Construction of the Ostsee-Pipeline-Anbindungsleitung (OPAL) in July 2010 (photo by LutzBruno/Wikimedia Commons).
The OPAL judgment from the European Union (EU) General Court will undermine Gazprom’s market dominance in Central and Eastern Europe.
Case
T-883/16 Republic of Poland v. European
Commission (hereafter the OPAL
case) is likely to have far more impact on European energy policy than just
limiting Gazprom’s capacity to export natural gas via Nord Stream 1. In the OPAL case, the judges of the EU General
Court established and elaborated a broad principle of energy solidarity drawing
upon Article 194(1) of the Treaty on the Functioning of the European Union
(TFEU). This principle of solidarity, which will require member states, in all
their energy market decisions with a potential cross-border impact, to take into
account not only their own interests but also those of other member states and
also those of the European Union as a whole, is likely to have a significant
impact on the development of European energy law over the next decade. It will
no longer be possible for member states to develop energy infrastructure while
ignoring the vital interests of other member states. The OPAL case will also
provide a basis for the European Commission, member states, and other
interested parties to bring legal challenges against those member states who
infringe the principle of solidarity.
More immediately, in addition to the OPAL pipeline, the OPAL case is likely to have an impact on
Nord Stream 2, potentially making the path to full utilisation of the pipeline
much less likely than it previously seemed. The OPAL ruling, for instance, makes it more difficult for Nord Stream
2 to pass the process of security of supply certification required by Article
11 of the Gas Directive 2009. That same directive in Article 36 also imposes
significant supply security and competition criteria before an exemption could
be granted from its liberalisation requirements. Those requirements will be
more difficult to fulfil post-OPAL.
The ruling is also likely to make it more difficult for Nord Stream
2’s owner, Gazprom, to deploy legal mechanisms and corporate structures to
avoid the application of EU energy liberalisation law to the pipeline. The OPAL ruling will also bear down on the development
of Turk Stream 2. As an import pipeline, it will also be subject to EU law on EU
territory, and the local energy regulatory authority will be required to apply EU
energy liberalisation legislation in the light of the OPAL ruling.
Overall, the OPAL ruling
is likely to make it more difficult for Gazprom to do individual deals that benefit
individual member states, but may harm other member states. As a result,
Gazprom’s capacity to play one EU member state off against another has been limited
by this ruling.
Related reading
Thu, Oct 17, 2019
The recent decision by the European Court of Justice to limit Gazprom’s use of Opal, an onshore pipeline in Germany, has wide-reaching implications for Gazprom’s use of both Nord Stream 1 and Nord Stream 2, as well as Gazprom’s reliance on Ukraine for gas transit to Europe.
EnergySource
by
Daniel D. Stein
OPAL
heading toward Luxembourg
An undersea natural gas import pipeline such as Nord Stream 1 is not
isolated. It requires connection to land-based pipelines that take the imported
gas deep into European markets. In the case of Nord Stream 1 (which has a capacity
of approximately 55 billion cubic meters (bcm)), there are two connecting
pipelines, NEL and OPAL. NEL carries 20 bcm westward from the Greifswald, a Nord
Stream landing point on the German Baltic coast, toward the Netherlands and the
rest of north-western Europe. The second connecting pipeline, OPAL, goes
eastward from the same Greifswald landing point through eastern Germany and on
to the Czech border. It has a carrying capacity of 36 bcm.
Following the entry into force of the EU’s
Gas Directive 2003, and in subsequently updated legislation in the 2009
Gas Directive, OPAL was, in principle, subject to full liberalisation. This
meant that the pipeline would be subject, at the very least, to third-party
access requirements and tariff transparency. Gazprom and its German corporate
allies, who owned OPAL, wished to avoid these restrictions. Fortunately for
them, under the EU’s energy liberalisation regime, it was accepted that in
order to encourage the building of new infrastructure, such as pipelines, such
infrastructure could be exempted from the liberalisation rules for a limited
period (e.g., fifteen to twenty years). Consequently, an exemption was sought
under Article 22 of the Gas Directive 2003 (now Article 36 of the Gas Directive
2009). An exemption was granted in 2009 by the German energy regulator and
approved by the European Commission in a formal decision. However, in taking
account of the exemption requirements regarding security of supply and
competition contained in the Gas Directive, the Commission imposed conditions in
the exemption decision. The Commission required that the dominant players in
the market (Gazprom and RWE) would be limited to half the pipeline’s capacity,
unless at least 3 bcm a year of gas was placed on the market under a gas
release programme. Gazprom refused to provide a gas release programme because
it would have resulted in an open auction for gas with third parties. In such
an auction, the prices set at market could have been used against Gazprom. For
example, customers with long term supply contracts with Gazprom, with price
review clauses, could have been incentivised to use the evidence of those
auctions to take Gazprom to arbitration to force a reduction in the price they
themselves paid for gas. Therefore, Gazprom and its German ally were limited to
using no more than half of the pipeline capacity.
