Thread by @profalanriley1

1 (a) My view on the US/German deal on Nord Stream 2 is that the deal is not sustainable. It does not take account of the current deployment of Russian gas exports as an energy weapon and the conflict between the ‘weaponry’ issue and the rule of law, particularly EU energy law.

1(b) For an overview of my argument see my CEPA article see here. cepa.org/russia-readies…

2. It is noticeable that the deal statement does address the issue of both the use of gas as an energy weapon and the role of EU energy law. The deal statement can be viewed here state.gov/joint-statemen…

3. In respect of the use of gas as an energy weapon the deal statement says, 'Should Russia attempt to use energy as a weapon or commit further aggressive acts against Ukraine, Germany will take action at the national level and press for effective measures at the European level'

4. In respect of EU energy law the deal statement says, 'Germany underscores that it will abide by both the letter and the spirit of the Third Energy Package with respect to Nord Stream 2 under German jurisdiction to ensure unbundling and third-party access'

5. One has to wonder whether anyone in Berlin and Washington was actually looking at what has been happening on the markets or the relevant provisions of Union energy law before they agreed the deal.

6.Gazprom is currently deploying its natural gas exports as an energy weapon, to in fact force through the pipeline through the EU regulatory processes. For more details see my recent AC article 'Gazprom's Folly' atlanticcouncil.org/blogs/energyso…

7. Russian natural gas exports are 20% down on pre-pandemic levels. Gas storage levels across the European Union are approximately 30% down on the five-year average. Gazprom is making very little effort to book more gas on the Ukrainian transit network icis.com/explore/resour…

8. Gazprom is also drawing natural gas from European storages to fulfil its long-term contracts further reducing storage levels across the Union dw.com/en/can-europe-…

9.The consequence has been spiralling natural gas prices now the highest for 13 years at over $10mmbtu.

10. It is true that there are also other factors in play here such as the impact of the long winter on storage levels, rising carbon prices in EU markets and stronger Asian demand

11. However, given higher demand and higher prices the normal commercial practice for Gazprom with access to huge pipeline capacity to Europe (not least the 100bcm of spare capacity on the Ukrainian network) would be to increase supply to the European market

12.Evidence for the proposition that this is all about leverage to force NS2 through is reinforced by the comment of the DG of Gazprom Export that Gazprom "would be able to cover additional demand with the commissioning of Nord Stream 2” reuters.com/business/energ…

13.This comment however overlooks the fact that there is already 100bcm of spare Ukrainian transit capacity that could be deployed today. There is no need to wait for Nord Stream 2 to be operational to satisfy demand within the European market.

14.This leverage play however assumes that EU energy law is capable of being bended in order to permit the full utilization of Nord Stream 2. This may be an incorrect assumption.

15.Whatever the US/German deal does or does not deliver, EU energy regulatory clearance contained principally in the Gas Directive 2009 is central.

16. EU energy law can delay the operation of the pipeline, restrict the extent of its operation (in respect of OPAL-NS1’s connecting pipeline, the use of that pipeline has been restricted to 50%) and ultimately it can stop a pipeline from operating.

17. NS2 as a new pipeline in law is subject to ownership bundling, third party access and tariff transparency. Gazprom does not want to sell its pipeline, permit third party access and be subject to tariff transparency.

18.The only way it can avoid these obligations is to seek an exemption under Article 36 of the Gas Directive. However, such an exemption would be challenging for Gazprom to obtain.

19.Article 36 requires that an exemption must not be detrimental to competition; to the effective functioning of the gas market or to the supply security of the Union

20.NS2 increases G’s already significant market power, undermines the resale market for Russian gas with the termination of the Ukrainian transit route and raises supply security issues, not least in G’s own attempt to cut gas exports to force NS2 through the EU regulatory proces

21.Worse still for Gazprom is Article 11 of the Gas Directive. This requires the relevant national regulator (here Germany) to consider in its certification process whether the non-EU owner poses a threat to the supply security risk of the Member State or the Union as a whole.

22.Gazprom’s very attempt to leverage its gas flows to force Nord Stream 2 through is indicative of a supply security risk sufficient to justify a refusal of Article 11 certification.

23.Are Berlin & Moscow trying to find a way round EU energy law? I would first recommend that G should be discouraged from seeking to use cuts in gas exports to lever the pipeline through the EU regulatory process. This will be problematic with the CJEU even if not in Berlin

24. It does though appear that NS2 is seeking to find a way around EU energy law. What they appear to be plotting appears to be a rather brutal maneuver. On June 24th NS2 applied for certification as an Independent System Operator(ITO) or an Independent Transmission Operator(ITO)

25. It is unclear from the NS2 press release whether it is referring to an ITO or ISO model. I suspect on reflection that it may be an application for an ITO model as that is the least restrictive (and popular) model. nord-stream2.com/media-info/new…

26.The ISO/ITO model permits the operator (albeit with significant regulation) to hold on to the pipeline and supply gas. The problem however is that NS2 is not entitled to apply for either the ITO or ISO model.

