Last month, ISPI Energy Watch analysed opposite interests around Nord Stream 2 and the reasons why Nord Stream 2 could face hurdles. European laws were defined as the “main weapons” of those countries opposing the project. Indeed, Naftogaz filed a complaint against Nord Stream 2 with the Energy Community Secretariat under Article 90 of the Energy Community Treaty ; in January 2016 the complaint passed on to the European Commission since it concerns the alleged violation of EU legislation by a Member State . In addition, various Member States (like Poland and Slovakia) formalised their concerns to the Commission in the last months of 2015 and the Commission itself, in a statement of last June, warned that “new pipelines must be built in full compliance with EU legislation”, and that it “will be vigilant about the rigorous application of EU law notably in the field of energy, internal market and competition”.
According to some commentators , Nord Stream 2 would jeopardise the achievement of several goals of the EU energy policy, in particular:
– the diversification of gas supply sources and the development of coherent, common EU policies towards Russia, independent from the particular interests of individual states and companies ;
– the recommended increased cooperation among EU Member States ;
– the realisation of EU policy goals in Central Eastern and South Eastern Europe, that aim at ensuring that each country has at least three independent sources of gas supply ;
– the achievement of EU energy policy goals towards Ukraine .
Some of the goals above have also been reflected in EU binding documents and, therefore, to a certain extent, represent an obligation for Member States when, for instance, they assess the legal feasibility of a project.
Security of supply together with competition issues seem to be also of concern to Mr Šefčovič, Vice-President of the European Commission, according to whom the Commission will need to carry out a detailed assessment on the project .
Regardless of the pros and cons of the project from a EU energy policy perspective, Nord Stream 2 will certainly need to face a number of legal constraints, stemming from the entry into force of the so-called Third Energy Package.
Before diving into details of those rules of the Third Energy Package which may hinder the success of the project, the preliminary legal question is whether EU law applies or whether the project should be simply considered a “bilateral deal” between Germany and Russia. In this respect, the positions of Gazprom reported by the press, according to which only domestic laws of the States over whose territory the pipeline will be laid are relevant, and that of the German Minister Sigmar Gabriel saying “[w]hat’s most important […] is that we strive to ensure that all this remains under the competence of the German authorities” ,appear naïve at best. Indeed, firstly, each Member State affected by the project must comply with EU principles. Secondly, Nord Stream 2 will cross not only Germany but also the territorial seas and economic zones of other Member States, and it is undoubted that EU law applies also on offshore sections of the pipeline if they are situated in the territorial seas of EU Member States. This has been confirmed by the European Commission’s Directorate General for Energy . Finally, a very recent Commission’s proposal for a Decision of the European Parliament and of the Council  is aimed at tightening-up intergovernmental energy agreements between a Member State and a non-EU country. In particular, according to this proposal, the Commission will be able to intervene before such agreements are signed if they are seen as potentially affecting the security of gas supplies in another EU country, or hampering the functioning of the EU’s internal energy market.
Having clarified this, it is worth mentioning which rules of the Third Energy Package are applicable to Nord Stream 2. By crossing the economic zone of more than one Member State, Nord Stream 2 might be defined as an “interconnector” under Directive 73/2009/EC, i.e. “a transmission line which crosses or spans a border between Member States for the sole purpose of connecting the national transmission systems of those Member States”. Indeed, although Nord Stream 2 does not connect two existing EU national transmission systems (in fact, the transmission systems actually connected are just those of Russia and Germany), it could be defined as an interconnector under Directive 73/2009/EC if just the physical presence of the pipeline in more Member States were considered relevant . Interconnectors, like domestic gas transmission networks, are subject to third party access (TPA) rules. This means that access to the network must be granted on fair and non-discriminatory basis and according to regulated tariffs.
In addition – and this is the most interesting novelty of the Third Energy Package – transmission system operators (TSOs) must comply with strict unbundling obligations. In particular, TSOs which did not exist or which were not a vertically integrated undertaking  as of 3 September 2009 must comply with the ownership unbundling model .That rule imposes that a same person cannot, at the same time, exercise control over an undertaking in the production or supply sector and control or exercise any rights over a TSO, and vice versa. In those cases, it is also prohibited to appoint members of the corporate bodies of a TSO. In other words, with the exception of pure passive financial interests (i.e. with no voting rights and similar) a same person cannot be a shareholder both of a producer/supplier in the power or gas sector and of a TSO.
A TSO must obtain by the competent regulatory authority a certification confirming that the unbundling rules are complied with. This certification must be approved by the Commission. If the TSO is controlled by a non-EU entity (such as Gazprom), in order to obtain the certification, in addition to compliance with unbundling rules, the TSO must also prove that the security of supply is not adversely affected .