Almost from the outset, Gazprom and its corporate allies sought a
more beneficial outcome than they had obtained from the 2009 Commission
decision. Not only was the capacity reduced by the Commission decision, but it
was a capacity reduction into one of Gazprom’s highly profitable markets. Nord
Stream 1 has a carrying capacity of 55 bcm. Gas from Nord Stream 1 could
therefore always flow westward via the sister pipeline to OPAL NEL. However,
NEL only had a carrying capacity of 20 bcm. Furthermore, NEL took gas to the much
more competitive and price sensitive Western European market. The European
Commission decision restricting the capacity of the OPAL pipeline effectively limited
the access of Nord Stream 1 via OPAL into a potentially highly profitable
market. A further concern from Gazprom’s perspective is that being unable to
use full capacity of Nord Stream 1 forced it to continue to depend more on the
Ukrainian Brotherhood pipeline network, increasing the leverage of Kyiv.
In December 2016, Gazprom—with the assistance and approval of the
German energy regulator—was able to obtain an
amendment to the 2009 OPAL exemption from the European Commission. In
essence, the cap was lifted. 50 percent of OPAL’s capacity would be exempt from
third party access and tariff regulation. The rest of the pipeline’s capacity
would be subject to two auction regimes. However, as Gazprom was dominant in
the marketplace, the reality was that Gazprom or Gazprom’s allies would take up
all the auctioned capacity. In essence, Gazprom was gifted the rest of the
capacity by the Commission. The actual operation of the pipeline after December
2016 demonstrated that this is exactly what happened. OPAL wholly became a
route for flooding Gazprom-controlled gas from Nord Stream 1, while gas flows through
the Ukrainian transit route along the Brotherhood pipeline network fell.
Given that Gazprom was already dominant in a number of Central and
Eastern European markets, the effect of granting Gazprom yet more capacity was
to strengthen its market dominance across the region. Greater access to OPAL
raised a series of economically credible concerns from other actors in the market,
from increasing pricing power, to increased capacity to exclude other market
participants, to the prospect of the loss of capacity to resell gas within the
European and Ukrainian markets.
The OPAL pipeline also raised a broader political concern that, with
greater Russian control of gas flows, Central and Eastern European governments
feared a return of greater Gazprom natural gas market dominance, which in turn
would presage a return of Russian political influence. As a consequence, it was
not surprising that Poland, supported by Latvia and Lithuania, challenged the
Commission’s decision to amend the 2009 exemption decision before the EU
courts.
The
EU General Court in the OPAL case.
The case was lodged by Poland in the EU General Court, the lower
court of the European Court of Justice, in December 2016. The ruling disposing
of the case in final judgment was handed down on September 10, 2019.
In that judgment, the EU General Court based its argument on the
‘principle of solidarity’ contained in Article 194(1) TFEU. It argued that this
was a sectoral expression of the broader principle of solidarity that binds all
member states and is found elsewhere throughout EU treaties. The Court said
that there is a general obligation to take into account the interests of both the
Union as a whole and other member states. This obligation is not just limited
to situations where there are natural disasters or other emergencies, it is of
general application in Union law.
In the energy sector, the Court said that member states must seek to
take into account the interests of the Union and other member states with
respect to security of supply, economic interests, and the diversification of
sources of supply. A balancing test of interests should be adopted when
applying the principle of solidarity in cases of conflict. The Court said that,
in this case, it was incumbent upon the German authorities and the Commission to
consider the interests of not just Germany but also of other member states, and
where there was conflict, those interests should be subject to balancing
assessment. This assessment may include, where appropriate, the interests of
the Union as a whole.
The Court pointed out a number of serious flaws in the Commission’s decision.
In particular, the failure to even refer to the principle of solidarity in the
text of the decision. It also observed that there was even no factual or legal
examination of that issue, despite the existence of Article 194(1), which set
out the principle, within the any part of the decision.
The judges in Luxembourg were also clearly unhappy with the limitation
of the Commission’s market assessment in the decision to the German and Czech
markets, despite the broader impact of Gazprom’s increased access to the OPAL
pipeline across Central and Eastern Europe. The Court pointed in particular to
the glaring absence of any assessment of the potential impact on the Polish
market in respect of gas flows from the Yamal and Brotherhood pipelines. It
also noted there was no assessment of the impact of supply security of the OPAL
pipeline at the Union level.
