New Gas Directive opens the way for a common EU approach on Russian imports

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The EU Council agreement on its negotiating mandate under the Romanian Presidency of the EU Council came as a rather unexpected success, especially after the long delay during the previous two mandates, Bulgarian and Austrian. It shows a common position between the EC and the EU Council, before the negotiations with the Parliament, and signals a new found unity for preserving, even exporting, the EU energy “acquis“. The agreement strengthens the Commission role in concluding intergovernmental agreements (IGAs) for regulating import pipelines in the future – a major transfer of competences from the member states to the EU. However, the journey is long and perils are all the way.

Hot issue for companies and end-users

Energy security is a misleading concept in respect to the gas transit routes from Russia to Europe, as there are strong cases to make, from the energy security perspective, both for and against Nord Stream 2 or Turkish Stream. For Germany, Austria and Bulgaria, for example, an intermediary less means good news; less worries about the old Ukrainian infrastructure, direct contracts with the gas producers and the prospect of much advantageous price arrangements. The latter is of uttermost importance for Germany, as its industry is fueled by large by the Russian gas.

When giant industrial groups like BASF – consuming annually as much gas as Denmark, for example – starts to look for the US market where the gas price is much lower than at home, it is clear why (local) economics tends to beat (common) politics.

The agreement achieved under the Romanian Presidency of the EU Council come as an important step ahead, „a big chance, because it is a move in line with the European Energy Union”, noted Kirsten Westphal, Senior Associate at Stiftung Wissenschaft und Politik, the German Institute for International and Security Affairs, one of the Europe’s largest think-tanks in the field of international politics. “What I saw in Germany’s position during the last year was that it got stuck to the status quo, in a very legalist position, and that somehow denied the political process and movement towards an European Energy Union”, she commented during a debate organized in Brussels by the European Policy Centre. However, she warned that the energy prices will be an issue also for the general public, all over the Europe, in the European election.

Right over might

Europe as a whole and each of the member states are caught in the conundrum of commerce & money vs politics & security. And it is the case of Sweden which is quite illustrative: in 2018, Sweden was critical of the Nord Stream 2 project, however, it has joined Finland and Germany in granting permits to Russia, as the Swedish officials said they were unable to turn down the Nord Stream 2 proposal, lacking any legal grounds for such a decision.

“What we have tried to do with the European Union is to adhere to the principle that right should be more important than might; it is not politics, it is the law that should apply”, argued Carl Bildt, former minister of Foreign Affairs of Sweden.

Part of what the new Gas Directive is doing is making clear an extending of the current EU regulation to external pipelines, and thus means essentially the rules on third-party access, ownership unbundling and market supervision in order to ensure effective competition in the EU’s gas market.

“What does Russia want? Russia wants a strong Gazprom with a stronger position, preferably monopolistic on the European gas markets”, says Carl Bildt. “EU has an interest in its own energy security, needless to say, and thus means it has an interest in the gas transit system, in having different sources and different possibility to meet its energy needs”, he continued. Carl Bildt insisted also on the fact that the stability of Ukraine is key to the stability of Europe: “If a major European country can destabilized, that might be the beginning of another story, and that story will not be a stable Europe”.

Ukraine fears being completely bypassed starting from 2020

“Looking at how the trilateral negotiations (between Ukraine, Russia and the EU) evolved, I currently see no ground for optimism to expect that there will be a reasonable deal”, said Yuri Vitrenko, executive director of Naftogaz. If Nord Stream 2 is finished, in 2020 there will be no gas transit through Ukraine at all, he argued. “Gazprom will use any excuse to move all gas transit through Nord Stream 2 pipeline, which will cost Ukraine 2.5 billion euros per year, in revenues from the gas transit, approximately 4% of its GDP. Russia is already preparing for the scenario of no transit through Ukraine since 2020”, the Naftogaz official continued. “They are now selling more gas to Europe and use they underground gas storages for coping with fulfilling their contractual obligations in the situation that Nord Stream 2 will encounter any delay”.

