June 13, 2017
Special feature IEA’s Energy Technology Perspectives:
Clean energy not on track, efficiency has stalled
BRUSSELS INSIDER #1 by Sonja van Renssen
EU tries to unlock Nord Stream 2 controversy
June 13, 2017
After months of internal wrangling, the European Commission has finally taken a tentative step forward in the tumultuous Nord Stream 2 debate. It announced on Friday 9 June that it will seek a mandate from EU member states to negotiate “a special legal framework” for the new pipeline from Russia to Germany. The Nord Stream 2 consortium called it “entirely unnecessary”. The US welcomed it. Energy experts wonder whether it is a genuine attempt at compromise – or purely driven by EU internal politics – and how far it will get.
“Nord Stream 2 does not contribute to the Energy Union’s objectives,” the European Commission’s Vice-President for the Energy Union Maroš Šefčovič said in a press release last Friday. He continued: “If the pipeline is nevertheless built, the least we have to do is to make sure that it will be operated in a transparent manner and in line with the main EU energy market rules.”
On Friday, the Commission announced that it wants “to negotiate with Russia a specific regime which will apply key principles of EU energy law to Nord Stream 2”. These principles are transparency in pipeline operation, non-discriminatory tariff setting, “an appropriate level” of non-discriminatory third party access and “a degree of separation” between supply and transmission. These are the – slightly fudged – principles of the EU’s third energy market liberalisation package.
Commissioner for Climate Action and Energy Miguel Arias Cañete explained: “As any other infrastructure project in the EU, Nord Stream 2 cannot and should not operate in a legal void or according to a third country’s energy laws only.” In a business-as-usual scenario, Nord Stream 2 “could allow a single supplier [read: Gazprom] to further strengthen its position on the EU gas market” and “endanger” existing supply routes, notably via Ukraine.
Nord Stream 2 the company, owned by Gazprom, dismissed the Commission’s initiative as “entirely unnecessary”. In a detailed reaction to the announcement, it argues that there is no need for it because a “comprehensive legal framework… is already in place”. In other words: “There is no legal void”.
The company points to several examples of this existing legal framework, including the UN Convention on the Law of the Sea (UNCLOS), the Espoo Convention on Transboundary Environmental Impact Assessments and national permitting laws.
The permits that Nord Stream 2 needs to go ahead will be decided by the national authorities of the countries through which the pipeline passes – Russia, Finland, Sweden, Denmark and Germany – the company said. It is also consulting other countries that may be affected – Poland, Lithuania, Latvia and Estonia – as per the Espoo Convention.
Nord Stream 2 argues that the existing legal framework has been sufficient to underpin six “comparable” import pipelines, including Nord Stream 1 (although the third package did not yet exist then). It notes that the German energy regulator Bundesnetzagentur (Germany is the project’s biggest backer) has already warned the Commission against “discriminatory practice”.
To sum up, Nord Stream 2 says: “This sort of political cherry-picking sets a dangerous precedent for any commercial infrastructure investment in the EU.”
The Commission’s announcement on Friday does not come out of the blue. There has been an intense debate about whether the EU’s third energy package should be applied to the offshore part of Nord Stream 2 (it definitely applies to the onshore connection, which is callee Eugal). The Commission’s legal services department – and Bundesnetzagentur – has said it should not.
In a decisive letter sent to Denmark and Sweden on 28 March – these countries had requested guidance from the Commission – Šefčovič and Cañete seemed to confirm that the third package did not automatically apply, introduced the term “legal void” and suggested that a special legal framework might be negotiated to fill it. Friday’s announcement is a follow-up to this letter.
It has some heavy-hitters behind it: the Commission’s decision was heralded all the way from across the Atlantic. In a telephone press briefing on 1 June, US Acting Special Envoy for International Energy Affairs Mary Burce Warlick said: “We view energy security as critical to achieving a Europe able to serve as a forceful ally. Russian gas can and should remain a part of the diversified energy mix for Europe, but our priority is helping Europe minimise dependency on any one single supplier.” [read: Gazprom.]
The construction of Nord Stream 2 would concentrate 80% of Russian gas imports to the EU through a single route, she added. Together with Turkstream, it would give Gazprom the technical ability to end gas transit through Ukraine by the end of the decade, depriving the country of over US$2 billion a year in transit revenues.
Hence, the US welcomes “the proposed European Council mandate that we and many member states believe should apply the third energy package [to] the entirety of Nord Stream 2, both on-shore and off-shore”. Warlick argued that “all aspects of these projects [have to] be carefully looked at” and “all member states who have concerns… ought to have a voice at the table”. (I.e. not just those states through which the pipeline passes, through national permitting decisions.)
