The company behind the Nord Stream 2 gas pipeline is threatening to sue the EU if it's not allowed to avoid new regulations that it says endanger the billions of euros that have been invested in the project.

In a letter obtained by POLITICO, Nord Stream 2 CEO Matthias Warnig wrote to European Commission President Jean-Claude Juncker that if the pipeline is not eligible for a derogation from the new rules, "the measure would be discriminatory against [Nord Stream 2] as an investor" and the EU may be breaking an international treaty.

The EU's Gas Directive was revamped earlier this year and extends the bloc's gas liberalization rules to cover new offshore gas pipelines from non-EU countries. It's an effort to bring the contentious Russia-backed project — opposed by the Commission and many Central European countries but supported by Germany — under the EU's regulatory umbrella.

The pipeline is to run 1,200 kilometers from Russia to Germany, but the new rules would only apply to the section of Nord Stream 2 in German territorial waters, a stretch of 54km.

Nord Stream 2 argues it is eligible for a "derogation" that applies to pipelines that are already "completed" when the new law is expected to kick in this summer. It says it wants to be treated in the same way as other comparable projects.

That's sparked a battle over the definition of "completed."

"The difference between being able to benefit from a Derogation or not ... is significant" — Matthias Warnig, Nord Stream 2 CEO

A Commission spokesperson said: "The pipeline has to be ready for commercial operation at the date of entry into force of the amended directive in order to be treated as an existing pipeline under the new legislation ... It is questionable whether Nord Stream 2 will be operational before entry into force of the amended directive."

The company admits the project won't be operational by the summer, but still wants the EU to confirm it "will be treated as 'completed' and falling within the Derogation regime." Otherwise, it warned, the move "would clearly be unreasonable, arbitrary and discriminatory."

The letter, dated April 12, is a "notice of dispute to the EU" under the Energy Charter Treaty, an international agreement that sets rules for cross-border cooperation in the energy industry, including investment protection. The Nord Stream 2 company is headquartered in Switzerland. Both Switzerland and the EU are signatories of the treaty.

A lot is at stake

If the company's definition prevails, an EU member country — in this case Germany — would have the final say in granting a derogation. But in the Commission's interpretation, Nord Stream 2 is a new pipeline and could apply for an "exemption" through the German energy regulator and it would be up to Brussels to approve, reject or amend that request.

If Nord Stream 2 can't get what it wants, it would have to apply EU rules mandating that its only shareholder — Russia's Gazprom — can't be both the owner of the pipeline and shipper of the gas, and that other companies have to get access to the final section of the pipeline.

That could have big economic consequences for Nord Stream 2, which is why it argues that an unfavorable definition would be costly.

"The difference between being able to benefit from a Derogation or not ... is significant," Warnig wrote, arguing that the derogation would protect the expectations of its investors.

"Such concerns are not materially different for a 'completed', 'half-completed' or 'almost completed' pipeline. The problem is the same in all these scenarios, namely that considerable financial resources have been invested in infrastructure and investment risk undertaken and that the rules for owning and operating this infrastructure are suddenly fundamentally changed by new regulation."

Nord Stream 2 said it has already invested more than €5.8 billion into the planning and construction of the €10 billion project.

However, it began construction without first getting all the needed permits. It has already laid over 1,000 kilometers of pipeline, but still needs permission from Denmark. The Danish regulator has demanded it map out a new route, which is likely to delay the pipeline beyond its planned completion date of later this year.

The Commission did not reply to specific questions about the letter, in which the company asked for a response from Brussels by May 13.

Based on how satisfied Nord Stream 2 is with that answer, "the investor can then either initiate the dispute settlement proceedings and essentially ask that an investment tribunal awards damages caused by a possible violation of [the treaty]," or it can decide against this option, said Kim Talus, professor of energy law at the University of Helsinki.

Nord Stream 2 is meant to ship 55 billion cubic meters of gas a year from Russia to Germany under the Baltic Sea, doubling the capacity of the existing Nord Stream 1 pipeline. Gazprom has financial backing from five West European companies — Austria’s OMV, Anglo-Dutch Shell, France’s Engie, and Germany’s Uniper and Wintershall.