27.The reason for this is that the ITO/ISO models are only for legacy pipelines which are vertically integrated. The cut-off date for such pipelines under the Amendment to the Gas Directive 2019 is 23rd May 2019.

28. At that date NS2 did not have all its licensing permits and was only 40% complete. I find it difficult to see how on any normal interpretation of the legislation that NS2 can claim to be a legacy pipeline as of 23rd May 2019.

29. Is the plan really then to keep gas storages low, and cut gas flows across transit pipelines as autumn approaches, and then present its application for certification as ITO/ISO. Ok NS2 is not entitled to either model but it made an application-and that should be enough?

30 (a).If this is the plan it has some flaws. The first is that contrary to what former German Vice-Chancellor Sigmar Gabriel promised President Putin, the application of the legal rules in respect of NS2 cannot be limited to German law.

30(b)See Sigmar Gabriel’s conversation with President Putin hoped to keep NS2 within the bounds of German law, and avoid 'external meddling' presumably from Brussels or other EU MS. en.kremlin.ru/events/preside…

31.However, while the German regulator receives the application, it is still applying Union law. It is subject to supervision of the EU Commission. For theCommission the prospect of a brutal frontal attack on Union law takes the issue beyond energy security it becomes existential

32.The EU is above all a system of law upon which the single market and customs union sit. It has to be uniformly applied across Union territory or the EU unravels. I suspect that in all this Gazprom is running inadvertently an existential battle

33. Berlin by contrast cannot claim inadvertence, after all it is a EU Member State pledged to comply with EU law under the EU treaties, and in the German/US deal it says (which it is obliged to do in any event under Union law) comply with the letter and spirit of EU energy law.

34. Is there another way that NS2 can be forced through or fast tracked? Can the ISO/ITO model be accepted by the German regulator and then face down a legal challenge in the EU courts by the European Commission and/or Member States?

35.The argument in favour is that the EU litigation would take years and in the meantime ‘the facts on the ground’ would mean NS2 would be running…that would be the reality-and by the time the CJEU ruled the Ukrainian network would fall into disrepair

36.The counter-argument is OPAL. The litigation over the OPAL pipeline the connecting pipeline to NS1. Originally in 2009 the Commission imposed an exemption decision which restricted capacity to 50%. In 2016 the Commission effectively lifted the cap

37. Poland sued in Case T-883/16 Poland v. Commission. In September 2019 Poland won in EU General Court. The Commission gave up the case but Germany took over from the Commission, so the case is now Case C-848/19P Germany v. Poland. On 15th July Poland (emphatically) won again.

38.The argument again is. ‘Ok they can sue but even in OPAL it took Poland almost three years to prevail’. Three years is enough. This overlooks two major issues interim measures and expedited procedures.

39.The EU General Court and the CJEU can issue injunctions (known broadly as interim measures) against a Member State. This in fact happened in OPAL. For approximately 8 months through 2016 the cap was re-imposed before the General Court finally relented.

40. There is also a much more compelling case for interim measures than inOPAL, which was already in operation. NS2 is not in operation. Plus can one permit a pipeline run by a non-EU owner to run when one of the issues in the case is whether the owner is a supply security risk?

41.NB for American readers-unlike the US, in the EU every Member State has standing in every EU case and can bring its own proceedings against another Member State for infringement of Union law (although it is rather rare it does happen).

42.The second issue is expedited procedures. OPAL was just one pipeline where the increase in capacity involves a max of 13bcm. NS2 involves a 55bcm pipeline and the fate of the 146bcm of Ukrainian capacity and 32bcm of Ukrainian storage capacity, all vital to EU supply security

43. A compelling case can be made for an expedited procedure. A parallel in terms of importance to the EU as a whole could be the Article 50 Wightman case C-621/18 Wightman et al v. Secretary of State It was a reference case but the speed with which the CJEU moved is instructive.

44.The order for reference from the Scottish Court of Session, Inner House was made on 21st September 2018, Advocate General Sanchez-Bordona delivered his opinion on 4th December 2018 and the CJEU sitting as the full court delivered its opinion on the 10th December 2018.

45.The Commission and/or supporting Member States could seek (a) interim measures and (b) an expedited procedure to dispose of the case. I find it difficult to see how the Luxembourg judiciary would not take such requests extremely seriously.

46.I am told that the Chancellery is ‘confident’ that the EU law issues can be resolved, perhaps I am missing something but I should also say that similar German sources gave me the same line at the beginning of the OPAL case in 2016.

47.The other darker possibility is that ultimately Moscow is not bothered about EU law. Once NS2 is physically complete to create another set of ‘facts on the ground’ by seeking to take out the Ukrainian transit network physically leaving NS2 as the only alternative in place.

48.Clearly if the darker option is taken what then the value of the US/German deal? Will either Berlin or Washington, take any steps to respond effectively to Moscow and support Central and Eastern Europe and Ukraine?

49.Assuming the darker option is not taken then this conflict becomes less about energy security and more an existential battle for the European Union. It becomes an issue of the rule of law in the Union.

50. Can a Member State no matter how rich or powerful seek to evade Union law and its statement in the US/German deal that it will comply with the letter and spirit of EU energy law. Ends.