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The European Commission's Last-Ditch Effort to Stop Nord Stream 2: How Likely Is It to Succeed?

The European Commissions proposal to extend the Gas Directive to so-called import pipelines is an obvious attempt to try to block Nord Stream 2, writes Karel Beckman, editor-in-chief of Energy Post. According to Beckman, it is not likely to succeed: the opposition to Nord Stream 2 is political in nature and cannot be stopped through legal means. (This article is part of a two-part response to the Commissionproposal of 8 November to amend the Gas Directive. For a contrary view, see Szymon Zarȩbas article: The Gas Directive and its application to EU-Third Country pipelines.)

On 8 November the European Commission took “steps to extend common EU gas rules to import pipelines”, it said in a press release. The Commission introduced an amendment to the EU Gas Directive to ensure that “the core principles of EU energy legislation (third-party access, tariff regulation, ownership unbundling and transparency) will apply to all gas pipelines to and from third countries up to the border of the EU’s jurisdiction”.

In a separate Q&A “fact sheet”, the Commission rhetorically asks, “Is this about Nord Stream 2? Will the proposal prevent Nord Stream 2”, and answers that “The proposal concerns all gas pipelines to and from third countries and is not aimed at preventing the construction of any new gas pipelines”.

But this is scarcely credible. The proposal would never have been made if it had not been for Nord Stream 2. Applying to the Gas Directive to “import pipelines” has never been an issue before.

Legal Service

Ironically, by introducing this amendment, the Commission admits that currently the Gas Directive does NOT apply to Nord Stream 2, contrary to what some opponents, such as Alan Riley of City Law School in London had been arguing.

In December 2015, Riley wrote: “For almost 100 kilometers, the pipeline goes through the territorial seas of both Denmark and Germany. It also goes through the exclusive economic zones of Denmark, Germany, Poland, Sweden, Finland, Estonia, Latvia, and Lithuania. It is difficult to see how the rules of the Gas Directive and accompanying EU legislation do not apply to gas pipelines running through the territorial seas of the member states.”

In 2016, the Commission asked its own Legal Service whether the Third Energy Package (to which the EU Gas Directive belongs) applies to Nord Stream 2, but its legal experts said this is not the case. As Severin Fischer of the Center for Security Studies at ETH Zurich notes, “In an internal document, the Commission’s legal service denied the applicability, since the EU’s regulatory framework would not cover offshore pipelines from third countries up to the entry point in the EU system some kilometers inland, where natural gas is distributed by connecting pipelines further into the internal market.”

The new proposal is obviously a response to the finding of the Legal Service. If adopted, it would give Brussels the means to exercise some control over the pipeline. It may even discourage Gazprom from building it. The question is whether it is likely to succeed.

Security of supply

The European Commission has made it abundantly clear that it is opposed to the planned pipeline. The reason it has given for its opposition is that Nord Stream 2 would be detrimental to “the EU’s strategy of security of supply” as Miguel Arias Cañete, Commissioner of Climate Action and Energy, has put it.

Cañete said diversification of routes and sources is key to this strategy and “Nord Stream 2 does not follow this core policy objective. On the contrary, if constructed, it would not only increase Europe’s dependence on one supplier, but it will also increase Europe’s dependence on one route.”

This does not quite make sense, however, since it is difficult to see how re-routing Russian gas supplies could make Europe “more dependent” on Russia. It is true that Europe will be more dependent on the route through the Baltic Sea, where Nord Stream 1 is already functioning, but that would seem to be a safer route than the current route through Ukraine.

The real reason for the Commission’s stance has to be found in the strong opposition to Nord Stream 2 from Eastern Europe and Ukraine, who stand to lose substantial transit fees, and perhaps even worse for them, will see their strategic position in the Russian gas supply route to Europe undermined. Brussels, moreover, is wrestling with Russia over its occupation of Eastern Ukraine and is therefore not inclined to accommodate any initiatives that make life easier for Gazprom.

But those are political considerations that do not give the Commission a legal handle to stop the project. With this new proposal, Brussels is trying to create such a handle.

Regulatory regimes

So how would the new rule work out? Clearly, the EU cannot make EU law apply outside its jurisdiction. i.e. at the Russian end of the pipeline or outside its territorial waters. What the Commission wants to do, therefore, is to make it apply to the part of the pipeline in the territorial waters of Denmark and Germany.

Once this has been accepted, a problem will have been created: the pipeline will be subject to two different regulatory regimes, one on the EU side and one on the Russian side.

The next step is that the Commission then offers to solve this problem.

The Commission has earlier asked the Member States for a “mandate” to negotiate an Intergovernmental Agreement (IGA) with Russia over Nord Stream 2, which, if the Commission has its way,  would include all the important elements of the Gas Directive. The European Council (the Member States) has yet to decide on this request. The Commission hopes that once its proposal for a revised Gas Directive is accepted, it will get a mandate to negotiate with Russia on the rules Nord Stream 2 should be subject to.

