The Biden-Merkel deal on Nord Stream-2 looks like a big success for Russian president Vladimir Putin. Thanks to the EU’s court system it might prove a hollow victory.
The pundits have been busy. When US president Joe Biden and German chancellor Angela Merkel had their farewell meeting in Washington last month, all was warmth and goodwill, with Mr Biden stressing the “friends can disagree”.
They were disagreeing a tad less than before, because the US president had just confirmed that he was dropping his sanctions on the company completing the controversial Nord Stream-2 (NS-2) pipeline, which will carry Russian gas under the Baltic to Germany. Mr Biden still doesn’t like the pipeline – and is taking a lot of flak from US politicians, both Democratic and Republican, who like it even less. But, well, the NS-2 is almost finished, he observed. And Ms Merkel committed Germany to various forms of aid to Ukraine, as well as to measures against Russia if the latter should in future move use energy as a weapon. The precise circumstances that would trigger these measures were not revealed (allegedly to avoid giving the Kremlin the chance to think of ways round them).
The deal unleashed a blizzard of comment and snap analyses, ranging from outrage in Eastern Europe to jubilation in Moscow and Berlin. Critics said that it increased West European dependence on Russian gas, increased the vulnerability of “front-line” East European states and further undermined the position of Ukraine as a transit state. Presumably the champagne corks were popping in the Kremlin for much the same reason.
As to Germany, Ms Merkel – whose swan-song this was – has the satisfaction of finally delivering on her promise to the Russian president and going fittingly into history. That is, she will depart to join the distinguished ranks of top German politicians who have thrown their country’s geopolitical weight in the EU and NATO behind national gains and deals with the Kremlin.
Dances with despots
This will not be the first time a Western monarch, president or prime minister has disregarded East Europe’s interests in dealing with a Russian Tzar. During the 17th and 18th centuries, in line with Voltaire’s praise of the “enlightened despot” Catherine the Great, there was quite a convincing argument for flattering Russia’s rulers: European kings and princes needed to access Russia’s natural resources – or solicit its military power to suppress discontent at home and fight their enemies. And they danced to the Romanovs’ tune accordingly.
How convincing that should be nowadays is a moot point, but in practice it seems not much has changed. Russian energy and mineral resources still permeate the intellectual discourse of influential circles in London. And Berlin and Paris consider Eastern Europe the continent’s “periphery”, while Russia is at the globe’s geopolitical core. The Iron Curtain fell 30 years ago, yet its vestiges still weigh like a nightmare on the nascent sense of solidarity between the East and the West of Europe, in both the EU and NATO.
Membership solidarity, including energy solidarity, is enshrined as a fundamental principle in the Treaty on the Functioning of the European Union (TFEU) – effectively the EU’s constitution. Yet this does not rule out zero-sum gains by German leaders at the expense of other members. To see this, it’s enough to quote from the recent summary by the Court of Justice of the European Union (CJEU) of Germany’s arguments on NS-2:
“The principle of energy solidarity as set out in Article 194(1) of the TFEU does not have binding effect, in the sense that it does not entail rights and obligations for the European Union and the Member States. According to the Federal Republic of Germany, it is an abstract, purely political notion”.
Thus, solidarity is abstract. However, Russia’s new ‘enlightened despot’ is a reality – and an overriding priority for Germany in the EU and NATO. And, to this day, substantial portions of the West European elite ignore East Europe’s reading of the challenges and risks facing the EU and NATO – including climate policies and general security, as well as relations with Russia. Containing Russia is seen by these “Westerners” as secondary to having China under control.
And now, it seems, president Biden himself is thinking along the same lines. The potential for lasting negative impact on relations between the US, the-EU, and-NATO, on the one hand, and Eastern Europe on the other, should not be overlooked. Being systematically ignored and marginalised isn’t a recipe for contentment.
Maybe, however, the implications should not be exaggerated. Looked at closely, the consequences of NS-2 coming online may not be so radical – nor Mr Biden’s concession quite so much of a victory for Mr Putin as it seems. And the same may go for development with NS-2’s “southern sister” Turkstream-2 (TS-2) and its separate extension through Bulgaria, Balkan Stream. As the French say, “mefiez-vous des apparences” – don’t trust appearances.
We cited the CJEU above. The passage, in fact occurs in a judgement delivered by its Grand Chamber on July 15th, six days before the fond farewells of Joe and Angela. And that judgement wasn’t good news for the German government – or for Gazprom.
It’s all a bit involved, but the essence is this:
- Until 2016, Gazprom was limited to using (or, more precisely, booking) only 50% of the capacity of OPAL, its 36 bcm/year pipeline on German soil, which takes gas from the original Nord Stream (NS-1) southwards to the EU transmission system, running along Germany’s eastern border. This limitation was to do with third-party access and tariff rules under the EU’s Third Energy Directive 2003/55/EC, governing cases in which the owner of pipeline infrastructure within the EU is also a supplier of gas.
- In May 2016, European Commission (EC) reviewed and exempted OPAL from this limitation. The request was granted later in the year. As a result, it became possible for 90% of OPAL’s capacity to be booked by Gazprom.
