Can Nord Stream 2 be stopped?

They may be able to follow a complex legal route that could place formidable obstacles in the way of the pipeline. There is also an even more complex political route that could result in a blocking of the project, but this would involve a high-stakes battle at the highest political level. Energy Post editor-in-chief Karel Beckman reports.

At a debate in the European Parliament on 6 April, the mood towards Nord Stream 2 could not have been more hostile. Petras Auštrevičius, MEP from Lithuania and Vice-Chair of the ALDE-faction (Alliance of Liberals and Democrats for Europe) in the European Parliament, called Nord Stream 2 a “killer project”, that “would kill much of what the Energy Union was intended to achieve”.

MEP (and former Polish Prime Minister) Jerzy Buzek of the European People’s Party (Christian-Democrats), and also Chair of the important ITRE Committee (Industry, Research and Energy) in the Parliament, said that “Nord Stream 2 and Energy Union cannot co-exist”. He also stressed that “the majority of the European Parliament opposes Nord Stream 2.”

By pitting Nord Stream 2 against “the Energy Union” the opponents have turned their opposition to the pipeline into a high-stakes game. The Energy Union is one of the top priorities of the current European Commission.

But their stance is not a surprise. Earlier, on 17 March, Prime Ministers and leaders of 9 EU member states (Czech Republic, Hungary, Poland, Slovak Republic, Romania, Estonia, Latvia, Lithuania, Croatia) had sent a letter to Jean-Claude Juncker, President of the European Commission, speaking out against Nord Stream 2. They pointed out, among other things, that Nord Stream 2 poses “risks for energy security in the region of Central and Eastern Europe, which is still highly dependent on a single source of energy”.

And the European Commission itself has also taken a highly critical stance towards Nord Stream 2. In a speech in October last year, Miguel Arias Cañete, Commissioner of Climate Action and Energy, said there were were “serious doubts” whether Nord Stream 2 was compatible with the EU’s “strategy of security of supply”. He 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.”

At the event on 6 April in Brussels, Maros Šefčovič, who as Vice-President of the European Commission is in charge of the Energy Union project, voiced equally strong criticism of Nord Stream 2. “Let me be very clear”, he said. “The impact of the Nord Stream 2 project goes clearly beyond the legal discussions. Nord Stream 2 could alter the landscape of the EU’s gas market while not giving access to a new source of supply or a new supplier, and further increasing excess capacity from Russia to the EU. This raises concerns, and I am pretty sure this will play a role in this debate.”

Investment decisions

The European Parliament and European Commission seem bent on stopping the Nord Stream 2 project. But can they? The EU is not directly involved in the decision-making process around Nord Stream 2: it is the national permitting authorities of the countries whose waters the pipeline will cross that must grant approval for the project. In this case, these are the permitting authorities of Russia, Finland, Sweden, Denmark and Germany.

Currently, the Nord Stream 2 consortium is “communicating” with the permitting authorities in the five countries, says Ulrich Lissek, Head of Communications of the company. If they give approval, the pipeline can go ahead, according to Lissek: “There is an established approval process based on the rule of law that we are going through. The outcome does not depend on a political decision in Brussels.”

Lissek, who was one of the speakers at the debate in Brussels, said in a separate interview with Energy Post that, although he regarded the political debate in Brussels as “important”, “its outcome will not have a direct impact on the project”.

Nor does Nord Stream 2 wait on an FID (final investment decision), Lissek explained. In effect, the FID has already been taken: the shareholders agreement that was signed in Vladivostok on 4 September last year was the start of the project, said Lissek. (At the time of the signing, Gazprom had a 51 per cent share in the joint project company, called New European Pipeline AG, while Eon, Shell, OMV and BASF/Wintershall each had 10 per cent and Engie 9 per cent. Later Gazprom’s share was reduced to 50 per cent and Engie’s increased to 10 per cent.)

The implementation of the agreement requires a number of separate investment decisions, such as the selection of the pipeline supplier, which took place last month, and getting the required permits from the authorities. Lissek said he does not expect problems with the environmental permits: after all, Nord Stream 1 was built in the same location and is already operational. Indeed, Nord Stream 1 also encountered a great deal of opposition, yet it has been fully approved and is functioning today. So, Lissek implied, why should Nord Stream 2 be treated differently?

