Managing your pipeline in European Union

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so I'm Kim Talus professor at uef Law School and uh University of Helsinki I've worked with pipelines and and other cross-border infrastructure both in my academic career and as well as in practice and I'm also advised specifically nordstream 2 on the application of EU law today's pipeline now today I'll talk for about a half an hour on Baltic Sea pipelines and eulo and then we have about a half an hour then for um questions and answers and while you can already start typing the questions I'll answer them then at the end of my presentation or at half an hour through the presentation the focus of the presentation is slightly more on nude stream 2 because I have to assume most of you will be more interested in that pipeline although from a Finnish perspective for the Baltic perspective also our other pipeline the multi-connector is an interesting project so all in all Baltic C at the moment is very interesting from a pipeline World perspective so let's see how to so this is what we are talking about two Pipelines one connecting Finland and Estonia one connecting Russia and Germany now I'll run through some of the technicalities of these Pipelines and then look a little bit at the um applicable law or the regulatory framework for these Pipelines so the first pipeline that we'll talk about is the multi connector and you'll see it from the map uh connecting the finish and the ball and the Estonian gas grids so multi-connector it's a 77 kilometer offshore pipeline between Finland and Estonia in addition to the offshore bit it also has onshore portions both in Finland and in Estonia the total cost for these projects is 250 million and in 2016 European commission granted it a funding of one eight seven point five million euros this corresponds to 75 percent of the total costs the daily Transportation capacity of the pipeline will be 72 million cubic meters per day now this capacity needs to be compared to the current capacities to Finland which is approximately 23 million cubic meters per day so from a finished perspective this pipeline is significant the gas can be transported bi-directionally and the idea is that it will be the usage will be based on market demand the plan is to have this python operational in 2020. now the rationale for the pipeline uh the rationale for the pipeline depends a little bit on from which angle do you look at the project from an EU rationale the idea is to integrate the Baltic Sea region with the rest of the EU gas transmission system so integrating energy Islands into the main grids from a Finnish National perspective this is not a standalone project it relates to the gas Market opening of Finland so far we've had a monopolistic system based on article 49 of the gas market directive and this is now coming to an end the new market act that will introduce competition to both wholesale and Retail markets is currently with the Finnish Parliament and is expected or the government bill is with the Finnish government or Finnish Parliament and expected to become low later this year now if we look at the website of the uh multi-connector the stated rationale there is to improve Regional security by diversifying gas sources now at the moment Finland is 100 dependent on Russian gas coming through two Pipelines connecting directly to the Finish grid this pipeline will allow at least at some stage and at the moment in theory the usage of clipedal and g-terminal and also the gas from other parts of the EU that requires though that any internal bottlenecks within the Baltic region are also dealt with the stated rationale is also to create a framework for Market opening growth and enable use of alternative sources such as LNG and biogas LNG are already mentioned biogas in Finland is a growing source of energy and my assumption is that then this pipeline would allow transporting this gas also to the Baltic baltics finally it enables interconnection of the finish and Baltic gas markets and their integration with the eu's common energy Market but of course this also means that internal bottlenecks and then the connection between Lithuania and Poland is completed the regulatory context for Baltic connector is relatively simple it appears on the list of projects of common interest or common European interest so it's a PCI project which means that has access to a favorable regulatory treatment under the PCI regulation which has been also implemented the details have been implemented into the Finish system it's also receiving the money as I mentioned from the connecting Europe facility which corresponds to 75 percent of the costs now there's no separate intergovernmental agreement for this pipeline it is currently owned by both Finnish and the Estonian gas companies or or government run companies and the operator for this pipeline at the moment is still unclear given that there is both territorial Waters exclude economic zones and then territorial waters on the other side in my opinion are the applicable laws to this pipeline have something to do with the ultimate control of the pipeline and the operatorship for this pipeline which as said is still unclear at the moment now then we move to node stream 2. so that's the basic introduction to multi-connector node stream is a slightly larger project it's a 1 200 kilometer offshore pipeline connecting Russia and Germany as I showed in the first slide total costs is in the range of 8 billion euros so slightly more than our Baltic connector it's also supposed to be operational in 2020 so matching with multi connector in that respect total capacity of both node stream pipes is 55 billion cubic meters of gas per year it's a Swiss company owned by Russian gas prom and it has now financing agreements with a consortia of EU companies the stated rationale for node stream 2 is to ensure a highly reliable supply of Russian gas to Europe regulatory context is slightly more complicated