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New Gas Market Directive Will Change Balance of Power Between EU and Member States

ITRE committee meeting on Russian gas supplies.

The European Commission has proposed amendments to the Gas Market Directive essentially to acquire control over Nord Stream 2. But once they are approved, the EU will have much more authority over Member States’ overall security of energy supply than it has now, warns Bent Ole Gram Mortensen of the University of Southern Denmark. According to Mortensen, there is no need for such far-reaching legislation: if Gazprom were to abuse its market position, the EU has other tools to intervene.

On 13 April, the European Council (EU Member States) is likely to discuss the amendments to the Gas Market Directive proposed by the European Commission last year. The ITRE Committee in the European Parliament has already approved the proposals and indeed added conditions of its own. But the Council is likely to take a more critical look.

One major problem with the Commission’s proposal is that it is clearly meant to address the issue of Nord Stream 2 – but will have implications for the entire gas and energy sector.

It will be difficult to find any legitimate reasons for the transit coastal states Denmark, Finland and Sweden to refuse approval of the Nord Stream 2 through their exclusive economic zone

The planned expansion of the natural gas transit link Nord Stream through the Baltic Sea between Russia and Germany has gradually become a major political affair. Two extra pipelines are planned to double the capacity of the existing connection.

From an international law perspective, the plans for the two additional pipelines do not seem to be a legal challenge. International law in the form of The 1982 United Nations Convention on the Law of the Sea (UNCLOS) establishes a right of transit passage in the exclusive economic zone of other coastal states (outside territorial waters), including the laying of submarine cables and pipelines. These rights are part of the concept of the freedom of the seas.

Certain exceptions exist especially on the basis of environmental considerations. However, as Nord Stream 2 is to be placed close to and in parallel with the existing Nord Stream pipeline (Nord Stream 1), no major environmental problems can be expected. Nord Stream 1 is only a few years old as it was inaugurated in 2011 and 2012, and environmental impact assessments were carried out. Such assessments have also been made for Nord Stream 2, apparently without any new findings.

It will therefore be difficult to find any legitimate reasons for the transit coastal states Denmark, Finland and Sweden to refuse approval of the Nord Stream 2 through their exclusive economic zone, if they want to remain in compliance with international law. These countries along with Germany and the EU are all parties to UNCLOS.

Geopolitics

Since the first Nord Stream pipelines were inaugurated, the geopolitical situation has changed. The conflict in Crimea and the war in Ukraine have made Russia unpopular in the West. As a result, the issue of energy supply security has become an increasing concern. Because the EU’s domestic production of gas is declining even more rapidly than expected, more gas must be imported, including from Russia. The EU already imports approximately 2/3 of its natural gas consumption. Some 40 % of imported natural gas originates from Russia.

Despite increased production of renewable energy in the EU, no significant drop in natural gas imports is expected for some time to come. One reason is that gas production in the Netherlands will be cut back drastically which will have an impact on the German Ruhr area.

The opening of the new route is expected to increase supply security in Western Europe and lead to lower gas prices across the continent

As such it is no wonder that the German government is interested in increasing the capacity on the Nord Stream connection. With political wishes to completely phase out nuclear power and to reduce the consumption of lignite and coal, Germany needs access to natural gas, while it is expanding its renewable energy capacity. And Germany is far from the only EU Member State that has an interest in additional gas supply through the Baltic Sea. The opening of the new route is expected to increase supply security in Western Europe and lead to lower gas prices across the continent.

In contrast, some Eastern European countries are concerned about Nord Stream 2. Even though countries as Poland and Ukraine have manage to reduce their dependencies, if any left, on imported Russian gas, Ukraine and Belarus plus EU Member States Poland and Slovakia also receive large revenue from Russian gas transit to Western Europe. From their point of view, redirecting parts of the supplies via Nord Stream 2, decreases transit revenue, and generally strengthens Gazprom’s negotiation situation with transit countries.

There has been controversy about transit through especially Ukraine with crises erupting since the 1990s and with crises erupting especially in 2006 and 2009/10. Recently (2018) a new arbitration decision was passed. Further, transit through Ukraine has been interrupted several times under the present transit agreement. Considering this, one cannot blame Western European EU Member States wishing a supply road outside of Ukraine.

Commission interest

The EU Commission, in response to concerns from Eastern Europe, has for a long time attempted to put obstacles in the way of Nord Stream 2, so far without success. EU energy legislation does not cover the operation of transit lines between an EU Member State (Germany) and a non-Member State (Russia). Not until the gas is landed in the EU is it covered by the common EU market rules. This was confirmed by an opinion from the EU Council’s own Legal Service.

