Expert: the battle to stop Nord Stream 2 makes sense

Berlin-based energy market analyst Thomas O’Donnell told the Polish Press Agency the Nord Stream 2 gas pipeline would face serious legal problems in 2022.

On November 16, the Federal Network Agency (German Bundesnetzagentur or BNetzA), which considered Nord Stream 2 AG’s application to operate the pipeline, suspended proceedings and demanded Gazprom to move its operations from Switzerland to Germany completely. The regulator then announced on December 17 that it could not make a certification decision in the first half of 2022 – recalls O’Donnell, an energy market analyst, lecturer at Berlin’s private Hertie University School of Governance and author of The Global Barrel blog.

Nord Stream 2 AG, which built the pipeline and is its sole owner, has a serious problem. The company entirely owned by Russia’s Gazprom must show to be still an “independent”, “competent”, and “neutral” operator of the pipeline, according to current EU legislation.

This is exactly the situation that Moscow and Berlin, enforcing the project, feared most. As a result, Angela Merkel’s officials habitually dismissed allegations by European and American allies that the pipeline would further increase Russia’s advantage over Ukraine. Instead, they constantly reiterated that this was not a geopolitical project, but merely a commercial one. German and Russian officials maintained it should only be subject to German law for the first three or four years. This arrogant attitude and partnership with Moscow not only has brought great damage to Germany’s reputation in the Baltics and Central and Eastern Europe but has also caused alarm within the EU – O’Donnell says.

In retrospect, perhaps Berlin and Moscow’s “dismissive self-confidence” was a bluff and meant to cover their real concerns the project would be “killed off” not only by US sanctions but also by EU competition law. As a result, Nord Stream 2 AG has adopted four successive strategies to deal with the problem, none of which have yielded satisfactory results.

– The EU’s Third Energy Package prohibits the owner of the transported gas – in this case, Gazprom, Russia’s state export monopoly – to own over half of the pipeline transporting its gas. It also requires the neutral granting to third parties access to gas transmission and other antitrust measures – recalls the expert.

As he notes, “at the project’s launch ceremony in September 2015 in St. Petersburg, five European energy companies partnered with NS2 AG and each pledged to share in the co-ownership of 49 per cent of the pipeline. The purpose of the ploy was clear: this percentage could be increased by one or two per cent if necessary.”

Just 19 months after Russia’s invasion of Ukraine, it was also expected that this co-ownership would provide a political cover for the project. However, the entire plan failed. In 2016, Poland’s Competition and Consumer Protection Office (UOKiK) decided against EU companies for failing to consult Polish entities on the project’s impact on the domestic gas sector’s competitiveness. The European courts maintained this decision. Also, the EU Court of Justice said in another case related to Gazprom and Germany that the EU treaties guarantee energy solidarity. In April 2017, Gazprom’s EU partner companies signed financing agreements for the project, but it was already 100 per cent owned by Russia – O’Donnell emphasizes.

Another strategy was to find a company that would buy half of the pipeline. BASF or Gascade, a pipeline company owned by BASF and Gazprom, were the obvious choice in this context, the expert analyses.

However, any potential listed buyer had to consider the risks associated with potential US sanctions. And given Moscow’s unpredictability, this risk was very high over a 25-30 year investment horizon. To make matters worse, US diplomats, to get around the difficulty of imposing legally airtight sanctions on German companies helping to build the pipeline, warned German banks that they too would suffer consequences if their clients were involved in the deal. While US sanctions did not prevent the physical construction of the pipeline, they acted virtually, burying any hope of NS2 AG finding a buyer – the analyst concludes.

Anticipating difficulties, both Russian and German officials tried to impouse the interpretation that the EU’s Third Energy Package does not apply to pipelines laid on the seabed. As early as October 28, 2015, Germany’s then Vice-Chancellor Sigmar Gabriel visited Putin in Moscow and promised the pipeline would be approved according to German rather than EU law.

Because of the European Commission’s legislative services intervention, the administration of the European Commission chief Jean-Claude Juncker, the European Parliament and Emmanuel Macron in the Council of Europe, Angela Merkel had to agree to pass an amendment extending the application of the third package in Germany. So now the gas pipeline is subject to EU law – O’Donnell points out but cautions that this is not yet a reason to proclaim victory.

– Since Gazprom could not sell half of Nord Stream 2 because of the risk of sanctions, the only option it has now is to claim that Nord Stream 2 AG is an +independent+ company. However, from a legal point of view, this is a preposterous and untenable claim in light of the CJEU law to date. Moreover, the possible approval of the BNetzA still has to be considered by the European Commission, and Poland would challenge the final approval in the EU Court of Justice. So, briefly, the fight is still on – concludes Thomas O’Donnell.

Thomas O’Donnell
Photo.: Freie Universität Berlin


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