Russia and Eastern European countries often clash over issues of natural gas supply – the allegation of unfair geopolitical influence by energy giant Gazprom is quickly at hand. Dr. Andreas Schröder shows how EU gas market policies might shift toward a rules-based approach rather than a system of political caprice.
Please note: The views expressed in this article are those of the author as a private person only and do not necessarily represent those of the organization for which the author works.
A common energy policy has been a centrepiece of the formation history of the European Union with the 1951 European Coal and Steel Community and the 1957 treaty of the European Atomic Energy Community. The two treaties show how relevant a common energy policy has been in the early days of the European Communities. Nowadays, the European Union calls for an ‘Energy Union’, implying an intensified collaboration of EU member states on energy matters. But what does this term mean in practice? The content of the current project is alienated from its original proposal brought forward by politicians such as Donald Tusk and colleagues. Talk of an energy transnational cooperation is more appropriate than any talk of a ‘Union’. Too many member states oppose centralized planning of energy supply as it was partly conceived by the early promoters of the Energy Union. The realities of European energy policies show how divergent the interests and strategies of European member states are. The energy supply mix remains one of the few untouched domains of national sovereignty in EU policy and there are few signs that member states are willing to sacrifice on this essential policy field, in spite of all contradicting talk. Besides renewable energy support policy, promotion of nuclear power and the preservation of coal power, natural gas supply is one of the fields where EU member states’ views are strongly divergent. In particular the question of the role of Russian gas in the EU supply mix and the different gas transport options remain debated. On the one side Hungarian Prime Minister Orban recently extended and agreed on favourable long-term gas supply conditions with Russia. Germany backs a new gas pipeline project linking Germany with Russia while other Eastern European states heavily push for further independence from Russian gas opposing all new pipeline links to Russia.
The re-ordering of Russian gas flows into Europe is driven by EU regulation and court arbitrations
More recently, signs of ‘saber-rattling’ appear on the Polish side indicating the possibility of a Polish-Russian clash on natural gas supply and transit. Poland imports roughly 9-10 bcm/year of its 16 bcm/y gas consumption from Russian Gazprom. Polish energy supplier PGNiG said in February 2017 it had filed a new claim to the Stockholm arbitration court, as part of an arbitration procedure it initiated in May 2015 (cf. Natural Gas World, 2017a). The aim is to change the pricing of a long-term gas supply contract signed between PGNiG and Gazprom in September 1996. For several years, PGNiG has been aiming at reducing the pricing terms. An earlier arbitration case taken by PGNiG against Gazprom in 2011 resulted in a discount of 15%. Not only does Polish PGNiG desire to greatly reduce Russian gas imports upon 2022 expiry of the long-term contract, but Poland also plans to not extend Russian gas transit to Germany via its Yamal pipeline system beyond 2020 and it opposes alternative routes circumventing Poland. A general revision of the Russian supply route strategy into Europe is possible around the 2020 expiry of the two transit contracts as well as the Russian Gazprom long-term gas supply contracts for Ukrainian company Naftogaz in 2020 and for the Polish energy supplier PGNiG in 2022. Both players have announced their desire of becoming independent of Russian gas supplies after contract expiry (Poland) or even before (Ukraine). 2016 was the first year where the official statistics of Ukraine declare it did effectively not consume any gas from Russia. The expectation is that this situation remains in place at least until a final ruling on the supply contract is published by the Stockholm international arbitration court. In 2017 we expect news on the arbitration case between Russian energy giant Gazprom and Ukrainian Naftogaz who have been litigating since June 2014 (RAPSI, 2016). The tribunal in Stockholm is said to come up with a verdict that encompasses ruling on both issues: the transit contract via Ukraine and the supply contract into Ukraine. In case the ruling on the take-or-pay obligations is positive to Gazprom, Ukraine may be obliged to offtake Russian gas at the agreed price until January 2020.
The market share of Russian gas in Europe increased considerably since 2012 but this article argues dependency on Russian gas has been reduced since. Source: Eurostat (2017) and own estimations.