than what it is for Baltic connector so the question of the applicable law has been discussed in in the media for and and in the academic circles for a number of months or or even years if we consider new stream one discussions as well you can approach this question in my opinion from three different levels of law you can look at international law and there primarily the U.N conventional law of the sea can also there are other International instruments that apply but I'm not going to go into those you can look at this from European Union laws and you can look at European Union energy regulation here primarily I'll talk about the natural gas market directives and the other gas market related regulations you can also look at it from a national perspective and then you look at the treatment of eez in Finland Sweden Denmark and Germany and you look at the territorial Waters and laws there for Denmark and Germany and this is what I propose to do do next under the own class 1982 regime you have a separation between territorial sea and exclusive economic zone territorial C you have a full sovereignty only subject to those exceptions that are mentioned in the treaty itself exclusive economic zone is something very different there Coastal states have a functional sovereignty so in the eez all states have a freedom to lay submarine cables and Pipelines Coastal States can take action that is allowed under the treaty so they really they relate to environmental considerations mostly so you can act to prevent reduce and control of pollution from Pipelines the coastal States also have a say in the Delia nation of the course of the pipelines but they don't have the right to stop the pipeline from being put into their eez completely the own Clause does not allow the coastal states in the eez to uh offer to regulate the operations of the pipeline now EU law of course or the jurisdiction of EU law follows the jurisdictions of its member states and in the case commission versus United Kingdom in the habitats directive the conclusion of the court on the finding of the Court was that habitat's directive applied in the eez of UK this is natural because the habitat's directive relates to environmental considerations and they are among those factors that are fall within the competence of coastal States so if we then move from international law to European law the question first is what is node stream 2 pipeline it's not an upstream pipeline because it does not fall into the um how do you say that in English um it's not it's not within the definition of an upstream pipeline it's not an interconnect or even if technically it is an interconnector but the definition of an interconnector is that it crosses or spans a border between member states and given that Russia is not a member state of the EU and probably never will be it's not an interconnector under the EU energy law is it a transmission line that's a more difficult question and for that we need to look at the details of the law and we need to look at the existing practice relating to Coast to Coast Pipelines so for the content of EU law we can look at the capacity or location Network code which which is the commission regulation uh 984 2013. capacity or network codes are the most detailed level of EU regulation when it comes to operational issues in Pipelines and specifically Article 2 1 of this regulation or the network code specifies that the regulation shall apply to interconnection points but then it says that it may also apply to entry points from an exit points to third countries but this is subject to the decision of the relevant National regulatory authorities so I would argue that there was never an intention to apply EU gas market regulation to these offshore pipelines bringing gas to the border of EU and the existing practice confirms this I haven't listed all imaginable pipelines that could be listed here I've just putting in two transmit pipeline which is an existing Pipeline and Galaxy pipeline which is also it's a planned pipeline both in the Mediterranean Sea in both these cases the supplier and part owner of the pipeline is the Algerian National company Sona truck and to me this suggests that EU energy law is not applied to these pipelines prior to their connecting into the gas transmission systems uh in the downstream EU now if we look at other pipelines if we move away from coast to coast pipelines we can look at Southern gas Corridor project and here the EU law is applied only to those sections which are within EU borders so transatriatic pipeline which has an exemption but it's not applied to those parts which are outside of the EU border so it seems to me that EU energy law is not applicable to these pipelines prior to their connection into the downstream system of EU now if we look at National laws the finish act on exclusive economic zone lists all the laws that are applied in the eez of Finland gas market act or natural gas market Act is not on that list and therefore it is not applied in the easy of Finland Swedish ease Act has a similar situation the natural gas market Act of Sweden is not applicable in the eez of Sweden Danish natural gas act on the other hand specifies in Article 2 4 that the ACT does not apply or is excluded from the scope of the ACT those transmission networks in the territorial Waters or the eez that are not connected to the Danish natural gas system so explicitly Danish national law excludes the application of Danish natural gas market act to node stream 2 which does not connect to the Danish pipeline system so to conclude about the applicability of EU energy law if we look at the international law approach EU law applies environmental laws of EU yes but EU energy law or the third package does not apply to node stream 2. if we look at EU energy law and regulation the wording the intent and the practice suggest that third part the third package is not applicable and if we look at the loss of the coastal States Finland Sweden