European Commission plans to complicate construction of Nord Stream 2

The European Commission has proposed a new law that could complicate Russia's plan to build a massive new gas pipeline to Germany. But jurisdictional issues, timing, and derogations mean the fate of the project is likely to be decided by Moscow and Berlin. As EuObserver writes in an article "New EU law takes aim at Russia pipeline", Wednesday's (8 November) bill amends a 2009 law to clarify that EU anti-monopoly legislation also applies to offshore pipeline segments on EU territory.

That would mean that Russia's future Nord Stream 2 gas pipeline, part of which is to lie in German and Danish territorial waters in the Baltic Sea, would have to be operated by a firm other than its builder, Gazprom, and would be forced to grant access to EU clients, such as Poland or the Baltic states, even if Russia wanted to block them. The same demands prompted Russia to abandon a pipeline to Bulgaria, called South Stream, three years ago.

EU energy commissioner Maros Sefcovic told press on Tuesday that the new bill was not aimed at blocking Nord Stream 2. He said the Commission came out with the change due to "competing legal opinions" on the Russian project, that it was designed to give "long-term legal certainty for all stakeholders", and that it would "apply to all existing and future pipelines equally."

But the new pipeline, which would concentrate 80 percent of Russian gas exports on the German route, goes against EU efforts to make easterly EU states less vulnerable to Russian cut-offs and price gouging.

It also threatens to harm Ukraine by making its transit pipelines obsolete at a time when Kiev is trying to align itself with the West.

"The Commission sees no need for new infrastructure of the magnitude of Nord Stream 2," it said in a memo accompanying the new bill. Sefcovic also described the project as being "controversial" on Wednesday. The Commission note said the EU has no power to force Russia to apply its laws on those parts of the pipeline that lie in Russian or international waters, however. "The proposal clarifies that EU law applies in EU jurisdictions. There is therefore no extraterritorial application," the memo said.

The jurisdictional issue means it would be up to Berlin to negotiate a Nord Stream 2 deal with Moscow in line with the new EU measures. The Commission warned that if Russia did not agree to apply EU law, "it [would] not [be] practical to have different regulatory regimes apply to the two ends of the same pipeline". It also reiterated its offer to negotiate with Russia on behalf of Germany and the rest of the EU.

Commission offer

But if Germany rejects the offer and if the pipeline model ends up being impractical by Commission standards, Wednesday's legal amendment gives it no power to force Berlin's hand. If Denmark objects to Nord Stream 2 going through its waters because it does not conform with the new EU law, then Russia could alter its route to bypass Danish waters. With Nord Stream 2 to come online by the end of 2019, the Commission said the gas law tweak should be agreed by EU states and by MEPs in a "fast-track" procedure by the end of next year.

The bill is likely to face objections not just from Germany, but also Austria, France, the Netherlands, and the UK, whose top energy firms are investing almost €1 billion each in the Russian project. If the law is passed after Nord Stream 2 becomes an "existing" pipeline, the bill also enables Germany to pass a national law granting itself a "derogation" from the new rules. "The Commission proposal on derogations concerns gas pipelines already in operation," its memo said. Referring to Germany's option to grant itself a derogation on a previous Russia pipeline, Nord Stream 1, which came online in 2012, the Commission said "the procedure would follow the respective administrative law of the member state in question." The gas law amendment is unlikely to make happy reading for Gazprom and the Kremlin despite its limitations.

Strategic uncertainty

With the Nord Stream 2 consortium planning to ask banks next year to finance the majority of the pipeline's €9.5 billion cost, UK energy consultancy Platts said in a note that Sefcovic's bill could deter investors because it "extends legal uncertainty around the pipeline."

The threat of US sanctions, passed earlier this year, against EU firms that take part in Russian energy projects could also deter capital markets.

"The financing of such large infrastructure projects becomes almost impossible after the introduction of such sanctions", Rainer Seele, the CEO of Austrian firm OMV, one of the Nord Stream 2 investors, said in Moscow in September.

Congress approved the measures for geopolitical reasons, with Russia hawks saying it would make nonsense of previous EU and US economic sanctions on Russia over Ukraine if the pipeline was built. The EU sanctions, imposed in 2014, were designed not to cover gas exports, even though an internal Commission paper at the time said that could be an option if the Ukraine conflict escalated.

Russian gas exports to the EU went up by 7.68 billion cubic metres (BCM) to 80.67 BCM in the first half of 2017 compared to the same period last year, Platts noted. Nearly half of the 9.5 percent increase, 3.61 BCM, came via the Nord Stream 1 pipeline to Germany.