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Foreign Policy Program

Policy Brief
Summary: The Ukranian-Russian
European Gas Policy in Trouble
gas stand-off caused a two-week by Dr. Jörg Himmelreich, Senior Transatlantic Fellow,
interruption of Russian gas sup-
The German Marshall Fund of the United States
plies to Europe that left countries
like Greece, Bulgaria, and Slovakia
in the cold during a strong winter After the match is before the match. This security by improving the gas market
and revealed again how vulnerable soccer wisdom describes exactly the situ- integration and competition” along the
the European Union is in its gas ation of today’s European gas policy. The lines of the “Third Gas Package” doesn’t
Ukrainian-Russian gas stand-off caused seem to be sufficient alone.
supplies from Russia. Jörg Himmel- a two-week interruption of Russian gas
reich suggests four hard decisions supplies to Europe that left countries like 1. Dependence on Russia
that must be made by the EU. Greece, Bulgaria, and Slovakia in the cold
Europe needs to address the vary- during a strong winter. As the EU sources The EU imports 29 percent of its gas
ing dependencies on Russian gas 80 percent of its gas through the Ukrai- from the Russian majority-state-owned
nian transmission company Naftygaz, this Gazprom, and European demand for gas
within member states, the lack of
crisis revealed again, and with much fur- should continue to grow. To meet the
interconnectivity within the market,
ther-reaching consequences than the one ambitious EU climate change policy goals
discuss the need for a European in January 2006, how vulnerable the EU is of a 20 percent reduction in CO² emis-
common external energy policy, in its gas supplies from Russia—and how sion levels by 2020, gas is replacing “dirty”
and establish of a European energy little prepared it still is to respond. coal as the electricity-generating fuel of
agency. preference. The share of Russian gas in the
The upcoming EU Summit (March 10- national energy consumption, however,
12), will probably pass the “Third Gas varies sharply within the 27 EU member
Soccer wisdom tells us that after
Package” to foster the European gas market. states. It depends on the share of gas in
the match is before the match. The separation of gas transmission infra- the national energy mix and on geogra-
This describes the contemporary structure from the supply and marketing phy. Mediterranean Spain, Portugal, and
European gas policy that needs business of the “vertically integrated” Cyprus don’t source any gas from Russia.
improvement. The upcoming EU European gas giants, like ENI, Gaz de Finland imports 100 percent of its gas
Summit provides the continent France, E.ON and RWE, and the creation of from Russia but, because of a more diverse
an independent Agency for the Co- energy mix, depends much less on Russian
the opportunity to discuss this
operation of Energy Regulators (ACER) gas imports than Slovakia or Latvia, which
pressing issue.
that coordinates the national pipeline poli- import almost 100 percent from Russia
cies of every single EU member state, shall with a gas share of almost 30 percent in
both improve the conditions of a competi- their national energy mix. Germany, which
tive gas market within the EU and strength- imports almost 40 percent of its gas from
en the EU in its gas relations with Russia. Russia is, with 78.7 Mtoe (Million tons of
oil equivalent), Europe’s biggest consumer
1744 R Street NW For drawing the adequate “lessons of Russian gas. These different dependen-
Washington, DC 20009 learned” from that serious menace of cies lead to very different relationships and
T 1 202 745 3950 European gas supply security, the EU will interests with Russia among the 27 EU
F 1 202 265 1662 have to make some hard decisions. The member states.
E quick response of “improving the supply
Foreign Policy Program