The current case of OPAL regulation as litmus test for credibility of EU regulation
The EU regulation policy on the OPAL pipeline from East Germany to Czech Republic shall be seen in this context as it ties into the general picture of the future organisation of Russian gas flows into Europe. Upon accusation of the Polish supplier PGNiG issued in December 2016 on the EU regulation on the OPAL pipeline, the EU Court of Justice is expected to come up with a verdict on the question of whether this pipeline can be used by Russian supplier Gazprom above 50% of its capacity (cf. CEEP 2016, Yafimava 2016). Although capacity usage is a rather technical decision, the court will decide on the principle whether the EU Commission shall go forward with its tendency of adopting a rules-based regulation rather than a politicized regulation. As a recent paper of Oxford Institute points out, credibility of the EU in abiding to its own set rules is at stake in this issue (Yafimava, 2017). Clarity on the EU rules in the OPAL case will help finding a balanced position on all other topics at stake between EU and Gazprom. Yafimava (2017) even goes as far as stating that a rules-based approach on the OPAL regulation is more likely to deter the new Russian-German pipeline project NordStream II compared to a political regulation approach as supposedly favoured by the Polish plaintiffs. While future ruling on the OPAL pipeline and hence the viability of the NordStream II pipeline project remains uncertain at this stage, Strachota & Poplawski (2016) rightly point out how Nord Stream II and the inner German pipeline-extension, named EUGAL, are already in the phase of implementation – in spite of all the political debate and attached policy risk. Fears of Poland being faced with a ‘fait accompli’ are legitimate.
The geopolitical implications of infrastructure planning remain strong
The debate on new pipeline projects between Russia and the EU has been intense since years. The connection ‘South Stream’ via the Black Sea route was cancelled in 2014 during construction phase upon heavy internal EU resistance. The alternative 32-62 bcm/y Turkish Stream option is currently being built and Gazprom envisions increased usage of Southern European routes with the 20 bcm/y Trans-Adriatic Pipeline TAP between Albania & Italy or the Poseidon/ITG project between Turkey, Greece & Italy, as stated by Gazprom Chairman A. Medvedev during the January 2017 European Gas Conference in Vienna. On the Northern front, the 55 bcm/y Russian-German Nord Stream II pipeline via the Baltic Sea remains a realistic project at this stage, surrounded by a controversial political debate. Views opposing the NordStream II are often citing the contradiction of Nord Stream II with the EU set supply diversity strategy (Zachmann 2016; Riley 2016; Strachota & Poplawski 2016) while positive effects of the project for EU gas markets are stated by a number of primarily German authors (EWI, 2016; Fischer 2016; Grigorieva, 2016; Lang, Westphal, 2017). In debating these projects, the distinction between reliance and dependence on Russian gas clearly helps. While Russian imports account for roughly one third of European demand for both oil & gas, there is little talk on oil import dependency on Russia but a lot of focus on gas import dependency on Russia. This is because natural gas had fewer alternative suppliers than oil in the past. Meanwhile, the abundancy of liquefied natural gas LNG and increased regasification & storage capacities in Europe have brought about alternative supply options for natural gas as well. In the new setting, a differentiation of supply diversification and supply route diversification therefore helps to structure the debate, as proposed in Lang & Westphal (2017). The building of the Nord Stream II pipeline through the Baltic Sea is effectively a widening of route options rather than supply diversity. It is to some extent a question of who earns transit fees for the transport of Russian gas. Partly, the debate blends the EU supply strategy and its energy cooperation with Ukraine into the argumentation and mixes up reliability with supply diversity.
Germany could emerge as a central EU hub for natural gas markets
The Netherlands TTF market is currently the reference market for Continental European gas markets as it is the most liquid trading platform in this region. The importance of the Netherlands in producing gas caused the rise of the Netherlands as one of the prime suppliers of the European markets. These days may soon be over due to declining Dutch production volumes. The same holds for the United Kingdom, another gas market of big size which reached the status of reference market for European gas trading due to its past as big supplier. Competition to this role arises with Germany emerging as one of the main hubs for pipeline-based gas flows in Europe. An EWI report (2016) draws a picture of a Germany as main hub for the continent due to the large amount of incoming flows via Nord Stream I & II. The current picture with high pipeline-based flows from Russia & Norway shows how Germany is stabilizing as a relatively low-cost hub in the European market, partly pricing even below the Dutch TTF market. With Nord Stream II, Germany could gain as a transit hub, collecting significant transit revenues, possibly even becoming the major European gas hub, as claimed by Strachota & Poplawski (2016). A positive factor accruing to the EU is that gas prices could be kept at a production-cost based stable price environment as long as pipeline transport cost is under control by reliable grid operators. By increasing the supply route options, one would avoid exposure to the erratic transit pricing behaviour of individual countries (Bros, 2016). This in itself can be a gain to all European gas consumers, including Eastern European consumers.
EU weary of maligning Gazprom
In 2016 Russian gas sales to Europe & Turkey stood at record high levels of 179.3 bcm/y (total demand is ca. 500 bmc/y) and the start into 2017 shows a continued strong trend (Gazprom, 2017).
