Is Ukraine a “Stranger” to the EU? OPAL Case

In their recent contribution to the Global Trust Working Paper Series, Professor Eyal Benvenisti and Dr. Sivan Shlomo Agon raise one conspicuous, though rarely asked, question within a broader topic of state sovereignty in a globalised world. They wonder how sovereign decision-making powers can be restrained in the face of interests of “strangers”, i.e. third countries, as well as natural and legal persons, to which the effects of national policies “radiate” without allowing them to hold the decision-makers politically accountable. The authors make the first proposition that:

“international courts can and in fact do play a role in promoting the duties of states towards strangers affected by their policies, thereby alleviating some of the democratic and accountability deficits associated with globalization” (p.2).

Their second proposition is that international courts have developed ways to account for the “interests of affected others from within and outside” their host systems. Both propositions are then tested against the ample practice of the WTO dispute settlement system.

The article echoes well in the universe of “global administrative law” (GAL), i.e. a normative paradigm promoted by Professor Benvenisti which introduces practices of accountability (transparency, good process, reasoned decision-making, and basic legality) in what would otherwise be a non-democratic process of global administration. (For early conceptualizations of GAL, see the EJIL’s symposium issue).

The article is also provocative as it resonates far beyond the ambit of the WTO law. The present note offers to look for the advanced propositions in a group of energy-related cases currently pending before the Court of Justice of the EU (CJEU).

Admittedly, international energy law is rarely scanned for general international law trends and patterns. This may be due to the highly technical complexity of the underlying field of study, combined with the traditional view of energy as a nation state prerogative (recall General Assembly resolution 1803 (XVII) of 14 December 1962 “Permanent sovereignty over natural resources”). Yet, the intensity of present-day energy cooperation, spurred by critical socio-economic and even geopolitical needs, has effectively isolated exclusively national areas of regulation (e.g., access to upstream energy resources) and produced a layer of new, inherently international rules of community building.

In Europe, this resulted in the creation of the Energy Community, an inter-governmental organization of which both EU and non-EU countries (e.g. Ukraine) are members. The preamble of the Treaty establishing the Energy Community speaks of the resolve “to establish among the Parties an integrated market in natural gas and electricity, based on common interest and solidarity”. Its Article 2 sets the task of creating “a stable regulatory and market framework” and “a single regulatory space”. This direction is reinforced by Articles 6 (equivalent of Article 4(3) TEU espousing the duties to actively promote, facilitate and refrain from undermining the community) and 18 (equivalent of Articles 101-102, 107 TFEU related to competition). For non-EU countries which agree to implement the EU’s energy acquis, the Energy Community is an important promise of integration and solidarity. For Ukraine, e.g., this participation equals a strategic political choice (in the face of historical energy dependence on Russia).

Nevertheless, between December 2016 – March 2017 CJEU was seized with three separate actions (T-849/16, T-883/16 and T-196/17), each requesting annulment of the European Commission’s decision of 28 October 2016. Applicants in all three cases plead the lack of “regardingness” towards Ukraine on the part of the EU (represented by the European Commission). In addition, two applicants – state-owned Naftogaz of Ukraine (Naftogaz) and PGNiG Supply & Trading (PST) – effectively seek “regardingness” from the court itself.

The challenged Commission’s decision relates to the regulatory regime of the OPAL pipeline, which runs from the entry point Lubmin in the north of Germany to the exit point Brandov near the German-Czech border. OPAL carries natural gas arriving exclusively through Nord Stream. The latter is a pair of sub-marine pipelines commissioned in 2011-2012 as the third route to bring Russian gas to the EU; Nord Stream is 51% owned by Russian PJSC Gazprom, which also exerts joint control over OPAL. The first, traditional route for these deliveries has been the Ukrainian gas transmission system, which, since 1991, belongs to the state of Ukraine and is operated by Naftogaz Group. The second route (Yamal-Europe) was finished in 2006 and remains in joint ownership of Gazprom and Polish incumbent PGNiG, which the European Commission qualified as joint control for the Third Energy Package purposes. From the Ukrainian perspective, the amassment of alternative delivery routes for Russian gas has been part of Russia’s strategy to strip Ukraine off the valuable gas transit revenues as well as other advantages (geopolitical, security, etc.) of maintaining a critical connection to Europe and the EU in particular.