However, in case of new interconnectors (as well as LNG terminals and storage facilities) an exemption from the application of third party access and unbundling rules can be obtained under Article 36 of Directive 73/2009/EC. In order to obtain the exemption, the applicant must demonstrate, inter alia, that:
– the investment must enhance competition in gas supply and the security of supply;
– the level of risk attached to the investment must be such that the investment would not be made without the granting of an exemption;
– the exemption must not jeopardise competition or the effective functioning of the internal natural gas market or the efficient functioning of the transportation systems.
The exemption from third party access rules is not a new provision of the Third Energy Package. In fact, in the context of Nord Stream 1, in 2009  the OPAL pipeline (the section of the pipeline allowing natural gas to flow from Nord Stream to the Czech Republic via Germany) obtained a partial exemption of its capacity for 22 years. Thanks to the exemption, 50% of the capacity of OPAL is currently allocated on the basis of third party access rules, while the other 50% can be freely used according to the sponsor’s private agreements .
However, as anticipated above, the Third Energy Package also included unbundling rules and, in order to obtain an exemption, it is necessary to demonstrate that such an exemption is essential. In this respect, it is worth noting that the Commission grants exemptions only if and to the extent they are strictly necessary for the viability of the project. Indeed, in several occasions the Commission has been stricter than the regulatory authorities of the Member States, granting the exemption subject to revenues or capacity caps, revision after a certain period, or other conditions. On some other cases, the Commission has even ordered the relevant Member State to withdraw the exemption decision because it could not sufficiently demonstrate that the exemption was necessary considering the risks involved in the project .
In addition, even if an exemption is granted, it has been clarified that the unbundling certification is still required. For instance, although it obtained an exemption from the third party access rules and ownership unbundling, TAP AG (the operator of the Trans-Adriatic Pipeline) had to implement certain measures so as to comply with the “ITO” unbundling model .
Moving to the Nord Stream 2 project, the current ownership structure appears not to comply with ownership unbundling rules, given that the shareholders are Gazprom and a number of other players active in the gas market. As clarified above, an exemption, both from third party access rules and ownership unbundling restrictions, can be requested by the sponsors of the project. However, in order to obtain the exemption, the tests (including the pro-competitiveness of the project) set out under Directive 73/2009/EC must be satisfied. Assuming that all conditions are met, in the context of the unbundling certification process, if the control  over the project company is still held by Gazprom, i.e. a non-EU entity, it should also be proven that the security of supply is not adversely affected. All those conditions would be assessed not only by the German regulatory authority but also by the Commission.
To conclude: the realization of Nord Stream 2 is certainly set to face political opposition, but it seems that legal constraints are also something to deal with, independent of the political positions of the various Member States.
Francesca Morra, Lawyer and Partner, Paul Hastings
 The Energy Community Treaty was signed on 25 October 2005 in Athens between the European Union and several Countries from Eastern Europe. The Treaty entered into force on 1 July 2006.
 The complaint was transferred to the European Commission under Procedural Act No. 2008/01/MC-EnC of the Energy Community Ministerial Council on the Rules of Procedure for Dispute Settlement under the Energy Community Treaty.
 Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy, February 2015, European Commission p.4 and p. 21.
 EC Stress Test Report Results, October 2014.
 Interview of 11 February 2016 on EurActiv.
 Meeting between German Energy Minister Sigmar Gabriel and President Putin of 28 October 2015; transcript available here.
 "Energy Union winter 2016 package” - Proposal for a Decision of the European Parliament and of the Council on establishing an information exchange mechanism with regard to intergovernmental agreements and non-binding instruments between Member States and third countries in the field of energy and repealing Decision No 994/2012/EU, 16 February 2016, COM(2016) 53.
 A vertically integrated undertaking is a company or a group of companies carrying out transmission, distribution, LNG or storage activities and, at the same time, production or supply of natural gas.
 As regards transportation companies which were vertically integrated companies as of 3 September 2009, Member States were entitled to opt for models alternative to the ownership unbundling. In particular, for those companies the ITO (independent transmission operator) model under Chapter IV of Directive 2009/73/EC and the ISO (independent system operator) model under Article 14 of the same Directive are also possible.
 Paragraph 3.b of Article 11 of Directive 2009/73/EC.
 According to an answer to a Parliamentary question by Mr Oettinger on behalf of the Commission on 14 November 2013, the exemption’s decision is subject to revision but, at EU level, no formal amendment decisions have been published so far.
 It is worth noting that the concept of “control” does not necessarily coincide with having 51% shareholding, given that the antitrust principles apply (i.e. control can be also based on agreements between shareholders or factual circumstances).