly conceivable. This is an opportune moment to discuss with the European Commission the possibility of communicating such expectations to Moscow.  Brussels could force it into compliance with EU laws, if it only wanted to.

The dispute can be resolved in favour of DG Energy and critics of Nord Stream 2, provided there is good will within the Commission.  But there has been too little of that even to reveal the documents demonstrating its internal dispute over Nord Stream 2.

Facade concessions by Gazprom

Another source of concern is the attempt to amicably settle the antitrust battle between Gazprom and the European Commission, without imposing any specific obligations on the Russians.  The currently tabled proposal is only a facade, albeit the media present it as a way to civilise Gazprom and an argument in favour of green-lighting Nord Stream 2.

The European Commission has unveiled the proposed terms of settlement agreed on with Gazprom in the course of the antitrust investigation.  They offer no chance of improving the position of Poland, or other CEE countries.  At the same time, they would not harm Gazprom, which would escape a penalty and would only formally confirm its readiness to behave more flexibly on the market, which it has in fact done for years.

The Commission and Gazprom have agreed that, to avoid a fine to the tune of 10% of its global revenue, Gazprom would have to answer three charges: unfair prices, dividing the markets and exerting unauthorised influence on infrastructure. To this end, it would have to indeterminately link its pricing formula with an unspecified European exchange, and allow free gas flows over the infrastructure it can influence (in the Baltics and Bulgaria).  As such influence in the case of the Yamal Pipeline follows from an intergovernmental agreement between Poland and Russia, no decisions favourable to Poland could be made during the proceedings.  This could be ensured by an amendment to IGA, allowing EC to review intergovernmental agreements.

Since the shale gas revolution, increase in global gas supply and improved access to alternative gas sources, Gazprom has been forced to offer more flexible terms to its customers.  Pricing formulas have been revised in the case of Western European buyers, and re-export bans blocking free gas flows are gradually being scrapped (e.g. from the contract with PGNiG − five years ago, in 2012).  Gazprom is selling out of its interests in gas transmission infrastructure in Lithuania and Latvia, in accordance with the Third Energy Package and its antitrust measure prohibiting simultaneous management and transmission of gas over a pipeline.

Gazprom’s commitments can thus be regarded as a not too costly facade. If they are accepted, following a market test in seven weeks’ time, the Russians would face no sanctions for their past anti-competitive behaviour.  This would be a lenient approach compared with the tough treatment of Microsoft, which was made to pay fines. The settlement deal is being criticised by Poles from PGNiG, but also by the European Parliament Committee on Industry, Research and Energy (ITRE), which includes MEPs from various countries.

Who is paralysing the Commission?

For a year, the European Commission has withheld documents testifying to a disagreement over Nord Stream 2 among its very members.  Furthermore, it has not made any categorical demands on Gazprom during the antitrust probe.  You could add to that list the approval for increased use of existing infrastructure to support Gazprom’s further expansion in Central and Eastern Europe, i.e. the OPAL pipeline decision of  October 28th 2016.  Its implementation has been temporarily suspended pending claims filed by PGNiG and the Polish government to the Court of Justice of the European Union.

In the light of those facts it is not unreasonable to ask whether Brussels is in fact paralysed by German influences, which would fit in with the pledge given by Vice-Chancellor Sigmar Gabriel to Vladimir Putin, as stated in Kremlin records.