EU changes could make Nord Stream 2 derogation harder

Author: Diane Pallardy

2019/07/22

LONDON (ICIS)--A new legal mandate granted to the European Commission could make it harder for the developers of Nord Stream 2 to escape a requirement to conform to EU rules, according to experts.

The Council of the EU gave the commission a mandate to begin negotiating an update of the international energy charter treaty on 15 July. The treaty is an agreement between 53 parties, including most EU member states and some countries outside the EU, which outlines a framework for trade and investment in energy.

Proposed changes

Under the new mandate, Brussels will seek to change the definition of investor to exclude companies that do not have substantial business activities in their country of origin, which would prevent them from bringing disputes under the treaty, the proposed negotiating document says .

This could include developer Nord Stream 2 AG, as the company is registered in Switzerland, which is a signatory of the treaty. It is owned by Russia’s state-owned Gazprom.

The treaty currently allows a state to deny investment protection provisions to companies owned by or controlled from another country with no substantial business activities in the country of origin.

The document also adds a clarification that this investment protection would not be covered by a commitment by the parties to not change their laws.

This would void Nord Stream 2 AG’s legal reasoning on why the pipe is eligible for a derogation from the EU gas directive, which the developer has requested . Unless granted a derogation, Nord Stream 2 would be subject to EU rules on transparency, ownership unbundling, third-party access and non-discriminatory tariffs.

Since receiving Nord Stream 2 AG’s request, the commission had one month to reply and the two parties had three months to reach an amicable settlement.

The commission had requested the negotiating mandate just one day after it was bound to reply to Nord Stream 2 AG’s notice of dispute in May.

The changes to the energy charter treaty would make it harder for the developers of Nord Stream 2 to receive a derogation from the gas directive, experts said.

“It could be argued that the commission’s proposal is indeed an answer to the developers’ letter. The answer is that the commission intends to change the treaty in order to improve its chances should the developers launch litigation,” Katja Yafimava, researcher at the Oxford Energy Institute told ICIS.

This new attempt from Brussels to block the Russian pipeline could play against the EU, Yafimava said.

“The haste with which the commission proposed to change the treaty and the timing of it doing so undermines its position vis-a-vis Nord Stream 2 because it could be argued that the commission is trying to change rules as soon as these rules are being used against the EU,” she said.

“The EU will probably lose any court case in the European Court, hence their attempt to renegotiate the treaty,” London Energy Consulting managing director David Cox said.

Next STEPS

Reforming the treaty will not help the EU escape the legal and financial risks it is exposed to in enforcing the provisions of the amended gas directive on Nord Stream 2, according to Annette Berkhahn, senior energy advisor with Arthur D. Little consultancy.

“The directive cannot stop the pipeline from being built and taken into operation. All it can do, potentially, is to make transport through Nord Stream 2 more expensive and thus gas delivered through it less cost competitive,” she said.

A compromise remains possible, but if the commission applies the amended directive without granting derogation, then Nord Stream 2 AG could take the matter to court, Berkhahn said.

In a letter to the commission in July, Nord Stream 2 AG underlined the lack of progress and requested again that the pipeline be treated as completed and eligible for a derogation.

The European Commission will need to negotiate its proposed changes with the other signatories of the energy treaty, which could be a lengthy process. Diane Pallardy