FC Heading Heading Nord Stream 2 - Oxfordenergy

obliged to ensure that in addition to the unbundling requirement, the operator complies with TPA andtariff (methodology) transparency requirements, although this is not part of certification process per se.The national regulator is obliged to open a certification procedure and has the right to do so uponnotification by the TSO, upon a reasoned request from the EC, or on its own initiative. On 11 June NS2AG submitted its application for certification at the request of the German regulator, BNetzA. On 13September BNetzA announced that NS2 AG ‘has now submitted all necessary documents forinspection’ thus setting off a 4-month period, effective from 8 September, within which BNetzA is obligedto produce a draft certification decision.19 It is understood that it is within this 4-month period that theGerman Federal Ministry for Economic Affairs and Energy is obliged to provide its assessment of thepotential impact of certification on the security of energy supply, to be accounted for in the BNetzA’sdraft decision.20 On 15 October the Ministry announced that it had consulted neighbouring countriesabout the impact of NS2 certification on gas supply security and was expecting their replies within aweek or so.21 Nine member states – Estonia, Italy, Latvia, Lithuania, Austria, Poland, Slovakia, theCzech Republic and Hungary participated in the consultation. Poland, the most vocal opponent of NS2,was represented by the Polish state-owned gas company, PGNiG, and its German subsidiary, PGNiGSupply & Trading. In their submission, dated 20 October, both have argued that the certification of NS2under the Independent Transmission Operator (ITO) model will increase threats to the security of gassupplies to the EU and its member states, including Poland.22 However, this argument was not acceptedby the Ministry. On 25 October, having received and studied all the replies, the Ministry announced thatNS2 certification would not endanger the security of gas supply to Germany and the EU. 23The Ministry’s positive assessment is necessary but not a sufficient condition for NS2 certification, asBNetzA’s confirmation of the NS2 operator’s compliance with the amended Gas Directive’s unbundlingrequirements is also needed. BNetzA’s draft decision (which can be explicit or tacit) must then benotified ‘without delay’ to the EC, which is obliged to issue an opinion on it within 2 months (extendableby a further 2 months if the EC decides to seek the views of the Agency for Cooperation of EuropeanRegulators (ACER), Germany, or the interested parties24), following which BNetzA has 2 more monthsfor issuing a final certification decision. The certification process can thus take up to 10 months, withthe final certification decision made in July 2022 at the latest. 25 Although BNetzA is obliged to take ‘theutmost account’ of the EC opinion on its draft certification decision, neither the EC nor any third partyhave a veto power over BNetzA’s final certification decision. Notably, the certification decision onlybecomes effective once the whole procedure has been concluded. It is possible that, following the EUCourt of Justice (CJEU) OPAL exemption judgement of July 2021, the certification process might alsoinclude an energy solidarity assessment.26Could gas flows start before certification is completed?If the NS2 operator were to start flowing gas while the certification process is ongoing and absent ofeffective certification decision, this would constitute an administrative offence and the operator wouldbe liable to incur fines.27 Therefore, under normal circumstances, the NS2 AG would start flowing gas19BNetzA (2021a).It is worth noting that as part of its agreement with the US, concluded in July 2021, Germany underscored its commitment toabide by both ‘the letter and the spirit’ of the Third Energy Package with respect to Nord Stream 2 under German jurisdiction toensure unbundling and third-party access, including ‘an assessment of any risks posed by certification of the project operator tothe security of energy supply of the EU’. See US Department of State, ‘Joint Statement of the United States and Germany onsupport for Ukraine, European energy security, and our climate goals’, 21 July 2021.21‘Germany expects Nord Steam 2 input from European neighbours within weeks’, Reuters, 15 October 2021.22PGNiG (2021a).23BMWi (2021). According to PGNiG, 8 December was the deadline for the Ministry to deliver its assessment, see PGNiG(2021a).24It is understood that to date EC has never sought ACER’s view as part of certification process.25Certification procedure and its timings are stipulated in Art. 10 and 11 of the Amended Gas Directive and in Art. 3 of the GasRegulation.26The CJEU has ruled that the principle of energy solidarity is justiciable and must be assessed inter alia as part of theexemption decision making process. See Talus (2021) and Yafimava (2021).27‘Nord Stream 2 eyes operations before year-end as pipelaying completed’, Platts, 7 September 2021.20The contents of this paper are the author’s sole responsibility. They do not necessarily represent the viewsof the Oxford Institute for Energy Studies or any of its Members.4