- In December 2016, Poland’s government (and its national oil & gas company PGNiG) appealed against this decision, which they said infringed – inter alia – the principle of “energy solidarity”, by harming competing pipelines and thus prioritising overall European supply over specific effects on Poland’s energy security;
- In 2019, the CJEU (or, more precisely, its General Court) upheld Poland’s appeal and annulled the 2016 decision. Germany promptly appealed.
- Meanwhile, pending a final judgement, OPAL continued by default to operate under the 90% rule, which applied also to another pipeline that came on stream in 2020-2021. This was the 55 bcm/year EUGAS, running parallel to OPAL, built to serve NS-2 and fully on stream at the beginning of April 2021.
- The final judgement came in mid-July 2021, when the Grand Chamber of the CJEU upheld Poland’s case and the 2019 decision. This means that the 50% limit again becomes applicable.
Simple arithmetics will show that Mr Putin doesn’t have a lot to smile about. Before July’s decision, Gazprom had the right to use 90% of the combined onshore capacity of OPAL and EUGAL. That’s 90% of 91 bcm/year – i.e. 81.8 bcm. Now it’s 50%, or 45.5 bcm/year on NS-1 and NS-2. Which logically means that, in terms of ultimate transmission capacity, Gazprom hasn’t gained very much by constructing the 55 bcm/year NS-2. Mostly, in fact, it will have gained a construction bill of $12 billion and a pipeline it can’t make full use of. Which doesn’t look like a geopolitical coup.
The Southern Flank
Logically, the situation should not be different on the EU’s “southern flank”, where the analogue of NS-2 is TS-2 and, for OPAL and EUGAL we can read “Balkan Stream”, its extension into Bulgaria and beyond, through Serbia and on to Hungary. European law does not apply to Turkey, but Bulgaria and Hungary are EU member states.
For Gazprom, it is critically important to control 100% of the exit capacity from Turkey and 100% of the entry capacity to Serbia, e.g. ex-EU – and to guarantee that there are no offshoots to regional gas networks within Bulgaria. An MoU between Gazprom and the Bulgarian Ministry of Energy – which has strangely gone missing – codifies these commitments.
Gazprom’s exclusive long-term legacy supply and transmission contracts give it a range of non-market privileges, lower transmission tariffs and locked market shares under ‘take-or-pay’ clauses. BTG’s new entry and exit tariff plan for the new gas year (2021-2022) – which this website analysed recently – is another classic proof of the deep state of dependencies which defy market rules and antitrust legislation. In this plan, BTG reduces all the tariffs applicable to routes used by Gazexportр while raising all those on other routes, used by Gazexport’s competitors. This is what underlies the legitimate concerns of the European regulatory watchdog, ACER, that the Bulgarian TSO could cross-subsidise the loss-making Balkan Stream.
Now, compared with the situation in Germany, a distinguishing feature of Turk Stream’s segment in Bulgaria is that Gazprom’s risk exposure is far less, as the bulk of the funding – i.e. the resultant debt – is bourne by Bulgartransgaz (BTG), TSO of the Bulgarian National Gas Transmission Network (NGTN). BTG’s critical levels of dependency stem from the fact that, should the national regulator or the EC overturn the exclusive capacity-booking arrangements with Gazprom, its revenues will drop and debt repayment will become impossible. So the sheer existence of BTG is at stake. But it’s difficult to see why the Turk Stream extension in Bulgaria should be treated differently from EUGAL and OPAL in Germany.
The most probable outcome is a mandatory capacity release, when the lack of access by third parties is appealed in court, with the capacities freed auctioned on the Regional Booking Platform (RBP) to Gazprom’s competitors. That might work and, if so, would be good news for competition and supply diversification. But it would hardly be a reason for celebrations in Moscow.
Reasons to be cheerful?
By way of conclusion, we may, for once, permit ourselves a little optimism. Sanctions have not been much use in containing Mr Putin’s Nord Stream and Turk Stream projects. Germany can be relied upon to ignore them in pursuit of its own (imagined) interests and of its obsessive desire to conciliate the Kremlin. Quite often, the EC can be relied on to go along with Germany. And, especially in the wake of the disruptive Donald Trump, the US Administration is reluctant to “rock the boat” with Germany by pushing things to their logical conclusions.
However, the EU has a legal, market and regulatory framework that, if somewhat byzantine, is fairly robust and, in terms of competition, quite sound. Its courts, too, seem independently minded. So maybe sanctions are less effective than the strict application of that framework by those courts.
With two provisos. First, “strict” has to mean no exemptions at all. And second, a certain amount of political will is going to be necessary to ensure that.
You’ll see. In the next few months Moscow will be putting into practice a game plan that involves manipulation of entirely foreseeable gas shortages and other “emergencies” to force Germany and its fellow importers of Russian gas to scrap the Third Energy Package’s limitations on capacity booking on energy security grounds. Moreover, Gazprom and its German partners will undoubtedly explore additional loopholes in the legal framework regarding the status of NS-2 in German territorial waters, including virtual sales and gas title-transfers in the offshore segment of the pipeline. So vigilance, far-sightedness and determination will be needed. There are glimmerings of light, but we’re not out of the wood yet.
*The remaining capacity difference in the Nord Stream between its off and onshore segments that Gazprom uses – 20 bcm/y annum capacity belongs to the North-European Gas Pipeline (NEL)
(Source: Analyses & Alternatives)