Nord Stream 2 certification woes

This week’s pod discusses the contested Nord Stream 2 pipeline following the temporary suspension of certification by the German regulator.

Listen to a discussion on the latest developments regarding Gazprom’s attempts to gain approval and the bureaucratic, legal as well as geopolitical obstacles that stand in its way. When can we expect Russian gas to start flowing into Germany?

Guest: 

• Ana Stanic, Principal, E&A Law

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:05

Hello listeners and welcome to the Montel Weekly podcast, bring New Energy Matters in an informal setting. In today's pod, we return to the controversial issue of North Stream two. Early in the autumn, there were those that expected the pipeline to be delivering gas into Germany by December, perhaps more in hope than expectation. Then in November, Germany's regulator, the Bunes net tour. Added to market confusion by temporarily suspending North Stream Two's license to operate. Now many think the pipeline won't begin supplying gas until September next year. Joining me, Richard Sverrisson in discussing the legal issues and delving deep into the bureaucratic processes at work is Ana Stanic of E&A law. A warm welcome to you, Ana. Ana Stanic, Principal, E&A Law: How are you? Fine, thanks yourself.

Ana Stanic, Principal, E&A Law: 0:50

Very good. Thank you.

Richard Sverrisson, Editor-in-Chief, Montel: 0:51

Excellent. If we can just cut straight to the subject at hand here. Ana did the decision by the Bunard Nets. Nets take you by surprise. Surely it must have known that the operator needed to be a German entity in order to comply with EU law.

Ana Stanic, Principal, E&A Law: 1:06

I think it did take me by surprise to the extent that the official application was lodged in September. I understand. In fact, I think the, that was when it was confirmed that every, that the application was complete. I think the initial application was already submitted in June, so yes. To discover. That is a requirement of German law so late in the process. The whole process is meant to to last four months at maximum to issue the entire draft decision. It's a bit late normally, I'm not a German lawyer, but normally an administrative law procedures, let's say we take, as an example, environmental law and EIA assessments, which are something set in European law. You, you have a typically 14 days to, for a regulatory body to tell you whether an application is complete or not. So having taken such a long time to do that, yes, it was quite a surprise.

Richard Sverrisson, Editor-in-Chief, Montel: 2:00

But what does the delay tell us then that could be, there could be more surprises in store or that, if it takes two months for it to reach a decision on this, it's gonna. Could there be further delays along the line?

Ana Stanic, Principal, E&A Law: 2:11

Certainly we, it indicates possibility of further delays, but from a legal perspective, one would expect there not to be any further delay. Presumably now they've had a chance to look at the entire application in detail in the early comment. All the issues that I've raised is this matter. I think it would be quite difficult from a legal perspective, administrative law perspective. Again I'm not a German lawyer so I have no idea what the hurdles there are, but I would imagine it would be similar to what we have elsewhere in the European Union and therefore that, a regulatory authority cannot. Keep on telling you that your application is incomplete. That's part that would be then a basis to, to challenge the regulatory's decision. And in fact, even to sue for damages, because obviously, and here it is at a set in European law, there are timeframe. Set out in the directive by which a Ben says to issue its decision. So you can't just keep on postponing that decision by finding matters that are incomplete in the application.

Richard Sverrisson, Editor-in-Chief, Montel: 3:13

Do you have the impression perhaps that the bonuses, nets are to, wants to be seen, to be accommodating demands from the US or Poland? Before eventually clearing the project?

Ana Stanic, Principal, E&A Law: 3:22

I can't speculate as a lawyer on that. And what I would say is that it's very important from a legal and legal certainty point of view. And we're talking about here, not just about Nord Stream two but generally how the German regulators to deal with issues of certification and other issues more generally. Procedural rules are complied with and timeframes are complied with. This is very crucial for, investment into, whether it's Germany or whether it's into the EU as a whole. And if we just step outside of the area of gas and we talk about energy transition that we need to deliver. We have to have a regulatory bodies that are seen to, to issue timely decisions, and that if they don't issue timely decisions, then there is mechanisms for compensation for the failure to do I would expect the German regulator to know this and the importance of it. Not only doing what is required by the law, but being seen to do so I would, going back to your original question, I would hope. That this is now, once the issue is resolved, exactly what it is that they're even asking Nord stream to, to do in order to comply with German law.