only after the certification process has been completed and certification has been granted (i.e. insummer 2022 at the latest, if both BNetzA and the EC were to take the maximum period of time allowedby the acquis i.e. 10 months). However, from the gas supply perspective the winter of 2021/22 looksanything but normal, and it is conceivable that BNetzA could indicate to the NS2 operator that it couldstart flowing gas before its certification process is completed and continue to do so on a time-limitedbasis to alleviate a supply shortage in Europe. 28 This is especially pertinent as a relatively small amountof additional firm capacity has been offered for booking on other export corridors towards Europe.29Alternatively, certification could be ‘fast-tracked’ with either or both BNetzA and the EC taking less timefor assessment than the maximum period allowed by the acquis, followed by a swift start of gas flows.This scenario, while possible, could make BNetzA and the EC vulnerable to criticism of the certificationprocess being insufficiently thorough, particularly from those countries that have been highly critical ofNS2 and its certification, most vocally Poland. However, some of this criticism about timing could bedeflected by the fact that NS2 AG had first submitted its certification request to BNetzA on 11 June,which suggests that BNetzA may have started reviewing the documents submitted as part of the requestbefore the last required document was received on 8 September, when the official start of the 4-monthcertification procedure was triggered. This suggests that BNetzA may need less time than the 4 monthsallowed by the acquis and issue its draft certification decision ahead of its early January deadline.Under either of these two scenarios, NS2 could start flowing gas in winter 2021-22, and potentially evenbefore the end of 2021. Another scenario, under which no gas would flow via NS2 until summer 2022when the certification procedure is completed at the end of the 10-month period, is also possible. Shouldthe latter materialise it would mean that Russian pipeline gas exports to Europe would be limited by theamount of firm capacity booked (or available for booking) on the existing export routes for as long asNS2 remains uncertified, thus also limiting Russia’s potential contribution towards alleviating anyEuropean gas supply crunch over the 2021-22 winter period and beyond.On 4 October – the day when NS2 AG announced it had started filling the pipeline with gas – BNetzAalso announced that, since it cannot be ruled out that NS2 AG will put the pipeline into operation in thenear future, it wrote to NS2 AG, requesting it to provide information ‘without delay’ and, ‘if applicable’,to submit evidence that all regulatory requirements for the operation are met, in particular with regardto non-discriminatory network access. At the same time, BNetzA is also reserving ‘the right to launchsupervisory or abuse proceedings’ immediately, should ‘doubts about its compliance’ not be dispelled. 30Just over two weeks later, on 22 October, BNetzA said it is ‘in conversations’ with NS2 AG and expectsit will provide assurances of meeting the regulator’s requirements. 31 Whether these statements are anindication that flows could start prior to the completion of the certification process - if NS2 AG were toprovide requested information - is an open question and one that may still be answered in theaffirmative.Could certification be conditional on continued post-2024 Ukraine transit?The German government’s position in respect of NS2 has been that some gas transit across Ukrainemust be preserved if NS2 is to go ahead. Notably, in April 2018 Chancellor Angela Merkel stated that‘a Nord Stream 2 project is not possible without clarity on the future transit role of Ukraine’. 32 This claritywas achieved in December 2019 through a trilateral Russia-Ukraine-EU transit agreement, whichguaranteed preservation of – or payment for – transit across Ukraine during 2020-24 and envisaged apossibility of extension up to 2034. Germany has played an important role in helping to negotiate thisagreement. In July 2021, as part of its joint agreement with the US – which was concluded after the UShad issued a sanctions waiver for NS2 – Germany committed to ‘utilize all available leverage to facilitate28Fulwood and Sharples (2021).Approximately 56.4 mcm/day and 9.8 mcm/day of firm capacity offered have not been booked in monthly auctions forNovember via Poland and Ukraine respectively.30‘Gas injected into NS2, Danish energy regulator says pipeline can start operations’, Gas Matters, 4 October 2021,‘EXCLUSIVE-Germany seeks competition assurances over Nord Stream 2 gas link’, Reuters, 5 October 2021.31‘German regulator in touch with Nord Stream 2 over certification issues’, Reuters, 22 October 2021.32‘Merkel says Nord Stream 2 not possible without clarity for Ukraine’, Reuters, 10 April 2018.29The contents of this paper are the author’s sole responsibility. They do not necessarily represent the viewsof the Oxford Institute for Energy Studies or any of its Members.5

