Editorial: Gas Caught in the Cross-hairs [NGW Magazine]

The story of Nord Stream 2 has been one of the most tortuous yet written by the European gas industry. And still it grinds on.

The mix of transAtlantic politics, persistent Cold War-era attitudes and rising demand for gas imports have collided in an unholy mess. There is still no clear resolution yet in sight for the 55bn m³/yr pipeline that is mostly built and due on line this year.

This is damaging for natural gas, generally recognised as the cleanest and surest way to cut carbon dioxide emissions within Europe. But it might help speed up renewable gas; and taking a longer view, liberalisation in Russia – although this is admittedly a long shot.

In one of the earlier moves in the saga, the Polish competition authority blocked the formation of a joint venture to own and operate the pipeline. Instead of challenging its ruling, as it was thought they might, given the lack of competition in Poland’s energy markets, the five partners became Gazprom’s five financiers.

Then the European Commission tried to extend its market oversight beyond the European Union; but its own lawyers said that would not work, given the UN Convention on the Law of the Sea.

We are still waiting for the Danish authorities to grant or deny NS 2 the same access to its waters that is enjoyed by NS 1: a refusal has been allowed for in the project’s routing plans.

Then there is the threat of sanctions from the US, either imposed on the financiers or, in some reports, on the wider circle of contractors involved in the pipeline laying or logistics chain.

There has also been a series of sub-plots involving Gazprom’s use of capacity in the onshore pipeline in Germany, Opal, with a knock-on effect on its use of Nord Stream 1 capacity.

And in the press, we read of more circumnavigations, with a report in the Financial Times that a new company is to be set up to own and operate the short section of the pipeline inside German waters in order to frustrate EU oversight. This small section would be under EU rules and the remaining 1,200 km would not be.

With the proposed amendment to the directive yet to be signed into force, the timing looks suspicious: as the report says, the plan could stoke further criticism of the pipeline. But no sources are named and only identified as being “familiar with the plans.”

NS 2 itself declined to go on the record on this, but did note that political agreement on amendments to the EU's gas directive has been reached and that, according to media reports, the agreement is based on a compromise that was supported by 27 out of 28 EU states.

It added that the new draft legislation limits the geographical scope of the EU's internal market rules to the territorial sea of the member state where the first interconnection point with the EU's gas grid is: Germany.

NS 2 also points out that the pipeline will make a positive contribution to the Energy Union objectives by securing an additional route of gas supply for the import of additional volumes. Europe’s own production is falling, either through natural decline or by decree.

The same day – March 15 – that the FT published its article, the Oxford Institute of Energy Studies published a paper that went into some depth, raising the issues facing the German regulator and examining the power it has to grant Gazprom exemptions to third-party access rules; the possibility of reviving Russian laws on unbundling Gazprom; using the St Petersburg commodity exchange to auction off gas to third-parties; and transferring ownership of either the German offshore section to a company such as Gascade, the majority owner of Eugal – the Opal analogue for Nord Stream 1 – or transferring ownership of  the whole pipe to one of Gazprom’s regional transmission arms. The paper also points out that four-fifths of Eugal’s capacity has already been sold on legally binding contracts for 20 years, the remainder being withheld for short and medium term bookings. Again, at the moment, that means Gazprom.

But equally it is recognised that all possible Nord Stream gas originates in Russia and whoever produces it makes little difference to the perception, all the major producers being state-owned or in some way affiliated to the Kremlin.

Countries like Poland and Lithuania are anyway free to buy LNG in greater quantities, to the benefit of the US, now flexing its muscles as a major new entrant to the LNG exporters’ club. Ukraine too is buying gas from anywhere but Russia, from a contractual point of view at least – Ukraine is one reason for Gazprom’s EU exports growing.

Nor can the EU or the US force Russian gas to flow only through Ukraine, although a BP-Rosneft gas marketing operation using this route, old though the pipelines are, might appease some Nord Stream opponents.

This contradictory position persists to this day: on the one hand, Russian gas through Ukraine, despite Crimea and so on, is acceptable – as the FT article says, “governments on both sides of the Atlantic worry that Moscow could use the pipeline to reduce gas shipments through Ukraine and deny Kiev an important source of revenue.” Nobody else seems willing to cut Kiev a $2bn cheque each year. On the other hand, Russian gas that avoids Ukraine will make Europe too dependent on Moscow, and there must be sanctions.

As ever, the legal issues will be forced to fit with the broader political goals and the courts will have to unpick the rights and wrongs of it.

NGW

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