The Commission has just over two months to appeal the ruling of the
General Court to the European Court of Justice. The likelihood of such an
appeal is low. In the first place, there is a practical political difficulty in
both dealing with the decision at the end of the current Commission and putting
in on the desk of the new Commission, which comes into office on November 1 and
would only leave a couple weeks to decide about an appeal.
In either case, it is very doubtful that the appeal would prevail in
the EU’s superior court. The General Court was clearly unimpressed by the
narrow scope of the Commission’s market assessment and failure to even discuss
the principle of solidarity. With such a problematic decision, it is likely
that CJEU would have no alternative but to uphold the judgment of the General
Court.
An alternative option for the Commission would be to accept that the
2016 decision is dead and draft a new decision granting Gazprom full access to
the pipeline. This could be a workable solution because a broader market
analysis today could take account of both increased liquefied natural gas (LNG)
capacity in Poland and the prospect of the Baltic Pipeline coming on stream in
2022, which, it could be argued, undermined the additional market power that
Gazprom would obtain via greater access to OPAL. However, the difficulty with
any such analysis is that it would also have to take account of the advent of
Nord Stream 2, which would significantly increase Gazprom’s market dominance. In
addition, any such analysis would be subject to potential legal challenge from
Poland, Lithuania, Latvia, and other member states across the region.
It is likely, therefore, that the
Commission will not appeal the ruling of the General Court, and, for now, will
not attempt to adopt a new decision on OPAL that would effectively grant
Gazprom greater access to the pipeline.
Implications
of the OPAL judgment
The direct and immediate impact of the OPAL judgment is that Gazprom and Gazprom’s allies’ capacity to
sell natural gas via Nord Stream and the OPAL pipeline is reduced by
approximately 12.8 bcm per year. The OPAL
ruling has a secondary positive effect for Ukraine, in that the only current alternative
route for Gazprom is the Ukrainian Brotherhood pipeline. As a result, Ukraine
will, for now, obtain additional transit fees from the re-routing of gas flows.
However, the immediate impact of the ruling is of far greater import
than the allocation of transit fees and the physical fact of re-routing. Firstly,
the OPAL ruling will play into Russian calculations about making a deal with
Ukraine over a new transit agreement. The current transit agreement came into
force on January 1, 2010and will
expire at 10:00 a.m. Moscow time on January 1, 2020. Without an agreement, no
gas can flow through the Brotherhood pipeline network (and 86bcm of
gas flowed through it in 2018, which is approximately the same as total
German annual consumption).
Gazprom was probably relying on the full utilisation of Nord Stream
1 and OPAL as an alternative route for natural gas flows, in the event that it
decided to let the Ukrainian contract expire. It still has the rest of the
capacity of Nord Stream 1 and Yamal, as well as considerable quantities of gas stored
in Western storage facilities, but annual flows of approximately 13 bcm are
difficultto replace at short
notice.
A second concern for Gazprom is that the OPAL ruling would likely influence
the European Commission perspective on the terms of use for any completed Nord
Stream 2 pipeline. For instance, even if an exemption were granted from the EUs
liberalisation rules to Nord Stream 2, would the Commission impose similar
conditions to Nord Stream 2 as it did to OPAL in 2009? The Commission could
impose a significant, say 50 percent, capacity restriction in the use of the
pipeline in order to account for the supply security and competition impact of
Nord Stream 2 on other member states and the Union as a whole. The effect of
the two capacity restrictions on OPAL and Nord Stream 2 together would likely
change Gazprom’s approach to the Ukrainian transit contract. It would make a
refusal to agree to another contract with Ukraine pointless, as Gazprom would
need to continue to place significant gas flows via the Ukrainian transit route
in order to export at its current scale into European markets.
One broader significant impact of the OPAL ruling therefore is that it could encourage Moscow to seek to
negotiate a deal with Ukraine before the January 1 expiration of the current
transit contract.
The third implication of the judgment is in respect to Nord Stream 2’s
prospects. Even if the Danish Energy
Agency finally grants Nord Stream 2 a route permit, the pipeline is now fully
subject to Union law. In particular, as a non-EU owned pipeline, it has to be
certified by the national regulator (Germany, in this case) that the granting
of certification will not put at risk the supply security of the member state
or the Union as a whole. Clearly, the OPAL
ruling is likely to play a significant role here. Given Gazprom’s behaviour in
interrupting gas supplies to EU member states, particularly in 2014–2015, when
Gazprom reduced
supplies via Nord Stream 1 to member states reselling gas to Ukraine,
certification could be problematic. Any attempt to grant a certification
without addressing the concerns of other member states would be likely to
result in a legal challenge by Central and Eastern European member states in
the EU courts.
