Legal Eye: The 'law' of natural gas supply

 "The establishment of genuine solidarity between Member States in major emergency supply situations is essential, even more so as Member States become increasingly interdependent regarding security of supply" - Preamble, Directive 2004/67/EC

Recent news headlines in Poland tend to suggest that Germany has pulled a 'fast one' (and may even have violated EU law) by entering into a bilateral agreement with Russia to deliver natural gas directly to Germany via a pipeline to be constructed at the bottom of the Baltic, resulting in the 'loss' of lucrative pipeline transit fees that otherwise would be payable to the Polish government if the pipeline were to cross Polish territory.

Nothing could be further from the truth. Germany, along with each Member State (Poland included), is free to enter into bilateral agreements with energy producing countries outside the EU to secure natural gas supplies. The Directive affirms the "sovereign rights of Member States over their own natural resources."

Constant supply

The Directive, expected to be adopted by each Member State no later than May 19, 2006, is intended to establish a minimum level of cooperation among Member States to ensure the uninterrupted supply of natural gas in the internal market, together with the creation of safeguards to address major supply disruptions at the Community level. For instance, the Directive calls for the creation of the Gas Coordination Group, comprised of representatives of the Member States, the gas industry and end users, which will be charged with coordinating the response of Member States to major interruptions in the supply of natural gas. The power of the Gas Coordination Group, however, is limited to providing 'guidance' to Member States and serving as a coordinator to facilitate the actions of one or more Member State at the national level. Member States are required to prepare individual national emergency plans to address major supply interruptions. To this end the Directive specifically permits two or more Member States to enter into bilateral agreements (as opposed to an EU wide agreement) between themselves in order to respond to potential supply interruptions.

On the homefront

The Directive affords individual households special protection, requiring Member States to "ensure that supplies for household customers are protected in the event of a partial disruption of natural gas supplies" within the Member State and further to ensure the supply of natural gas during extremely cold temperatures. The same protection may be extended to small- and medium-sized businesses, in addition to other end users who are unable to switch to other energy sources in the event of a natural gas supply interruption. And finally, the Directive empowers Member States to set minimum storage targets to protect against unexpected natural gas supply interruptions.

Revealing information

The Directive does not limit the right of one Member State to enter into a natural gas supply contract with a non-EU gas supplier. The only obligation involves giving notice of such contracts, if any, to the EU Commission on an annual basis.

Now, back to Russia. Russia needs the EU, including Poland, just as much (if not more) as the EU needs Russia with respect to natural gas supply. Why? At the start of 2004 almost 90 percent of all Russian natural gas exports were to Europe (EU and non-EU member states). In contrast, Russian gas (as a percentage of total EU gas consumption), represented only 19 percent of EU gas consumption during this same time period.

Paul Fogo is a senior attorney with Miller, Canfield, W. Babicki & Partners