What This Court Decision Means for the European Natural Gas Picture
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What This Court Decision Means for the European Natural Gas Picture

by | published September 25th, 2019

At a meeting in London last year, I suggested to my colleagues that the geopolitics surrounding Russian natural gas imports into Europe would have more to do with internal EU rather than external matters.

My focus for those comments involved how additional Russian volume would be distributed, rather than the main venue by which it is to be received.

My interest at the time was to direct attention away from viewing the Nord Stream 2 debate as the major one deciding the sourcing of continental energy streams.

Now, Nord Stream 2 is the pipeline intended to parallel an already existing pipeline – appropriately called Nord Stream – already carrying natural gas from Russia, across the floor of the Baltic Sea to northern Germany. It has unleashed the latest furor of disagreement at EU headquarters in Brussels over how dependent Europe is to energy coming from Russia.

Diversifying energy sourcing may have been the initial concern when this debt erupted, but the cross-border impact has widened more recently. This has resulted from Russia using the Nord Stream 2 project to ramp up pressure on another sore spot in European thinking.

The Kremlin regards Nord Stream 2 as the justification to negotiate a further reduction in gas moving across Ukraine to Europe.

Let’s go behind the scenes…

The Impact of Conflict between Russia and Ukraine

The tension between Moscow and Kiev has prompted rising worry that the reliability of Russian energy volume reaching Europe will once again be dependent upon politics beyond EU control.

This becomes an especially nasty reminder of events several years ago, when gas imports were cut during a particularly bad January cold snap because of differences between Russia and Ukraine.

That comprises a main part of the drive to lessen European reliance on gas coming from Russia. Moscow’s answer has been to hold Ukraine responsible for that interruption in service and regarding the new Nord Stream 2 line bypassing Ukraine as a source for European security.

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Unfortunately, the issue for many in Brussels has become more nuanced. It now includes continued opposition to Russian policies against Ukraine, opposition that began with the Russian takeover of Crimea and continues with Russian support for armed insurrection in Eastern Ukraine.

The geopolitics scene today involves much more than where Europe obtains gas.

It has become a matter of European security itself.

A Treaty, a Protocol, and a Refusal

To all of this is added one further longstanding source of friction between Brussels and Moscow.

This one emerges from a difference surrounding the Energy Charter Treaty (ECT), an international agreement that Russia signed years ago but has not followed.

The problem comes from the ECT transit protocol.

EU-Russian negotiations were suspended over the matter in 2011 and have not yet resumed. That protocol requires signatories to separate production of gas from transport and allow third parties access to domestic pipelines.

Moscow has steadfastly refused to do either, as they would challenge the monopoly that state-controlled Gazprom has in the production and transit of Russian natural gas. In return, Brussels has prevented Gazprom from acquiring European-based energy assets.

The Nord Stream system was Russia’s way to circumvent the EU actions against Gazprom. The pipelines may be administered by separately created entities in which German interests on paper have a major say (and include a former German Chancellor as its head).

But don’t mistake the obvious – Gazprom effectively manages European domestic energy assets by means of providing the gas flow.

That leverage is now thrown up in the air, and it involves components of the European pipeline grid I mentioned specifically during my London briefing.

A decision by the European Court of Justice (ECJ) two weeks ago has fundamentally changed prospects for natural gas imports from Russia.

They Perform the Geopolitical Square Dance Beautifully

That decision requires that Gazprom reduce gas shipments via OPAL to 50% of pipeline capacity. OPAL (Ostsee-Pipeline-Anbindungsleitung) is a German eastern border distribution pipeline connecting to several neighboring Eastern European countries.

OPAL is one of two German domestic systems – the other being NEL (Nordeurop√§ische Erdgasleitung) – used to transit gas received via Nord Stream and Nord Stream 2 for wider distribution in Europe. The inability to move its desired volume on OPAL (and perhaps on NEL as well, depending upon pending legal actions) effectively undercuts Gazprom’s ability to determine European gas distribution (an effective way to control European domestic assets and circumvent ECT).

Limiting Gazprom’s access to the OPAL is viewed as a positive step by European countries concerned about energy security. Some of my sources in the area are also suggesting that the ruling may increase Ukraine’s chances of achieving a new gas transit deal with Russia.

The lawsuit was initiated by Polish state gas company PGNiG after the European Commission removed an earlier cap on pipeline shipments in 2016. For its part, Warsaw had claimed the commission had not conducted an examination of what the removal of that cap would do to Poland’s security of gas supply.

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In my London comments (which at the time were made with the commission’s 2016 action in force) I suggested that the ECT could be used to limit Gazprom’s access into the European market. That would have limited Gazprom’s impact on OPAL and NEL capacity without requiring a specific ruling on the distribution pipelines.

The European Court of Justice (ECJ) decision will certainly affect the current negotiations between Moscow and Kiev and will probably result in throughout across Ukraine to Europe remaining in place, at least in a short-term agreement. My contacts at Ukrainian state company Naftogaz are optimistic that the ECJ has bought them some time.

But as Europe enters another winter heating season, its options remain limited.

Continental sources continue to decline with main Dutch and Norwegian flow moving downward. Liquefied natural gas (LNG) imports from Qatar, North Africa, and the U.S. are increasing, but cannot fill demand requirements.

That means the Nord Stream/Gazprom/Ukraine/OPAL/EU political square dance will continue.

Sincerely,

Kent

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