Outside the European Court of Justice building, Luxembourg (photo by katarina_dzurekova/Flickr).
The recent decision
by a panel of the European Court of Justice (ECJ) to limit Gazprom’s use of
Opal, an onshore pipeline in Germany, has been the subject of much commentary
given its possible implications for Gazprom’s use of both Nord Stream 1 (NS1)
and Nord Stream 2 (NS2), as well as the extent of Gazprom’s reliance on Ukraine
for gas transit to Europe. In upholding a Polish challenge, the ECJ overturned the
European Commission’s approval of an earlier decision by BNetzA, the German
regulator, permitting Gazprom to use almost all the capacity of the Opal
pipeline, the onshore continuation of NS1. The ECJ held that the Commission breached
the principle of energy solidarity by not assessing whether BNetzA’s decision
“might undermine the interests of other Member States in the field of energy.” The
immediate impact of the ECJ decision, which is subject to appeal to the full court,
will result in Gazprom’s losing 12–13 billion cubic meters per annum (bcma) of capacity
in Opal. As a result, Gazprom may have to increase transit flows through
Ukraine, at least in the short-term, to satisfy contractual obligations to
European buyers.
Less clear are the longer-term impacts of the ECJ decision
on the future of NS2 and Eugal, its onshore connection. If the decision is
interpreted broadly to mean that energy solidarity must be considered in all capacity
allocation decisions, Gazprom’s access to Eugal, and therefore its ability to
fully utilize NS2, could also be constrained. In the case of Opal, the ECJ was
dealing with a third party access exemption, rather than a market-based capacity
allocation such as that outlined
in the European Union’s (EU) 2017 Capacity Allocation Regulation. For now at
least, BNetzA has taken the position that the Opal decision does
not affect Eugal, which did not involve a third party access exemption and
instead utilized capacity allocation principles later adopted in the 2017 Regulation.
Beyond any direct impact on Eugal, of course, the ECJ decision may also impact
how the extension
of the Commission’s Gas Directive, approved earlier this year, will be applied
to NS2, i.e., whether the concept of solidarity must be applied to capacity
booked in NS2.
It should be noted that the ECJ decision did not find that
permitting Gazprom access to virtually the full capacity of Opal actually violated
the principle of energy solidarity, only that the impact on Poland and other EU
member states caused by allowing full access was not considered. While it is unlikely
the Commission will appeal the ECJ decision, it is possible that BNetzA could
now reevaluate its earlier decision to allow Gazprom greater access to Opal and
find no significant impact on Poland (and perhaps other states). After all, Poland
plans to stop
buying Russian gas when its current long-term contract ends in 2022, which
suggests that its energy security is decoupled from NS2, and Gazprom’s ability
to use most of the capacity of Opal over the past few years did not impact Poland’s
gas imports from Russia via the Yamal pipeline or the revenues it earned from
transiting Russian gas to Germany via that same pipeline. Poland may have not
been adequately consulted, but neither its energy nor economic security appears
to have been harmed by the earlier decision.
While industry observers continue to debate the long-term
impact of the Opal decision, the clock is running on efforts to maintain
transit through Ukraine after December 31, 2019, when the current
Ukraine-Russia transit agreement expires. Trilateral (Ukraine/Russia/EU)
negotiations are continuing, with the most recent round taking place in
Brussels on September 19. From all reports, Ukraine, with EU support, is holding
out for a long-term agreement with significant minimum transit volumes (a ten-year,
60 bcma agreement has been proposed by the Commission). Russia has apparently countered
with a proposal for shorter-term bookings according to European standards (or
alternatively, a one-year extension
of the existing agreement), with an additional precondition that Ukraine drop
any claim to billions of dollars of compensation awarded under the arbitration
decisions arising from the 2009 Russia-Ukraine gas purchase and transit
agreements.
While negotiations continue (the next round is scheduled for
October 28), the question naturally arises as to the potential impact of the
Opal decision on the relative negotiating leverage of the parties. It’s been
clear for some time that Gazprom will require substantial volumes of transit
through Ukraine for at least the next few years due to delays in the
implementation of NS2 and the fact that the onshore extension of the second
line of TurkStream (TS2) beyond Turkey will not be completed any time soon
(assuming Turkey does not agree to purchase significant volumes from TS2). In
fact, even with NS2 and TS2 fully operational, Gazprom would need some transit
capacity through Ukraine due to seasonal fluctuations in European demand, off-peak
filling of European underground gas storages, and pipeline maintenance
requirements (typically, NS1 shuts down for two weeks during the summer for
annual maintenance, and flows through Ukraine spike to make up for the lost
capacity). If Gazprom needs to compensate for the loss of Opal capacity due to
the ECJ decision, its Ukraine transit requirement will presumably be increased
by the amount of that loss.
If the parties maintain their current negotiating posture,
there is a good chance they will reach the end of the year deadlocked, and the
struggle then becomes a public relations contest. Ukraine will argue that it
needs a long-term agreement to justify the associated investment required to
maintain its gas transit system (GTS), while Gazprom will argue that its offer
to continue to book capacity on a short-term basis is reasonable and in line
with European practice. Gazprom will be hoping that the EU, fearful of the
impact of a complete cut-off of transit from Russia to Europe via Ukraine, will
put pressure on Ukraine to make concessions to keep the gas flowing. In the
event of a deadlock, it’s hard to calculate how the loss of Opal capacity due
to the ECJ decision (relatively small in the context of total Gazprom exports
to Europe will impact the outcome of the transit negotiations. It may slightly
increase Gazprom’s leverage, since a cut-off of Ukraine transit would have an
even larger impact on Europe if Europe depended on larger volumes of gas
imports via Ukraine, thus potentially adding to European pressure on Ukraine to
reach a deal. In the event of a stalemate and cut-off of transit January 1,
2020, one could even foresee a quick decision by the Commission to again allow
Gazprom access to the full capacity of Opal to partially mitigate the impact of
a disruption in flows across Ukraine. Alternatively, faced with the potential
long-term loss of capacity in Opal and the danger that the ECJ decision may
result in limitations on NS2 and Eugal, Gazprom may feel more pressure to
commit to larger volumes of gas transit via Ukraine over a longer period of
time.
Daniel D. Stein is an
independent energy analyst who previously served as senior advisor in the State
Department’s Bureau of Energy Resources.
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 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.
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