What Happened

The Council of the European Union on Feb. 8 approved new rules on offshore energy pipelines originating in non-EU member states. The European Parliament will now consider the Franco-German compromise measure, which assigns negotiating authority over pipeline rules and exemptions to the country where the duct's first interconnector is located.

Why It Matters

If passed, the measure would give Germany negotiating power with regard to Nord Stream 2, a 55 billion-cubic-meter (bcm) pipeline connecting Russia and Germany across the Baltic Sea. Berlin has long supported the pipeline, arguing it is not a political project but an economic one. This has not sat well among Eastern and Central European states such as Poland, Ukraine and Slovakia, which stand to lose lucrative transit contracts for Russian natural gas traversing their territory on the way to Germany via older, onshore pipelines. Eastern and Central European countries also fear Russia would be more likely to halt shipments of natural gas to them for political ends, since Nord Stream 2 would lessen the impact of such cutoffs on customers further downstream, like Germany.

If Berlin takes over negotiations regarding Nord Stream 2 with Gazprom, Russia's state-controlled gas monopoly, the pipeline would likely win EU approval. In the process, Germany would demand pro-competition concessions like requirements that Gazprom sell an allotment of the natural gas on spot market exchanges. This would force Gazprom to compete on the open market, promoting the EU goal of moving away from long-term oil-indexed prices and contracts. Brussels, however, would still play a strong role in the regulation of onshore pipelines connecting to Nord Stream 2, meaning that, even if Germany ultimately receives negotiating power, the project would still have to surmount many legal and economic challenges before it becomes a reality.

Background

Central and Eastern European countries aren't the only ones opposed to Nord Stream 2. The United States also takes a dim view of the project on the grounds that it would increase European dependence on Russian natural gas and make it far easier for Russia to cut off gas to Ukraine to gain leverage over Kiev. The United States has even threatened to sanction companies involved in Nord Stream 2, though it has not done so yet.

This year will also be crucial for talks between Moscow and Kiev on natural gas contracts at large. The transit contract between Russia and Ukraine, the main conduit for Russian gas to Europe at present, expires at the end of 2019. Russia and Gazprom have been open to signing a new contract, but various leaks and statements have suggested that Russia is considering a new transit deal offering only 10 bcm to 15 bcm per year, far below the 87 bcm of Russian gas that transited Ukraine on the way to the European Union and Moldova in 2018. The precipitous decline likely stems from Russia's expectation that it will be able to bypass those countries and cut straight to EU markets.

In public announcements and talks with Moscow in 2018, Berlin began to link the Nord Stream 2 project to the Ukrainian transit issue. If Germany becomes lead negotiator on Nord Stream 2, it could well make rules on supplies and volumes contingent on Russia's continued use of the Ukrainian route (in addition to Nord Stream 2), and a new transit contract between Moscow and Kiev. The issue is likely to come up during the next round of trilateral gas talks featuring the European Union, Ukraine and Russia in May, as well as subsequent meetings.