Richard Sverrisson, Editor-in-Chief, Montel: 4:30

Is there a difference between gas and a particular Russian gas and a power line that's coming from a third country into the eu? Doesn't the nature of Nortrom to make it a little bit more controversial and perhaps that the Punnett targeter argue to feels it has to be more thorough in order to avoid a lawsuit down the line from whether it be from the us. Or Poland or from gas from Russia.

Ana Stanic, Principal, E&A Law: 4:54

The law is the same in the terms of what are, what the law requires. The assessment, both of the Na German regulator and the law in the European Commission to do, it's set out very clearly in Article 11 of the third energy package, the gas directive. And so the complexity of the assessment which turns on things like taking into account the issue of. The certification is the German regulator is required to assess two very important things as part of the certification. One is whether the effective ownership or the effective unbundling as is defined in Article nine is complied with, and that's where we understand that. Nord Stream two is proposing the it o model as a way to comply with those requirements. And then the second very important question is the issue of whether the certification would put at risk the energy supply, both of Germany and more generally of the European community as a whole. That's where the complexity you refer to comes in. That assessment is one that needs to be made, and in fact, my understanding is that it has already been made. By the ministry of econom I think it's called Energy and Economy, economic Affairs of Germany, which has says it has made that assessment that it has consulted with the neighboring countries and has made assessment that Nord Stream two certification. Does not put at risk security of energy supply. So that aspect of the assessment has been made and I don't believe that assessment can be reopened. So the next stage, if and when there is a next stage, once the draft opinion. Is given by the German regulator, then the commission has two ti two months plus two months maximum to issue its decision. So it can't, these mechanisms are set in stone in terms of law, and they can't be somehow molded to for other reasons. That is what the law says. That is what the law is. So the timeframe needs to be complied with. Otherwise there are breaches of European law.

Richard Sverrisson, Editor-in-Chief, Montel: 7:05

What was the first model, Ana , you mentioned the first aspect, the item model.

Ana Stanic, Principal, E&A Law: 7:09

Yes. The item model is the in independent transmission operator model. So as you may recall, we have three different models that are possible under the third gas directive. And those are the, obviously the ownership unbundling, which is a total unbundling between the owner of the transmission system of, and the actual operator of the system. And the I model is one. And then there's the ISO model and then there's the I model. And the I model is, my understanding is the one that Nord Stream two. Has opted for, and there it's one where the transition system remains part of the vertically integrated undertaking. In this case gas Pro. But a t, the TSO is set up as a separate legal entity. And then there are all these requirements in particular Article 17, which seems to be relevant given what we understand from the decision or the press statements of the German regulator. It is key and that is the transmission system operator must be equipped with all human, and I'm quoting here, technical, physical, and financial resources necessary to fulfill its obligations as a transmission system operator. Under the directive, and this is where we see the press release from the German regulator saying that they're not satisfied that, or they need in order to proceed continue with the certification process. They need to be satisfied that the German subsidiary that. Nord Stream two, I understand is proposing to own the 33 kilometers of the pipeline that is in Germany, that German subsidiary is equipped fully in terms of assets being presumably mainly the act, the and the technical staffing human resources to actually manage the company as a standalone subsidiary.

Richard Sverrisson, Editor-in-Chief, Montel: 9:08

So it's only about the 33 kilometers. It's not about the whole length of the pipeline.

