EXCLUSIVE / The bilateral agreements for the construction of the Gazprom-favoured South Stream gas pipeline – concluded between Russia, Bulgaria, Serbia, Hungary, Greece, Slovenia, Croatia and Austria – are all in breach of EU law and need to be renegotiated from scratch, the European Commission said today (4 December).

Speaking in the European Parliament, Klaus-Dieter Borchardt, director for energy markets at the European Commission, said the deals were in breach of EU law.

“The Commission has looked into these intergovernmental agreements and came to the conclusion that none of the agreements is in compliance with EU law," Borchardt said.

"That is the reason why we have told these states that they are under the obligation, either coming from the EU treaties, or from the Energy Community treaty, that they have to ask for re-negotiation with Russia, to bring the intergovernmental agreements in line with EU law,” he added.

The development comes at a moment of heightened sensitivity in EU-Russia relations. Last week European heads of state were dismayed by the decision of Ukrainian President Viktor Yanukovych to reject the signing of a partnership agreement that would bond relations between the former Soviet state and the EU.

Instead, Yanukovych has signalled Ukraine will bind itself closer to Russia, triggering mass protests at home in favour of closer ties with Europe.

Russian deals out of the window

The parliament event where Borchardt spoke was attended by high-level representatives, including Russian deputy minister for energy Anatoly Yankovski, Gazprom’s director-general for export Alexander Medvedev, and Serbian energy minister Zorana Mihajlovi?.

Borchardt explained that if these negotiations are not successfully conducted, then these countries had to denounce their agreements with Russia.

He explained that the EU's Energy Commissioner, Günther Oettinger, had just sent a letter to Russian energy minister Alexander Novak explaining the situation and asking him “to look positively” into the possibility of re-negotiating the deals with the countries concerned.

These include EU members Bulgaria, Hungary, Greece, Slovenia, Croatia and Austria, as well as Serbia, which is a member of the Energy Community, an EU-backed international agreement covering former communist countries of Eastern Europe.

“What I can say is the intergovernmental agreements will not be the basis for the construction or the operation of South Stream. Because if the member states or states concerned are not renegotiating, then the Commission has the ways and means to oblige them to do so. And South Stream cannot operate under these agreements,” Borchardt insisted.

Three conditions

The Commission official highlighted at least three major issues about the deals:

First, the EU's so-called network ownership 'unbundling' rules need to be observed, he said. This means that Gazprom, which is both a producer and a supplier of gas, cannot simultaneously own production capacity and its transmission network;

Secondly, non-discriminatory access of third parties to the pipeline needs to be ensured. There cannot be an exclusive right for Gazprom to be the only shipper; and

Thirdly, the tariff structure needed to be addressed.

“Is it possible to bring in line the construct of South Stream and the operational part of South Stream with these rules? I don’t know. I don’t know yet ,” the official repeated.

But even if negotiations are successful, work to accommodate South Stream with EU concerns would take time, Borchardt warned.

“Not months, maybe two years before we get there," he said.

Exemptions may be in the distant future

Exemptions from unbundling obligations are not ruled out, the official said. But such a window of opportunity would open up only when gas capacities would start to be allocated to the different segments of the pipeline, he explained, adding that such a moment would take place only in the remote future.

“It will not be an easy task; it needs a lot of mutual understanding, maybe also some new ideas that are not yet discussed. But I have to say in all openness and frankness that the South Stream pipeline will not operate on the territory of the EU if it is not in compliance of our energy law,” Borchardt stressed.

Asked by EURACTIV to reveal when the Commission had made the announcement to the EU countries concerned, Borchardt said this took place in several steps.

First, the EU executive had asked them to send to Brussels their intergovernmental agreements which were subsequently analysed by Oettinger's services. He said he had personally chaired a meeting on 18 October, at which he also invited a Gazprom representative, and that the countries were well aware of the situation since.

“They are fully informed of what I said today,” Borchardt assured.

'First welding' ceremonies

The Commission's announcement may embarrass at least two South Stream transit countries.

Bulgaria, which opened its doors to South Stream in April 2012 under a previous government, hosted a South Stream “first welding” ceremony on 4 November, in the village of Rasovo in the Montana municipality of Bulgaria, near the border with Serbia.

And Serbia did the same on 24 November in the village of Šajkaš, in Vojvodina. Both countries reportedly knew that they were promoting a project under agreements seen by Brussels as illegal.

Asked about the timeframe to re-negotiate the agreements, the Commission official remained vague. The first step, he said, is for the EU countries concerned to ask for a re-opening of the intergovernmental agreements with Moscow. Borchardt said the EU Executive hoped that Moscow would look at this positively.

But Russia has apparently no intention of re-opening those deals. Speaking at the event, Gazprom’s Medvedev stressed that “nothing could prevent the construction of South Stream”.

Borchardt replied by saying: “What the Commission would hardly accept is that you put to us a pipeline that is built, that’s in the landscape, and then handing over the baby to us and say – now it’s up to you, Commission, to find a solution how can we operate it."

Russian deputy minister for energy Anatoly Yankovski, who delivered a prepared speech shortly afterwards, said that Russia does not accept that EU rules should apply to trans-boundary projects such as pipelines, which are not stationed solely on EU territory.

He added that EU law could not prevail in EU-Russia relations, which are governed only by international law. In other words, the intergovernmental agreements concluded by Russia over South Stream were prevailing over other legal norms, Yankovski said.