Policy Brief
2. Post-war gas transmission structures not ratify the Energy Charter Treaty or the Transit Protocol, both
of which it signed in 1994. It will not accept the demands made
The private energy companies from Western Europe that source in those agreements: to make the structure and dealings of its
gas from Russia are played off against each other in bilateral state-owned companies transparent, and to allow Western com-
agreements with Gazprom as customers competing for Russian panies to take majority stakes in the Russian transport networks.
gas supplies. Those companies that have the best chances of be-
ing awarded the contract are the ones offering Gazprom shares The European-Russian gas pipeline structure deepens the seg-
in the European pipeline distribution network. This greed for mentation of the European gas market and individual coun-
the acquisition of stakes in European transmission networks, tries’ relationship with Russia. The present pipeline structure
which in turn leads to direct access to the European end custom- in the EU is the result of bilateral agreements concluded by the
er, is one reason among others for the ambitious price increases national, state-owned energy groups following World War II.
that Gazprom was claiming from Ukraine. Gazprom knows that The majority of the pipeline infrastructures in Germany, Italy,
Naftygaz is unable to pay this price, but it attempts to force Austria, and the East-European EU member states are still ori-
Naftygaz to pay with assets, including stakes of its transmission ented toward Moscow. The main East-West corridors have few
network in Ukraine. Given all the confidentiality and opaque- branches southward.
ness of the new Naftygaz–Gazprom agreement, Gazprom is close
to getting some stakes in the Ukranian regional networks. In A real pan-European pipeline network does not exist. The main
addition, Gazprom has been taking steps to undermine Euro- impediment for an integrated European market is this lack of
pean attempts to find other energy sources, binding by contract interconnectivity. Therefore, the EU needs to establish additional
alternative gas transport routes and suppliers from Central Asia pipelines to complete the existing mainly East-West pipeline
and Algeria and those for liquefied natural gas (LNG) in Qatar structure. In addition, the national gas storage infrastructures
and in North Africa. Russia even promotes a gas OPEC as a close have to be improved, and a common set of rules has to be imple-
cooperation of gas producers. Norway, as Europe’s second largest mented regarding how many days of gas consumption the gas
gas supplier, obviously has little interest in reducing gas prices by storage shall cover every EU state and under which emergency
accelerating the exploration of its rich energy resources. conditions one country has to supply additional gas to another.
The improvement of the interconnectivity with the EU’s Eastern
“To meet the ambitious EU climate neighborhood and of the gas storage infrastructure and poli-
cies could work as a perfect tool of integration, too. Under an
EU umbrella, European and U.S. companies should be engaged
change goals of a 20 percent reduction in in buying into existing Ukrainian pipelines or future pipeline
systems in the EU and its Eastern neighborhood.
CO2 emission levels by 2020, gas is
3. Supply security as a public good
replacing ‘dirty’ coal as the electricity-
Since the early 1990s, European energy policy consisted of
generating fuel of preference.” privatizing national, state-owned energy groups and liberating
the markets so as to achieve a greater security of energy supply
There is no reason why Russia should give up this strategy through increased competition. But gas transport is technically
anytime in the near future. It has benefited hugely from it, both viable only through pipelines. That might change to some little
in economic and foreign policy terms. Given the firm politi- extent in the future, when the technology to liquefy gas makes
cal leverage that the ownership of large stakes of the European LNG more economically competitive to gas. But LNG will sub-
pipeline network offers to Gazprom and the Kremlin, calls for a stitute only for a small part of the gas transport by pipes. Thus,
“de-politicization” of European-Russian energy relations appear in the near future, a real competitive gas market remains rather
to be rather utopian. Russia’s energy business, like in many other incomplete given the high costs of additional infrastructure and,
countries in the world, always had been politicized. Russia will thus, creates only limited alternatives. That is why competition is

