The national and European politics behind Nord Stream II

At a first glance, the expansion of the Nord Stream Pipeline might merely be seen as a rather technical and legal issue. However, its wide geopolitical implications have always been source of controversies and have led to an intense flurry of activities. In fact, since the very beginning, many stakeholders have been trying to influence the final decisions that have to be taken by both the Commission and some Member States.

In order to shed light on the broader economic, environmental and geopolitical implications of this project, the first part briefly introduces the different arguments deployed either in favour or against the expansion of the Nord Stream pipeline. The second part focuses on the positions of the key decisions makers, which are the four Member States (namely Germany, Denmark, Finland and Sweden) in charge of deciding on whether to deliver the building permits.

However, these decision makers do not live in isolation from the rest of the world and other players may very well be able to influence the final outcome, also because of the broader impact of the project as well as the consensual approach characterising European decision-making process.

This is why, in this part of the report, the positions of members of the European Parliament are mapped on the basis of VoteWatch Europe’s data. Strong opposition to the project is observed across the European Parliament and, as the decisions makers are still sitting on the fence for the time being, the opponents to the project might still be able to either block or delay the realization of Nord Stream II. Finally, as the debate involving the European Commission is mostly focused on the legal challenges to the project, the third part of this report briefly summarizes the positions of different players on the application of EU law to the project. As in reality decisions on legal matters are not completely apolitical, this section also reports on the pressures exerted on the European Commission by several stakeholders, who are either promoting or opposing the project.

A disputed project

The controversial nature of the project was highlighted by the debate “Nord Stream 2-The Energy Union at crossroads”, held in the European Parliament on April 6. In fact, this animated event stressed the differences between the EU’s Member States and underscored the rationalities of stakeholders’ positions. The arguments deployed in favour of the Nord Stream 2 were that the project would respond to European gas domestic production decline; it would also help the EU to meet its climate goals, given that the coal usage in power generation would be reduced and the future of nuclear energy is still uncertain. Finally, it would stimulate new infrastructure and it would promote and create competition in the European energy market.

The arguments against it were diverse: Nord Stream would affect the landscape of the EU’s gas market and it would not comply with Energy Union’s goals of diversification of suppliers and routes; it raises legal, geopolitical and economic concerns; it would destroy the Ukrainian gas transit route whereas endangering its gas transportation system; it is not a commercial project, but merely Russia’s geopolitical weapon; it would raise wider gap on gas prices between Eastern and Western Europe and it would jeopardize energy security in Central and South-Eastern European countries and Ukraine; it is not in line with EU’s climate and environmental policies. Finally, opponents claim that the project goes against the current EU’s energy vision and, as such, it would heavily endanger the Energy Union.

The political battle: approval by the Member States

The fate of the Nord Stream 2 will be shaped by four main stakeholders’ decisions: the governments of Denmark, Finland, Sweden and Germany. In the light of the support for the project expressed so far by the German Vice-Chancellor Sigmar Gabriel, and the recent position of the Federal Government on the issue, it is most likely that Germany would not obstruct the building permit’s granting. However, according to the data on voting patterns of MEPs by VoteWatch Europe (shown in Infographic I), every German MEP from the parties in government opposed doubling the capacity of Nord Stream II last December. Furthermore, despite the support of the government of Austria and France to the project, all the MEPs from those countries, who are members of parties in the government, voted against doubling the capacity of the pipeline. Italian and UK’s MEPs from governmental parties are also opposing the deal. As one of the speakers at the event on 6th April stated it, there is a large majority in the European Parliament against the Nord Stream 2 and “we will keep going against the project”. Nevertheless, given its powers on the matter, the European Parliament cannot block, nor delay the Nord Stream 2 project. Still, it can raise awareness on the matter, as well as generate more and transparent debate which might have an influence in the further shaping of the stakeholders’ positions.

Infographic I: Share of MEPs supporting doubling the capacity of Nord Stream II

Nord Stream

Additionally, as the other three countries which are supposed to grant the building permits for Nord Stream 2 have been sitting on the fence so far, their final decisions will be influenced by unofficial pressure and further political and economic bargains with the other EU countries (Infographic II). As our infographic shows, many smaller EU countries are opposing the project. Among the Germans, key members of the two main political parties are opposing the project in the EP.  The same is true for other large and influential EU countries, such as France, Italy, the UK, but also Austria. While MEPs’ are certainly less powerful than the party leaders at national level, the fact that they have a different view can send a signal of doubt within the party ranks.

Infographic II: Governments’ Positions on doubling the capacity of Nord Stream

Nord Stream 2

The legal battle: the European Commission

The important role of the European Commission in this matter is highlighted by two high level meetings recently held in Brussels. These meeting are part of an advocacy campaign undertaken by the Nord Stream consortium which met European Commission’s top level representatives on 5th April. That day, Nord Stream AG’s Managing Director, Matthias Warning, met with the EU Energy Commissioner, Miguel Arias Canete, whereas the former Germany’s Chancellor Gerhard Schroeder (who is the Chairman of the Shareholders’ Committee) was received by the Commission’s President, Jean-Claude Juncker.