an extension of up to 10 years to the Ukraine’s gas transit agreement with Russia’.33 The new Germangovernment – the coalition talks for which are under way and expected to be finalized by the end ofNovember – is likely to take the same position.34 Olaf Scholz, the candidate for Chancellor of the SPD– the party leading the collation talks with two other parties, Greens and FDP – who is expected tobecome Chancellor in December stated that ‘Ukraine should remain a transit country’. 35 The presenceof FDP and especially the Greens in the coalition government – both of which have previouslydemonstrated a lukewarm attitude towards NS2 – makes it all the more likely that Ukraine’s post-2024transit role will be addressed. 36 Notably, in September 2021 the US energy security envoy, AmosHochstein, stated there is ‘a breathing room’ until the end of 2024 to ensure that Ukraine keeps itstransit role.37Therefore, it is possible that Germany may attempt to condition NS2 certification on continued transitacross Ukraine after 2024, when the existing transit agreement expires. Should this attempt fail, it couldseriously complicate, if not derail, certification. For this attempt to be successful, Russia would have tosee tangible benefits for itself from continued post-2024 transit through Ukraine, such as more flexibletransportation conditions and a lower transit tariff, 38 otherwise it may well perceive it as an attempt toobtain the same concession twice. The parties’ ability and willingness to meet each other half-waywould certainly make certification more straight forward.Certification model: ITO or OU?Nord Stream AG has applied to be certified as an Independent Transmission Operator (ITO)39 – one ofthe three unbundling models allowed under the amended Gas Directive. The ITO model allows apipeline operator to remain a part of a vertically integrated undertaking (VIU), provided the applicablesafeguards are in place, ensuring the operator’s inability – or lack of incentive – to discriminate againstthird parties’ gas in favour of that of the VIU as far as access to the pipeline is concerned. 40 The Directivestipulates that ‘[a]s regards the part of the transmission system’ connecting Germany with Russiabetween the border of Germany and the first connection point with the German network, where on thedate of its entry into force (23 May 2019) the transmission system belongs to a VIU, Germany is allowednot to implement the ownership unbundling (OU) model while it is obliged to implement one of the othermodels such as the ITO, the Independent System Operator (ISO), or any other form of unbundlingwhich guarantees more effective independence of the operator than the ITO. 41 After the Polishcompetition authority had raised objections to Gazprom’s intention of selling 50% of shares in NS2 AGto 5 European companies (WintershallDea, Uniper, OMV, Shell, and Engie) in 2016, 42 NS2 AGremained a wholly owned subsidiary of Gazprom. In 2020, the NS2 AG shares were transferred to LLCUS Department of State, ‘Joint Statement of the United States and Germany on support for Ukraine, European energysecurity, and our climate goals’, 21 July 2021.34‘German parties aim to make Scholz chancellor by early December’, Reuters, 21 October 2021.35‘Ukraine should remain transit gas supplier – German politician’, TASS, 27 September 2021.36For the Greens’ and FDP’s positions on NS2, see ‘Green party leader criticises Nord Stream 2 deal for underminingUkraine’s security’, Clean Energy Wire, 23 July 2021, ‘Nord Stream 2 must be in line with European regulation to receive permit– Baerbock’, Clean Energy Wire, 20 October 2021, ‘Cross-party German alliance opposes Nord Stream 2 pipeline’, CleanEnergy Wire, 21 February 2018.37‘U.S. reassures allies over Nord Stream 2 but says it’s ‘a reality’, Reuters, 11 September 2021.38In October 2021, the Ukrainian president stated a 50% discount could be applied to the tariff charged for transiting Russiangas through Ukraine in respect of volumes above 40 bcma, stipulated by the existing transit agreement. For this discount tobecome effective, it would have to be set by the Ukrainian regulator. However, this offer appears to have been made in respectof a time