Nord Stream 2 loses case to have EU pipeline rules waived

Nord Stream 2 AG, the controversial gas pipeline project owned by Gazprom PJSC, lost a German court fight to sidestep European Union rules separating production from transportation, a decision that may delay the start of the operations.

The Dusseldorf Higher Regional Court on Wednesday dismissed a bid by Gazprom to overturn the German Network Agency’s decision to impose the EU measures, a spokesman for the tribunal said by phone.

While the ruling means that Nord Stream 2 could be fined if it fails to comply with the EU regulation once gas flows, it doesn’t have an impact on the construction of the project, which was licensed under a different set of rules and is expected to be concluded this month. Technically, the EU measures also don’t bar starting the flow of gas, but Gazprom would need to restructure Nord Stream 2, a step that could cost time.

Gas prices initially jumped on the decision, before paring gains to trade 2.5% higher at €45.985 a megawatt-hour by 10.36am in Amsterdam. While the ruling was widely expected, some traders say it could delay much needed flows via the pipeline.

Nord Stream 2 said it would evaluate the ruling before announcing any next steps. The Zug, Switzerland-based company reiterated that the pipeline was completed from an economic point of view by 23 May 23 2019, the key date as to when EU rules apply.

“Based on the applicable legal framework at that time, the company had made investments worth billions of euros long before the European Commission announced its plan to amend” the EU’s gas rules.

Germany’s regulator in May last year refused to issue a waiver for the project. Under the EU gas directive, exemptions can only be granted to pipelines completed by 23 May 23 2019. The measures were revised after works on the pipeline had started - a move that Nord Stream 2 alleges was discriminatory.

In order to comply with the rules, Nord Stream 2 must be certified as an independent transmission or system operator under the EU regulation. While that doesn’t require Gazprom to sell ownership rights in the unit, it must give up control and command rights toward its leadership and include other measures like Chinese Walls to guarantee the independence.

As a precaution, Nord Stream 2 has already applied for this kind of certification at the German regulator, known as the Bundesnetzagentur. Documents are being reviewed and more paperwork might be requested, a spokesman for the regulator said by email. Once the application is complete, the agency has four months to prepare a draft decision.

There have been other pipelines that were already operating before the certification was completed and no fines were issued in the period when the regulator and the company were in talks over the process. It is likely that the same will apply to Nord Stream 2.

The Nord Stream 2 link can ship 5.6 billion cubic meters of fuel to Europe this year, Gazprom said earlier this month. Traders are watching every step of the project, as it will help ease a supply crunch in the European gas market. The news Nord Stream 2 will start operating soon sent benchmark futures in the Netherlands down as much as 7% last week.

The twin link - which will double the capacity of the existing undersea route from Russian gas fields to Europe - has been a major source of friction in trans-Atlantic relations for several years, with the US claiming it could give Russia new leverage over Europe and introducing sanctions targeting the project. Joe Biden’s administration softened the US stance, reaching a deal with Germany last month to end a longstanding rift over the pipeline.

There is also an arbitration case pending under the European Energy Charta over the issue and Gazprom is also seeking to nullify the rules in a suit filed with the EU’s courts.

©2021 Bloomberg L.P.