EU countries ask for help to escape from South Stream 'mess'

Six EU countries are in "a mess" over the bilateral deals they signed with Russia on the South Stream gas pipeline, with Bulgaria the most desperate to get EU help, European Commission officials told.


Speaking in Brussels today (6 December), a Bulgarian minister said Sofia would seek to bring its bilateral agreement with Russia on the South Stream project in conformity with EU law.


The announcement came amid heightened tensions between the EU executive and Gazprom over gas pipeline contracts.


Earlier this week, a Commission official announced that the bilateral agreements for the construction of the Gazprom-favoured South Stream pipeline – concluded between Russia and other European countries - are were in breach of EU law and needed to be renegotiated from scratch.


Gazprom and Russian officials made it immediately clear that Moscow had no intention of halting the construction of the pipeline. Russia considers the inter-governmental agreements valid under international law, which in its view has supremacy over EU law.


Six EU countries have signed inter-governmental agreements with Russia over South Stream - Austria, Bulgaria, Croatia, Greece, Hungary and Slovenia. Serbia, which is part of the EU-backed Energy Community, also signed a similar bilateral deal (see background).


Gazprom says EU Commission reacted too late


The dispute took another turn today (6 December) when Gazprom accused the Commission of reacting too late, after the construction of South Stream had begun.


“We are not a signatory to these agreements, but their contents have been public for years," Gazprom said in a written statement. "This is why we are surprised and disappointed that the Commission voices its concerns only now, after construction works have begun. This unfortunate timing is even less comprehensible given that South Stream has been granted national priority status in several EU member states,” it said.


The Russian gas monopoly was careful to leave a door open to solve the dispute, suggesting that it could reach a compromise with the EU based on the experience of the OPAL pipeline, an offshore leg of Nord Stream.


Meanwhile, the countries that signed the deals with Russia now appear entangled in a legal jumble.


Zinaida Zlatanova, Bulgaria’s vice-prime minister, responsible for EU affairs, told the Bulgarian press in Brussels today that Sofia would get in conformity with EU law regarding South Stream. But she did not say whether Sofia would ask to re-negotiate its inter-governmental agreement with Russia.


She refused speculating over what would happen if Russia decided to sue Bulgaria for not delivering on the inter-governmental agreement.


‘Commission didn’t lose time’


The European Commission, for its part, said it had informed Russia “days ago” about the situation.


Marlene Holzner, a spokesperson for EU Energy Commissioner Günther Oettinger, strongly denied Gazprom's claims that the EU executive had known about the bilateral deals for a long time. The Gazprom statement was simply “not correct”, she said.


Some of the bilateral agreements have indeed been published in the official journals of the respective countries but the Commission received them officially only on 17 February 2013, Holzner said. The Commission followed up on 14 August by sending letters to the authorities of the seven countries concerned, detailing all the breaches of EU law in every single agreement, paragraph by paragraph, she added.


A letter sent by the Commission to the Bulgarian authorities, dated 14 August, analysed the Bulgaria-Russia agreement in great detail. The six-page document, addressed to the Bulgarian deputy energy minister, Evgenia Haritonova, has never been made public, despite pressure by some MPs in the Bulgarian Parliament to disclose it.


Apart from breaches to EU energy market rules forbidding energy producers from simultaneously owning transmission networks (so-called ownership unbundling), which are common to all seven agreements, the letter identifies the following grievances:


Bulgaria committed to provide the most favourable tax regime to Gazprom, which according to the EU Commission is in breach of the EU's state aid rules;


At one point, the inter-governmental agreement (IGA) stipulates that Bulgarian and Greek companies would be subcontracted, and at another, that preference would be given to companies from the states of the Parties (Bulgaria and Russia), which is against EU competition rules;


The IGA stipulates that tariffs for using the pipeline would be established "by the Company", which is in contradiction with the powers of the national regulator to approve transmission tariffs in accordance with EU law.


Between a rock and a hard place


According to officials contacted by EurActiv who asked not to be named in the absence of a wider EU-Russia deal, Bulgaria has to choose between building the pipeline and Russian letting gas through it, and then face infringements and possible heavy EU sanctions, or denounce the agreement, and then probably pay huge compensations to Russia, which would undoubtedly sue Sofia for not delivering on the agreement.


This is why, EurActiv was told, Bulgaria was "the most desperate country" to seek EU help for sorting out the mess it got itself into.


Holzner explained that from the Commission’s perspective, the construction of the pipeline could proceed, but the crucial moment when EU law would start to apply is when the gas will start to pass through the pipe. At this moment, Brussels would make sure that EU law is applied, she said. This basically means that the capacity needs to be distributed not to one company, but to all companies interested.


But Holzner also explained that it seemed highly unlikely that a pipeline of such magnitude could be built in the conditions of legal uncertainty, as in her words no bank would be interested in financing such a risky project.


EurActiv also asked Holzner if indeed the experience with the OPAL pipeline could provide a basis for compromise. She said that the pipelines were different, in the sense that in the OPAL case, Russia had accepted that the pipeline was on EU territory. Accordingly, they had asked for an exemption from the third energy package, and the Commission had given them such exemption.


“What we always do is look into the specific case and ask ourselves: would this pipeline be built without an exemption, or would it be not been built,” she explained. She added that any exemption was temporary, as it was the case with OPAL.


“South Stream is a different matter, because they haven’t formally asked for an exemption. They have made IGAs not respecting EU legislation. It’s a unilateral move,” she said.