Ana Stanic, Principal, E&A Law: 9:12

This is where the Ukrainians and the Polish are insisting that the entire pipeline that the German subsidiary would need to be responsible and the subsidiary is set up for the entire pipeline. But this obviously runs counter to the fact that the jurisdiction. EU law only relates to the 33 kilometers in the territorial sea. And so this is, and this discussion the Ukrainian polish position takes us back to the original draft of the fourth. Gas directive, which was adopted in order to ad address the issues of Nord Stream two, which sought to extend the ambit of the directive to include also the part of the pipeline that sits in the exclusive economic zone. But as many of us had explained to. The EU at the time, and I had appeared before the European Economics and Social Committee to, in particular to explain this point under the Law of the SEA Convention, the European members of the European Union. And therefore the European Union itself has no jurisdiction over the exclusive economic zone. So the debate has, in a way returned back to that. To the extent of can the German regulator demand that Nord Stream two German subsidiary actually relate to beyond the 33 kilometers? And I think that's where the issue is. Now.

Richard Sverrisson, Editor-in-Chief, Montel: 10:40

What's the answer to the issue? I know is the, is it a no or from your side, what's your view?

Ana Stanic, Principal, E&A Law: 10:44

For me, the answer is no. Because I per, I would perceive that as again. A breach of the law of the Sih Convention obligations. And actually it's not just only, it's a breach under Law of the Sea Convention states signatories of all of the SEA Convention simply do not have jurisdiction. It. So it's not a, you just simply cannot overreach beyond what is in the law of the SEA Convention.

Richard Sverrisson, Editor-in-Chief, Montel: 11:07

And it's clear, the political nature of the pipeline is, it's, is understandably making it much more complex. And you have a bit of a legal labyrinth here, but the underlying legal aspects are clear in your view, Ana , that's very interesting. You mentioned that the German ministry of economics and energy. Now we have a new government in Germany. The greens are a part of that government, and they were most opposed to Nord Stream two during the election campaign. And now they control that ministry. But there were very few references, if any, to the pipeline in the coalition deal. That was made public last week. Does this suggest you think that they will let the German regulator certification process run its course and that they won't get involved?

Ana Stanic, Principal, E&A Law: 11:53

That's certainly what I would, as a lawyer expect them to do. So the answer is yes. These matters are administrative and legal matters. We have provisions in the law. That address including matters of political concern. As is questions of security of supply. We have a decision by the ministry. Again, I repeat, I'm not a German lawyer. I don't know on what basis the ministry could reopen its decision. It may well be that it could reopen its decision based on further conflicts. We've seen the amassing of troops on the border between Ukraine and Russia. It could be that they could say that actually the new circumstances require reassessment of whether the certification puts at risk, security of supply of the European community as a whole. But I think it would take a lot. In my view for that kind of a decision to be able to be justified legally as opposed to politically and we have to remember that there is an ongoing energy charter treaty claim that the Nord Stream two has brought against the European Union. In fact, it's the first. A case against European Union under the Energy Charter Treaty for for the delay and on in, in the entire process of commissioning and building of Nord Stream two. And I think up, certainly the Mer Merkels government and was very keen to separate the poli politics of issues and the broader disagreements with Russia. With with the legal aspects of the certification and of the construction of the Nord Stream two projects. So whether and whether this new coalition government does the same, we will know fairly soon. We had a joint statement of the two, the US and the German government back in July. And one would expect that both sides will maintain the agreement reach there. But we have actually seen in the last few days fairly strong moves in the US Senate with respect to trying, demanding impositions of new sanctions. And that could mean that it could be, that there might be a change in any event on the US front combined with a new. New coalition government in Germany and who knows what may happen between now and the end of the year on all of this.

Richard Sverrisson, Editor-in-Chief, Montel: 14:17

Which kind of leads me to my next question, Ana . Some have linked the certification of Nord stream to, to deal in which Russia continues to send gas via Ukraine beyond 2024. Now, indeed, the US has demanded this from Germany as part of its acceptance of the pipeline's physical completion. Do you suspect the technicalities surrounding the pipeline's compliance with EU competition law? Being used to mask political demands. Is there a wider, bigger political picture here?