In this regard, it is worth mentioning that only the first of the two meetings was of official nature and, therefore, highly emphasized by the media. EC’s public declarations upon the official meeting stated that Mr Canete highlighted the Commission’s concerns regarding the impact of Nord Stream 2’s project on the EU’s strategy on security and diversification of supply and on the future of the Ukrainian gas transit route. In contrast to this meeting, the one between Jean-Claude Juncker and Gerhard Schroeder was of “friendly” nature and it was not published on the EC’s President weekly programme, and neither was it followed by official declarations.

Those meetings are relevant in the light of the legal challenges faced by the Nord Stream 2 project under the Third Energy Package and the Commission’s regulatory powers on the matter, as they might either delay or even block the construction of the pipeline. In this context, the main controversy and the main stake regards whether the EU law applies not only to the onshore section of the Nord Stream 2, but to the offshore section as well, which falls under the jurisdiction of Denmark, Finland, Germany and Sweden.

A legal opinion, though not officially issued (by the EC’s Directorate General for Energy and recently endorsed by the EC’s Vice-President Maros Sefcovic ), argues that the provisions of the Third Energy Package are of applicability to both the pipeline’s onshore part in Germany and also its offshore parts under the jurisdiction of respective Member States, including the exclusive economic zones and territorial waters. The EC’s recent position on the application of EU’s law to the pipeline collides with the opinions expressed in this regard by both Russia, whose Permanent Representative to the EU declared the Third Energy Package does not apply to the project, and Nord Stream AG, which considers as well that the rules of unbundling and third-party access do not apply to Nord Stream 2 as a whole, but only to its parts running inside Germany.

Furthermore, it appears that both the Russian side’s and Nord Stream AG’s strategy is, aside of the non-recognition of the EU’s law applicability to the pipeline, to ensure that the matter would remain under the competence of the German authorities. In fact, Germany’s Minister of Economic Affairs and Energy said in a meeting with Vladimir Putin on October 28, 2015: “What’s most important as far as legal issues are concerned is that we strive to ensure that all this remains under the competence of the German authorities, if possible. So if we can do this, then opportunities for external meddling will be limited”.

The abovementioned legal opinion of the EC’s Directorate General for Energy highlights that establishing a specific regulatory regime for application of the third-party access and unbundling provisions to the Nord Stream 2 project would require either an international agreement involving negotiations with Russia or the setting up of a certification procedure framework which would need discussions with Gazprom and the project’s shareholders. Despite the Russian Energy Minister’s recent, though evasive in its substance, declaration that “there were no questions of any discrepancy to the energy legislation of the European Union” with regard to the pipeline project, it is likely that the Nord Stream consortium will attempt to put the German authorities in the forefront of this dispute- “This is to be resolved between the national regulators and the authorities here in Brussels”.

In this regard, the main stake is whether the German regulator would apply the same approach to the Nord Stream 2 as it had applied as in the case of the NEL pipeline; if so, the Nord Stream 2 might be considered as an extension of an existing transmission system in Germany and might eventually circumvent the unbundling requirement, but this solution might be challenged by the Commission through, eventually, an infringement procedure. In conjunction with that, Russia might attempt to look for alternative solutions, like the liberalization of the gas exports to Europe, which would comply with the third-party access requirement and would allow to the Russian independent gas producers to book further capacities of the Nord Stream 2 pipeline. Ultimately, the promoters of the project could challenge the EC in the European Court of Justice, and that might delay the project by several years.

But Gazprom needs, in order to preserve its European market share (aimed at nearly 160 billion cubic meters in 2016 and still the most important one for its gas export sales also in the years to come), to stick up with the construction timing of Nord Stream 2, which should be finalized by 2019. In this regard, the issuing of the building permits by the Member States (Denmark, Finland, Germany and Sweden) is expected to happen by 2017, as the consortium needs to start the process of borrowing the financing for the project, which totals 70% of the overall estimated cost of $ 9.9 billion.

However, there are other stakeholders trying to influence the Commission’s decisions on the matter, though in the opposite direction. Indeed, as highlighted in Infographic II, the Prime Ministers of seven EU Member States, namely Czech Republic, Estonia, Hungary, Latvia, Poland, Slovakia and Romania, as well as the president of Lithuania, signed a letter against the project, addressed to EC’s president Jean-Claude Juncker, which claims that the project would generate “potentially destabilising geopolitical consequences”. Although the Croatian government did not sign the letter, it also seems very negative towards the realization of the pipeline. Thus, although in theory European Commission’s decisions should not be influenced by the political preferences of this or that Members State, the institution will definitely take into account that a consistent number of member states are vocally opposing the project, also in view of potential gains on other on-going negotiations regarding other hot political issues.

This analysis has been undertaken jointly by D&D Consulting Services and VoteWatch Europe (feel free to contact us for more information).