Nord Stream has so far escaped the EU regulation (as highlighted in the European Commission’s position on application of the EU law to the analogous Nord Stream 2 project).

In 2009, OPAL was granted an exemption from certain EU law requirements (third-party access, tariff regulation, unbundling), conditioned upon a limitation on gas deliveries at Brandov by dominant undertakings Gazprom and RWE. This Commission decision was motivated by competition concerns, and the dominant undertakings were given an opportunity to lift this limitation by offering a portion of gas volumes to the market. Since this chance was never exploited, the limitation effectively prevented Gazprom and its affiliates from bringing additional gas through Nord Stream. This meant that gas volumes continued to flow through other transit routes, including Ukraine where there is no deficit of available transport capacity.

By the challenged decision, the Commission authorises changes to the 2009 regime of OPAL causing the increase in gas deliveries through Nord Stream. Ukraine fears that these additional volumes are diverted from the Ukrainian route, thus undermining the war-torn country’s weakened financial stance, and its security of supply situation, as well as basically negating the significance of recent years’ fast-forward reforms in its gas sector. For Ukraine, the situation is dire, as the challenged decision corresponds in time with intensive works on the Turkish Stream, another gas pipeline sponsored by Gazprom to diminish gas transit volumes through Ukraine.

In these circumstances, PST, the Republic of Poland and Naftogaz argue before the CJEU that in adopting the challenged decision Ukrainian interests were not taken into account. While PST refers to the default on the obligation to consult on infrastructure developments under Article 274 of the Ukraine-EU Association Agreement, Poland and Naftogaz rely on the Energy Community Treaty as forming the basis for such a duty of consideration. More specifically, Naftogaz claims that when applying the EU’s Directive 2009/73/EC, the Commission has to account for the impact of its decisions on competition, security of supply and market efficiency in the Energy Community (i.e. Ukraine).

Interestingly, the European Commission itself mentions certain interests of Ukraine and the Energy Community in the challenged decision. Yet it has apparently done so without prior interchanges with the Ukrainian side.

In addition, PST and Naftogaz seek access to the court through Article 263, para four TFEU. Since the challenged decision does not address them directly, they need to prove that it is of “direct and individual concern to them”. This clausula (partially covered by the Plaumann test) is universally famous for the high legal threshold for private parties. Moreover, the European Commission’s decision at hand was made based on EU law and relates to the EU-based infrastructure. However, it has a real chance of objectively affecting the two claimants. For instance, Naftogaz (as a group of companies) produces the bulk of gas in Ukraine, supplies all segments of the Ukrainian market, currently operates the gas transit contract with Gazprom (under which the Ukrainian gas transmission system is contracted), procures gas on EU markets and ensures the country’s security of gas supply. State-owned Naftogaz receives revenues from gas transit through Ukraine and critically depends on access to Western gas markets, which is now enabled by physical reverse flows from Slovakia, Hungary and Poland (while virtual reverse flows are still obstructed by Gazprom) dependent on forward transit flows of Russian gas.

More details on the case unfortunately could not be disclosed now. But in words of Benvenisti/Agon, CJEU functions within a specific treaty regime and is:

“expected not merely to resolve disputes, but to promote the regime’s underlying goals and interests, overcome international cooperation problems, and keep states within a particular normative community” (p.7).

CJEU could have the chance to pronounce on whether the Energy Community in fact promises a duty of consideration, when and how this duty should be exercised, and whether there is a priority of interests compared to other “strangers” (e.g., Russia). The proceedings could also test the robustness of the court’s approach towards locus standi in such globalised cases. Ultimately, the disputes may be instrumental in uncovering the CJEU’s role in democratisation of global governance, especially in the immediate vicinity of the EU.

Disclaimer: While the author currently represents one of the litigants, thoughts and conclusions given here are without prejudice to the party’s position in the proceedings and belong to the author alone.