Equal access

Does this mean case closed, Nord Stream 2 will be built if the shareholders want it to? Well, not quite. As Alan Riley, professor at City Law School in London and nonresident senior fellow with the Atlantic Council, pointed out in Brussels: Nord Stream 2 may well face both legal and political obstacles that Nord Stream 1 did not encounter. (See also his in-depth article on Energy Post.) “The world has changed since the first Nord Stream was launched in 2008”, he said.

Riley noted that firstly, EU energy law has progressed (the Third Energy Package and Third Gas Directive were adopted in 2009) and secondly, Ukraine was invaded by Russia in 2014 and is still in a state of war, which creates a new political context.

According to Riley, the European Commission and individual member states do have legal options to block Nord Stream 2. The key issue here is whether EU law – specifically, the Third Energy Package – applies to the pipeline or not. Under the Third Energy Package, the owners of major gas pipelines must be independent of the suppliers of gas, and they must allow equal access to all suppliers who want to make use of the pipeline. Nord Stream 2 clearly does not conform to these requirements: it is 50% owned by Gazprom, which is a supplier, and also partly by companies like Shell, OMV and Engie, also suppliers. If the Nord Stream 2 consortium were forced to submit to the unbundling and third party access rules of the Third Energy Package, it seems clear that the business case for the project would be destroyed.

However, the Nord Stream 2 consortium takes the view that since the pipeline runs offshore, the Third Energy Package does not apply to it. The rules of the Third Energy Package, says Lissek, do apply to the connecting parts of the pipeline inside Germany (owned by different companies), but not to Nord Stream itself, which runs offshore and is an “import pipeline”. He said there are ample precedents for this view: “The five gas pipelines in the Mediterranean that run from Africa to Europe are not subject to the Third Energy Package either. Nor is Nord Stream 1. So Nord Stream 2 cannot be treated differently.”

Riley disagrees. He says EU law applies to the territorial waters of the relevant member states (the 12-mile limits) and to their 200-mile Exclusive Economic Zones (EEZ). For Nord Stream 2 this means that “at least 100 kilometres of the offshore route fall under the Third Energy Package”.

If the Third Energy Package has not been applied to existing “import pipelines”, said Riley, it’s because it was not in force yet when they were built. Since it has come in force, there is no reason why it should not apply.

If he is right that would mean that the offshore pipe would need to be certified as TSO by the national regulators of the five countries involved. And under aticle 11 of the Third Gas Directive, the regulators must refuse to grant certification to a project if it does not a) comply with the “unbundling” and third-party access requirements of the Third Energy Package, and b) if the project puts at risk “the security of energy supply of the Member State and the European Union”.

Legal Service

Maros Šefčovič also alluded to this point in his speech in Brussels. “Let me underline again that EU law applies in principle also to off-shore infrastructure under the jurisdiction of Member States including their exclusive economic zones”, he said. But he added, “What exactly within EU sectorial legislation applies has to be assessed in regard to their specific provisions.” In other words, the Commission Vice-President is not entirely sure yet of the applicability of the Third Energy Package to Nord Stream 2.

A spokeswoman for the Commission did not want to make any further comments. She said “the Commission is in touch with the German Energy Regulator to find out more about the details of the project. On that basis the Commission will draw its conclusions on the extent to which EU law (internal energy market, environment, competition etc.) applies to the Nord Stream 2 project and the next steps to be taken by the Commission.”

On 19 November last year, the European Commission sought the advice of its Legal Service on this question. To the disappointment of the Commission, the Legal Service replied that the Gas Directive does not apply to the part of the project running through the exclusive economic zones and territorial waters of the member states concerned. This was reported on 7 February by the website Politico on the basis of an analysis of the Legal Service reply written by DG Energy, which Energy Post also has a copy of.

In this analysis, DG Energy concedes that “if the opinion of the Legal Service is applied, this would mean that the EU cannot claim any applicability of its energy legislation to any part of Nord Stream 2.”

However, the author of the analysis then goes on to present a contrary opinion, arguing, in a detailed Annex, why, according to DG Energy, the Legal Service opinion is wrong and EU law should apply to Nord Stream 2. Thus, the issue is not settled yet.

Huge losses

That’s as far as the Third Energy Package is concerned. But as Riley pointed out, the certification process by the national regulators also involves a “supply security test”, and he wondered, “how on earth can Nord Stream 2 ever pass such a test?”

