Observatory on European Studies - Towards a single EU concept of security supply in the natural gas sector?

Nuno Cunha Rodrigues *

In the past the fragmentation of the EU internal market in natural gas was founded on different reasons.

Some related to the introduction of territorial restrictions (or comparable provisions such as profit sharing mechanisms) by upstream sellers in supply contracts that were able to block arbitrage between low price areas and high price areas within the EU.[1]

Following several cases, such as the Gazprom[2] or the Qatarenergy[3], it’s clear that these clauses are forbidden under EU competition law rules.

Furthermore, and until recently, the internal market in natural gas didn´t work properly due to geographical reasons – knowing that many Member States are not interconnected or due to the structure of the markets – vertically integrated – or to the extreme dependency on some foreign states suppliers – such as Russia.[4]

The official approach has always tended to privilege opening the market as a way of guaranteeing a secure energy supply which was done, until today, through the approval of different packages of EU law imposing that to Member States.[5]

As several times was mentioned by the EC, an enhanced security of gas supply in the EU requires an open, competitive, liquid, interconnected and diversified single EU market.

This means exploring all possibilities to reduce dependency on fossil fuels by increased energy efficiency, investment into new alternative technologies and a diversification of supply regions.

These goals are clearly mentioned in the RepowerEu communication when referring that only a “truly interconnected and resilient EU energy network will provide energy security for all.” [6]

At the same time the EC has punished several anti-competitive practices that harmed European consumers and threaten the proper functioning of the internal market in natural gas.

Nowadays, due to the war in Ukraine, the EU dependency on Russian gas became perceptible to the European public opinion and led the EU to shift its policy in the gas sector.

Here, the need to assure security supply in this market is more evident than in others. According to the TFEU, Member States have a shared competence with the EU to define energy security supply. In the energy sector Member Stares can still choose between various power plants and general supply structures, without prejudice to section 2(c) of Article 192 of the TFEU[7] or to apply for security supply reasons when invoking exceptions to the application of EU energy law, in accordance to Article 194 (1) (b) of the TFEU.[8]

They can also call for exceptions when considering the application of freedoms of movements. Still, both the ECJ’s jurisprudence and the EU law have been reducing Member States’ margin of discretion regarding in both possibilities.[9]

In several recent cases, the ECJ concluded that, according to Article 194(1) (a) and (b) of the TFEU, Union policy on energy aims to ensure the functioning of the energy market and security of energy supply in the EU. Furthermore, according to the Court of Luxembourg, Article 194(1) (b) TFEU clearly identifies security of energy supply in the EU as one of the fundamental objectives of EU policy in the field of energy.[10]

Aware of the ECJ’s jurisprudence and the need to enhance the functioning of the internal market, the EC has made itself responsible for defining the framework of energy security supply, as can be perceived from recent EU law and soft law instruments approved.

This is the case of the Gas Directive 2019/692 which establishes, in Article 49a (1), derogations in relation to transmission lines to and from third countries. This Article is similar to the so-called “Gazprom clause”[11] that required a certification by the Member State that does not jeopardize the security of energy supplies of the Member and the European Union. This clause was unsuccessfully challenged by Russia in the WTO.[12]

In other cases the specificities of EU Member States – special geographical ones – allows them to benefit from derogations established in EU law.[13]

Similarly, the proposal of a new Directive on common rules for the internal markets in renewable and natural gases and in hydrogen also establishes, in Article 82 (3) that the EC’s previous permission is mandatory when a Member State intends to enter into negotiations with a third country to conclude an agreement on the operation of a transmission line and that the EC can forbid those negotiations if it considers them to be detrimental to the functioning of the internal market in natural gas, competition or security of supply in a Member State or in the EU.[14]

As so, one can conclude there is a gradual Europeanization of the concept of energy security supply that leaves less room for Member States to use its margin of discretion in applying to it.

Put it differently, this means that security supply in the natural gas sector is no longer a national security issue but a European one.

Here, the effective application of competition law and EU energy law by the EC will be decisive in order to assure that EU energy markets, including natural gas ones, are not distorted by companies or Member States that might try to take advantage from a new EU internal market in natural gas that will come out after the war.

 

[1] See the following cases: Norwegian Statoil and Norsk Hydro, press release IP/02/1084 of 17 July 2002; NLNG, press release IP/02/1869 of 12 December 2002; ENI, press release IP/03/1345 of 6 October 2003; Austrian OMV, press release IP/05/195 of 17 February 2005; German E.ON Ruhrgas, press release IP/05/710 of 10 June 2005; GDF, press release IP/04/1310 of 26 October 2004; Algerian Government, press release IP/07/1074 of 11 July 2007.

