Compliance News / Compliance

Russian Pipeline Deal Breaches EU Law

Negotiations Must Start Over

December 5, 2013
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The bilateral agreement for the South Stream gas pipeline is a breach of EU law and must be negotiated from scratch, according to the European Commission on Wednesday.  The pipeline serving Russia, Bulgaria, Serbia, Hungary, Greece, Slovenia, Croatia and Austria must comply with EU law before being allowed to enter EU territory.

The problem is one of monopolies, Klaus-Dieter Borchardt, director for energy markets at the European Commission, explained to the European Parliament. According to the statutes of the Third Energy Package, energy suppliers may not own the infrastructure used to transport the product to customers. Hence, Russian-owned Gazprom may not own the pipeline it is building. Additionally, Gazprom cannot hold a monopoly on the gas shipped through the pipeline. Other parties also much have access to it. Finally, the tariff structure must be addressed before the deal complies with EU energy law.

The hiccup doesn’t halt construction of the pipeline – only its operation. That’s good for Gazprom. The company’s deputy chairman, Alexander Medvedev, says the company has buyers for the 63 billion cubic meters of gas that will flow through the pipeline. It also already has started construction of the multi-billion euro pipeline in Serbia, employing some 150,000 workers. The pipeline pointedly bypassing Ukraine, which suffered a virtual shutoff during the frigid winter of 2009 when it struggled to pay its energy bills.

Ukraine isn’t the only nation soured on Gazprom, however. That 2009 shutoff seriously affected European countries as well, because the pipeline through Ukraine was the primary source of gas for the continent. Relations worsened further when the European Commission began investigating whether Gazprom has price gouged and hindered the free flow of gas throughout Europe.

 The EU is seeking alternative energy suppliers, and Borchardt speculates that achieving a legal solution may take two years. His office already is working toward resolving the dispute.  

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