An agreement reached between Washington and Berlin this week effectively removed a threat of sanctions against the controversial Nord Stream 2 gas pipeline from Russia to Germany bypassing Ukraine, making it highly likely that the pipeline construction will be finalized by autumn.
Katja Yafimava, a senior research fellow at the Oxford Institute for Energy Studies, told New Europe on July 22 removing the threat of sanctions, which could delay but not stop construction of Nord Stream 2, also makes it more likely that the issues around technical certification will be resolved swiftly.
“The question of when the pipeline will become operational and whether there will be any capacity restrictions is more complex and nuanced. Given that the agreement is between Germany and the US rather than between the EU and the US, it is the German regulatory authority – and not the EC – that will play a key role in stipulating a regulatory regime for Nord Stream 2 under German jurisdiction through certification of the Nord Stream 2 operator rather than through an exemption,” Yafimava said.
As part of the agreement, Germany has confirmed that it “will abide by both the letter and the spirit” of the Third Energy Package with respect to the German section of Nord Stream 2 pipeline, “to ensure unbundling and third-party access”, including “an assessment of any risks posed by certification of project operator” to the EU security of energy supply, the Oxford expert explained.
The amended Gas Directive, which is part of the Third Energy Package, requires the German regulatory authority to assess the operator’s compliance with one of the unbundling options set by the Directive and issue a certification decision to that effect.
According to Yafimava, certification process can take up to 10 months and includes receipt of an opinion, which is not legally binding, of the European Commission, which in turn may consult the Agency for Cooperation of European Regulators (ACER) as well as interested parties. “It is logical to expect that the German regulatory authority will ultimately certify the operator of the German section of Nord Stream 2, but it is also likely that before doing so it will request Nord Stream 2 AG to make certain changes to its operatorship model, that would be deemed sufficient to ensure compliance with the Directive’s unbundling requirements and demonstrated that granting certification will not put at risk the EU security of energy supply,” Yafimava explained.
According to the London-based expert, the German regulatory authority will have to walk a thin line in issuing a certification decision as it will be closely watched by the EU Commission and those member states that are not happy about Nord Stream 2 in any form or shape, and its certification decision will have to be robust enough to withstand a potential legal challenge. “While certification process is ongoing and it could take up to 10 months the German regulatory authority could allow gas flows to start on a provisional basis but just as well it may decide not to allow flows to start until certification process is complete,” Yafimava said, noting that its decision may also depend on the degree of tightness of the European gas market.
“Certification conditions of the Nord Stream 2 operator might become part of Russia-Ukraine-Germany trilateral negotiations on post 2024 transit of Russian gas across Ukraine as facilitation of the existing transit agreement extension is one of Germany’s commitments under the US-German agreement, whereby Gazprom’s commitment for post 2024 transit across Ukraine could facilitate certification process,” Yafimava argued.
Meanwhile, Chris Weafer, co-founder of Macro Advisory in Moscow, told New Europe on July 22 Russia will not have an issue with the agreement between Germany and the US. “It has long adopted the position that the dispute over Nord Stream 2 is between the two countries only. Moscow has avoided making any comments about the dispute since early 2020 other than to give construction progress reports,” Weafer said.
The deal agreed in Washington is primarily aimed at appeasing the US Congress. The headline is that Germany now holds Russia to good behavior concerning Ukraine and protects Ukraine’s sovereignty, the Moscow-based expert argued.
Weafer opined that the White House is obviously hoping that these headlines will be enough to have Senator Ted Cruz, who is the principal opponent of Nord Stream 2, to now drop his objection to the Senate review of several important Administration staff and for a line to be finally drawn under this contentious issue. “But that is yet to be clarified and Senator Cruz may still make a late bid to try and block the project. After this week’s agreement, however, it seems his options are very limited,” Weafer said. He reminded that Cruz represents the US state of Texas that would like to sell a lot more gas to Europe. “It will not be able to do so, as easily or with the hope for higher price, when Nord Stream 2 is brought online,” Weafer argued.
“Moscow will be happy that the uncertainty over the project now appears to be almost at an end. In reality, the deal announced in Washington, places no additional restrictions or burden on Moscow. It does not mention Crimea and it does not commit Russia to extend the existing gas transit deal with Ukraine when it ends in 2024,” he said.
Recall that Russian gas monopoly Gazprom, at peak, used to transit over 120 billion cubic meters of gas to Europe via Ukraine. That was cut to a 65 billion cubic meters “take or pay” deal for 2020 and is now cut to 40 billion cubic meters annually in 2021-2024, he said. “After that there is no requirement for Russia to use the Ukraine transit route unless it strikes a new deal. The agreement in Washington does not require Russia to do so. Germany has committed to pay for an upgrade to the Ukraine pipeline network, although with no specific details, other than an estimate of cost at 200 million euros, announced as yet, and that will at least allow for a reverse flow from Germany after 2024 if required,” Weafer said.
“The reality is that the Ukraine-Russia gas dispute has cost Ukraine billions of dollars in annual transit fees while Gazprom exports to Europe have grown, and will grow, substantially,” Weafer said, adding, “In the future, Kyiv will be beholden to Germany for its gas which is ironic in that it was the 2009 Ukraine-Russia dispute that created the opportunity for both Nord Stream pipelines, not to mention the progressing Turkish Stream 2 route snaking its way through the Balkans to Austria”.
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