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Nord Stream 2 hits two more hurdles

Controversial Russian pipeline project suffers two more setbacks in its TPA exemption fight

May has not been kind to the backers of the Russia-Germany Nord Stream 2 gas pipeline in their efforts to escape obligations to offer non-discriminatory third-party access (TPA) under the EU’s revised Gas Directive.

First, in mid-May, German energy regulator the Bundesnetzagentur rejected an application from Nord Stream 2’s Swiss holding company for a derogation from the directive for the section of the pipeline on German soil. Later in the month, the EU Court of Justice threw out the company’s bid to annul the revised directive altogether.

Nord Stream 2 would double capacity on the existing Russia-Germany pipeline to 110bn m³/yr, enabling Russia’s Gazprom to ship more gas directly to western Europe under the Baltic Sea as an alternative to its existing Ukraine-Slovakia and Belarus-Poland overland routes. Gazprom has a monopoly on Russian pipeline gas exports and is 100pc owner of Nord Stream 2 AG—although Shell, Germany’s Uniper and Wintershall, France’s Engie and Austria’s OMV have made up 50pc of the investment commitment.

ECT route

It now seems the Energy Charter Treaty (ECT) could be Russia’s only chance to win exemption for the pipeline from EU market rules on TPA and ownership unbundling, which were revised in April-May 2019 to include infrastructure not within EU member states but delivering to their borders. Nord Stream 2 AG launched legal proceedings against the EU under the ECT last year, citing unfair treatment.

“The coronavirus effect has further damaged the business case for Nord Stream 2” Westphal, German Institute for International and Security Affairs

The claim is not entirely unfounded. The EU has afforded concessions in the past, including a 25-year exemption from TPA rules to the 10bn m³/yr Trans-Adriatic Pipeline (Tap) from Turkey to Greece.

But Moscow may find it tricky to convince a tribunal. Comparable claims taken before a WTO panel in the past were mostly rejected. And the European Commission is currently negotiating with the fifty or so signatories to the ECT in an effort to make it more compatible with its Third Energy Package.

And while Nord Stream AG’s domicile in ECT signatory Switzerland allows it to bring the suit, Russia’s withdrawal from the ECT in 2009 is unlikely to help its case. In any case, proceedings are expected to last somewhere between two and four years.

Export monopoly

On the other hand, Gazprom’s legal moves are somewhat Quixotic—given that it is neither particularly onerous to unbundle a single pipeline to meet EU rules, nor does a TPA obligation make any real difference as long as it holds its monopoly on Russian exports. In simple terms, no other actor could feasibly use any capacity made available.

In theory, having an exemption from TPA rules could allow Gazprom to try to hoard Nord Stream 2 capacity even if other Russian producers were given the right to export. But it seems unlikely that, if Gazprom lost the export majority argument in Moscow, it could rely on an EU-awarded derogation to confound the Kremlin.

Fighting the revised directive’s application to Nord Stream 2 is “chiefly for political reasons: Moscow would not want to be seen as giving in to… Brussels”, argues Kirsten Westphal, a senior associate with thinktank the German Institute for International and Security Affairs. “I can see an end to Gazprom’s export monopoly for piped gas to China, but not to Europe. Rosneft’s gas may be needed to fill the Power of Siberia pipeline, but it is unlikely that Moscow will allow companies other than Gazprom to use Nord Stream 2,” she says.

Getting it done

A greater risk to Nord Stream 2 are US sanctions imposed in December last year, which prompted Swiss-Dutch company Allseas to withdraw its pipelaying vessel from the project. It is unclear when—or even if—pipelaying will resume, or whether the project can be completed using Russian vessels.  

The economics of Nord Stream 2, or indeed Nord Stream 1, never made any real sense—why invest $10bn to in effect replicate capacity already offered in the fully amortised Ukraine and Belarus routes? Given most of the costs are now sunk, however, the project will likely be completed, maybe even in 2021 if the pipelaying issue is resolved.

But potential gas demand destruction in the aftermath of the Covid-19 pandemic will erode even the fig leaf of justification behind which Nord Stream 2’s European backers tried to hide Moscow’s nakedly political motivations. “The Western companies in the project were confident there would be an increase in gas demand,” says Westphal, affording them a benefit of the doubt many would call generous.

“This is now questionable. The coronavirus effect has further damaged the business case for Nord Stream 2.”

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