Germany Faces EU Probe Over Controversial Gas Pipeline Loan

A spokesman of the German Economics Ministry in Berlin confirmed on Monday that the government had received a letter from Neelie Kroes, the European Union competition commissioner, asking Berlin to explain why it had offered a financial guarantee for the project. The spokesman added that the German government would send its response this week.

Kroes and her team want to find out whether the guarantee to cover 1 billion euros ($1.27 billion) of the project's costs constitutes state aid and if so, whether it was compatible with EU subsidy rules. The European Commission has the right to probe all large state aid payments made by EU governments and can block them or demand repayment if they are deemed illegal.

"The Commission has requested information from the German authorities so that we can verify that any state support is fully compatible with the EU state aid rules," a spokesman for Kroes told The Financial Times.

Dogged by controversy

Berlin granted the guarantee, the largest ever by the German government, last year. According to the contract's terms, Berlin would step in should Russian energy giant Gazprom default on a loan aimed at financing part of a 5 billion euro undersea gas pipeline linking Russia and Germany.

The guarantee is just the latest in a string of controversies to hit the North European Gas Pipeline (NGEP) that would allow Siberian gas to be pumped through the Baltic Sea to Germany. The NGEP is 51-percent owned by Gazprom, while German energy companies E.ON and BASF hold 24.5 percent each through their gas units.

Last year, former German Chancellor Gerhard Schröder was strongly criticized for deciding to head the pipeline project.

Poland and the Baltic states of Estonia, Latvia and Lithuania are angry for being left out of the agreement. Earlier this month Poland's defense minister compared the deal to a pact made between Nazi Germany and the Soviet Union because Poland was bypassed.

"Pipeline affair" turns murky

The "pipeline affair," as the issue is being called, raised hackles in Germany last month after revelations that the guarantee was agreed to last year on Oct. 24, a month after the election that ended Schröder's second term as chancellor and just before he was to accept a post as head of the supervisory board of the consortium that is to build the pipeline. Schröder will draw 250,000 euros a year for the job.

Schröder, however, has denied any conflict of interest, saying he had not known of a request for a guarantee nor of his government's decision to grant it. Gazprom also has said it will not draw the loan offered by Deutsche Bank and the state-owned KfW bank, nor take advantage of the guarantee.

But, several German politicians, including some from Schröder's own Social Democratic Party, are now calling for a parliamentary investigation into the affair.

The issue also seems to have left a bad taste in Russia's mouth.

Last month Russian daily Nezavisimaya Gazeta wrote that "Gerhard Schröder's business relationship with Gazprom is looking more and more unsavory... The image of the most important joint energy project for Europe is suffering as a result."