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Nord Stream 2 hits back over Polish claims on pipeline's legal status

Highlights

Pipeline 'legally complete' before directive amendments

Derogation would not harm energy security: report

Decision on whether to grant derogation due by May

London — The developer of the 55 Bcm/year Nord Stream 2 gas pipeline from Russia to Germany continued to push its case for a derogation from new EU rules on non-EU gas links after Poland was allowed to join the process for ruling on the exemption.

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The Gazprom-owned Nord Stream 2 development company in January asked the German energy regulator Bundesnetzagentur for a derogation from the EU's third energy package requirements for the pipeline.

Such a derogation would allow the pipeline to be exempted from third-party access and unbundling rules, and requirements on transparent tariffs.

Poland's PGNiG last week said it had joined the procedure under which Bundesnetzagentur will make its decision, saying Nord Stream 2 would damage security of supply and competition in the gas market in Central and Eastern Europe, and should not be allowed special legal treatment.

Significant volumes of Russian gas currently are transited to Germany via Poland, which are a key revenue generator for the country.

Nord Stream 2 rejects the Polish stance, saying the pipeline would not have any impact on CEE supply security and should legally be allowed a derogation from the amended EU Gas Directive.

In accordance with applicable law, the decision on whether to grant the derogation will be made by the Bundesnetzagentur, with the proceedings to be mandatorily concluded by May 24.

A decision is expected before that date.

Supply security

In comments to S&P Global Platts, Nord Stream 2 pointed to a recent independent study by UK-based consultancy Frontier Economics that found that a derogation for Nord Stream 2 from EU energy regulation would not harm supply security in that region.

The study, it said, concluded that increased market integration of Eastern European countries (within CEE as well as between CEE and Western Europe) and significant expansion of import capacities in Eastern Europe -- independent of the volumes transported via the traditional transit routes -- mean that a derogation for Nord Stream 2 would not harm security of gas supply or gas prices in those countries.

In fact, the derogation would not be detrimental to security of supply in the EU as a whole, nor would it lead to an impairment of security of supply in individual European countries or pose a danger to "energy solidarity," it concluded.

There has also been concern that Nord Stream 2 would concentrate too much of Europe's gas supply on one source and one route.

However, Nord Stream 2 said the pipeline contributes to the security of gas supply in Germany and the EU simply by providing an additional transport infrastructure element.

"This increases the diversification of transport routes and the reliability of the gas system in the event of, for example, technical failures of individual infrastructures," it said.

"The contribution of Nord Stream 2 to the security of gas supply will be enhanced by the fact that it is an offshore pipeline, connecting Russia directly with Germany and thus with the EU. It therefore does not depend on transit through third countries, thus avoiding risks such as technical failures in transit countries."

Poland has also suggested volumes of Russian gas transiting the country could fall after Nord Stream 2 begins operations.

However, Nord Stream 2 said modelling of future gas flows and prices by the Institute of Energy Economics at the University of Cologne (EWI) for the Frontier report found that transit via Poland would continue to be fully used, assuming EU consumers aim to buy gas at the lowest cost.

Legal interpretation

Nord Stream 2 also believes it should win a derogation because the pipeline was "economically complete" before the amended EU gas directive came into effect in May 2019.

"The company had made irrevocable investments worth billions of euros trusting the applicable legal framework at that time, long before the European Commission announced its plan to change the legal framework," Nord Stream 2 said.

"On the effective date of May 23, 2019, the Nord Stream 2 pipeline had been completed from the perspective of economic functionality," it said.

It said investments of Eur5.8 billion had already been made irrevocably, while the pipelay in the German territorial waters was already complete at the end of 2018.

For the whole pipeline, 200,000 pipes made of 2 million mt of steel had already been delivered and some 1,300 km of the pipeline -- more than 50% -- had already been laid in the Baltic Sea.

"Therefore, it would be clearly discriminatory if Nord Stream 2 were the only existing pipeline investment affected by the new rules," it said.

Opponents of the pipeline say until the entire link is laid it cannot be considered "complete."

However, Nord Stream 2 said that reducing the statutory criterion "completion" to the conclusion of the physical construction of a gas interconnector would violate the EU primary law principle of the "protection of legitimate expectations."

This law, it said, is consistently held by the European Court of Justice as being one of the general principles of EU law.

It would also breach the fundamental right to equal treatment under European law, the fundamental right to protection of property and the protection of the right to conduct a business, it said.

Other legal challenges

Nord Stream 2 continues to look to have the amendments in the gas directive canceled.

It began arbitration proceedings in September in a bid to force the EU to annul changes to the directive, having already asked the EU's General Court in July last year to annul what it called "discriminatory" changes.

According to a legal opinion published this week in the German Handelsblatt newspaper, legal experts from the University of Tubingen believe there is "no reasonable justification" for regulating pipelines from non-EU countries.

Professor Stefan Thomas told the paper that the amended gas directive "suddenly and abruptly" covered gas infrastructure whose construction was already well advanced.

"If investors had known about the new regulations when planning and applying for the construction, they might have calculated quite differently," he said.