In his latest article, professor Alan Riley argues that “The third energy package (..) poses far greater difficulties for Gazprom than the second energy package regime, notably with the requirement for ownership unbundling and the supply security analysis required by Article 11 of the gas directive 2009”[1]. Riley elaborates on this issue remunerating three key inconsistencies between EU law - the third energy package and the business model of NS II.
Firstly, under Article 32(1) of the Gas Directive all Member States are required to provide third-party access to all transmission and distribution pipelines which will be allocated by regular capacity auctions. Currently, such condition is impossible to be met due to Russian law granting Gazprom monopoly on the export of gas thereby, exclusive use of entry point of pipeline in Russia.
Secondly, Article 32(1) also requires the setting of regulated tariffs, to all eligible customers in a non-discriminatory manner. In case of NSII such tariff should be cooperatively established and supervised by German and Danish national regulatory authorities (NRA).
Last but not least, Article 9(1) of the Directive requires full ownership unbundling for new infrastructure. The effect of this requirement is that the pipeline infrastructure has to be owned by the transmission system operator (TSO). Taking into account that Nord Stream II is fully owned by Gazprom, this requirement would require a fundamental redesign of the business model Furthermore, the prospective TSO should be additionally certificated by competent NRA in line with article 11 of Directive which foresees that NRA should examine whether granting certification to TSO would not pose risks for the security of energy supply of the Member States and the EU as a whole.
In theory exemption is possible from the requirements of the provisions of the third energy package under art 36 of Directive. However, in order to enjoy such treatment, infrastructural project should enhance both competition in gas and security of supply. This in case of NSII is highly unlikely.
Developing his analysis, Riley then poses the crucial question of whether NSII is subject to provisions of Gas Directive. From a geographical point of view, the pipeline crosses Russian territorial waters, its exclusive economic zone (EEZ) as well as the EEZ of four Member States (Finland, Sweden, Denmark, and Germany) and the territorial waters of two Member States (Denmark and Germany), plus German inland waters and soil. Therefore, at first sight, it seems undeniable that within the EU’s territory, EU law – Gas Directive applies.
A contrary argument is that Art. 36 does not specify that import pipelines are eligible for derogations – explicitly mentioned examples include only interconnectors, LNG terminals, and storage facilities. Crucially, interconnectors are defined as ‘a transmission line which crosses or spans a border between the Member States for the sole purpose of connecting the national transmission systems of those Member States’. Import pipelines like NSII, fail this definition what means that they would be a subject to all the burden of liberalization without being able to enjoy possible derogations. It leads to the conclusion that import pipeline are not expressly mentioned as subjects of the Directive.
Riley argues that the EU’s legislature intended for import pipelines to be able to obtain an exemption. To this end he raises several arguments in support
Firstly, Recital 35 of Gas Directive, states that: ‘the possibility of temporary derogations should apply, for the security of supply reasons, in particular to new pipelines within the Community transporting new gas from third countries into the Community’.
Similarly, Commission Regulation 2017/459 which provides the operating framework for the capacity allocation mechanisms includes following provision: “This regulation shall apply to interconnection points. It may also apply to entry points from and exit points to third countries, subject to the decision of the relevant national regulatory authority”.
Furthermore, as a response to a Parliamentary question regarding NSI, the EC stated that: ‘No exemption has been granted or requested for the Nord Stream pipeline project. Should South Stream promoters decide to apply for an exemption under the third energy package, the Commission stands ready to review the national regulator's decision on such requests’[2]. This set of arguments confirms that lack of explicitly mentioned import pipelines is rather a legal loophole than a rational intention of the lawmaker.
Furthermore he highlights that the Third Energy Package has been already applied to import pipelines, namely Jamal pipeline (which similarly as NSII also misses the definition of interconnector) and South Stream Pipeline( use of the third energy package resulted in the cancellation of the project). Often used counter-argument that there are several pipelines which are not subjects of the EU law, namely Magreb Pipeline, Transmed, Greenstream, the Medgaz Pipeline, and Galsi Pipeline, should acknowledge that these pieces of infrastructure were constructed long before the implementation of the Third Energy Package.
Another contentious issue is the applicability of the law in Exclusive Economic Zones (EEZ) of MS. In this regard crucial is a relation between international public law – namely United Nations Convention on Law of Seas (UNCLOS) and EU law. Riley argues that Article 79 of Convention does not exclude coastal MS to regulate the functioning of the infrastructure, at the same time allowing its construction.
If the 2009 directive cannot apply to import pipelines, then the operation and effectiveness of the European Union’s single market in gas can be substantially undermined. If energy firms and their third state supporters wish to avoid the application of the liberalization provisions of the 2009 directive import pipelines provide an effective device to do so. A firm can seek to build two pipelines one an ‘import pipeline’ to the borders of the Union, and a second ‘connecting pipeline’ flowing solely through Union territory which is subject to Union law.
In essence, this two-stage approach permits commercial actors to avoid the application of Union law, gain a competitive advantage over other actors and avoid a supply security assessment under Article 11. In essence, the regulatory structure adopted by the Union legislature becomes optional under an interpretation of the directive which takes import pipelines out of its scope. The likely consequence is regulatory fragmentation and a significant distortion of the competitive conditions within the EU market[3].
Therefore, it is of key importance to swiftly adapt the newly proposed by the European Commission amendments to the directive which will formally extend the Gas Directive to all new import pipelines. Enactment of such an amendment will provide clarity in respect of new pipelines and legal security for older pipelines.
[1] Riley, Alan, A Pipeline Too Far? EU Law Obstacles to Nordstream 2 (January 31, 2018). International Energy Law Review, March 2018. Available at SSRN: https://ssrn.com/abstract=3114202
[2] Response to Parliamentary Question, E-001009/2014, 31st March 2014. See also response to
Parliamentary Question E-010819/2013, 14th November 2013, in which the Commission specifically
refers to Article 36(1) and goes to indicate that no exemption request had yet been submitted by
Southstream.
[3] Zareba, Legal Issues Related to the Application of the Gas Directive to Gas Pipelines Between EU and
Third Countries, (2017) PISM, Warsaw, 3rd November 2017.
Riley, Alan, A Pipeline Too Far? EU Law Obstacles to Nordstream 2 (January 31, 2018).
FULL ARTICLE: International Energy Law Review, March 2018. Available at SSRN: https://ssrn.com/abstract=3114202