The Commission summarizes this strategy as follows in its Q&A: “The proposal clarifies that EU law applies in EU jurisdictions. There is therefore no extraterritorial application. Nevertheless, the Commission recognises that in the case of cross-border pipelines it is not practical to have different regulatory regimes apply to the two ends of the same pipeline. In such a situation of “conflict of laws” it is customary to initiate international negotiations to agree on the operational principles of the pipeline in question. The EU stands ready to work out such agreements with third-countries, if requested.

It adds that the “proposal is complementary to the Nord Stream 2 mandate. Given that Union law cannot be directly applied in third countries an agreement with Russia remains the best instrument to establish a clear, coherent and stable regulatory framework for the operation of Nord Stream 2.

Fundamental friction

The Commission’s proposal is pretty clever, in some ways, but it also concedes quite a lot.

As Severin Fischer pointedly notes, “the Commission has created a fundamental friction in its own argumentation. If Brussels sees the need to change the directive to apply EU energy market regulation to the parts of the pipeline that run in territorial waters, [its earlier] claim about a “legal void” is obviously unjustified. There cannot be a conflict of law systems, if a change to the law is required in order to make the EU law applicable in the first place.”

The fact is, however, that the Commission had few other options left. The proposal is in effect a last resort. It is the only way left to put legal obstacles in the way of Nord Stream 2.

But it is a highly uncertain route, for various reasons.

First, it is questionable whether the European Council will give the Commission the mandate it is looking for. Many Member States support Nord Stream 2 and even those who don’t might not feel comfortable ceding this power to Brussels.

Secondly, even if the Commission gets a mandate, it will only be able to start negotiations with Russia. The Russians could resort to delaying tactics until the pipeline is built. And they don’t necessarily need to agree with the EU’s demands that the pipeline be subject to all requirements of the Gas Directive. After all, to get an agreement it takes two sides to agree.

Thirdly, if it ever gets to an IGA, this would not necessarily stop Nord Stream 2 from being built. On the contrary, an IGA after all is intended to facilitate the building of the pipeline, not to stop it!

Note also that the proposal creates a problem with regard to existingand other planned import pipelines. If it is adopted, it would obviously need to be applied to all import pipelines, not just Nord Stream 2.

With regard to existing pipelines, the Commission proposes that Member States will be allowed to “grant derogations for existing pipelines from certain key requirements of the Gas Directive 2009/73/EC. This would include unbundling, third-party access and tariff regulation, provided that the derogation would not be detrimental to competition, the functioning of the market and security of supply in the Union.” Hardly what you would call fair and equal treatment.

What about newly to be built gas pipelines, e.g. through the Mediterranean? The Commission notes that the Trans-Adriatic pipeline (TAP) project, which is as advanced as Nord Stream 2, “already has an exemption pursuant to Article 36 Gas Directive, and would, hence, not be affected by this legal change.”

Other potential new pipeline projects, “e.g. from Russia to Bulgaria, or in the Mediterranean, would be covered by the proposal and thus subject to the requirements set out in the Gas Directive”, but, the Commission adds reassuringly, “New pipeline projects to and from third countries can apply for an exemption for new infrastructure pursuant to Article 36 of the Gas Directive.” If they can get an exemption, why not Nord Stream 2?

Sanctions regime

All this makes it unlikely that the Commission’s plan will be successful.

Katja Yafimava, Senior Research Fellow at the Oxford Institute for Energy Studies, who has followed the Nord Stream 2 dossier for years and has published extensively about it, is not optimistic about the proposal’s chances of success.

In my view”, she writes in an emailed statement, “the European Commission (EC) is simply creating a conflict of laws so that the Third Energy Package would apply on the EU/German end of the pipeline whereas the Russian law would apply on the Russian end of pipeline, so that the EC could then argue that there is the conflict of laws and hence the legal rationale for the Nord Stream 2 mandate, and on that basis ask the Council for the mandate to ‘reconcile’ that conflict by attempting to impose the Third Energy Package on the Russian end of the pipeline. So the mandate and the acquis change should be seen jointly but at the end of the day, if the Russian government says ‘no’, the EC would fail. In my view the Russian government would be certain to say ‘no’ to full application of EU energy law provisions to the pipeline.”

The fundamental problem for the Commission is that it is attempting to make a political move through legal means, which is bound to fail. The only way Nord Stream 2 could be stopped, it seems, is if the EU’s political leaders declare that they won’t allow it, not so much because of energy security reasons, but, essentially, because of Russia’s occupation of Ukraine. In other words, Nord Stream 2 would somehow have to become part of the sanctions regime.

That would of course take the issue to the highest political level and risk creating a major international crisis. How likely this is to happen may depend to a large extent on the attitude of a new German government.

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