This concluding article in a 3-part series details Gazprom’s changing European natural gas export strategy as it bumps up against EU regulations designed to promote market liberalization by unbundling energy production, transmission, delivery and storage from single-company ownership.

The new Gazprom-designed gas transit system outlined earlier in this series – here and here – is not fait accompli. Due to the EU’s anti-monopoly legislation and, according to Mr. Socor, current pending legal clarification of the operating regime, Gazprom is not permitted to monopolize the full capacity of both the OPAL and NEL pipelines. That means, that even though the EU did exempt the Nord Stream pipeline from third-party-access rules, Nord Stream must operate correspondingly below its full capacity, as Socor emphazises.

Let’s look first at the EU criteria for exempting Gazprom from regulated third party access for all transmission and distribution infrastructure. Note, granting Gazprom an exemption from ownership unbundling requirements on its pipelines and gas storage facilities in Germany would essentially ‘institutionalize’ European dependency on Russian gas supplies.

Article 36 Directive 2009/73/EC lays out the gas criteria for exemptions:

1. The investment must enhance competition in gas supply and enhance security of supply;

2. The level of risk attached to the investment is such that the investment would not take place unless an exemption was granted;

3. The infrastructure must be owned by a natural or legal person, which is separate at least in terms of its legal form from the system operators in whose systems that infrastructure will be built;

4. Charges are levied on users of that infrastructure;

5. The exemption is not detrimental to competition or the effective functioning of the internal gas market, or the efficient functioning of the regulated system to which the infrastructure is connected.

In the above case, there is significant risk that Gazprom’s dominant position might be reinforced because eventual full capacity utilization of the respective pipelines will result in increased gas imports from Gazprom. This is further underscored by Socor’s “Germany in New Role as Transit Country for Russian Gas” citing a discussion in Moscow on February 5th between Gazprom CEO Aleksei Miller and Matthias Warnig, CEO of the Gazprom-controlled Nord Stream consortium, about “the option of expanding the Nord Stream pipeline by adding a third and possibly a fourth line to the existing two. A third and a fourth line would reach beyond the Baltic Sea to countries on the North Sea.”

That means there is not only currently free capacity available (up to 55 bcm) but most importantly, substantial capacity expansion is already envisaged. Both additional Nord Stream pipelines (#Three and #Four) would replicate existing annual capacities of 27.5 bcm for Nord Stream pipeline segments #One and #Two. Consequently, overall capacity would double from 55 bcm to 110 bcm per year. This would likely strengthen Gazprom’s position on the producer markets in Belgium and the Netherlands.

Most importantly, given future projected gas demand in Europe in combination with existing capacities in both pipeline and LNG, Gazprom’s and Russia’s aggressive export capacity expansion into Western European countries via Nord Stream – essentially creating overcapacity with no equivalent European demand currently forecast – would only be economically viable if the real reason is to replace – and not to duplicate – the Ukraine with Germany as the new transit country to Europe’s most lucrative energy markets.

One analysis projects – taking into account gas import infrastructures (pipeline and LNG) either under construction or in the planning stages – an overcapacity of 77 bcm by 2020.

These brief remarks illustrate that Gazprom appears to have acted against the ratio of Article 36 Directive 2009/73/EC. Article 36 has to be read together with Article 9 of Directive 2009/73/EC, whereby ‘ownership unbundling’ obliges Member States to ensure that the same legal person is not entitled to exercise control over a production or supply undertaking and, at the same time, exercise control or any right over a transmission system operator or transmission system. And vice versa, control over a transmission system or transmission system operator should preclude the possibility of exercising control or any right over a production or supply undertaking.

As such, an exemption from the obligation under Article 9 Directive 2009/73/EC is additionally required because according to Article 36, an exemption from regulated third party access presupposes the pipeline is owned by a legal person, separate at least in its legal form from the system operator in whose system that infrastructure will be built. The EU Commission’s reasoning as for Article 9 of the Directive and whether its criteria are met in Gazprom’s case, with all its overlapping legal identities, will be very interesting. Time will tell whether this is the kind of market liberalization along with the interconnection of regional power grids and pipelines that will allow EU countries to share and trade energy more flexibly than at the present stage.

The EU’s ultimate goals are to mitigate the impact of potential supply interruptions – and from an energy security perspective – avert overdependence on a single energy supplier. The outcome of ongoing negotiations and disputes between Gazprom and the EU will help inform the latter’s success at liberalizing Europe’s energy markets and strengthening its energy security.