For many energy experts, the Commission’s move is clearly political. “I do not really see a legal void,” Kirsten Westphal, a Senior Associate at the Stiftung Wissenschaft und Politik (SWP) at the German Institute for International and Security Affairs, told Energy Post. “There are clear legal procedures [based on international law] in every member state.” Rather, she says: “If you take the Energy Union seriously, this project does not really fit.”
“Is is really about seeking a common framework or just about delaying?” wondered Severin Fischer, a Senior Researcher at the Center for Security Studies at ETH Zurich in Switzerland, on Twitter. “Would a deal be accepted in Poland and the Baltic states?” he added.
Probably not, though Nord Stream 2’s critics could be outvoted on this one. The Commission told media outlet Euractiv on Friday that the decision on a mandate would be taken by qualified majority in the EU Council, meaning that at least 16 out of 28 member states (or member states representing at least 65% of the EU population) would have to vote in favour. Some experts however, such as Westphal, do not think qualified majority voting is a given. They expect a debate in Council over whether a unanimous decision is needed.
If Germany is certainly not expected to be enthusiastic about the mandate – it has consistently argued that this is a commercial project with no legal uncertainties – Poland might not be either, Westphal suggests moreover.
The problem is that if there is a mandate, the debate over Nord Stream 2 shifts from whether it will be built to under what conditions it will be built. By accepting the need for a mandate, Poland and other Nord Stream critics would effectively accept that the project will happen. Paradoxically, a mandate would be a big boost for the Energy Union in terms of ushering in a united stance on energy policy, even if the Commission argues that the project itself does not contribute to the Union’s energy security goals.
Poland and other critics might accept a mandate if they feel they cannot block the project altogether and switch instead to trying to delay it, through protracted negotiations.
Certainly Polish MEP and chair of the European Parliament’s energy and industry committee Jerzy Buzek lost no time in reminding everyone via Twitter on Friday that “any agreement with Russia on Nord Stream 2 will need to go through the European Parliament which has been fiercely against this project since the very beginning”. That’s if it ever gets as far as an actual agreement. First, the Commission must win its mandate.
BRUSSELS INSIDER #2 by Sonja van Renssen
What is behind the latest move in the battle over Nord Stream 2
June 13, 2017
With its proposal for a special legal regime for Nord Stream 2, the European Commission wants the EU’s energy market rules to apply beyond European borders. But this “influences the legal situation inside Russia”, one energy expert warns. It is likely to require some kind of “security of demand” to get Russia to the table. In the meantime, Nord Stream 2 the company argues that the EU internal market for gas is sufficiently developed to avoid any threat to security of supply from Gazprom, its owner. Many Central and Eastern Europe countries and companies take a different view: they see an increasingly dominant Gazprom that the Commission is failing to curb through its decisions in a Gazprom anti-trust case and use of the OPAL pipeline.
The European Commission’s proposal to negotiate “a special legal framework” for Nord Stream 2 last Friday looks like a proposal for an intergovernmental agreement (IGA) between the EU and Russia. These kinds of agreements have typically underpinned new oil and gas pipelines between EU and non-EU states. The Commission won new powers in December to scrutinise bilateral oil and gas IGAs before they are signed. Now it appears to be taking the unprecedented step of proposing to negotiate an IGA on behalf of the EU.
The Commission would not confirm to Energy Post that the mandate it seeks is for an IGA, however. Perhaps this is because the agreement would be unprecedented in terms of scope. IGAs have typically dealt with more technical matters, whereas the big question here is all about third party access. “[The Commission’s proposal] is very far-reaching,” says Kirsten Westphal, a Senior Associate at the Stiftung Wissenschaft und Politik (SWP) at the German Institute for International and Security Affairs, in an interview. “It influences the legal situation inside Russia.”
There have been significant reforms in the Russian gas sector, with liberalisation of the LNG market and growing pressure to open up the pipeline market also. The Commission’s proposal reaches into this debate, but with unknown effects – it could end up strengthening a backlash to these reforms for example.
It is hard to see how Russia would welcome such interference, in whatever direction. For Westphal, the mandate needs to offer some kind of security of demand to entice the Russians to engage with it in the first place. This was also the point of a mandate that the Commission cites as an example of a precedent for its current initiative. Back in 2011, the Commission requested and received a mandate to negotiate a treaty between the EU, Azerbaijan and Turkmenistan to build a Trans-Caspian Pipeline System. The agreement sought to pool the gas demand of the EU-27 to strengthen the case for the pipeline.
“It could be a way of accommodating Nord Stream 2 with the Energy Union,” suggests Westphal. “But then the EU has to offer predictability of demand.” If the mandate’s pretext is legal and the real driver political, for her the key to its success is economic. “Does the EU still need these big gas pipelines?”
