German court order may delay Nord Stream 2 pipeline startup

(Bloomberg) --Nord Stream 2 AG, the Gazprom PJSC-owned pipeline project to bring more Russian natural gas to Europe, risks delays after losing a court ruling imposing changes to its organization.

The Dusseldorf Higher Regional Court on Wednesday dismissed a bid to sidestep European Union rules requiring gas producers to be legally separate from entities that transport the fuel, the tribunal said in an emailed statement.

The project, which is slated to 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. The U.S. has claimed it could give Russia new leverage over Europe and introduced sanctions targeting the project. Joe Biden’s administration softened the U.S. stance, reaching a deal with Germany last month to end a longstanding rift over the pipeline.

Europe is facing a supply crunch, with inventories at their lowest in more than a decade for this time of year. As a result, the market has been volatile, with prices tumbling at any signs of the start of flows via Nord Stream 2 and surging on news of tighter supplies.

Gazprom said earlier this month that the Nord Stream 2 link can ship 5.6 billion cubic meters of fuel to Europe this year. While the decision was widely expected, some traders bet it could delay much needed flows via the pipeline.

Gas prices initially jumped on Wednesday’s decision before paring gains, with traders on edge at any signs of more or less supplies coming into Europe.

Nord Stream 2 had asked to have the part of the pipeline on German territory be exempted from the EU regulations.

The Zug, Switzerland-based company said it would evaluate the ruling -- which can be appealed -- before announcing any next steps. It reiterated that the pipeline was completed from an economic point of view by 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, it said.

Wednesday’s judgment doesn’t impact the construction of the 1,230 kilometer (764 miles) project, which is scheduled to begin operating this year. But to avoid fines, Gazprom would have to change the setup of the Nord Stream 2 to get a license under the rules.

In order to comply, 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 over its leadership and include other measures like Chinese Walls to guarantee Nord Stream 2’s independence from the Russian gas giant.

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

The court on Wednesday said because the physical construction wasn’t completed by the cut-off date, Nord Stream 2 couldn’t get the carve-out. The judges rejected the company’s argument that economically, the project was completed at that time because the bulk of the money was already invested.  

As a precaution, Nord Stream 2 has already applied for the necessary 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.

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.

Wednesday’s case is OLG Dusseldorf, VI-3 Kart 211/20 [V].