The European Commission has suggested expanding the application of the gas directive on pipelines from third countries. If such decision is made, Russia’s Nord Stream 2 pipeline project will need additional negotiations between Germany and Russian on the conditions of the pipeline operation, and, hence, a significant extension to the commissioning date. Also, there is a necessity to set tariffs higher than previously anticipated. In the best case scenario for Ukraine, Gazprom may face such challenges that would seriously threaten the realization of the project.
The European Commission has suggested expanding the provisions of the gas directive of the Third energy package on pipelines from third countries into European Union member states and vice versa. The gas directive (2009/73/EU) regulates access to third parties, tariffs, requirements towards unbundling and transparency.
The president of the European Union Jean-Claude Juncker addressed the issue on 13 September 2017. Later on, the commission submitted the suggestions to the Council and to the European Parliament. The head of the EU Directorate on energy affairs, who visited Ukraine in mid-April, said that the European Parliament had already voted in favor of expanding the directive. In March 2018, members of the EU parliament’s energy committee supported the legislation effective of 1 January 2017. Now, the ball is on the Council’s side.
The pipelines shall be subject to the following requirements:
Access to pipelines for third parties;
Use of equal, reasonable and non-discriminatory tariffs. The suggestion mentions that the first EU nation the pipeline passes may choose not to apply the directive to this pipeline if it doesn’t harm the competition, the operation of the market and secure shipments into the European Union”.
The amendments will create the need for separate negotiations between Germany and Russia on the conditions of operating the pipeline. In any case, this would push its commissioning date to a later day.
The application of the unbundling process specified in the directive may force Gazprom to sell its share in the project. Another possibility is the unbundling of the Russian gas monopoly, which is obviously fictional. The condition is rather tough. Third parties’ access to the pipeline. In such case, a condition, which has been used in the case of the OPAL pipeline, may be applied to this project also – to reserve around 50% of the capacity.
Theoretically, this could allow other Russian suppliers of natural gas (for example, the NOVATEK companies) to ship gas to the European Union towards that amount of 50%. Economically reasonable, non-discriminatory tariffs will mean that, should the gas directive be applied to the calculation of the tariff, Decree 715/2009 and Decree 2017/ 460 would also have to be applied, which would, in turn, cause the tariff to rise even further. As far as I know, Nord Stream 2 AG intends to exclude the investment component from the tariff in order to enhance the economic attractiveness of the route. The introduction of new EU standards will not allow Gazprom to lower the tariff.
If the gas directive ends up being approved, the best case scenario for Ukraine is that no Nord Stream 2 construction will happen. Facing a 50% load, the necessity for Gazprom to sell its shares to third parties, rising transit tariffs, Gazprom may refuse to realize the project.
What will it bring for the Ukrainian gas transportation system? If Nord Stream 2 does not emerge, it will allow saving significant (65-75 billion of cubic meters annually) amount of the gas that is transited through Ukraine. If the gas directive be applied with amendments, and Nord Stream begins operation, it will enable saving of the transited gas (approximately 45-60 billion of cubic meter annually).
How probable are the amendments to the gas directive to be introduced? In order for these amendments to be approved, the Council of Europe needs a qualifying majority (16 out of 28 EU member states or support from countries with over 65% of the Union’s population). At the same time, the situation is very different at the Council of Europe. The Council’s legal service considers it appropriate to apply Russian and German laws respectively at points of exit from Russia and points of entry into the German territory, whereas the underwater section should be regulated by the UN legal convention on maritime justice. Such was the conclusion reache by the legal service of the Council of Europe, according to data from Reuters, confirmed this on 1 March 2018, adding that the question needs to be researched more.
The European Union is providing Ukraine with billions of euros, and should support Nord Stream 2?
It should be noted that the corporate pressure on European governments is rather strong. Almost all of the largest oil and gas companies on the continent participate in projects linked to Nord Stream 2. Engie, Royal Dutch Shell, Uniper, Wintershall and OMV are directly involved in Nord Stream 2, whereas Fluxys, ONTRAS and Gasunie act as shareholders in the EUGAL pipeline, which is an extension of Nord Stream 2 to Germany (similar to OPAL).
As part of public hearings, the commission has turned to corporations and civil organization for the support of amending the gas directive. Just 12 companies (and organizations), of which 11 are Polish (only 33 were surveyed), were in favor of such amendments.
The second quarter of 2018 will probably be decisive in determining the fate of Nord Stream 2. Therefore, Ukrainian producers, we think, should consider paying more attention to this issue with gas associations and organizations of Europe like EFET, Business Europe, Eurogas.