Russia Readies its Nord Stream 2 Weaponry

Photo credit: Helio Dilolwa.
Photo credit: Helio Dilolwa.

The pipeline is already being used to test EU resolve. This must be resisted.

The U.S.-EU deal on Nord Stream 2 published on July 21 makes a commitment to support EU law and specifically the bloc’s energy law. The authors of the deal have however ignored the current strategy of the gas pipeline’s driving force — the Kremlin-linked energy giant Gazprom. Russia is now preparing to ride roughshod over EU rules and seek, through brute force, to use its gas exports to make western Europe accept the pipeline on its own terms.

Russia’s bid to undermine the rule of law in the European Union, already underway, is likely to trigger a reaction from the European Commission as the “Guardian of the Treaties” and from many EU member states. This next battle will no longer be about the pipeline and energy security but about more existential issues, including the EU’s rule of law and the uniform applicability of its legal order. As a result of the deal, the Biden administration will no longer be seeking to block the pipeline, but the project is very obviously heading straight into a legal swamp.

So what is happening? The operation of Nord Stream 2 requires authorization under EU law. This is principally contained in the Gas Directive 2009, and the 2019 amendment to the Gas Directive, which formally extends EU energy law to all import pipelines. So, Nord Stream 2’s owner Gazprom must comply with the ownership unbundling rules (i.e. it has to sell the pipeline to a third party); third party access (i.e. Gazprom has to permit competitors such as Novatek and Rosneft to have access) and tariff transparency (which could mean customers on long term supply contracts using that tariff information to seek price reviews of their own contract prices.)

In addition, because Gazprom is a non-EU entity, it is subject to Article 11 of the Gas Directive, the regulator (here the German regulator) has to make a supply security risk assessment before certification, answering the question, Is the owner of the pipeline a supply security risk to the member state or to the Union as a whole? Given Gazprom’s inglorious history of cuts and threats of cut-offs, and more recently the 2014-2015 attempt to cut gas flows to Slovakia, Poland, and Hungary to stop gas being resold to Ukraine, that assessment is problematic.

To make matters worse for Gazprom, on 15 July in C-848/19P Germany v. Poland, the Court of Justice of the European Union (CJEU) supported an expansive interpretation of the principle of solidarity contained in the EU’s energy provision, Article 194(1). This means that the German regulator will be forced to consider, at all stages of the regulatory process, the interests of all member states. Furthermore, since the German regulator is applying EU law, it is subject to supervision by the European Commission, and ultimately litigation before the CJEU by the Commission or member states (who unlike U.S. states before the Supreme Court, have standing rights in all cases and can always bring a case to enforce Union law.)

It should be noted that the deal says that the U.S. and Germany support the “key principles enshrined in the EU’s Third Energy Package of diversity and supply security.” And that, “Germany underscores that it will abide by both the letter and spirit of the Third Energy Package with Nord Stream 2 under German jurisdiction to ensure unbundling and third-party access.” Quite why Germany feels the need to state that it will obey EU law is moot. Perhaps it’s because current Gazprom market operations are designed to undermine both the letter and spirit of the Third Energy Package and its principal legislative element, the Gas Directive 2009.

Russian gas exports to Europe are currently running 20% below pre-pandemic levels. Furthermore, Gazprom is drawing from its European gas storage to supply EU-based customers. Following a severe winter, European gas storage is approximately 40% below July 2020 levels. This has resulted in European natural gas prices spiraling upwards to $10 MMBtu, the highest European price for 13 years. At the same time Elena Burmistrova, Director General of Gazprom Export, has been clear that the company, “would be able to cover additional demand with the commissioning of Nord Stream 2.” The statement blithely ignores the fact that there is currently 100bcm of available Ukrainian transit capacity through which Russian gas could flow to EU markets immediately.

This is clearly designed to pressure EU regulators to force through Nord Stream 2, by an implicit threat to withhold gas exports. There will be sufficient Russian gas exports, Gazprom is saying, but only if Nord Stream 2 is cleared, and regardless of EU rules.

Gazprom’s disdain for EU rules is clear elsewhere. Nord Stream 2 recently applied to commence the certification process under the Gas Directive 2009. However, it can only do so if it commences the process of ownership unbundling. Gazprom cannot both provide the gas and own the pipeline. On June 24, Nord Stream 2 nonetheless applied to become an independent system operator (ISO) or independent transmission operator (ITO) (the press release is unclear as to which) with the German regulator.  Certification as an ITO or ISO allows the pipeline owner to continue (albeit with significant regulation) to own the pipeline and supply gas. However, that option is only available to legacy pipelines already completed and in operation. As with the attempt to leverage its gas flows to force Nord Stream 2 through the EU’s regulatory system, this application marks a further blatant disregard for EU legal norms.

Gazprom is using the fear of high natural gas prices and shortages once the weather becomes colder. It is not a new tactic, since it is entirely reminiscent of the crude but effective approach used by the company in the past, but it gives the lie to any hope that Russia might seek a less bellicose approach to its energy customers.

At the very least, Germany’s commitment to comply with the letter and spirit of the Third Energy Package looks a little hollow in the face of Russia’s open disdain for the rules contained in that package. This attempt is continuing, prices are already rising, gas shortages already exist and no doubt a puzzled German energy regulator is wondering what it is going to do with Nord Stream 2’s ITO/ISO application.

The difficulty for both the U.S. and Germany is that Nord Stream 2 is no longer about energy security or Ukrainian independence, serious as those issues are. It becomes instead an existential battle for the uniform application of the rule of law, and particularly EU law, across Union territory. This is a battle that the European Commission and many member states will have to fight and win. If the law falls, so does the Union.

July 22, 2021