Foreign Policy Program

Policy Brief
making slow progress, and privatized oligopolies do not pursue “The European Union must succeed in
any greater competition if there is no discrimination-free access
to the distribution networks. Besides this, private European establishing a European Energy Agency, an
energy companies themselves have, in an oligopolistic energy
market, little interest in increasing the competition by building institution with the authority to negotiate a
additional transmission infrastructure or LNG terminals. On the
other hand, supply security is a public good with public interest,
and the European gas companies are in various degrees depen-
European Energy Agreement with Russia
dent from the Russian state-owned Gazprom. Therefore, the
EU Commission should take up the initiative to encourage the
on behalf of all European private energy
European private gas companies to build additional transmis-
sion systems, regulate access, and permit the sale of European
groups and to permit the sale of European
pipeline stakes to a politicized Gazprom. Thus far, the European
Union has focused solely on its internal energy supply issues and pipeline networks to Gazprom.”
has ignored those that concerned foreign affairs.
This strategic security implication for the European gas mar-
In the new Millennium, the European Union intends to focus ket makes it so decisive that the European Union must succeed
on climate protection. However, the ambitious environmental in establishing a European Energy Agency, an institution with
objectives set by the EU Summit in March of 2007 can only be the authority to negotiate a European Energy Agreement with
realized if they are supported by a long-term, secure, uninter- Russia on behalf of all European private energy groups and to
rupted supply of oil and gas, on which the European economy permit the sale of European pipeline networks to Gazprom.
depends, and if this supply is protected by a corresponding In March, the EU Summit will decide on the creation of the
foreign policy. This means that the EU urgently needs a com- European Agency for the Coordination of Energy Regulators
mon external energy policy. Even the EU reform treaty signed in (ACER), which is politically the smallest common denominator
Lisbon leaves it to the individual EU member states to determine among the 27 member states but falls sharply short of what is re-
their national energy mix. ally needed. The EU Commission’s original proposal would have
separated the large pipeline networks from the big European
4. ACER as a European Energy Agency energy giants and subjected their management to a national
transmission system operator (TSO), and to introduce and obli-
Combining these diverging European interests into one joint ener- gate EU permission for sales of pipeline stakes to third non-EU
gy policy vis-à-vis Russia is of the utmost importance. Moreover, countries – called the “Gazprom Clause.” The German govern-
the EU will need to adapt its energy policy to meet new global ment, together with France, watered down this proposal. The
challenges. These no longer consist of improving the competition pipeline network can still remain in the legal ownership of the
within the internal EU energy market only; the issue now is to energy company, but it has to be managed by an independent
protect the internal market from third parties outside of the EU, TSO that follows national rules. The energy company may sell its
who neither follow the rules of fair competition nor adhere to the pipeline infrastructure to everyone, but it has to seek the approv-
principles of a free market. This is not a protectionist violation of al of the national government in cases of conflict with European
the rule of free competition but a necessary security framework to interest. The ACER is only created to coordinate the rules of the
ensure the free market competition against those who abuse it for national TSOs to the best possible extent and has only an advi-
purely foreign political strategic objectives. Such a governmental sory authority to the EU Commission. Instead of such a political
security framework in and for the European gas market follows dwarf, the EU needs a European organization that has the virtual
entirely the line of Washington arguments that in 2005 politically authority to design and implement a real pan-European pipeline
forced the management of the Californian Unocal to refuse the policy. Such an agency should also be empowered to regulate
higher takeover bid of the Chinese state-owned oil giant CNOOC national access to the pipeline network, to implement common
and to accept the smaller $1.5 billion Chevron bid.

Foreign Policy Program

Policy Brief
rules for the creation and management of national gas storage Jörg Himmelreich, Senior Transatlantic Fellow, GMF
infrastructures and their use in emergency cases, and to design a
central pan-European pipeline infrastructure. Dr. Jörg Himmelreich is a non-resident senior transatlantic fellow of
the German Marshall Fund of the United States (GMF). His special
The main prerequisite for all of this, however, is that the EU focus is on Russia, CIS, global energy security, South Caucasus,
member states must learn to give up their national legisla- Central Asia, and transatlantic relations. Dr. Himmelreich comes to
tive and administrative competencies in energy policy. Only GMF from the German Foreign Office, where he served as a policy
by transferring their national energy policy competencies to planner in 2004. In the year prior, Dr. Himmelreich worked with the
a virtual European energy agency will they secure an uninter- DaimlerChrysler Board of Management, where he focused on political
rupted supply of gas to the European Union—from Russia and and economic relations in Russia, Central Asia, and Eastern Europe.
elsewhere. He previously served as director of investment banking for media and
communications for the London office of European commercial bank
WestLB, having established and directed the bank’s Moscow subsid-
iary from 1996 to 2000. Dr. Himmelreich has also held appointments
as head of privatization of the construction industry at the Federal
German Trust Agency, as a junior professor at the Institute for Public
Law at the Free University of Berlin.a Studies, and has been a visiting
professor at the University of California.

About GMF

The German Marshall Fund of the United States (GMF) is a

nonpartisan American public policy and grantmaking institution
dedicated to promoting greater cooperation and understanding
between the United States and Europe. GMF does this by supporting
individuals and institutions working on transatlantic issues, by
convening leaders to discuss the most pressing transatlantic themes,
and by examining ways in which transatlantic cooperation can
address a variety of global policy challenges. In addition, GMF
supports a number of initiatives to strengthen democracies. Founded
in 1972 through a gift from Germany as a permanent memorial to
Marshall Plan assistance, GMF maintains a strong presence on both
sides of the Atlantic. In addition to its headquarters in Washington,
DC, GMF has seven offices in Europe: Berlin, Bratislava, Paris, Brussels,