Analysis
What the new EU Gas Directive really means for Nord Stream 2
On Thursday, February 7th, the French foreign ministry revealed to the public that it would back a Romanian proposed new Gas Directive for the EU. If implemented, the new Gas Directive would harm the construction and operation of the Nord Stream 2 gas-pipeline connecting Russian and Germany via the Baltic Sea. One day later, after an intervention of the German government, France and Germany agreed to amend the new Gas Directive, apparently in favor of Nord Stream 2. The amendment was supported by all, but one EU member states. The events of the two days signaled a surprising change in controversy around Nord Stream 2.
The pipeline project has many opponents in Europe and even across the Atlantic. The major argument against Nord Stream 2 is the growing dependency on Russian gas and increased vulnerability to Russian political threats. The German government instead sees the pipeline to contribute to the development of the European gas market and energy security on the continent. Real business interests, however, are driving the conflict so that the controversy around Nord Stream 2 became internationally highly politicized.
The U.S. openly threaten to sanction the pipeline and companies involved in the project at a time, when U.S. gas companies try to enter the gas export market. The most influential EU institutions, the EU Commission and the EU Parliament, are skeptical of Nord Stream 2. Several, mostly Central European countries see a geopolitical threat in the pipeline. On the other side, Germany’s status as a major European gas hub would grow with Nord Stream 2. Next to the Russian gas company Gazprom, German, Austrian, Dutch, and French energy companies benefit from Nord Stream 2.
It was certainly a surprise when the French government took a stance against the pipeline on Thursday. Without the support of France, Germany would have lost the most important proponent of the pipeline in the EU. The second surprise was France’s backpedaling on its position a day later when its government agreed with Germany on an amended new Gas Directive. Not less surprising is that almost all EU members agreed on this amendment.
The question, why France initially stepped out and later returned are difficult to assess. Several factors, of economic and political nature, might have influenced their decision. But these events prove, once again, how deeply politicized the controversy around Nord Stream 2 has become. The closer look at the new Gas Directive might bring us more clarity.
The EU takes a political stance against Nord Stream 2.
It is neither a new verdict nor a secret that the controversy around Nord Stream 2 is highly emotional and politized. Opponents became deaf for economic rationality behind the project, proponents are blind for the rift the pipeline creates across the European continent. Unfortunately, EU Institutions appear to have taken a position against the pipeline and failed to advocate between both sides. The EU’s new Gas Directive, and even its amended version, is not supporting the EU gas market to develop as intended. The original goal of the EU Gas Directive is the liberalization of the European gas market, the promotion of competition, and ease of trade between member states. The new Gas Directive, however, diverts these goals in order to antagonize Nord Stream 2.
It is here important to acknowledge that Nord Stream 2 is currently the EU’s single and viable infrastructure project for considerable high volumes of gas imports. The new Gas Directive puts more regulation on this pipeline project by design, so that its economic viability is at risk – and eventually the construction of Nord Stream 2 could be stopped. Only because of the bilateral intervention of Germany and France, the new Gas Directive will not have detrimental effects on the pipeline as originally intended.
The politicization of Nord Stream 2 is a catastrophe for the EU for several reasons:
- Individual
cas law-making: Individual case law-making in the EU will have to be applied for all future import infrastructure projects and thus makes it harder for third countries to build pipelines or import terminals. - Political risk: Individual case law-making creates political risk for gas exporting nations. Exporters will have difficulties to understand the EU market rules, or even expect discrimination.
- National- and EU interests: Although the amended new Gas Directive
allows member states to maintain control over deals with gas exporting third countries, EU members are obliged to apply EU law. Those circumstances are prone to conflicts between national interests and EU interests.
The amended new Gas Directive makes Nord Stream 2 a political case by law.
The originally proposed new Gas Directive included several aspects that are important to be mentioned in this context. These aspects demonstrate the problem of the EU to develop a unified gas market and to satisfy concerns of individual members.
At first, it is necessary to understand that the content of the originally new Gas Directive has not been changed by the amended version. The difference between both is that in the amended version, it is not the EU Commission who will have control over the utilization of the directive, but the authorities of the EU member, where the gas import takes place. The affected EU member, however, is committed to complying with the original new Gas Directive.
The most important change of the new Gas Directive over preceding Gas Directives is the fact that import pipelines from third countries entering the EU will be subject to EU law. The fact is disputed, as in case of Nord Stream 2, it potentially conflicts with UNCLOS (“the law of the seas”) and WTO rules, which however is not part of the discussion in this article.
