EU-Russia energy relations:

factors of insecurity

Vladimir Milov, Russia

Brussels, June 3rd, 2010

Russia and the EU energy profiles: poles apart

Russia EU

• Main source of European • Growing energy import

energy imports
• Energy policy agenda focused
on centralization of control,
nationalization, resource
nationalism, and use of
energy as a political tool
dependence
• Energy policy agenda focused
on liberalization, market
opening and promotion of
competition
Russian international energy behavior:
“reliability” in rhetoric, confrontation in reality
2004 • January gas supply disruption to Belarus due to price conflict

2005 • Gas supplies from Turkmenistan disrupted in Q1 2005 due to price conflict
• 10-year oil transportation contract with Kazmunaigaz (shipments of Kazakh oil to
Mazeikiu Nafta refinery in Lithuania) breached

2006 • January gas conflict with Ukraine

• Oil supply to Lithuania disrupted after sale of Mazeikiu Nafta refinery to Polish PKN
Orlen

2007 • January oil transit conflict with Belarus

2008 • Oil supplies to Czech Republic disrupted on the background of the U.S. missile
defense systems deployment negotiations
• Energy supplies to Georgia disrupted due to military conflict

2009 • January gas war with Ukraine

• Gas blockade of Turkmenistan
• Russia’s withdrawal from the Energy Charter Treaty in late 2009

2010 • January oil export duties conflict with Belarus

Russia’s traditional energy dominance area had became

a zone of permanent energy confrontation.
Eastern European and post-Soviet countries: most
exposed to risks of dependence on Russian gas supplies

Share of Russian natural gas in the primary energy consumption, %

Pola n d 7,3%

Slov en ia 7,4%

Rom a n ia 10,0%

Cr oa t ia 11,1%

Ser bia 11,1%

Bu lg a r ia 12,4%

Eston ia 16,6%

La t v ia 19,5%

Slov a kia 30,8%

Geor g ia 32,3%

Hu n g a r y 32,4%

Lit h u a n ia 34,0%

Ukr a in e 39,2%

A r m en ia 66,1%

Moldov a 71,7%

Bela r u s 75,7%

0% 20% 40% 60% 80% 100%

Source: BP Statistical Review of World Energy (primary energy consumption), Gazprom (gas imports by relevant countries)
…whereas Western Europe has a bit more room for
maneuver

Share of Russian natural gas in the primary energy consumption, %

Denmark 0,0%
Ireland 0,0%
Portugal 0,0%
Spain 0,0%
Sweden 0,0%
Switzerland 0,9%
France 3,8%
Belgium 6,2%
Netherlands 6,6%
Greece 7,3%
UK 8,9%
Germany 11,0%
Italy 11,4%
Austria 15,8%
Finland 16,1%

0% 10% 20% 30% 40% 50%

Source: BP Statistical Review of World Energy (primary energy consumption), Gazprom (gas imports by relevant countries)
Can Russia’s attempts to bypass Ukraine secure the
reliability of gas transit?

Structure of Russian gas export pipeline corridors, %

100%
8%
20%

26% 44%
Alternative
corridors
22%

50% Belarus
16%

66%
58%
40% Ukraine

0%
Today After Nord Stream-1 is After NS-1&2, South
build Stream, Blue-Stream-2
are build
Gazprom in difficulty: “fat years” wasted

Gazprom’s gas export price and capital expenditures in 2005-2010

500 50
European gas export price,
$/tcm (left axis)
400
Capex, $ billion (right axis) 40

300 30

200 20

100 10

0 0
2005 2006 2007 2008 2009 2010*

Source:Gazprom; * - Gazprom’s plan for 2010

Gazprom’s “fat years” wasted part 2

Gazprom’s investments in core business and financial acquisitions

in 2003-2007, billion USD
50
44,6
Capex in gas production
40 upstream

Financial acquisitions
30

22,2

20

10

Source: Boris Nemtsov and Vladimir Milov, “Putin and Gazprom”, Moscow 2008
Gazprom’s outdated oil-linked pricing policy: a great threat
to it’s own competitiveness in Europe

Share of various gas exporters in the European Union gas imports

in 2008-2009, %
50%

40% 2008
36,8%
34,7%
33,2% 33,0%
28,8% 2009
30% 26,1%

20%

10%
5,0%
2,4%

0%
Russia Norway Qatar Other exporters

Source:Eurostat
Medvedev’s 2009 energy initiative: a call for more
central planning

“Conceptual Approach to the New Legal Framework for Energy

Cooperation (Goals and Principles)” released on April 21st, 2009,
calls for:

• Recognition of “security of demand” (transparent and

predictable marketing) – in other words, central planning of
energy demand;
• Central planning of “future energy balance structure”;
• Replacement of free M&A process with regulated “asset swaps”;
• Replacement of universal third-party access principle with
separation of “transit countries” and imposing stricter
regulatory regime on them.
Is there a room for convergence?

• The Russia-Ukraine gas crisis of January 2009,

• The threat of new energy conflicts on the post-
Soviet space in the fall of 2009 – early 2010,
• The new Gosplan-like Medvedev’s energy initiative
backed by Russia’s decisive denial of the Energy
Charter Treaty ratification,
• Different interests of Eastern and Western
European countries,

…is there a room for convergence?...