[2] In the Gazprom case – started in March 2017 - the EC investigated practices that evolved the use of these two types of clauses and declared them as being anti-competitive due to the illegal partitioning of EU markets and the creation of significant barriers to trade in the EU. Subsequently, the EC adopted a decision imposing on Gazprom a set of obligations.

See EC press release, 24 May 2018, available at https://ec.europa.eu/commission/presscorner/detail/en/IP_18_3921 (last accessed in 7th November 2022).

[3] Following investigations conducted by several other NCA’s, in 2018 the EC launched an investigation to QatarEnergy - the largest exporter of LNG globally and to Europe - into whether it´s liquefied natural gas (LNG) supply deals with European utilities barred them from diverting shipments within the region. Interestingly, in 2022, QatarEnergy asked for the EU investigation to be dropped in order for them to supply emergency gas.

See EC press release, Brussels, 21 June 2018, Antitrust: Commission opens investigation into restrictions to the free flow of gas sold by Qatar Petroleum in Europe.

[4] In 2020 over three quarters of the EU's imports of natural gas came from Russia (43 %), Norway (21 %), Algeria (8 %) and Qatar (5 %). See Eurostat data available at https://ec.europa.eu/eurostat/cache/infographs/energy/bloc-2c.html (last accessed in 7th November 2022).

As mentioned in the REPowerEU Plan, Brussels, 18.5.2022 COM(2022) 230 final, p.2, “The public expects the EU and its Member States to follow through on the commitments made to reduce our dependence on Russian fossil fuels. 85% of people polled believe that the EU should reduce its dependency on Russian gas and oil as soon as possible.”

[5] Establishing common rules for the internal market in natural gas see the Directive 2009/73/EC and, before that, the Directive 2003/55/EC.

[6] See REPowerEU Plan, Brussels, 18.5.2022 COM (2022) 230 final, p. 2.

[7] This provision, however, is difficult to enforce practically since the measures must be approved unanimously within a joint decision framework.

Regarding the application of Article 192 (2) of the TFEU see judgement of 13 March 2019, Poland vs. European Parliament and Council of the EU, Case C‑128/17, ECLI:EU:C:2019:194, paragraph 28.

[8] See also Judgement of 22 September 2020, Austria vs. Commission, Case C‑594/18, ECLI:EU:C:2020:742, paragraph 48: “the second subparagraph of Article 194(2) TFEU provides that the measures adopted by the European Parliament and the Council are not to affect a Member State’s right to determine the conditions for exploiting its energy resources, its choice between different energy sources and the general structure of its energy supply, and does not preclude that choice from being nuclear energy.”

[9] See Judgement of 10 July 1984, Campus Oil, case C-72/83 and Judgement of 18 July 1984; Bulk Oil, case C- 174/84.

[10] See Judgement of 22 September 2020, Austria vs. Commission, Case C‑594/18, ECLI:EU:C:2020:742, paragraph 48; Judgement of 29 July 2019, Inter-Environnement Wallonie and Bond Beter Leefmilieu Vlaanderen, C‑411/17, EU:C:2019:622, paragraph 156 and judgment of 7 September 2016, ANODE, C‑121/15, EU:C:2016:637, paragraph 48.

[11] The Gazprom Clause was first included in Article 11 of the Directive 2009/73/EC and it refers to the certification requirements for a transmission system operator from third countries. Article 11(a) requires a foreign operator to comply with all and the same conditions as EU operators under Article 9, in particular unbundling, while the second requirement under Article 11(b) requires that the granting of a certification does not jeopardize the security of energy supply.

[12] In the case EU–Energy Sector, the panel rejected Russia's characterization of the Gazprom clause as de facto discrimination against Russian pipeline companies. However, it found that, for EU member states that committed to liberalizing pipeline services, the mechanism breached the national treatment obligation of the General Agreement on Trade in Services (GATS) by treating foreign companies less favorably than EU companies (which are not subject to review).

See Panel Report, European Union and Its Member States—Certain Measures Relating to the Energy Sector, paras. 7.1177, 7.1181, WTO Doc. WT/DS476/R (adopted Oct. 8, 2018) available at https://www.wto.org/english/tratop_e/dispu_e/476r_e.pdf (last accessed in 7th November 2022).

[13] This is the case of Malta; Cyprus and Sweden. See Article 20 of Regulation (EU) 2017/1938.

[14] See Article 82 (3) (b) of the proposal of Directive. Brussels, 15.12.2021, COM(2021) 803 final 2021/0425(COD).

* Nuno Cunha Rodrigues

Professor Associado da Faculdade de Direito da Universidade de Lisboa

Cátedra Jean Monnet