Transcript Reveals Russia, Germany Unconcerned With EU Law for Nord Stream-II

Speaking at the Atlantic Council Energy and Economic Summit in Istanbul, Turkey, City College Professor Alan Riley, City Law School, London, not only showed various ways in which the Nord Stream II project contravenes European Union energy regulations, but also unveiled a transcript on a meeting between Russian President Vladimir Putin and Germany's Minister for Economic Affairs and Energy that puts the plans to build the Nord Stream-II pipeline in a very embarrassing light.

According to Prof. Riley, in the transcript from 28 October, Germany's Minister of Energy, Sigmar Gabriel, informs President Putin that Germany need not concern itself with EU law vis-á-vis the Nord Stream-II project.

Prof. Riley quoted the transcript: “'Germany will strive to ensure that all this remains under the competence of the German authorities, so if we can do this then opportunities for external meddling will be limited.

“I'm assuming 'external meddling' means the European Commission applying European law will be limited,” explained Prof. Riley, who quipped that he didn't need MI6 for the transcript, which was actually available on the Kremlin's website.

He commented, “This is, surely, a huge 'own goal.' The European Commission has been red flagged on this; so has most of Central & Eastern Europe and the UK.”

Prof. Riley says that these communications could cause difficulty for Russian-German cooperation on Nord Stream-II as well as resulting in intensive scrutiny of such an approach for the project.

Nord Stream-II, the proposal to build a second set of pipelines in addition to Nord Stream, from Russian waters in the Baltic all the way to Germany via the Baltic sea has faced contention from several Eastern European countries, who say the project is designed to circumvent Ukraine and flies in the face of current diversification efforts. 

A shareholders' agreement was signed in September for the Nord Stream-II project, involving Shell, E.ON, ENGIE, Gazprom, and BASF.

Among the questions surrounding the project include the Energy Union's strategy for the diversification of European gas security, an emphasis on creating a single market for gas for the whole of the European Union with a series of interconnections.

“One must ask how creating a direct supply route for 55 bcm [billion cubic metres] of Russian gas into Germany assists European supply security,” Prof. Riley said.

He echoed previous criticisms, which assert that gas from Nord Stream-II is not new supply but taking supply from Ukraine and diverting it through the new Nord Stream pipelines to Germany. The expansion will strip Ukraine of over $2 billion in transit revenues. Prof. Riley also noted that the IMF had recently provided Ukraine $17 billion in loans to maintain stability. “How does [Nord Stream II] help our Ukraine policy, where we're trying to support the country's economic and energy reform?”

There are a number of legal issues that could impede Nord Stream II, he said, including the fact that these new Nord Stream strings must be compliant with the rules of the Third Energy Package, which was not fully in force for the original Nord Stream.

He referred specifically to Article 11, which he called the “Gazprom clause.”

“If you have a transmission pipeline owned by a non-EU owner (or they may have control), then it requires certification under Article 11, one of the criteria of which is that it doesn't threaten European energy security.”

Given the implications for European supply security, he said he doesn't see much chance of certification.

Moreover, Prof. Riley points out that for member states in Central & Eastern Europe (CEE), one of the main supply security values is the fact that gas transits from and through these countries into Western Europe. He said that because it is unlikely that Gazprom would ever cut off natural gas supplies to Western European states, it gives more surety to the countries in CEE that the gas will keep flowing. “To remove that, you're undermining their supply security.”

The prospect of getting an exemption for new infrastructure, under Article 36, he said, is problematic, as any exemption needs to enhance competition, in contrast to Nord Stream-II, which would “increases Gazprom's market power into the German market and Western Europe."

He added, “Again, it's not new gas; it's the same gas going in a different direction.”

Now, he reports, to reduce its perceived control of the project, Gazprom has been trying to reduce its percentage stake in the Nord Stream-II project, down from the original 51%. “I think this is an attempt to escape the Third Energy Package rules, but EU law already deals with the prospect of attempted circumvention of the rules. They don't look whether you have 51% of the shareholding; they look at whether in fact you have 'decisive control'–the influence over the operation of the business,” explained Prof. Riley, who said other shareholders may receive gas discounts, for example, or upstream assets.

Finally, because of the publication of the Kremlin transcript, he opined that the European Commission is likely measuring what steps it can take, and Gazprom is unlikely to be able to circumvent the rules.

-Drew Leifheit