Denmark it's the clear wording of the all the national laws is that they do not apply to this pipeline so what would it mean if EU energy law would apply to the pipeline to any pipeline Coast to Coast pipeline connecting EU and a third country it would mean a third-party access would apply it would mean that unbundling Provisions would apply and so on and so forth and the ownership structures for example in a oil and gas producing country are among the key decisions key Sovereign decisions that a country would make in terms of Algeria this was done immediately after the independence and so so these are very significant decisions and we have to remember that there's a difference between energy policy and energy law in upstream and downstream countries both of these approaches are legitimate they are just very very different the rationale is the police objectives of an upstream country and a downstream country are completely different so these are serious uh consequences for an upstream country and so in in my humble opinion they would be very controversial in all our Energy Partners uh governments now I moved to a separate but related topic because European commission has at least um it seems so or is going to be asking the member states for a mandate to negotiate and nude stream to specific intergovernmental agreement between EU and Russia now the first specific or The Logical question is is a specific intergovernmental agreement necessary my answer that would be it's not necessary but it is an option it can be done if it would be done it would be from an EU side initiated through the mechanisms under article 218 of the treaty and the functioning of the European Union where the council under qualified majority would vote to give the commission a mandate and some negotiation guidance or directives as I think they're called in the article because this would be a mixed agreement at the end it would still be ratified by all national Parliament and therefore unanimity would be required at the end and because of this my understanding is that the council will also seek unanimity immediately and this is not the first time we have this situation of an intergovernmental agreement being um proposed for a pipeline we also have the example from 2011 of the trans Caspian pipeline system where the European Commission had the mandate to negotiate an inter government intergovernmental agreement between EU and then the Caspian States unfortunately that decision from the council is classified so we have no information on the exact content of that example which is unfortunate continuing with the intergovernmental agreement if this type of inter-government governmental agreement would be concluded what would it then include ing to the press releases or press reporting on the topic the commission is suggesting that in order to prevent what the commission calls a legal void an IGA should cover the offshore section of the pipeline it should cover both building and operation of the pipeline and it would be based on some fundamental principles stemming from EU energy law creating the words fundamental principles stemming from EU energy law I would understand it to mean third-party access unbundling transparency and these type of considerations now the difficult issues that I see with this approach is that it would extend the application of EU energy law outside the EU borders without an overall plan on how to do that and without the involvement of European Parliament now if we start extending the application of EU energy law to non-eu or energy Community countries that should be done through a specific plan and even then with a plan we would run into difficulties of the downstream energy law and policy being so different from Upstream energy law and policy we might also lead into different other different types of problems and if we look at the impact of these things in the EU Market one has to note that all the gas volumes that are moved through these pipelines are subject to EU energy law once they move into the downstream pipeline system of EU now the final Point here is that if an intergovernmental agreement is not adopted then I would not speak of a legal void the legal regime and that situation is based on international law European Union law and also the national laws of all relevant Coastal States and what the operational regime would then be would depend also on the operatorship so I think it's technically wrong to speak about a legal void in that situation to to conclude briefly two very very different projects the the other project the Baltic connector is mainly driven or exclusively driven by public sector involvement and financing is coming from the public sector the other project is purely well purely a private sector initiative although gas prom is a government-owned entity the European partners together with gasprom are financing it from private funds at least that's how it seems to me for the approach of the let's say European commission or EU the other project is high on the priority list connecting these energy islands with main EU grids and for the other projects the commission and some of the member states are highly critical so two very very different projects being constructed planned and constructed at the same time and should become operational at the same time and all within the Baltic Sea so Baltic C is an interesting area at the moment from the pipelines perspective now I would invite you so this is um actually I'll show you one more slide there is uh two papers that I've written on these topics the other one is called application of EU energy law to certain National laws of Baltic Sea countries to North stream 2 pipeline project publishing Journal a world energy law and business earlier this year the other one is called an intergovernmental agreement for nude stream 2 rationale content and impact and this was also published earlier this year actually not very many days ago in ogel which is an online Journal