The issue of “energy security” is a critical one in the debate around Nord Stream 2. The opponents invariably argue that the pipeline has an extremely negative impact on Europe’s energy security. This is enough reason, they say, for EU leaders to block the project. One of the critical strategical objectives of the EU’s Energy Union is after all “energy security, solidarity and trust”, as it was phrased by the European Commission when it launched the Energy Union in 2014. This phrase also appears in the official Energy Union “package” that was published on 25 February 2015. Šefčovič repeated it in Brussels: “Energy security, solidarity and trust constitute a key dimension of our framework strategy of 25 February 2015”, he said.

But what exactly is “energy security”? And what is “solidarity”? From an economic perspective, energy security in the gas market is defined by the European Commission as “diversification of energy sources, suppliers and routes”. As Šefčovič put it: “diversification of energy sources, suppliers and routes are crucial for ensuring secure and resilient energy supplies to European citizens and companies.”

The critics of Nord Stream 2 have no doubt that the pipeline fails to meet the energy security test on these grounds. Šefčovič said: “Nord Stream 2 could alter the landscape of the EU gas market while not giving access to a new source of suply, and further increasing excess capacity from Russia to the EU.” He added that “Nord Stream 2 could lead to decreasing gas transportation corridors from three to two, abandoning the route through Ukraine. Also the Yamal route via Poland could be endangered.”

Buzek too said that “Nord Stream 2 is against the EU strategy of energy diversification. It would further strengthen the position of a dominant supplier who is already under investigation for abusing its position.”

Yet this argument seems debatable. Even if Nord Stream 2 does not bring additional supplies (the consortium says it will, opponents deny this), all it does is change the route by which Russian gas is transported to Europe. This may not increase suppliers or bring additional routes (since there already is a Nord Stream 1), but neither does it reduce the number of routes or supplies. So how can it reduce competition or energy security?

The answer is: from an EU perspective it clearly doesn’t. From an Eastern European perspective, however, things look rather different.

Once Nord Stream 2 becomes operational, Gazprom may close down its gas transit through Ukraine (this is not certain yet), and through countries like Poland and Slovakia, either completely or partially. This will lead to huge losses for these countries. Ukraine stands to lose $2 billion in annual transit fees, but a country like Slovakia also makes $800 million annually on its gas transit contract.

This puts the opposition from Central and East European countries in a somewhat different light. For many years they have made profits from their transit capabilities. Now they are afraid to be passed by. This is painful for them, but why would Russia and its Western European partners not be allowed to decide on a more profitable arrangement for themselves? Isn’t this the whole idea of the “well-functioning gas market” the EU has managed to create – against Russian opposition – over the last seven years, since the last supply crisis in 2009, when Gazprom cut off gas transit through Ukraine?

Péter Kaderják, Director of the Regional Centre for Energy Policy Research (REKK) in Budapest – an opponent of Nord Stream 2 – said in Brussels that the diversification strategy of the EU has worked very well so far. He pointed to the new LNG terminals being built or planned in Lithuania and Poland, the new interconnectors that have been built, and the reverse flow capabilities that have been created since 2009. As a result, he said, “supply security risk has significantly decreased” and Eastern European gas markets have increasingly integrated with the west.

The result of this diversification effort is that Eastern European countries have become much less dependent on Russia. They can now easily import gas from Western Europe. True, their market position will clearly worsen, once Nord Stream 2 is built. As Kaderják said, there will be “a widening price gap between West and East”. But one could argue that this is what competition is about. The market is not about “solidarity”.

It may also be noted that it is rather misleading to argue, as the 9 prime ministers do in their letter to Juncker, that Eastern European countries are “still highly dependent on a single source of energy”. They may still be “highly dependent” on Russia for their gas supplies, but gas is only part of their energy needs. Many countries in Eastern Europe, like Poland, Hungary and Bulgaria, actually do not use much gas in their energy mix at all. And they can choose to develop alternative sources of energy. There seems to be an element of choice involved when it comes to being “dependent on Russian gas”.

Criminal organization

None of this is meant to imply that Russia does not have geopolitical motivations in building Nord Stream 2. No doubt for Moscow Nord Stream 2 is also seen as a weapon in its conflict with Ukraine. That is what makes the issue so complex. The EU will have to decide whether it should regard Nord Stream 2 as simply an economic project, or also as a geopolitical threat.

MEP Rebecca Harms, co-chair of the Group of the Greens in the European Parliament, had no doubts on this account. She said in Brussels that Ukraine is at war, and asked: “Why should we allow a further weakening of the country?”

The problem with this argument is that it could be applied to any project that affects the Ukrainian economy negatively. As Lissek of the Nord Stream 2 consortium said: ”Do we have to stop every economic exchange with Russia?” He complained: “Why is so much importance attached to this project? That’s not very fair.”