One of Nord Stream 2’s arguments against the Commission’s initiative is that it understates the progress of the EU internal energy market. “Effective rules are in place to let the market decide whether to buy Nord Stream 2 gas,” it said in a reaction on Friday. “In view of the variety of supply options, it [Nord Stream 2] cannot lead to a dominant position on the EU gas market for any supplier.” It is “wrong to assume that Nord Stream 2 will replace the Ukrainian or any other existing transport route”. (See also the Energy Post panel debate video on the economic consequences of Nord Stream 2 for Europe.)
Georg Zachmann, a Senior Fellow at Bruegel, a Brussels-based think tank, says: “My impression is that with the continued availability of abundant LNG and flexibility to move away from gas in electricity generation, the EU continues to have some leverage in bringing about market rules [that work to its advantage].”
But this is not how many Central and Eastern European countries and their companies feel about it. Gas markets there are far less liquid. And the problem is that Nord Stream 2 is but one of a slew of EU-Russian (energy) issues currently on the table. Together with the draft settlement in the Gazprom anti-trust case and the Commission’s decision (still in court) on the OPAL pipeline, they see a Russian company growing not declining in power.
In early May, Poland, Estonia and Lithuania criticised the Commission’s proposed anti-trust settlement, calling for Gazprom to be fined and make much stronger commitments to ensure more competition in Central and Eastern European markets. In a nutshell, these countries argue that the commitments that Gazprom has proposed are already out of date, in part because they do not adequately take into account the changing basis of the market from long- to short-term contracts.
In a briefing to journalists in Brussels on 30 May, Polish state-controlled oil and gas company PGNiG also argued in favour of a fine and additional commitments to prevent future anti-trust violations. It wants Gazprom to commit to:
- Market-based pricing (with the possibility for arbitration).
- Take-or-pay capped at 75% (without the possibility for arbitration).
- Divestment in gas transport and storage facilities (notably the Yamal and OPAL pipelines, and gas storage facility Katharina).
- Application of network codes and bidirectional gas flows on all interconnectors between Central and Eastern Europe and the Energy Community.
- Full compliance with all principles of the EU’s third energy package, including for Nord Stream 1 and 2.
To illustrate just how dominant Gazprom is, PGNiG’s CEO Piotr Woźniak noted that at an auction in March, the Russian giant had bought up all existing capacities on EUGAL, the pipeline that would distribute Nord Stream 2 gas within Europe, for the next 20 years. And that before the pipeline has even been built! “How can one company book 100% of capacity on a planned pipeline out until 2039?” he demanded. This is not taken into account in the Commission’s anti-trust case, he added, which looks backwards, not forwards. In his mind, it will be “fully feasible” for Gazprom to completely bypass Ukraine in future.
There is no formal end-date for the Commission’s anti-trust proceedings against Gazprom. After a meeting between Gazprom’s Deputy Chief Executive Alexander Medvedev and EU Competition Commissioner Margrethe Vestager on 29 May, both parties said further talks were needed.
In the meantime, many of the same faces are also waiting for a decision from the European Court of Justice on a series of legal challenges, kicked off by Poland and PGNiG last December, to the Commission’s decision on 28 October on conditions for use of the OPAL pipeline. This carries Russian gas from Nord Stream 1 across Germany to the Czech Republic.
Central and Eastern Europe recognise that in the long term, only diversification of supply and more competition can deliver real security of gas supplies. The arrival of the first shipment of US LNG in Poland on 7 June will have come as a relief. They talk excitedly too about a new interconnector from Poland to Norway, via Denmark, for which a Memorandum of Understanding was signed between Denmark and Poland in Copenhagen on Friday, the same day that the Commission made its Nord Stream 2 proposal. The Commission is “actively facilitating” the Poland-Norway hook-up, it says.
The Commission’s Nord Stream 2 initiative has to be seen in the context of all these other developments. From its perspective, it is giving member states a fresh chance to embrace the Energy Union – with the safety of knowing that if it doesn’t get the mandate, it’s absolved of all responsibility over Nord Stream 2. The really interesting question is whether the Commission’s proposal is purely motivated by such internal politics, or whether it really is proposing to engage with Russia on a new plane.
That depends on what’s in the mandate and more specifically, if Westphal is correct, whether the Commission has a vision for its use of gas going forward. Russia, in the meantime, may very well plough ahead with Nord Stream 2 while keeping the door open to talks about it. Certainly Nord Stream 2 has said it will continue with the project as planned. The EU’s negotiating partners seem to be taking the long-term view, whether or not Brussels does.