EU competition law may derail Nord Stream 2

The planned Nord Stream 2 project will not escape EU competition law on the grounds that it is a subsea pipeline, meaning its feasibility is highly questionable, speakers told a debate in the European Parliament on Wednesday.

The project will be subject to EU competition law – including regulations on third-party access and unbundling – even though it will connect Russia and Germany directly by going under the Baltic Sea, speakers said.

Alan Riley, a non-resident senior fellow with the Atlantic Council’s Global Energy Center, told the debate that there are no exemptions for subsea infrastructure under EU law. Moreover, the legal obligations under the EU’s Third Energy Package (TEP) represent a massive challenge for Nord Stream 2’s promoters, meaning it is "highly likely that the project will be cancelled", Riley told Interfax Natural Gas Daily on the sidelines of the event.

According to Riley, three specific TEP obligations could derail the project: third-party access, ownership unbundling and the supply security test.

"The problem is that, given that Gazprom has [an] export monopoly and the entry point will be in Russia, how on earth can you [give others] third-party access?" Riley told the debate.

He also pointed out that the stakeholders in Nord Stream 2 – Gazprom, OMV, E.On, Engie, Shell and Wintershall – were gas suppliers and therefore not allowed to own the pipeline directly.

"The second thing is ownership unbundling. The gas directive is very clear – all new infrastructure has to be subject to new ownership unbundling, which essentially means that suppliers cannot own the pipelines. Essentially, all participants in Nord Stream 2 are suppliers," Riley warned.

Moreover, under article 11 of the 2009 EU Gas Directive all non-EU owned pipelines will have to be subject to a supply security test, which he said Nord Stream 2 seemed highly unlikely to pass.

Uncertainties remain

Maroš Šefcovic, the European Commission’s vice president in charge of Energy Union, reiterated that Nord Stream 2 would be subject to EU law, although he said it was not yet clear which provisions would apply.

"Let me underline again that EU law applies in principle also to offshore infrastructure under the jurisdiction of member states including their exclusive economic zones. What exactly within EU sectorial legislation applies has to be assessed in regard to their specific provisions," Šefcovic told the debate.

The fact that the pipeline’s starting point was in Russia – a point raised by Nord Stream 2’s Communications Director Ulrich Lissek during the debate – does not mean the project can escape EU law, Šefcovic said.

"The construction of such an important infrastructure project as Nord Stream 2 cannot happen in a legal void," he said. "Neither can it be exclusively operated only according to Russian law. Against the background of colliding legal regimes, Nord Stream 2, if built, has to be operated under a legal framework that also takes due account of the key principles of our energy market rules."

If built, Nord Stream 2 would double the transmission capacity of the existing 55 billion cubic metre per year Nord Stream pipeline. The expansion could be operational by 2019, the expiry date of Russia’s current transit contract with Ukraine.

However, the EU is keen to keep Ukraine – which is a member of the Energy Community – as a key transit country for Russian gas. The current transit agreement brings in annual revenues of around $2 billion for Ukraine.

"Nord Stream 2 and the Energy Union cannot coexist. The expansion of the pipeline strikes at the very heart of the Energy Union – it is against the idea of diversification of energy sources and supplies. It fundamentally endangers our energy security, and strengthens the monopoly of one gas supplier," MEP Jerzy Buzek (EPP, Poland) told the debate.

But Lissek said Russia was only one of several players in the European gas market and that it was competing for market share with other companies. The importance of gas would increase in line with the expansion of renewables, the phase-out of coal-fired generation and uncertainties about the future of nuclear power, he said.

"There is enough for other gas suppliers, for LNG, to fill the [supply] gap," Lissek told the debate. "There are possibilities for other companies to join the market."

Please contact Matt.Shelton@interfax.co.uk for a free trial to Natural Gas Daily or Global Gas Analytics