For Ukraine the ending of Russian gas transit would clearly be an economic blow. Yet the country also has itself to blame. For years it has allowed tremendous corruption in the gas sector, thereby putting the energy security of Western European countries at risk. The Russian decision in 2006 and 2009 to cut gas transit through Ukraine had a lot do with that.

Opponents of Nord Stream 2 argue that this past is not relevant anymore: Ukraine has firmly started on a process of reform. Šefčovič said: “Ukraine continues to be a reliable gas partner and transit country….” He added that “The completion of energy sector reforms in Ukraine [is] of utmost importance and should be further implemented. There is no better reassurance for Ukraine to remain a transit country and to attract investors to its gas assets then by completing ownership unbundling of Naftogaz and setting up an independent energy regulator in line with the 3rd Energy Package. Ukraine has all our support to make these necessary game-changing steps.”

The question is, does the energy market reform in Ukraine imply that Nord Stream 2 should not be built and the EU should help the country retain its dominant position in Russian gas transit to Western Europe? Wouldn’t this be an incentive for the country not to pursue its market reforms?

In an article published by the Atlantic Council in April, the well-known Russia expert Anders Åslund, a fierce critic of Nord Stream 2, writes that Ukraine has made tremendous progress in its energy reforms. One effect has been an “extraordinary” decline in gas consumption: “As late as 2011, consumption amounted to 59.3 billion cubic metres. In 2015, it had fallen to merely 36 bcm, of which Ukraine itself produced 20 bcm.” The expectation is that in 2016 gas consumption will fall to a mere 29 bcm, “of which Ukraine itself will produce 20 bcm”. In 2015, Ukraine imported a mere 6.1 bcm from Russia.

Åslund writes that “Energy is the linchpin of Ukraine’s independence on Russia”, and recommends that Ukraine should “stop buying gas from Russia altogether”, yet he wants Nord Stream 2 also to be stopped, as it is “instigated by Gazprom and certain German interests to weaken the EU and its energy policy to the disadvantage of Ukraine”. This does not seem consistent.

Åslund has a broader perspective, though, since he also wants Gazprom to be investigated as “a criminal organization”. He may have a point, but if Gazprom really is a criminal organization, then it seems reasonable to argue that this is what the debate in Europe should be about: not about Nord Stream 2 but about Gazprom. After all, Gazprom is dealing with Europe in many ways, supplying large amounts of gas through various channels.

Similar direction

In the end, a political process to halt Nord Stream 2 could be even more complicated than a legal process. The only way this could happen is if the European Commission and European Parliament received full support from the European Council. But that would require the agreement of Germany and other Western European member states, like The Netherlands and Austria, which stand to benefit from Nord Stream 2.

So far, the European Council has been fairly critical of the project. After a meeting in December 2015, its President Donald Tusk wrote: “Talking about the Energy Union, leaders had an exchange on the Nord Stream II project, some of them were very critical, and we also discussed the conditions that need to be met by major energy infrastructure projects. We reiterated that any new infrastructure should be fully in line with the Energy Union objectives. Not to mention the obvious obligation that all projects have to comply with all EU laws, including the third Energy Package. These are clear conditions for receiving support from the EU institutions or any Member State – political, legal or financial. Now the ball is in the court of the European Commission. But the political message of the European Council is clear and goes in a similar direction as the position expressed by the European Parliament.”

Didier Seeuws, Director of Transport, Telecommunications and Energy at the European Council, said in Brussels that the Council had “put forward not only legal but also political conditionality”. But Seeuws declined to speculate about what exactly a political decision from EU leaders to block Nord Stream 2 would look like. Any such move would run into one formidable problem: Russia would regard it as an extremely hostile act.

Perhaps Péter Kaderják had the wisest advice to offer at the event in Brussels. He said that if Nord Stream 2 gets built, “Regulatory measures should ensure that competition is maintained in the Central and South East European region even if Gazprom transits gas along new routes. The EU and local regulators should prevent Gazprom from blocking interconnection capacities and make it release significant gas volumes in Germany.”

This kind of compromise might be the most pragmatic outcome of the battle for Nord Stream 2. A similar solution is hinted at in the “analysis of the Legal Service reply” written by DG Energy, which refers to the possibility of a “case-specific regulatory framework for the project”. It is probably the maximum that the opponents of Nord Stream 2 will be able to achieve.

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Republished with permission from Energypost.eu. The original article can be accessed at Energypost.eu