In the absence of EU legislation, the EU Commission has tried to get a mandate from the Council to negotiate an intergovernmental agreement with Russia. This request was discussed in by the Council, but nothing concrete has come out of it, and it is hardly likely to go ahead.

It is hardly surprising that an opinion from the EU Council’s Legal Service confirmed in early March 2018 that the proposed legislation breaches UNCLOS

In November 2017, the Commission took another initiative. It proposed a change so that the EU Gas Market Directive should henceforth also include pipelines that lead natural gas into the EU from third countries, such as Russia. This includes offshore pipelines, which are in the territory of Member States but situated in their internal waters as well as in their exclusive economic zone (EEZ), as long as the offshore pipeline has an interconnection point with the EU network.

This would mean that legal instruments such as unbundling and third party access could be applied to both Nord Stream pipelines as well as all other gas interconnectors between EU Member States and third countries. This in spite of the fact that the coastal States do not enjoy full sovereignty over their EEZ, but merely have a functional sovereignty limited by the provisions of UNCLOS as confirmed by the Court of Justice of the European Union.

The jurisdiction and applicability of EU law presumably follows the jurisdiction and rights of the coastal States, which hardly includes a right to dictate how the part of the project that is located in its EEZ should be operated. It is hardly surprising therefore that an opinion from the EU Council’s Legal Service confirmed in early March 2018 that the proposed legislation breaches UNCLOS.

Lex Nord Stream

Nevertheless, the Commission is still trying to amend the Gas Market Directive to include offshore projects. The sole motivation seems to be a desire to block Nord Stream 2. The proposed new legislation may be called a lex Nord Stream – but its changes will apply to all interconnectors in and out of the EU.

Thus, although the amendment may seem like a technicality, it actually concerns the relationship between the Member States and the EU. With the latest treaty, the EU has been assigned specific competencies in the internal energy market, network interconnections and security of supply (TFEU Article 194). On the other hand, there is also a right for each Member State to “determine the conditions for the utilization of its energy resources, its choice between different energy sources and the general composition of its energy supply.”

The existing law on offshore interconnectors is reasonably clear. EU market regulations do not apply to interconnectors to and from third countries, but apply only when the gas is landed in the EU

This balance will be altered if, by virtue of a change in the Gas Market Directive, the Commission will be able to influence and possibly block the ability of each Member State to approve this kind of interconnection agreement. Among other things the Gas Market Directive contains a veto clause in art. 36(9) in favour of the Commission, if a national exemption is granted from some of the market regulations such as unbundling and third party access. With the proposed amendments, this will give the Commission a strong tool, should the Member States try to grant interconnectors to and from third countries exemptions.

From clarity to ambiguity

The existing law on offshore interconnectors is reasonably clear. UNCLOS establishes the right to lay down pipelines outside the territorial waters of other coastal States. EU market regulations do not apply to interconnectors to and from third countries, but apply only when the gas is landed in the EU.

Member States should ask themselves whether they want to give the EU more influence on their security of supply in the future, just for the sake of this one interconnector

If we change the Gas Market Directive, the question is whether it is in fact contrary to the limited competences that the coastal states enjoy in the EEZ under the UNCLOS. Regardless of whether Nord Stream 2 is a political or commercial project, it does not change the balance made in UNCLOS between the rights of coastal states and the principle of freedom of the seas.

The governments of the Member States should ask themselves whether they want to give the EU more influence on their security of supply in the future, just for the sake of this one interconnector. If the EU Commission succeeds in amending the Gas Market Directive, it would affect all existing and future corresponding gas interconnectors, and it would be expected that similar changes would occur for electricity interconnectors.

Member States have good reasons to be well-connected with the outside world both regarding electricity and natural gas. Will they be willing to leave it to the EU Commission to manage their energy supply security and allow the EU Commission a de facto right to veto future national opportunities for interconnection with non-EU countries?

If Gazprom abuses its market position, the EU already has competition law tools to intervene

Such a de facto right to veto seems to be a consequence of the proposed change of the Gas Marked Directive. In a second statement in late March this year, the EU Council’s Legal Service confirmed that the proposed legislation would lead to this shift of competences. Consequently, Member States would even have to terminate bilateral treaties with third countries and let the Commission renegotiate them.

If Gazprom abuses its market position, the EU already has competition law tools to intervene. Gazprom has previously been investigated by the Commission and the present European Commissioner for Competition, Margrethe Vestager, does not appear afraid to use these tools.

Further, the energy packages with their legal instruments will apply to onshore grid connections such as the Opal gas pipeline. This is already happening. What is the need to expand the Gas Market Directive to pipelines between member states and third countries? Or is the Commission taking advantage of the political tensions between Russia and NATO/EU to expand its control over the energy policy of the Member States? Those are questions that the EU Member States will now have to answer in the Council.

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