Deputy Minister for Foreign Affairs of Ukraine on European Integration Issues Olena Zerkal insisted on the fact that her country is determined to continue to create adapt the national legal framework based on the EU legislation, because ”for us this is the only insurance we might have against Russia”. “We are no against new pipelines or diversification of the routes of supply”, she added. “What we say is that the rule should be obligatory for all players on the market”. “We urge Europe to be cleverer and not to go for the business as usual with the Russians, despite all their aggressions in Ukraine, because Ukraine might not be the last case of Russian aggression”, Olena Zerkal also said.

Common rule is good for economy

Commenting on the EU Council provisional agreement on amending to the Gas Directive, she said: “We are very grateful to the Romanian Presidency for actually making possible the adoption of these amendments to the Gas Directive. We were advocating for them for more than a year, as we think that this is the way to advance towards a common legal ground for any kind of operators in the European market.“ At energynomics.ro request, Olena Zerkal also elaborated on the impact of the changes recently agreed upon in the EU Council: “Now it very much depends on how these amendments will be implemented, and here we will see a primal role for the European Commission. We still think that the most obvious and accurate way to regulate the Nord Stream 2, in case of its construction, would be an agreement between the EC and Russia, where all kind of issues can be fixed.”

Yuri Vitrenko also made a case for forcing Russia into applying the same rules as all the operators in the European market. “We are very supportive of Central Asian gas producers being able to transit gas through Russia and through Ukraine to the European market. This will be beneficial to the German consumers for the prices will be lower. We would also like to have independent producers in Russia, including European companies, German companies, being able to export gas to Germany, for example, using Ukrainian system or using any other system. We would also want European companies to buy Russian gas, even from Gazprom, at Ukrainian-Russian border and be able to book capacities in Ukraine, and let them decide what they want to use. Our problem is that Russia illegally blocks the use of Ukrainian transit system for the exclusive use of Gazprom.”

The only leverage Ukraine and EU have against Russia is to make clear that there will be no Nord Stream 2 unless the Ukrainian route is secured, Yuri Vitrenko added. Russia and Gazprom should first play by the rules, accept and follow all the decisions of the arbitration courts, unblock the Central Asian gas transit, unblock export for independent producers, let European companies buy Russian gas at border and only when all these are done, they should be given OK to go on with Nord Stream 2. “But they will not build Nord Stream 2 under such conditions, because the only reason why they need Nord Stream 2 is to be able to abuse their dominance on the European market”, concluded Vitrenko.

US: Firms operating in the Russian energy export pipeline sector risk significant sanctions

Nicole Gibson, Deputy Director for European Energy Diplomacy in the US Department of State, insisted on the geopolitical risks posed by Nord Stream 2 – it is dividing Europe and it is weakening Ukraine. Both also the Turk Stream was labeled by Nicole Gibson as “diversionary pipelines”: “These pipelines will divide and strengthen Russian ability to use its energy resources for political coercion and malign influence”.

She urged EU leaders to take decisive actions to make sure the Nord Stream 2 will not happen. However, as the US are more and more projecting themselves less as a strategic partner to Europe, but as a commercial partner, in terms of energy (LNG, for example), but also in terms of political and military cooperation (within NATO, more visible), the US appeal only reaches the already convinced. Under these conditions, it is crucial how far are the US are ready to go on sanctioning European companies involved in building the Nord Stream 2. For the moment, the US sticks with their strategy to influence the companies decisions only with the threat of sanctions, with no hints on the specific actions the US might take.

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This article firstly appeared in the printed edition of energynomics.ro Magazine, issued in March 2019.

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Gabriel Avăcăriței

Journalist experienced with both old and new media, Gabriel has been the editor in chief of energynomics.ro since 2013. His great command in communication, organizing information and publishing are put to work every working day in order to develop all the projects of the energynomics.ro B2B communication platform: website, magazine, and own-events.

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