Nord Stream 2 – implications of the EU gas directive amendment

EU directives are legal acts which require member states to achieve a particular result, but without dictating the means of achieving it. Their purpose is to focus on business conducted within the EU which routinely affects companies operating in the 28 member states. But the principal impact of the newly amended EU gas directive will not be felt by member states. Instead, its target is Russia.

The amendment widens the scope of the existing directive which has been in place for a decade. In the future, rules governing the internal gas market will also apply to pipelines to and from third countries. The European Parliament voted in favor of the controversial revision in April and the Council of the European Union (EU) then approved it - at remarkable speed for such a complex piece of legislation - so that the amendment could come into force by July.

On the face of it, the amendment’s stated objective is straightforward: to ensure the rules governing the EU’s internal gas market apply to transmission lines between a member state and a third country, right up to the border of that member state’s territory and its territorial sea. Under the amended directive, gas pipelines entering the EU from non-EU countries will now be covered by EU law.

The official explanation is that it will improve the “functioning of the EU internal energy market and [enhance] solidarity between Member States.” According to legislators, this will close a legal gap in the EU’s regulatory framework while also helping to boost competition in the internal gas market.

But there is a more specific and more obvious explanation: Nord Stream 2, the second twin gas trunkline system across the Baltic Sea, is the main target of the amendment. The aim of this 1,200-km (745-mi) pipeline project is to deliver Russian gas directly to Germany, and in the process, bypass Ukraine, Poland, and the Baltic states. Offshore construction of Nord Stream 2 began in August 2018. Once completed, it is set to double Russian gas shipments to Germany.

However, the project is opposed by the European Commission (EC) and by many central European countries. The amendment, widely perceived as an attempt to bring the pipeline under the EU’s regulatory umbrella, will require Gazprom to provide “third-party access, non-discriminatory practices and transparency.” Yet as the Moscow Times recently reported, Gazprom maintains ‘a jealously guarded monopoly’ over gas exports from Russia.

At the same time, the political will in Germany and Russia to complete the pipeline is equally strong – unsurprising, given the scale of mutual economic benefit. It is therefore unlikely that the amended directive will halt work on Nord Stream 2, as some EU member states had hoped. Nevertheless, the scope of the amended Directive will enable its operation to be delayed, or possibly even suspended.

More immediately, Nord Stream 2 has threatened to sue the EU. According to reports, its CEO, Matthias Warnig, wrote to EC President Jean-Claude Juncker in April stating that if the pipeline is not eligible for a derogation from the new rules, “the measure would be discriminatory against [Nord Stream 2] as an investor” and as a consequence, the EU may be breaking an international treaty.

The most likely outcome could well be that the German authorities confirm that the project will comply with the amended directive. The mechanism to implement this would probably involve a transfer of ownership and/or operating rights of the entire pipeline, or its German section, to an existing or new transmission system operator. The German authorities and the EU would then issue a certification of compliance.

Another option might involve seeking exemptions from some of the directive’s requirements, although this will probably not be pursued, for two reasons. First, it would create regulatory uncertainty. Second, it would result in operational delays because of the discretion that the EC would be in a position to exercise over conditions that could be imposed as part of granting such exemptions.

In April, the completion of Nord Stream 2 was potentially derailed by another development. Nord Stream AG submitted a third application and an environmental impact assessment to the Danish Energy Agency (DEA) for a route through Danish waters, more than two years after the first application was made. The DEA has asked for comments from the public, Danish authorities and organizations by July 10.

Although Gazprom’s subsidiary complied with the requests made by the Danish authorities, it also accused Denmark of deliberately trying to delay the project by asking for the third route option in two years. Predicting either the timeline or the eventual outcome of this application is difficult, save to say that it could delay Nord Stream 2’s scheduled completion date. However, as with the other potential roadblocks, it is unlikely to prevent it. •

The author

Zoya Burbeza is a Solicitor at Zaiwalla & Co. She is a specialist international litigation and arbitration lawyer with extensive experience providing commercial legal services to clients from Russia, Ukraine, and the CIS countries.

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