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Russia's Nord Stream 2 begins arbitration claim over EU gas link rules

London — Russia's Nord Stream 2 has begun arbitration proceedings in a bid to force the EU to annul changes to the bloc's Gas Directive that require Germany to apply internal market rules to the EU part of the planned 55 Bcm/year offshore link.

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A spokesman for the Nord Stream 2 operating company told S&P Global Platts on Thursday that an arbitration notice had been served and that the company was looking to have its case heard at an arbitration court outside of the EU.

"Nord Stream 2 has decided to ask the arbitral tribunal to determine that the EU is in breach of its international law commitments under the Energy CharterTreaty (ECT) and to make orders requiring the EU to discontinue its breach," the spokesman said. "A notice of arbitration was served today," he said.

Nord Stream 2 asked the EU's General Court in July to annul "discriminatory" changes to the EU's Gas Directive, which saw new EU rules governing offshore gas links with non-EU countries enter into force on May 23, with Nord Stream 2 the first affected.

The European Commission is keen to bring Nord Stream 2 under EU market rules so that it will have to reveal information about its costs, among other things, which would help Ukraine to offer competitive tariffs for its rival transit route.

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REGULATED TARIFFS

Nord Stream 2 is facing tariffs regulated by Germany for its section in German territorial waters by February 24, 2020 at the latest, unless it gains a waiver.

That is the directive's deadline for applying EU internal market rules to the EU section of offshore gas links with non-EU countries.

Existing non-EU links, however, including Russia's first 55 Bcm/year Nord Stream link to Germany and links from North Africa to Spain and Italy, are eligible for waivers from the additional requirements.

Nord Stream 2 argues that its Eur9.5 billion ($10.7 billion) investment was committed and nearly half the pipeline already laid before the new rules entered in force on May 23.

Arbitration cases such as these have an average duration of 2-4 years, meaning the changes will likely enter into force in Germany well before the arbitration proceedings are concluded.

Nord Stream 2's separate appeal to the EU's General Court -- made in July -- was expected to take 20 months to reach its conclusion and also is not likely to be ruled on until after the changes are implemented in national law.

Nord Stream 2 argues that the changes to the EU's Gas Directive break EU rules on equal treatment for investors as they treat "completed" and "new" offshore links to non-EU countries differently.

Russia had planned to bring Nord Stream 2 online by the end of this year, before its transit contract with Ukraine expires, but permitting issues in Denmark mean the start could be delayed to mid-2020.

-- Stuart Elliott, Stuart.Elliott@spglobal.com

-- Edited by Daniel Lalor, daniel.lalor@spglobal.com