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    Naftogaz Ukrainy Complains to EC on NS 2

Summary

Naftogaz has written to the EC to complain about NS 2, while NS 2 has written to the EC requesting fair treatment of the pipeline.

by: William Powell

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Naftogaz Ukrainy Complains to EC on NS 2

State monopoly Naftogaz Ukrainy has filed a complaint to the European Commission against Gazprom for abuses of dominance in European gas markets, it said in a statement May 6.

Its main target is Nord Stream 2 (NS 2), the 55bn m³/yr subsea pipeline from Russia's Baltic coast to north Germany which will cost almost €10bn, half financed by a consortium of European gas companies and half by the sole owner Gazprom.

Naftogaz argues that NS 2 is an abuse because it has no rational economic explanation, given the European Union’s “vast excess import capacity for natural gas.” As it has no economic basis, it argues, it is anti-competitive. It will also make redundant more of Ukraine’s gas transmission capacity, while Ukraine wants its pipelines to bring in transit revenues.

Transit fees from next January will be governed by the EU network codes, which define the calculations of the costs that transporters may charge for capacity.

The complaint proposes a series of remedies, one being that Gazprom makes gas available to European purchasers on Ukraine's eastern and western borders at a price equal to the price offered to Nord Stream 2 customers adjusted for relevant transportation costs.

Naftogaz describes NS 2 as a “predatory investment which creates a powerful entry deterrent weapon against imports of liquefied natural gas (LNG) into the EU, because excess capacity threatens the ability of new LNG projects to recover their capital costs.”

But if there is already ample capacity in Ukraine, as Naftogaz says, then there is already an entry deterrent weapon against LNG imports, without building NS 2. And so far this year, LNG imports have reached record levels in northern Europe, thanks to low prices relative to Asia.

Another concern is that Nord Stream 2 changes the direction of gas flows in Europe, resulting in material increases in transportation costs and therefore gas prices for several EU member states in central and eastern Europe, leading to a partitioning of the EU gas market.

The fourth concern with Nord Stream 2 is its use to restore Gazprom's dominance over gas supplies in Ukraine by threatening the abandonment of the Ukrainian transit route unless Naftogaz agrees to reverse the outcome of the previous arbitrations in Naftogaz's favour.

In addition to the abusive strategic investment in Nord Stream 2, the complaint addresses three further abuses.

First, the change in the direction of gas flows caused by Nord Stream 2 will make so-called "virtual reverse flows" – subtracting gas in the counter-flow direction from gas flowing in the main direction – through Ukraine impossible, affecting trade between EU states bordering Ukraine, and make imports from Europe to Ukraine more expensive.

Second, Gazprom refuses to sign efficient "swaps" with independent Russian producers and producers in central Asia, which would grant them indirect access to the European to Ukraine market and enhance competition. 

The third abuse concerns so-called "anticompetitive vertical foreclosure" in Germany through Gazprom's integrated company Wingas, one of the largest gas sales companies in Germany. Through its dominance in the upstream market and its integration with Wingas, Gazprom is able to foreclose downstream rivals in Germany, contrary to Article 102 TFEU.

Naftogaz's complaint addresses new abusive practices of Gazprom that were not addressed by the EC in its commitment decision in 2018, where it concluded a long-running investigation into Gazprom by imposing a series of commitments in respect of Gazprom's cumulative efforts to segregate EU gas markets and, having succeeded in doing so, impose unlawfully high prices.

Swiss NS 2 AG declined to comment to NGW on the letter. But it has written to the EC president Jean-Claude Juncker requesting official confirmation that the amended gas directive will not treat NS 2 worse than other comparable import offshore gas pipelines in which investments were made before the adoption of the amended directive.

The letter was served as a notification under Article 26 of the Energy Charter Treaty. NS 2 said international and EU law should apply to its project, in particular, the fundamental principles of non-discrimination and protection of legitimate expectations. Owing to the missing impact assessment for the amendment to the directive, NS 2 said, "it is necessary to obtain clarity about the definition of the completion of projects and the respective derogations."