On 17 June the European Commission published its much-trumpeted proposal for a Regulation on the phase out Russian natural gas and oil imports.
Ever since March 2022 when it proposed in REPower EU for the import of Russian gas to be reduced by 70 percent before the end of that year, the Commission has mulled ways to do so.
The Regulation has two aims: first to enhance the monitoring of energy dependencies by re-enforcing existing reporting obligations on companies regarding gas contracts and second, and more controversially, to completely phase-out of Russian gas imports by January 1, 2026.
In particular, it proposes to prohibit all imports of natural gas, whether through pipelines or LNG, originating in or exported, directly or indirectly, from Russia as from 1 January 2028 whilst granting two limited exceptions to contracts concluded before the date of the proposal: (i) imports under short-term contracts to end by June 17, 2026 and (ii) imports under long term contracts to end by the end of 2027. As of today, EU is expected to import 16 bcm of Russian gas via Turk Stream and 20 bcm of LNG this year.
The Legal Basis for an Import Ban
The Commission has based the EU’s competence to adopt this Regulation on Articles 207 and 194 of the Treaty on the Functioning of the EU. Article 207 it is claimed, gives EU powers to prohibit imports of Russian gas and Article 194 gives the EU power to impose reporting obligations.
Article 207 TFEU establishes the common commercial policy at EU level. In other words, it gives exclusive competence to EU to conclude tariff and trade agreements with third countries with respect to trade in goods and services, intellectual property, foreign direct investment, export policy as well as to adopt measures to protect trade in cases of dumping and subsidies.
That provision does not explicitly refer to import bans, nor would it confer powers to override the EUs international commitments, for example under WTO law.
Finally, the CJEU has established that this Article cannot be used to interfere with the division of competences between the EU and the Member States in related fields, such as environment or energy. Energy is a shared competence and Member States are entitled under Article 194(2) to determine their own energy mix.
Nevertheless, the Commission is seeking to rely on Article 207 as it would enable the proposed Regulation to be adopted by a qualified majority of the EU’s 27 MS. All measures sanctioning trade adopted to date against Russia, Iran and other countries by the EU rely on other Treaty powers and have required a unanimous vote.
Faced with Slovakia and Hungary’s opposition to the proposed phase out, the Commission is proposing this contentious route – one which could pave the way for challenges before the Court of Justice of the EU if it is adopted. So far Slovakia and Hungary have held up the approval of the 18th sanctions package against Russia as a bargaining chip for the negotiation of this regulation.
The Council has now met to discuss whether Article 207 is the appropriate legal basis for the regulation. Other countries have, as expected, also raised concerns.
In fact in a letter sent on Monday 14 July , Commission President Ursula von der Leyen set out a series of proposed guarantees aimed at alleviating Slovakia’s concerns.
These included creating a task force to support and monitor Slovakia’s energy transition, developing a solution for cross-border oil and gas tariffs, and clarifying technical mechanisms — such as allowing spot market operations to adjust existing long-term contracts. Notably this letter states that the EC will “Stand ready to discuss legal matters with Slovakia and intervene, if necessary, during potential different litigation resulting from the implementation of the Regulation on phasing-out Russian gas”
Force Majeure?
Concerns as to potential litigation have indeed been expressed by energy companies who anticipate the risks of contractual disputes if existing long-term contracts are banned but could also face regulatory penalties if they do not comply with the new regulation. The Spanish government had suggested that the draft Regulation should include a provision on compensation.
Although the Commission asserts that force majeure provisions should be able to relied on to justify breaches of contracts, given the inherent complexity of gas contracts, this may be optimistic and over simplistic. Any such claims are likely to be disputed before courts or international arbitration tribunal by affected counterparties.
It should not be forgotten that several recent international arbitration tribunals have not recognized the merits of a defence of force majeure to justify the termination by Gazprom of its contractual obligations with leading oil and gas companies. It could be argued that LNG supplies are fungible and can be diverted to other non -EU markets.
Extensive compliance obligations
Finally, the EC regulation links energy security with extensive compliance obligations. Yet even if the proposal would lead to mandatory reporting obligations, an EU wide import ban will not dismantle existing infrastructure, such as Austria’s Baumgarten hub, which remains physically capable of receiving Russian gas via Slovakia.
This raises questions as to implementation and enforcement and the willingness of national authorities to undertake these tasks. Without a robust verification and certification system, Russian gas could be ‘re-labelled’ especially as enforcement may rely heavily on national authorities—leaving room for political divergence.
