Ukraine’s Naftogaz calls for Nord Stream 1 EU rules derogation to be lifted

LONDON (ICIS)–The Ukrainian gas incumbent Naftogaz has called on the European Commission and member states to revoke a derogation from EU regulation granted to Nord Stream 1 and suspend flows via the pipeline amid concerns over the reliability of Russia’s Gazprom as a supplier.

In a letter sent to top EC officials this month and seen by ICIS, Naftogaz said it was imperative for the EU to review the derogation granted to Nord Stream 1 in 2020, which exempts the 55 billion cubic meter/year pipeline from complying with EU requirements for unbundling and third-party access.

Naftogaz said the exemption should be lifted because of “significant changes in the security of supply situation since 2020,” including Gazprom’s decision not to increase supplies to Europe in 2021 despite soaring demand and Russia’s war against Ukraine since February 2022.

Nord Stream 1 was originally granted a derogation from these requirements under EU energy law partly as a result of security of supply considerations.

DEROGATION

On 17 April 2019 the European parliament and the Council adopted the directive 2019/692 amending the directive 2009/73 concerning common rules for the internal natural gas market.

The pipeline’s operator, Nord Stream AG, submitted an application for derogation from the application of the primary provisions of the EU gas directive on 19 December 2019 to the German Federal Network Agency (BNetzA) after the changes to the EU gas directive were implemented into German law by the amended Energy Industry Act of the Federal Republic of Germany (EnWG).

The derogation applies to the pipeline section located on German territory, including German territorial waters and is initially valid for 20 years, retroactively from the amended EnWG’s entry into force on 12 December 2019.

With the letter sent to the EC, Naftogaz as the organiser of the Russian gas transit via Ukraine is calling for a formal reassessment of the derogation, the total or at least partial suspension of flows via Nord Stream 1 and their rerouting via Ukraine.

Neither the EC nor BNetzA commented by publication time.

CONTRACTUAL TERMS

The letter comes amid Ukrainian concerns that Gazprom would seek to pay less for the shipment of gas via its territory, despite a ship-or-pay contract signed at the end of 2019, effectively requesting the Russian producer to pay for transit, even if it does not use the transmission infrastructure.

The letter notes Gazprom cannot “unilaterally relieve itself of contractual obligations.”

According to the five-year agreement concluded at the end of 2019 with Naftogaz, as the organiser of the transit via Ukraine, Gazprom is expected to ship 109.6million cubic meters/day between 2021-2024 via two border points: Sokhranivka and Sudzha.

However, on 10 May 2022 the Ukrainian gas transmission system operator GTSOU, which executes the transit, decided to declare force majeure and halt inflows via Sokhranivka in eastern Ukraine, which had been under Russian control for several weeks.

Naftogaz said the decision was taken amid concerns that Russian troops or Russian-affiliated individuals were stealing transit gas and looking to divert it for use by a regional cogeneration (CHP) plant as well as a ferroalloy plant.

“If the operator [GTSOU] had taken no action, it would have had to use its own gas to balance the lacking volumes stolen by the occupiers. At current gas prices, losses could amount to $1bn per month,” the letter said.

REROUTING

GTSOU offered Gazprom to reroute the gas free of charge to the Sudzha border point, which has a daily entry capacity of 244mcm. GTSOU and Naftogaz say it is technically possible to reroute the gas via this point, quoting the example of 12-25 October 2020 when flows were diverted from Sokhranivka to Sudzha during a period of maintenance.

A source close to Naftogaz said Gazprom responded to the force majeure letter to say they would not recognise the claim and that they would continue to ship gas via Sokhranivka.

Gazprom further insists that if Ukraine fails to offtake the gas delivered at this border point it would lead to a proportional reduction in payments, the source said, noting this could be a violation of contractual terms.

Gazprom did not answer by publication time.