Charges of the EU Commission versus Gazprom on abusing its market position in several Eastern European member states are in place. Allegations in the pending anti-trust proceedings of the European Commission are manifold and they include the option of reselling gas and the abuse of market dominance by unfair pricing. Recent indications from EU officials point towards a more relaxed stance on the Gazprom antitrust case. The EU Commission Vice-President Sefcovic gave hints in stating the EU “should be less worried” about Gazprom than in the past given reduced EU energy consumption and greater gas-on-gas competition (Natural Gas World, 2017b). A settlement in the issue is expected but its timing is unclear. For the EU Commission this ruling can be another chance to maintain credibility and stick to rules-based market regulation. As Bochkarev (2016) puts it, if such ruling respects mutually accepted rules and each other’s interests, a depoliticization of European gas markets is possible. Clearly, a market-based rather than politicized energy market could be to the benefit of all, consumers and producers.
Summarized: The European energy market is far from being under Brussels’ centralized control. National sovereignty prevails and sometimes results in the energy market being taken hostage by political interests. The Nord Stream II pipeline project exposed the diverging interests of EU member states. With its future moves regarding the Gazprom antitrust case and regulatory decisions, the European Commission might strengthen a rules-based legal environment for EU gas markets.
Bochkarev (2017). Gazprom plays ball: the depoliticization of the European gas market. EnergyPost. http://energypost.eu/depoliticization-european-gas-market/
Bros (2016). Has Ukraine socred an own goal with ist transit fee proposal? Oxford Institute of Energy Studies.
CEEP (2016). OPAL pipeline increased capacity – a legal perspective. Centre Europe Energy Partners. http://www.ceep.be/opal-pipeline-increased-capacity-legal-perspective/
Eurostat (2017). European Statistics. http://ec.europa.eu/eurostat/web/energy/data/database
EWI (2016). Options for Gas Supply Diversification for the EU and Germany in the next Two Decades. EWI Research Scenarios.
Fischer (2016). Nord Stream 2: Trust in Europe. CSS Policy Perspectives Vol. 4/4, March 2016 and Reprint EnergyPost. http://energypost.eu/nord-stream-2-trust-europe/
Gazprom (2017). Gazprom’s gas exports to Europe hit an all-time high for the gas industry in 2016, totaling 179.3 billion cubic meters. http://www.gazprom.com/press/miller-journal/232849/
Grigorieva (2016). Nord Stream 2: Chancen und Dilemmata. Jacques Delors Institut. http://www.delorsinstitut.de/publikationen/jahre/2016/nord-stream-2-chancen-und-dilemmas/
Lang, Westphal (2017). Nord Stream 2 – Versuch einer politischen und wirtschaftlichen Einordnung. Stiftung Wissenschaft und Politik, S21.
RAPSI (2016). Swedish court’s ruling in Gazprom v. Naftogaz dispute expected prior to 31 March 2017. Russian Legal Information System. http://rapsinews.com/judicial_news/20161017/276980504.html
Riley (2016). Nord Stream 2: A Legal and Policy Analysis. Centre of European Policy Studies Special Report No. 151. https://www.ceps.eu/publications/nord-stream-2-legal-and-policy-analysis
Schäfer (2016). Stetige Belastung der Konjunktur. Ost-Ausschuss der Deutschen Wirtschaft, Pressemitteilung. http://www.ost-ausschuss.de/pressemitteilungen/2016
Strachota & Poplawski (2016). EUGAL: the unknown German branch of Nord Stream 2 will make Germany the key gas hub in Europe. Energy Post Blog. Source: http://energypost.eu/eugal-project-unknown-german-branch-nord-stream-2-will-make-germany-key-gas-hub-europe/
Natural Gas World (2017a). Poland Files Fresh Arbitration Claim Against Gazprom Over Gas Prices. http://www.naturalgasworld.com/pgnig-arbitration-claim-stockholm-gazprom-gas-prices
Natural Gas World (2017b). EU should be less worried about Gazprom: Sefcovic. http://www.naturalgasworld.com/eu-releases-2nd-energy-union-report-35720
Yafimava (2017). The OPAL Exemption Decision: past, present, and future. Oxford Institute of Energy Studies. https://www.oxfordenergy.org/wpcms/wp-content/uploads/2017/01/The-OPAL-Exemption-Decision-past-present-and-future-NG-117.pdf
Zachmann (2016).Nord Stream 2: a bad deal for Germany and Eastern Europe. BRUEGEL. http://bruegel.org/2016/07/nord-stream-2-a-bad-deal-for-germany-and-eastern-europe/