Nord Stream 2, other disputes fail to dent Russian natural gas flows to EU

Russia's Gazprom continues to supply high volumes of natural gas to the EU despite long-running disputes over pipelines, competition and Ukraine, the latest S&P Global Platts guide to EU-Russian natural gas relations(opens in a new tab) shows.

Flows via its 55 Bcm/year Nord Stream 1 pipeline to Germany hit a record high of 51 Bcm in 2017, helped by increased access to the onshore OPAL gas pipeline, at first just in January and then continuously from August.

The European Commission's decision in October 2016 to allow Gazprom to access up to 12.8 Bcm/year of extra OPAL capacity through public auctions was intended to settle that particular dispute, running since 2013.

But state-owned Polish gas company PGNiG gained an interim court order to suspend the decision, causing the interruption in capacity sales from February to July. It has also asked the EU General Court in Luxembourg to annul the decision completely.

The court has said it will rule on this in 2019, and that capacity booked for after this ruling may not be guaranteed. That leaves an element of doubt over Gazprom's future access to OPAL until the ruling is given.

EC BATTLES AGAINST NORD STREAM 2

While the EC has given Gazprom the green light to use more of Nord Stream 1, it is still battling fiercely against Gazprom's planned 55 Bcm/year Nord Stream 2 project, due onstream at the end of 2019.

The latest salvo is the EC's proposal to apply EU third energy package internal market rules to all offshore gas links with non-EU countries up to the limit of EU countries' exclusive economic zones, which go beyond their territorial waters.

The EC argues this is a simple "clarification" of the EU's gas directive which governs all onshore gas pipelines within EU territory, but in reality it is a hugely controversial move.

The proposal as written would cover long-standing links to Algeria, Tunisia and Libya, as well as the Nord Stream 1 pipeline, and any new links such as Nord Stream 2. It would also cover links to the UK after Brexit. But the clue as to the real target is in the option for national authorities to give existing pipelines long-term derogations -- meaning protection from the internal energy market requirements for an unspecified time.

EU national energy ministers are looking at allowing those derogations to last for up to 20 years, and be renewable. If agreed -- and there is no guarantee that the EC's proposal will make it into binding EU law at all -- this would effectively cover existing pipelines till the end of their operational life, if national authorities so desired.

That leaves Nord Stream 2 as the most exposed to requirements including ownership unbundling, third-party access and transparent, non-discriminatory tariff regulation for the EU section of the pipeline.

Ownership unbundling and third-party access would make little difference to Nord Stream 2. Existing vertically integrated companies such as Gazprom are eligible for very lightly supervised separation of their supply and transport arms under EU rules; and Gazprom still has an export monopoly for pipeline gas, so there are no third parties to ask for access.

So the real focus is on transmission tariffs. The EC clearly wants Nord Stream 2's tariffs to be more transparent, to give Ukraine a fighting chance to compete with them after 2019, when its transit contract with Russia expires. Russia has said that it is willing to consider sending gas through Ukraine if the price is right. The scene is thus set for tense talks on post-2020 transit tariffs.

Meanwhile, the EC's proposal on offshore gas pipelines is also likely to complicate a long-running WTO case. The WTO panel investigating Russia's formal complaint that the EU's third energy package rules discriminate against Russian infrastructure has already delayed its final report several times, saying the issue is highly complex.

The EC has been surprised to discover that the WTO panel considers Russia may have a case, suggesting that the EU's projects of common interest funding program discriminates against non-EU projects.

One dispute which could progress soon is the EC's antitrust case against Gazprom's alleged market abuse in Central and Eastern European countries. The EC is in advanced talks with Gazprom on commitments to resolve the case without a formal judgement, thus avoiding potential fines.

Closing that case with effective binding commitments could take some of the heat out of complaints that Nord Stream 2 may allow Russia to continue dominating these markets.

Overall it is clear the EU still wants to buy Russian gas in large volumes, and Russia still wants to sell to the EU. The commercial benefits to both sides continue to drive trade despite the disputes, and these benefits are unlikely to change much in the coming years.