Turku School of Economics, University of Turku,
Institut für Europäische Politik,
The Nord Stream 2 natural gas pipeline project has as of late become synonymous with a collision of geopolitics and energy policy. The disagreements between EU member states over the pipeline, which will bring additional gas from the Russian Federation to Germany through the Baltic Sea, as well as US sanctions imposed in December 2019 against construction companies involved in the project, have attracted a lot of media attention. Despite the obstacles the project is facing, Nord Stream 2 is expected to become operational later this year.
Given the high level of interest on Nord Stream 2, it is perhaps surprising how little attention has been paid to a significant recent development regarding one of the on-shore connectors of Nord Stream 1 in Germany, namely the OPAL pipeline. In fact, a recent judgment by the General Court of the European Union (GCEU) on the operation of the OPAL natural gas pipeline might have significant consequences for Nord Stream 2, as well as for the principle of energy solidarity within the EU.
The GCEU ruling on the OPAL pipeline
The OPAL-pipeline (German: Ostsee-Pipeline-Anbindungsleitung) is one of the two on-shore connectors of the Nord Stream 1 pipeline. This already existing twin pipeline of Nord Stream 2 has been operating since 2011 and can transport around 55 billion cubic meters (bcm) of natural gas per year from Russia to Germany. OPAL transports the gas coming from Nord Stream 1 through Germany to the Czech border, while NEL (Ger: Nordeuropäische Erdgasleitung), the second connector, transports the gas westwards to supply Northern Germany. Due to OPAL’s technical configuration, it can currently only be supplied by Nord Stream 1, with an annual maximum capacity of 36 bcm.
According to EU gas market rules, to ensure competition one single provider is not allowed to exceed 50% of the capacity of a pipeline located on EU soil. Thus, originally Gazprom was allowed to use only half of the capacity of the OPAL pipeline. Supported by the German market regulator, an exemption to this limit was approved by the European Commission (EC) in 2016, allowing Gazprom to use most of OPAL’s capacity in the absence of other providers.
Poland, supported by Latvia and Lithuania, challenged this 2016 decision by the EC. On September 10, 2019, the GCEU ruled that the 2016 decision by the EC was adopted in violation of the principle of energy solidarity, and thus annulled it, citing that the EC had not sufficiently considered the impact on Poland and other EU member states in its decision. The OPAL gas transporting company has complied with the judgment, reducing the OPAL capacity for Gazprom by around 12.8 bcm. Gazprom thus needs to find an alternative route for this amount of gas, with the existing on-shore pipelines through Ukraine (Brotherhood) and Poland (Yamal) being potential options.
The surrounding web of interests
The different interests concerning the gas trade and the OPAL pipeline in particular are manifold, with the EU itself, Germany, Russia, as well as several other Central and Eastern European countries holding stakes.
One fourth of primary energy in the EU area is generated using natural gas. In the second quarter of 2019, Russian pipeline gas amounted to 45% of all gas imports to the EU, with the EU importing more than 70% of its gas consumption. The main objective of the EU’s energy policy is to secure energy supply by diversifying sources and reducing dependency on single producers, as well as by ensuring a competitive market. However, there are considerable differences among member states in their respective dependence on gas imports and their relative positions on the gas market, resulting in oftentimes differing interests.
Germany is the largest buyer of Russian gas within the EU and thus holds a relatively strong bargaining position. Germany has an interest in maintaining Gazprom’s unrestricted access to OPAL, as the investments made to the infrastructure are to be covered by sales revenues. It therefore does not come as a surprise that the German government has challenged the court ruling in November 2019. However, a final decision on the appeal might take several months.
Poland, on the other hand, with a strong dependence on gas imports from Russia, is concerned about Russian dominance in the gas market and thus opposes increased pipeline capacity for Gazprom through OPAL. This is most likely also linked to the fact that Poland benefits from transfer fees for the Yamal pipeline. A reduced capacity in OPAL might prompt Gazprom to redirect some volumes through Poland and could thus increase its revenues and improve its bargaining position in future transit negotiations.
Changing dynamics in the EU gas market
The case of OPAL interestingly showcases the challenges of the gas market. When it comes to natural gas, once a pipeline project has been completed, both the seller and the buyer are locked into a geopolitical reality, which is to a degree centered on the pipeline. Even if legislative changes are made, the physical reality of the pipeline grid cannot be altered in the short or medium-term. Potential other sellers will not suddenly appear on the access point of a pipeline. Thus, in the event that the GCEU ruling is not overturned, the likeliest scenario is that the pipeline will be operated at under-capacity.
Natural gas is gaining new relevance as an – at least interim – alternative for hydrocarbons with a heavier carbon footprint, such as coal and oil. At the same time, the realities in the European gas market are changing. While Russia at the moment remains the main supplier of natural gas for the EU, the development of new technologies, such as liquefied natural gas (LNG) are altering the playing field in Europe. LNG, which is transported via ships, not only offers additional sources of supply but also alters the buyer-seller relations, with traditional trade via pipeline locking in both sides into a long-term and relatively inflexible trade relation.
In addition to that, two new projects, financially supported from the Connecting Europe Facility, are altering the existing network of pipeline trade. Firstly, the Baltic Pipeline, transporting a capacity of 10 bcm of natural gas from Norway to Poland under the Baltic Sea, is set to start delivering gas in October 2022. It will significantly reduce Poland’s dependence on Russian gas. Secondly, on January 1, 2020, a new bi-directional pipeline linking Estonia and Finland, the Balticconnector, was taken into commercial use. It ends Finland’s isolation from the European gas market, removing one of the last gas monopolies within the EU.
These new projects, along with the decision on OPAL and its potential repercussions are manifestations of increased energy solidarity within the EU. The application of this principle seemingly has the potential to weaken Russia’s ability to use its bargaining power vis-à-vis individual – especially smaller – EU member states. The agreement reached after months of negotiations between Ukraine and Russia late last year on continuing gas transit beyond 2019 is likely to have been affected by the OPAL ruling as well, as it reduced Gazprom’s capacity to circumvent Ukraine.
It remains to be seen whether the necessity to apply the solidarity principle on energy policy decisions, affirmed by the GCEU ruling, will also affect Nord Stream 2 and its German on-shore connection, EUGAL (Ger: Europäische Gas-Anbindungsleitung). In any case, the ruling concerning OPAL is a signal to trading partners that the EU is increasingly following through on its principle of solidarity among member states.
Expert article 2675