limited period of winter 2021-22 ‘to increase supply and ease the [European] region’s energy crunch’ and it is unclearwhether it would remain valid afterwards, ‘Ukraine offers Russia gas shipping discount to ease crisis’, Bloomberg, 22 October2021.39Nord Stream 2 (2021a).40NS2 AG has referred to its request as ‘precautionary’ as it does not recognise the amended Directive’s applicability to NS2and has continued a legal action for its annulment at the CJEU and the ongoing arbitration proceedings under Energy CharterTreaty (ECT).41For a detailed analysis of how the Directive’s unbundling requirements could be met by NS2 AG by implementing one ofthese models, see Yafimava (2019).42‘Nord Stream 2 partners withdraw amid Poland pressure’, Financial Times, 12 August 2016.33The contents of this paper are the author’s sole responsibility. They do not necessarily represent the viewsof the Oxford Institute for Energy Studies or any of its Members.6

Gazprom International Projects (a 100% transportation subsidiary of Gazprom), which also owns theNord Stream 1 (NS1) and Blue Stream pipelines. A transfer of NS2 AG shares to LLC GazpromInternational Projects can be interpreted as a step towards fulfilling the Directive’s unbundlingrequirements under the ITO model. As on 23 May 2019 the shares in NS2 AG – and therefore the (thenunder construction) NS2 pipeline itself – belonged to a VIU, NS2 AG meets the Directive’s ITO eligibilityrequirement.On 2 September 2021, the CJEU delivered a judgement on the case brought by the EC againstGermany on 16 November 2018, that the latter has incorrectly transposed the Gas Directive into itsnational law by defining a VIU in a way that ‘encompasses only undertakings which operate in theEuropean Union’. The CJEU has agreed with the Advocate General’s opinion that ‘in a situation wherenatural gas or electricity produced outside the European Union by an undertaking is transported withinthe European Union through a transmission system that is owned by the same undertaking, there is anobvious risk of discriminatory conduct in the operation of that network, capable of affecting thetransportation of the energy products of competitors’ and concluded that ‘it is necessary to adopt abroad interpretation of the concept of a ‘VIU’ such that the concept may encompass, where appropriate,activities carried on outside the territory of the European Union.’43 Notably, while the EC had reluctantlyagreed with BNetzA’s certification of GASCADE as an ITO in 2012, it criticised BNetzA’s exclusion ofBASF and Gazprom from the definition of a VIU. While BNetzA has stated that it will continue to conductthe certification process in line with the Directive as currently transposed into the German law until it isamended,44 it is likely that BNetzA will take the CJEU judgement into account while preparing its NS2certification decision. Specifically, BNetzA might certify NS2 AG as an ITO, subject to it introducingrigorous safeguards against any potential conflict of interest between transmission andproduction/supply activities inside and outside the EU having a negative impact in the EU.While this author believes that the NS2 operator is eligible for the ITO model, there is no single view onthis matter. The EC, which will have to provide an opinion on BNetzA’s draft certification decision, hasreportedly said that the OU model, under which the pipeline would have to be sold off, is the onlyunbundling model for which NS2 AG could be eligible. 45 Polish state-owned companies PGNiG andPGNIG Supply & Trading, which in August 2021 applied to, and in September 2021 were accepted by,BNetzA to participate in the NS2 certification procedure, both have alleged that NS2 AG is not eligiblefor the ITO model and argued against its certification under this model. 46However, the German regional court, OLG Dusseldorf, which on 25 August rejected the NS2 AG appealagainst BNetzA’s earlier decision not to grant it a derogation from the Directive’s requirements, appearsto have indicated that NS2 is eligible for the ITO model. 47Furthermore, the OU model is unlikely to be politically acceptable to Russia and could expose it to USsanctions. In September 2021, the House of Representatives of the US Congress passed anamendment to the NDAA 2022, which stipulated an imposition of sanctions ‘with respect on any entityresponsible for planning, construction, or operation of the Nord Stream 2 pipeline or a successor entity’,while also removing the Biden Administration’s right,

15 'Nord Stream 2 eyes operations before year-end as pipelaying completed', S&P Global Platts, 7 September 2021. 16 'Gazprom could supply 5.6 bcm of gas by Nord Stream 2 pipeline in 2021', Interfax, 19 August 2021. 17 Nord Stream 2, 'The first Nord Stream 2 string filled with technical gas', press release, 18 October 2021. 18 Gas .