Equally, if Nord Stream 2 seeks an exemption from the liberalisation
rules contained in the Gas Directive 2009, such as ownership unbundling, third
party access, and tariff regulation, the
OPAL ruling is likely to bite again. The exemption provision of the
directive, Article 36, specifically refers to the impact of an exemption on
supply security, the functioning of the internal market, and competition. Given
the OPAL ruling, Article 36 will have to involve an assessment of the impact on
the entire EU market of Nord Stream 2, and balance German interests against
those of other member states and the Union as a whole. As there are a number of
concrete concerns about higher prices in Central and Eastern Europe as a result
of Nord Stream 2, loss of transit security and increased market dominance of
Gazprom, together with market division and supply security concerns, would make
obtaining an exemption with limited or no conditions problematic.
One alternative option for Nord Stream 2 is to try and avoid the
application of EU energy law via a number of legal and corporate mechanisms.
For example, Gazprom has promoted the so-called ‘stub’
idea, which suggests that EU law could be avoided by dividing the pipeline
up, so that part of the pipeline operating outside EU territorial waters is
owned by one company, while a second EU owner would own the pipeline within EU
territorial waters. Only the latter would be subject to EU law. It was already
doubtful that such mechanisms would work because the Gas Directive was drafted
in order to ensure formalistic corporate mechanisms could not be deployed by
astute, powerful Western European energy companies. Hence, Recital 10 of the
Directive imports the very broad definition of control from EU antitrust law
into the Directive (which alone may already undermine the stub mechanism idea).
The tenor of the OPAL ruling makes such formalistic mechanisms even more risky.
The Court was clearly dismissive of the formalistic approach to the assessment
of the impact of the pipeline, which only dealt with the territories affected
along its direct route. Equally, it imposed an extensive and thoroughgoing inquiry
for any energy solidarity assessment. In that context, the prospect of Nord
Stream 2 and the German energy regulator seeking to broker a deal whereby some
corporate mechanism will allow the pipeline to avoid the full application of
Union law looks extremely doubtful and risky.
Nord Stream 2 receives all the attention, but there is also Turk
Stream 2, which will bring natural gas across the Black Sea to Bulgaria. The
Bulgarian energy authority will now find itself in the invidious position of
having to apply EU law to the Turk Stream 2 pipeline, with pressure being
applied by Gazprom and its allies while, at the same time, being overlooked by
the European Commission and several member states.
Conclusion:
Is OPAL a shadow over Gazprom?
The OPAL judgment places a
shadow over Gazprom across Central and Eastern Europe. There is now a serious
question as to whether or not Gazprom will be able to play the gas game,
whereby it can offer special pipeline deals to one member state while exploiting
others. OPAL has made such deals much
more difficult. Benefiting member states now face an legal obligation to take
other states’ interests into account, and the European Commission hovers over all
member state decisions, with additional interested member states ready to bring
their own legal challenges before the EU courts.
More immediately, OPAL has
changed the calculation for Gazprom in respect to the Ukrainian transit
contract. The price for expiration of the contract, in terms of the amount of
gas that can be sold via other routes, is now much higher for Gazprom. It is
also likely to be even higher in the future, as the OPAL ruling may be applied to Nord Stream 2 itself, with the
Commission perhaps limiting Gazprom to using half the pipeline’s capacity.
It may be that, given the amount of gas in storage in Western
European and the political needs of the Kremlin, the contract may be allowed to
expire in January 2020. However, given the
OPAL ruling, Gazprom’s most realistic option may well be to do a deal in
the spring of 2020, whereby it is locked into capacity access restrictions to
OPAL and Nord Stream 2 by EU decision, with substantial quantities of natural
gas still flowing through the Brotherhood pipeline.
Dr. Alan Riley is a senior fellow with the Atlantic Council Global Energy Center. Dr. Riley has previously advised Polish energy company PGNIG and Ukrainian energy company Naftogaz. You can follow him on Twitter
@profalanriley1
EnergySource provides analysis and insight on key energy issues, making sense of key energy trends and their implications for geopolitics, geoeconomics, policy, and markets.
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The OPAL judgment in Case T-883/16 “Republic of Poland v. European Commission” from the EU General Court will undermine Gazprom’s market dominance in Central and Eastern Europe.
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