INTERVIEW: EU rules could end Gazprom's pipeline gas export monopoly: EC

Brussels — Russia may have to end state-owned Gazprom's pipeline gas export monopoly to comply with EU rules that affect its planned 55 Bcm a year Nord Stream 2 link to Germany, according to a senior European Commission energy official.

The EU amended its gas directive last year to require all new offshore gas links entering EU territorial waters -- including Nord Stream 2 -- to be unbundled from any parent energy supply companies, and to offer third-party access, non-discriminatory tariffs and more transparency.

"The most critical ones are third-party access and unbundling," the EC's deputy director-general for energy, Klaus-Dieter Borchardt, told S&P Global Platts in an interview.

"It would be easiest if the Russians would end Gazprom's [pipeline] export monopoly and said, as we have in our network code for incremental capacity, that 10% of the capacity is open to everybody. And voila, they have the third-party access," he said.

Gazprom's pipeline export monopoly is enshrined in Russian law, and domestic rivals such as Novatek and Rosneft are limited to LNG exports to reach the international market.

Gazprom exported 199 Bcm in total to Europe in 2019, making Russia Europe's largest single gas supplier and Europe Russia's largest export market.

Split regulation

The EU rules apply to the pipeline section in EU territorial waters, which in Nord Stream 2's case is the last 54 km (33 miles) to the German coast.

The Nord Stream 2 developer is understood to be considering a split regulation approach, with a virtual entry point where the pipeline enters German waters and specific arrangements to comply with the EU rules from that point.

Borchardt was skeptical that this would comply with the EU gas directive.

"With a virtual entry point, my question would be: 'How will they guarantee the third-party access if they do not start at the beginning?' Because you cannot tie in something underwater, so it's still the same pipeline," he said.

Complying with the EU's unbundling rules, which require pipelines to have separated ownership from energy supply companies, would be easier, as the EU section could be given over to another grid operating company.

The next step is for Nord Stream 2 to approach the German energy regulator BundesNetzAgentur with either its plans for compliance or a request for an exemption from the EU gas directive as a new pipeline.

"It is in their hands now to demonstrate that how they want to set up the pipeline complies with these rules," Borchardt said.

If Nord Stream 2 seeks to comply, the EC will closely check whatever regime BNetzA decides is compliant.

If Nord Stream 2 were to seek an exemption, this would have to be agreed with BNetzA and sent to the EC for final approval. The EC can make its approval conditional on meeting further requirements, or it can reject the exemption request entirely.

BNetzA earlier this year rejected Nord Stream 2's application for a derogation available to offshore links completed before May 23, 2019, on the grounds that it was not fully laid by then.

Uncertain start

Nord Stream 2 has to comply with the EU rules from the moment the first Russian gas flows, but that date is currently uncertain.

There are only 160 km of pipe left to be laid in Danish waters, out of the total 2,460 km of pipe needed to complete the two-string line.

Russia had hoped to bring Nord Stream 2 online at the end of 2019, but permitting issues in Denmark and the threat of US sanctions have delayed it.

Borchardt thought Nord Stream 2 will eventually come online, however.

"This will not be a monument forever that will not be used. That is, in my view, out of the question. So it will be completed," he said.

The EC has always been clear that it does not see a need for Nord Stream 2, given Russia can deliver gas to the EU via existing pipelines in Ukraine.

But it is also clear that it disagrees with US sanction threats that have and could have an impact on European companies going about their normal business.

"We believe that these extended sanction powers are not in line with international law," Borchardt said. "We are very firm on this towards the Americans. There is no justification for this approach."

The US on July 15 updated its legislation to widen its powers to impose sanctions on companies involved in building Nord Stream 2 and the onshore section of Russia's TurkStream pipeline to Europe.