This report reviews the recently proposed amendment to the Gas Directive, as put forward by the European Commission, which has been submitted to the European Parliament and the Council of the EU in November of 2017.
The proposed amendment suggests the extension of the Third Energy Package, to include gas import pipelines from third countries.
This would mean that these import pipelines would also become subject to the four key principles of

1. Third Party Access,
2. Unbundling,
3. Transparency, and
4. Tariff Regulation.

It seems that the amendment will only have a practical impact on pipelines entering the EU by sea, though clarification on this issue is needed.
The stated purpose of the amendment is to “complete” the Gas Directive and ensure that key objectives such as increasing supply competition and boosting security of supply are met. Many market participants have voiced concerns about the implications of the amendment, questioning whether it is necessary and whether, indeed, it might even have detrimental effects, leading to higher gas prices than would otherwise be the case.

This report examines these questions, against the backdrop of how the market is functioning today, what the practical consequences of the amendment would be and what other measures could be taken to improve gas market functioning, given the remaining market imperfections that can be observed.
We first examine the process of liberalization, and the extent of progress in the market to date. We find that, although liberalization has taken some time to develop, requiring several legislative revisions, judicial decisions and multilateral co-operative and co-ordinatory efforts to take effect, the market is now beginning to work very well. This view is shared by many observers and relevant regulatory bodies. For example, in its recent report, ACER in addition to concluding that liberalization, integration and competition are progressing well, lists a number of recommended actions to be taken to improve internal gas market functioning further. None of these recommendations include the extension of EU regulations onto third country import pipelines. Some exceptions still remain however, with some individual Member States still lagging behind in adopting the Gas Directive into national legislation and regulations.

Among these remaining market imperfections we note there is potential for further improvement through:

• Ensuring full and unequivocal enforcement of the Gas Directive and Network Codes in all Member States across the EU, to complete the single gas market and European energy union as intended.
• Encouraging continued internal improvement and integration via cooperation and expansion of cross-border links.
• Removing regulatory barriers, which can result in inadequate security of supply, to ensure efficient use of gas storage capacity.

The proposed amendment claims to seek the following benefits:

• Ensuring that competition is not distorted and that gas can flow freely and efficiently to wherever it is needed within the European Union.
• Ensuring that competition increases among suppliers importing gas to the European Union.
• Improving security of supply.

However, the proposed amendment seems to have a number of practical implications and consequences which make it most unlikely that it can be effective in achieving its stated objectives relating to the four key principles, given that:

• Third Party Access can have no practical effect on supplies whatsoever, as there are no alternative shippers. The Gas Directive does not impact on the market structures selected by the supply countries.
• Transparency at EU import entry-points has already been achieved via the Network Codes; and has no practical value upstream from those points.
• Unbundling may be superfluous, given that the affected underwater stretches of pipeline are already owned and operated by separate legal entities (often in joint venture entities).
• Tariff Regulation may be effective in disclosing the transport element of the delivered price of gas, but since the gas has to compete against market prices anyway, once delivered into the EU, this is unlikely to bring any actual consumer benefits.

Key concerns about the practical implications of the proposed amendment include:

• Enforcing the amendment’s terms onto infrastructure owned and operated by foreign, often state-owned entities will mean that Inter-Governmental Agreements will have to be negotiated, by individual Member States (or by the EU), with all the respective countries affected. This will be time-consuming, may add costs and risks leading to various different agreements, all having different terms and conditions. This may distort competition, especially given that the proposed amendment is not clear as to what conditions to apply. It may also add to project uncertainty, thus increasing capital costs.
• The lack of specified terms for granting exemptions and derogation also adds uncertainty and risk. The number of individual Member States and supplier nations involved means that, in all likelihood, terms and conditions would vary between agreements, leading to market distortions and unequal competition. There is also a risk that other, non-gas market considerations could influence negotiations, leading to further distortions.
• Existing supply contracts using affected pipelines will also have to be renegotiated, also potentially creating additional costs.
• It seems that the amendment is intended only to have an impact on underwater stretches of pipeline entering the EU, but this is unclear. If so, it only applies to a small subset of the infrastructure used to import gas to the European Union. This means that subsea pipelines may have a competitive disadvantage, by comparison to overland pipelines and LNG, for no discernible, logical reason.
• The amendment fails entirely to meet the objective of increasing competition among suppliers, as this is beyond the jurisdiction of the EU, and also determined by the constraints of geography and geology.
• There is a risk that, if the amendment increases uncertainty regarding new projects, new gas supplies that would otherwise be cost-competitive might be sold into non-European markets.
• There is no clarity about what would happen if Member States or the EU failed to reach agreement with the affected export and transit nations. It seems highly unlikely that the EU would be able to impose requirements for internal asset and supply fragmentation onto foreign state-owned entities.
• The fact that the amendment only applies to pipelines (not to LNG), and apparently only to subsea pipelines, is particularly troublesome, as some modes of transport may be treated preferentially to others. This creates competitive distortion and is not in line with free market principles.
• The issue of whether the amendment leads to an improvement in security of supply is a matter of perspective. We argue that security of supply in a competitive market is a matter of multiple access routes to many diverse sources. Additional infrastructural elements can only add to such access and thus can never make an adverse impact on security of supply, as long as the developer bears all the costs and all risk of under-utilization, which will be the case for almost all new EU pipeline projects. Regardless of the presence of infrastructure, buyers are always free to choose to buy from whomever they wish, at the lowest price, at the highest quality, or any other relevant criteria. To the extent that the amendment might seek to find ways to halt certain import projects in preference to others, it is in direct conflict with its own security of supply objectives.

The  combination of  all these issues prompts us to advise in favor of carrying out a deep and well thought through impact analysis before a decision is made by the Council of the EU and of the EU Parliament.