Zoya Burbeza examines the implications of the EU gas directive amendment on Nord Stream 2

July 18 2019

Zoya Burbeza examines the EU gas directive amendment and its implications on Nord Stream 2

EU directives are legal acts which require member states to achieve a particular result without dictating the means of achieving that result. Their purpose is to focus on business conducted within the EU which routinely affect 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 future, rules governing the internal gas market will also apply to pipelines to and from third countries. The European Parliament voted in favour of the controversial revision in April. 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 quite straightforward: to ensure that 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 serve to 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 explanation, and a more obvious one: Nord Stream 2 is the main target of the amendment. The aim of this 1200km pipeline project is to deliver Russian gas directly to Germany, and in the process, bypass Ukraine, Poland and the Baltic States. Work on Nord Stream 2, which runs beneath the Baltic Sea, began in August 2018. Once completed, it is set to double Russian gas shipments to Germany. 

The costs incurred so far have been considerable: the management of Nord Stream 2 recently confirmed that more than €5.8 billion have already been invested in planning and construction while the eventual project bill will be around €11 billion.

Nord Stream 2 is opposed by the European Commission (EC) and by many Central European countries. Widely perceived as an attempt to bring the pipeline under the EU's regulatory umbrella, the amendment will require the majority state-owned Gazprom to provide “third party access, non-discriminatory practices and transparency”. The Moscow Times recently reported that Gazprom maintains ‘a jealously guarded monopoly’ over gas exports from Russia. 

Without doubt, the political will in Germany and Russia to complete the pipeline is equally strong – unsurprising perhaps, 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 Nord Stream 2 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 a new Transmission System Operator (TSO). 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. This will probably not be pursued, however, for two reasons. First, it would create regulatory uncertainty, and second, it would result in operational delays because of the wide discretion that the EC would be in a position to exercise over conditions that could be imposed as part of granting such exemptions.

And then there is Ukraine. Following the recent election of Volodymyr Zelensky as its new president, relations between Russia and Ukraine are expected to improve. Zelensky’s agenda in office remains opaque, however, as are the policies that he intends to pursue toward Russia and how these will be received, both by the Ukrainian electorate and by the Moscow government.

The Ukraine-Russia gas transit contract expires at the end of this year. If relations between the two countries have improved by then, the likelihood of the contract being renewed on mutually beneficial terms may increase. Compared to an expensive new underwater pipeline, exporting Russian gas to Europe through Ukraine via an existing land pipeline would certainly be more economically viable.

Even so, the prospect of a renewed transit contract is unlikely to result in Gazprom or the Russian government delaying completion of the Nord Stream 2 pipeline. Russia’s long-term strategy seems clear: to bypass former Soviet states and roll out the construction of pipelines directly to its end customers in Europe. 

This strategy will not only reduce its dependency on the evolving and unpredictable politics of its smaller neighbours, but also increase its leverage over them by securing a better control of gas supply for these countries and by having multiple options to export its vast gas supply to the EU. As the world’s largest exporter of natural gas, Russia has by far the world’s largest commercial gas reserves. Currently the second largest producer of natural gas, it has clear ambitions to be the largest in due course. 

In April, the completion of Nord Stream 2 was potentially derailed by another development.

Nord Stream AG, which is a subsidiary of Gazprom and the operator of Nord Stream 2, submitted a third application to the Danish authorities for a route through Danish waters. 
This was submitted more than two years after the first application was made.  

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 also delay Nord Stream 2’s scheduled completion date. However, as with the other potential roadblocks, it is unlikely to prevent it.

Zoya's article was originally published in Offshore Magazine, July 2019, here.

Back to Blogs & Insights