Ana Stanic, Principal, E&A Law: 14:47

I certainly agree that the, and it is, it's not it's explicit in the joint statement that the Germany undertakes to help facilitate the extension of up to 10 years on the Ukraine gas transit agreement. And I would imagine that part of. The negotiations that are taking place now in order to finalize the entire, if you say on the political front of the certification and other not sanctions, non sanctions is about securing that transit beyond 2024. So I would expect that if we were to get a breakthrough on that that then that would mean that we. We would have a much smoother ride for the certification process. Otherwise, the certification process, there, as I say, there are timeframes that need to be complied with and it's gonna be very difficult. Not to com to find continuous ways of not, suspending the processes so on, in indefinitely. I think it's at this point, a sort of a game of chicken.

Richard Sverrisson, Editor-in-Chief, Montel: 15:50

Absolutely. Yeah. But at the same time, you see in, in November, Russian gas flows improved slightly on the previous month, but remain low compared to recent years. Now, do you think Russia has been withholding supply during the global gas crunch and Europe's energy crisis to strengthens its hand here?

Ana Stanic, Principal, E&A Law: 16:09

As a lawyer, I'm, I'm only able to rely on what other. Gas experts and others tell me my understanding is that Russia has complied with all of its obligations in terms of annual obligations under the long-term contracts. And so it's completely legally it has complied with anything. So there's no breach of any obligations there. So the question is probably more about why it hasn't put more. Gas into the spot market. And then that is not really then anymore a question of a legal question.'cause there's obviously no breach. And it's a question of is does it commercially make sense for gas from two to provide more volumes? Simon Piani, just two days ago, a Chatham House was suggesting that there's some evidence that it may not even be able to. To get increased volumes onto the market. And Cartier and others have said that, why would they commercially want to sell more pri more gas on the market if that would then effectively reduce the price? They're now after quite a few years of actually making losses on their long-term supply contracts because they precisely, because they're index based as opposed to oil based, oil indexed. That they are now making money on them, whereas they were making losses before. And in a way, and this is something I can comment on as a lawyer, the European Commission and European gas buyers were insistent on long-term contracts with Gas Pro and other suppliers are being renegotiated from oil indexation. To spot price to hub pricing. And in fact, I was involved in a number of those gas price reviews. And now effectively the shoe is on the other foot because the, in the hub prices are so much higher than than oil index prices. So if you actually look at gas from contracts to Turkey, which are still oil index linked, you'll see that there's much more gas. Flowing under those and to an advantage to Turkey now it's actually buying at much cheaper prices. So in a way, the, our insistence from a moving away from long-term contracts and also moving away from oil indexation in Europe is now meaning that we are paying more for gas than we would otherwise, but. We can't always be winning. We can't always get the cheapest price. So I think that's sort of part of the commercial reality.

Richard Sverrisson, Editor-in-Chief, Montel: 18:36

Yeah. You know the situation now, we've had sky rocketing gas prices. We've never experienced such high gas prices before. Certainly not over this sustained period. You can see house sold suffering, industry suffering, energy supplies are going under. If you then have a period of extremely cold weather that lasts several weeks or even months. Is there a case for that the pressure would build on the bundes net UR to maybe defer the certification process or allow gas to flow temporarily to alleviate a crisis in Europe? Is that a situation that could arise or does the certification process have to be. Completed, fully completed

