Energy: Nord Stream 2 pipeline nears completion despite legal roadblocks

Margaret TaylorMonday 27 July 2020

The Danish Energy Agency’s (DEA) decision in early July that Russian ships could lay the final part of the Nord Stream 2 gas pipeline in its waters effectively removed the last major obstacle for the €9.5bn project.

The ships had been earmarked for the job since United States sanctions prompted Swiss-based Allseas Group to abandon pipe-laying work in December, but a construction permit issued by Denmark had to be amended first. The DEA’s agreement has, according to Anna Mikulska, a non-resident fellow in energy studies at Rice University, made it ‘much easier and cheaper for Russia to complete Nord Stream 2’.

It’s anticipated that the decision will allow the Gazprom-led pipeline, which covers over 1,200 kilometres and runs under the Baltic Sea from Ust-Luga in Russia to near Greifswald in Germany, to begin pumping gas by the turn of the year.

If a country doesn’t want to take gas from Russia, it doesn’t have to, but that has to be based on existing laws – you can’t just come up with new rules as you go

Kim Talus
Director of the Tulane Center for Energy Law at Tulane University

Dr Katja Yafimava, a senior research fellow at the Oxford Institute for Energy Studies, warns that the US, which is openly hostile to Russia using the project to gain greater control of European energy markets, is expected to retaliate with even more draconian sanctions.

Indeed, US Secretary of State Mike Pompeo stated in mid-July that the Trump administration would not shy from imposing further sanctions to send ‘a clear warning to companies that aiding and abetting Russia’s malign-influence projects will not be tolerated’. In late 2019, the US introduced the draft Protecting European Energy Security Clarification Act (PEESCA) with this aim.

If acted upon, the sanctions would damage relations between Washington and Berlin, which has accused the US of attempting to interfere in German energy policy. Despite this, Yafimava says that, as drafted, PEESCA is designed to halt Nord Stream 2 even as its end is in sight.

‘The draft PEESCA legislation is very broad and all encompassing,’ she says. ‘It includes pipe laying and pipe-laying activity, including vessel insurance and pipeline certification, and as such makes it impossible to know in advance what exactly could or would be sanctioned. At present, it is impossible to tell what the final draft will look like and whether it will be adopted.’

Yafimava believes PEESCA aims to make finalisation of construction as difficult as possible, and without distinguishing between European and non-European companies.

US sanctions are not the only hurdle Nord Stream 2 still has to overcome. A dispute with German regulator BNetzA, European Union-level litigation and arbitration, and a series of Polish competition investigations are all causing headaches for the project’s backers.

In Poland, the Office of Competition and Consumer Protection has been targeting the companies involved in Nord Stream 2 for the past two years. It initially took action against Gazprom and its financial partners Engie, Uniper, OMV, Shell and Wintershall in May 2018, before issuing Engie with a fine in November 2019 and raising a separate action against Gazprom at the start of 2020.

The Nord Stream 2 pipeline is going to replace carry gas from Russia, through the Kremlin’s adversary Ukraine – which will miss out on gas-transit fees as a result – and into Poland. Consequently, Warsaw fears the project will endanger its own gas supply before enough alternative sources can be found. Like the US, Poland is also opposed to Nord Stream 2 because it believes it is a means for Russia to wield further political power.

The Polish government say Nord Stream 2 is ‘a huge danger to the country that is being politically driven,’ explains Antoni Bolecki, a partner at Warsaw law firm Wardynski & Partners. ‘The message from the government is that Russia wants to bypass Ukraine and make other European countries, but especially Germany, more dependent on Russia.’

Not that Germany sees it that way. Chancellor Angela Merkel has long said she views the project purely as an economic one and has repeatedly spoken out against the US’ use of sanctions. Though in May, Germany’s energy regulator refused to exempt the pipeline from EU regulations that govern energy markets – something Gazprom is expected to sue over – Kim Talus, Director of the Tulane Center for Energy Law at Tulane University, says that move was a legal rather than political one.

In 2019, changes to the EU’s Gas Directive were implemented, effectively bring Nord Stream 2 under the EU’s regulatory umbrella. These changes don’t mention the project specifically, but it’s arguable that the changes are worded such that all other pipelines can enjoy a derogation that Nord Stream 2 cannot.

This, says Talus, was a highly contentious move that was understandably challenged by Gazprom in the EU General Court. That case was thrown out in May, but is expected to be appealed.

‘This is being seen as the most political project that exists at the moment and the most fascinating thing is the treatment of it from the EU side,’ he says. ‘The EU is a Western, modern democracy, with a very strong market-based system, where the rule of law should be strong.’ Despite this, he believes the EU has ‘targeted one project and done very strange things just because they don’t like it.’

‘If a country doesn’t want to take gas from Russia, it doesn’t have to, but that has to be based on existing laws – you can’t just come up with new rules as you go,’ adds Talus. ‘That the EU would do that has been fascinating.’

The company Nord Stream 2 launched arbitration proceedings against the EU last September, claiming it was discriminatory for the EU to amend its Gas Directive the way it did. The matter is likely to be long-running – establishing the tribunal is expected to take around a year.

The EU declined to comment on the ongoing matter when approached by Global Insight.

Talus says that at this late stage, with the project so close to completion, the reality is that no obstacle is likely to be enough to halt Nord Stream 2 – but will still cause hassle and expense for those behind it.