EC proposes applying internal market rules to import pipes

The European Commission on 8 November proposed an amendment to the EU gas directive that would extend core principles of the internal market to pipelines landing in the region from non-EU countries.

Under the gas directive of the third energy package, gas transport infrastructure must be unbundled from supply activities. It must also be accessible to third parties without discrimination, with tariffs published and applied transparently.

During the summer discussions took place between the European Commission and EU energy ministers, to obtain a mandate for negotiation with Russia on how the planned Nord Stream 2 pipeline will be operated. The commission’s approach was to push for the key principles of the gas directive to be applied to the offshore section of the pipe.

The proposed amendment has been widely interpreted as supporting the Commission’s efforts to gain the mandate, and therefore targeting Nord Stream 2.

Nord Stream 2 will add 55 billion cubic metres a year of transport capacity from Russia to Europe, delivering gas to northern Germany.

Half of the cost of the project, estimated at €9.5bn, will be met by Russia’s Gazprom. The remaining half will be shared equally by France’s Engie, German Uniper and Wintershall, Austrian OMV and Anglo-Dutch Shell.

In a fact sheet accompanying the draft legislation, the Commission said amendment aims “to ensure that all major pipelines in the EU and entering EU territory are operated under the same degree of transparency, are accessible to other operators and are operated efficiently.” It would apply to “All existing and potential future pipelines equally,” the Commission added.

However, member states will have the right to grant derogations for existing pipelines from requirements like unbundling, third-party access and tariff regulation. The right to apply a derogation is with the country where the first interconnection is located.

The Commission argues that there is currently no comprehensive legal framework covering gas pipelines to and from third countries, and the amendment will provide “legal certainty for all stakeholders”.

While denying that the proposal is not intended to stop the construction of any new pipeline, it states explicitly that the legislation will “complement” its proposal to negotiate directly with Russia on the terms of operation for Nord Stream 2 on behalf of other member states.

It also states that “the Commission sees no need for new infrastructure of the magnitude of Nord Stream 2… In addition, the EU will continue supporting Russian gas imports transiting through Ukraine.”

Political support uncertain

In order to take effect, the amendment must be passed by the European Parliament and Council, which sector analysts say should not be taken for granted.

“Politicians in Germany, France, Austria want Nord Stream 2 to go ahead,” said David Cox, of London Energy Consulting. “I don’t think it’s a done deal at all,” he added, referring to the amendment.

Katja Yafimava, a senior research fellow at the Oxford Institute of Energy Studies, agreed that the three countries, where companies backing Nord Stream 2 are based, are unlikely to be enthusiastic about the proposal. Italy and Spain might also think twice due to their pipelines from Algeria, while the UK could be another country with conflicting interests to consider, she added.

“For one, the UK should be wary because the proposal would render more power to member states where both interconnecting pipelines arrive, and potentially to the EC, at a time when the UK is leaving the EU and should not be wanting to see its negotiating power over the latter weakened,” she said.

Business as usual?

For the time being, there is no practical impact on the progress of the Nord Stream 2 project, and permitting processes are under way in the countries the pipe will cross – Russia, Finland, Denmark, Sweden and Germany.

Decisions on these are expected by the end of Q1 2018, a spokesman for Nord Stream 2 said.

The spokesman told ICIS that as there was no impact assessment or public consultation from the Commission in advance of publishing the amendment, it would take time to analyse the proposal and come to any conclusions.

He stressed that the Commission’s move does not have any effect on the permitting process for the pipeline, “therefore, we foresee no impact on our project timeline.”

“Permitting procedures have progressed normally and we expect them to continue doing so,” he added.

However, in a separate development, a bill is currently being scrutinised by the Danish parliament, that could potentially give politicians power to block undersea pipelines being built through Danish waters for foreign or security policy reasons. This is due for a second reading in parliament on 28 November.

Yafimava believed that if passed, the bill could potentially force Nord Stream 2 to take an alternative route through the Danish waters, entailing delays to the construction schedule.

The Nord Stream 2 spokesman confirmed that “following the ongoing law change procedure and the current political debate, Nord Stream 2 has decided to explore alternative routes outside the Danish territorial waters as risk mitigation.”

Impact on existing pipes

Although the EC’s proposal allows for countries to derogate from certain key aspects of the gas directive for existing import pipelines, it is unclear how this would work in practice.

As it stands, member states would have “significant discretion over a decision whether to grant such a derogation and what its content should be,” Yafimava said.

The draft also throws up questions about the status of pipes connecting Britain and mainland Europe – the Interconnector pipeline and the BBL pipeline – post Brexit. However, commentators had different views over the significance for Britain.

“Until we better understand the outcome of the Brexit negotiations it is difficult to assess any impacts, however, given UK was one of the first markets to operate pipeline third party access it is difficult to envisage that we will move away from this practice,” said Nick Wye, director of consultancy Waters Wye Associates.

“There is a general assumption that Brexit will make very little difference to the way we operate our energy markets as in the main, EU legislation in this regard has followed the practices employed by UK in the past.”

But Yafimava said that it would not necessarily follow that the draft would just be a way of ensuring continuity from the current conditions of operation for Britain’s cross-channel pipelines.

“As the UK is leaving the EU, post-brexit the question would become about access to the internal energy market as opposed to membership. So the rules governing interconnecting pipelines would have to be negotiated.”

Interconnector operator IUK was unable to comment on the issue by the time of publication and the BBL Company had not responded to ICIS inquiries.

emma.slawinski@icis.com