Poland unlikely to prevent derogation for Nord Stream 2 gas pipeline

Author: Diane Pallardy

2020/04/01

LONDON (ICIS)--Despite Poland’s vocal criticism of the Russian Nord Stream 2 pipeline, its inclusion in the derogation procedure initiated by Germany does not mean the derogation has become less likely, experts told ICIS.

German regulator Bnetza recently included Polish incumbent PGNiG in the consultation on the derogation for Nord Stream 2, which will double Russia’s direct export capacity to Germany as the first entry point of the route to the EU. Poland has long been critical of the project, arguing that it will increase the European Union’s reliance on Russian gas and threaten the bloc’s energy security.

According to the EU gas directive, a member state can exempt export pipelines that enter the EU network on its territory. In the case of Nord Stream 2 it would be Germany.

If the pipeline is located in the territory of more than one member state, the member state where the pipeline first connects with the EU network shall decide whether to exempt the pipeline after consulting all the member states concerned, the directive states.

The only member state in the territory of which Nord Stream 2 is located is Germany.

“This means the German regulator is not obliged to consult any other member states. However, the German regulator has decided to consult them – perhaps to safeguard itself from any potential criticism that it ignored other member states’ concerns,” Oxford Energy Institute researcher Katja Yafimava said.

The inclusion of PGNiG might be a move to mitigate potential risk of infringement procedures against Germany initiated by the European Commission or appeals against Bnetza’s decision based on an exclusion of a potentially relevant stakeholder, EastWest Institute fellow Danila Bochkarev said.

“Including PGNIG in the process is in my opinion a signal from the German side that it tries to be open and transparent in the derogation procedure. I am really not sure though if it will change a lot in the derogation process,” according to senior fellow at the Centre for Eastern Studies Agata Loskot-Strachota.

DEROGATION STILL POSSIBLE

There is a strong case for Bnetza giving the project a derogation, Bochkarev said. “Poland suggests that the pipeline will be harmful for the EU’s energy security and could negatively affect the volumes of Russian gas transiting the country. However, Poland’s position could hardly be defended since it is actively diversifying its own supplies with new LNG infrastructure and the Baltic Pipe for example, he added.

“Bnetza might grant a partial derogation, which would establish the regulatory regime for the German section of Nord Stream 2 that would not be too materially different from the one applicable at the time when the investment was made and prior to the amended directive’s entry into force,” Yafimava suggested.

The partial derogation could contain conditions ensuring the derogation is not detrimental to competition, the effective functioning of the internal market, and the EU’s security of supply, she also said.

LEGAL BASIS FOR DEROGATION

Changes to the gas directive that extended the applicability of EU rules to pipelines connecting the bloc with non-member states came into force in May 2019.

The new rules require that all export pipelines connected to the EU have to be transparent about their tariffs, separate their owner from the supplier of the gas flowing in them and allow third parties to book their capacity.

Nord Stream 2 is a 55 billion cubic meters offshore pipeline directly connecting Russia and Germany and so it is now subject to EU rules. But the pipeline is fully owned by Russian state-owned gas supplier Gazprom, which also has a monopoly on Russian pipeline gas exports and so will be the only company feeding the pipeline. This means no other company will book capacity on Nord Stream 2 since Gazprom is the only company able to use it.

The directive includes the possibility for pipelines to be exempted from EU rules.

For pipelines existing before the directive’s entry into force on 23 May 2019, the member state where the pipeline first connects to the EU network decides whether or not to exempt the infrastructure.

The EU Commission decides about future projects for which a final investment decision (FID) is yet to be made, and which would not go ahead without an exemption.

Nord Stream 2 is over 93% built and its FID was made before the directive was changed. So it does not meet all the criteria for either of the two procedures.

Despite this, Bnetza initiated a procedure to exempt the pipeline and its existing twin Nord Stream from the directive and has to make a decision for both by 24 May.