Ana Stanic, Principal, E&A Law: 19:15

Again, this is a, again, a question of German law, so I don't have an answer to it. I can only use logic to say that. I think the certification process needs to continue along the way it's provided for in the law and in particular in the European sphere. But whether there is a possibility, which I imagine there must be under German law to actually allow for emergency supplies of gas to, to come through Nord stream to in order to deal with what would be a security of supply issue, I would imagine that there is. That can that should be able to be invoked. Certainly the provisions of EU law in terms of what would be a security supply matter and how that would impact on the broader security supply impact beyond Germany would need to be taken into account. But I would imagine that they would be a mechanism for allowing emergency supplies whilst. The certification process is ongoing to allow a way of alleviating an emergency situation that you mentioned, but that assessment would need to be made also by reference to where other alternative gas supply could come from. So it would need to be a, a fairly. Robust analysis, but presumably, which is one that is is being considered carefully, not just by, by the Germans, but by everyone every other country I, including the UK and. Given the situation we are in, the fact that capa, storage of gas is at a no time load for the same reason that the, that this just was uneconomical for storage to, to be filled up because of the high prices means that the entire, the market signals were are simply not there to encourage. Are asked to be prepared for a long win, long wind, cold winter, or alternatively that the winter is cold elsewhere in the world and we simply don't get those extra LNG capacity that would otherwise be destined to Europe. They go somewhere else and we get a supply crunch a res result of that. But there's quite a few possible reasons why we might face an insufficient amount of gas this winter.

Richard Sverrisson, Editor-in-Chief, Montel: 21:31

What are the next steps now, Ana ? So Gasper has to create this German subsidiary, and what happens after that? If the bunes net is happy with that, does the clock start ticking again?

Ana Stanic, Principal, E&A Law: 21:40

Yeah, that's right. The clock starts ticking when they were to say now we consider your application complete. That's why I'm think, that's why I would be surprised for them to be able to then get back and say a month later, oh. And we forgot you your application is not complete for this other reason that we've just discovered. They then, so if that happens when the German regulator says, okay, now we are satisfied that we can go ahead, then they'll have six weeks. Remaining now on the clock to issue their decision. Then that draft decision goes to the commission. The commission takes needs to make its own assessment in accordance with Article 11, and then it has it has two months. It can ask for another extension of two months. In that period, it will consult in the same way that Germany has consulted. It'll consult with all the member states of the eu, which will have an ability to make their views known about what they consider. The risks a ification for the security of supply has this should address. And in, in this process, the commission, as presumably the ministry of the German ministry, has already done, they will need to take into account what the court, the European Court has said in the opal exemption decision where it said that the issue of energy solidarity. Or the principle of energy solidarity needs to be taken into account in making these kind of assessments. But in my view, the wording of Article 11 in terms of the obligation to assess security supply of the whole community means that energy solidarity is part of that assessment in any event. But they will have to make sure that they do that. And so in a maximum of four months. After the German regulator passes on the draft decision, the commission should be sending it back with its comments to the German regulator. The German regulator is then required to take utmost account of what the commission has stated in its decision. When it issues its final decision, and it has. Another two months to do that to effectively amend its draft decision, to take utmost account of what the commission has said it's in, in its decision. Just so we un, so that we understand that there is the potential at any point in time for any of these decisions to be challenged. Just in the same way that the Opal exemption decision was challenged and successfully challenged by picnic in. And so what we know of those decisions is that it's unlikely that an injunction would be granted to stop the certification going ahead and the gas flow going ahead, but watch. Could happen is that if this challenge of the decision in the court is successful, which would normally take a year and a half to issue the decision, the court, then of course that could have the effect in the same way the Opel exemption has had to stop the process and retrospectively.

Richard Sverrisson, Editor-in-Chief, Montel: 24:51

When's the earliest then? This is the a hundred million dollar question, Ana , when's the earliest that the gas could been begin flowing in into Germany from North Stream two.

Ana Stanic, Principal, E&A Law: 25:00

If there is a will for the gas to flow, then I, the earliest that it could be in my view if it's true that it. For some reason takes a month to set up a subsidiary in Germany, which I dunno why it would take so long in, obviously in the uk. Setting up a company is much, is very quick. But okay, assuming it takes really a month in Germany then I would imagine that we can't see the first flows before, let's say March of next year. But if the commission was to take the full four months then we're talking about June.

Richard Sverrisson, Editor-in-Chief, Montel: 25:33

Perfect. Ana , thank you very much for clarifying what is in fact a very complex legal and bureaucratic process. So thank you again.

Ana Stanic, Principal, E&A Law: 25:41

You're very welcome.

Richard Sverrisson, Editor-in-Chief, Montel: 25:42

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