Assuming that EU law will be applied to Nord Stream 2, it would mean that the pipeline itself cannot be owned by the same company that provides gas to the pipeline, which is Gazprom. This contradicts with Gazprom’s business strategy. The Russian company builds Nord Stream 2 and intends to own, operate, and supply the pipeline later on. It is thus hard to believe that Gazprom wants to change its intention and potentially would have to reconsider the construction pipeline project as such. The so-called unbundling of ownership is the EU’s idea to liberalize the market. Unbundled ownership is already in practice within the EU and affects the Nord Stream 2 pipeline onshore extension. The only extension of Nord Stream 2 in the EU, so far, is the interconnector pipeline EUGAL. EUGAL is compliant to EU law, which means the owner and operator of the pipeline is not the pipeline supplier. For the fact that Nord Stream 2 can only feed into EUGAL at the moment, Nord Stream 2 itself is already committed to EU law in its full capacity – all future interconnecting pipelines will be subject to EU law as well. This means in practical terms that Gazprom has de facto no control over its supplied gas, once it entered the EUGAL pipeline.
The new Gas Directive now requires ownership unbundling also for import pipelines. For Nord Stream 2 this would entail an owner different to Gazprom, and for Gazprom to sell its gas before entering the pipeline to third suppliers. As Gazprom is Russia’s pipeline gas export monopoly by law, these conditions are rather difficult to achieve – but not impossible, if Germany remains in control.
The amended new Gas Directive retains control for German authorities over the Nord Stream 2 pipeline. Although Germany is still committed to the new Gas Directive, it has two opportunities to ease the conflict between the new Gas Directive and Nord Stream 2 and the pipeline’s future operation. The first opportunity is granting an exemption from the new Gas Directive for Nord Stream 2. With an exemption, the pipeline could be operated as planned. The rules for granting exemptions are vague and thus prone to political decisions. According to the new Gas Directive, exemptions can be given once the new infrastructure is either supporting the EU’s energy supply security, or it is not detrimental to EU competition. The German government would unlikely have problems to claim these facts for Nord Stream 2, while the EU Commission is more skeptical about the pipeline’s support of energy security.
The second opportunity is a German or international joint venture that takes ownership over Nord Stream 2 so that the requirements for unbundling are fulfilled. Looking back at EUGAL, the interconnector pipeline is owned to a majority by the German company GASCADE. GASCADE itself is owned to 50 percent by Gazprom. The possibility of a similar ownership splitting for Nord Stream 2 is questionable but remains at hand. The non-transparency of ownership within the German gas market is a problem often articulated by Nord Stream 2 opponents – and in this case, has the potential to violate the EU unbundling rules.
Whatever route the German authorities will take in order to keep Nord Stream 2 alive – at this stage, the exemptions policy is more likely –, the decision needs to be politically backed by the German government. With the amended new Gas Directive, the EU Commission has lost the opportunity to get a grip on Nord Stream 2.
Why the EU accepts the amended new Gas Directive.
Despite the fact that Nord Stream 2 de facto got a green light with the amended new Gas Directive, the EU members – except Bulgaria -, and most Nord Stream 2 opponents, agreed to the amended new Gas Directive. The new Gas Directive has also already passed the EU Parliaments approval. While it is difficult to assess the EU member’s single motive to approve the French-German amendment, there are some reasons that might have triggered some EU members to agree.
- National- over EU control: Any EU member will have to comply with the new Gas Directive. While the Gas Directive could potentially affect the energy security of a single member, the authorities are rather keen to maintain control.
- Clarity over future pipelines: As the new Gas Directive applies to (almost) every third country import pipeline (exceptions for Norwegian pipelines are not discussed in this article), EU members receive legal clarity on how to proceed with current or future projects. For example, the exemption policy might benefit some EU members that import gas from North Africa as well.
- Guarantee of compliance: As Nord Stream 2 is probably not compliant to the new Gas Directive, the operation of the pipeline will depend on the German exemption policy. The exemption policy might not be as strict as the EU Commission’s policy, but at least provide Gazprom with some insecurity. This, in turn, would lead Gazprom to become more compliant to the EU market.
- Russia as a business partner: Some EU members are not keen to alienate Russia too much. Russia remains the major gas supplier to the EU and so far, and in specific for the already existing Nord Stream pipeline, made adjustments to its business strategy comforting EU rules. Further alienation could backfire elsewhere.
Altogether, this article blocked out the foreign political aspect of the controversy around Nord Stream 2. This includes the opportunity of countries using foreign relations to achieve their goals. The question, whether France has seen political pressure from across the Atlantic or from its Eastern partner Germany in this case, cannot be answered. Also, the question of how much political or economic pressure EU members receive from a German-French leadership within the EU is not answered in this article. However, those factors certainly play a role in this scenario.
The verdict is that the EU has lost control over the development of the European gas market. It seems that EU members have shown unity in an agreement that clarifies the new rules of the gas market, but in reality, EU members have taken away the authority of the EU Commission. The case of Nord Stream 2 remains highly political – and even worse its politicization is practically EU law.