GAS Nord Stream 2 20 May, 2020 10:00 am   

Will Gazprom split Nord Stream 2?

Agata Łoskot-Strachota from the Centre for Eastern Studies writes about the consequences of applying the EU Gas Directive to the contentious Nord Stream 2 gas pipeline. “One of the options Nord Stream 2 AG may choose is to divide the gas pipeline on paper into two parts: one section would run where the EU law doesn’t work – from the pipe’s starting point in Russia to the border of Germany’s territorial waters, and the second section – across Germany’s territorial waters” – she predicts.

Germany’s regulatory office’s refusal to award Nord Stream 2 derogation from the EU Gas Directive means that in order for NS2 to start transmitting gas to Germany and the EU in the foreseeable future, EU rules need to be applied to the pipe. It seems unlikely for the project to receive an exemption from the EU regulations based on the rules for new gas pipelines. Bundesnetzagentur’s (BNetzA) decision goes against the interests of Gazprom and Nord Stream 2 AG, controlled by the Russian giant. This is why even before the decision was made, the company had announced it would take legal action if its application for derogation was rejected. Gazprom wanted to challenge the ruling because it had already made investments and had legitimate expectations that it would receive a derogation. However, court proceedings in such cases are usually time-consuming.

Currently it is uncertain how Nord Stream 2 would be brought under the EU regulatory umbrella in practice. However, it may be expected that the pipeline’s operator and proponents will make sure the rules will be applied to the project in the most beneficial way possible. This means their goal will be to award Gazprom as much access to the pipe as possible under conditions that are most favorable to the company. It is worth pointing out that according to the revised EU Gas Directive the institution responsible for applying EU law to Nord Stream 2 is Germany’s regulatory office BNetzA, while the European Commission supervises the process.
According to the revised Directive, the EU law applies to the territorial waters of the country where the new infrastructure is first connected to the EU grid. In the case of Nord Stream 2 that country is Germany. According to the interpretation of the gas pipeline’s proponents, this means the EU rules will apply only to the section of the pipe in Germany’s territorial waters (55 km of the pipe out of a total of 1230 km), leaving the remaining part of the pipeline, which is a lot longer, out of the EU legal realm. The rules include guaranteed access to third parties, ownership unbundling and independent gas providers, a certified operator, as well as non-discriminatory tariffs that are determined in a transparent process by a regulatory body. Therefore, one of the options Nord Stream 2 AG may choose is to divide the gas pipeline on paper into two parts: one section would run where the EU law doesn’t work – from the pipe’s starting point in Russia to the border of Germany’s territorial waters, and the second section – across Germany’s territorial waters.

These two parts would have two different operators – the first one would be Gazprom’s company Nord Stream 2 AG, and the other one would have a different operator. According to the German media, it is possible the second operator could be, e.g. Gascade, a certified company that has been operating in Germany for years. It is owned by BASF and Gazprom and is the developer (and future operator) of the EUGAL gas pipeline, which is to be the main onshore extension of Nord Stream 2. However, it is possible that Nord Stream 2 AG would decide to establish a new operator for the German section of its pipeline, but such a new entity would have to undergo a certification process. This would be more time-consuming and complicated (one of the reasons being EC’s larger engagement in the process), than relying on an existing operator, such as Gascade, especially if the operator was registered in a different country than Germany.

Splitting the gas pipeline into EU and non-EU parts and between two operators is an artificial division. Nord Stream 2 has only one entry point – near Russia’ Ust-Luga and one exit point – in Lubmin in the north of Germany. Therefore, in this case it is not known how to apply two different tariff systems (or whether NS2 AG would decide to adopt one joint system that would be in line with EU rules), or how to provide third party access to the pipeline through the organization of open and non-discriminatory auctions. The alternative option is much less likely and a lot more difficult for Gazprom and Nord Stream 2 AG, as it would entail subjecting the entire gas pipeline to EU law and organizing capacity auctions at the pipe’s entry point on the Baltic shore in Russia. However, this solution seems highly unlikely as it would stir a number of problems and doubts – most of all a conflict between the EU and Russian legislation in areas such as third-party access to export gas pipelines.

The European Commission supervises the implementation of EU law and its role will be especially important in the case of the much disputed Nord Stream 2 pipeline. Therefore, the EC, which is currently dealing with the coronavirus and its economic impact as well as the implementation of the European Green Deal, and EC’s efficiency at enforcing the Gas Directive will play a key role in this situation. The issue at hand is especially delicate because the current EC president is German and it is likely that the process of applying the EU law to Nord Stream 2 will take place during a German presidency in the EU Council. In these circumstances every decision (or no decisions/actions) that will clearly benefit Germany may be interpreted as an attempt at promoting Berlin’s interests, which would only deepen the existing divisions caused by Nord Stream 2. This would be troublesome for the unity and cohesion of the EU during the coronavirus pandemic.

Finally, two things need to be taken into consideration. First, apart from looking for the most beneficial way to apply EU regulations to NS2, Gazprom took the EU Gas Directive to the Court of Justice of the European Union and has been claiming it went against the Energy Charter. Secondly, Nord Stream 2 is still under construction and, despite the recent intensification of actions that may lead to the resumption of its construction, it is unknown when it will be completed.