Foreign Policy Program

Policy Brief
European Gas Policy in Trouble
by Dr. Jörg Himmelreich, Senior Transatlantic Fellow, The German Marshall Fund of the United States
After the match is before the match. This soccer wisdom describes exactly the situation of today’s European gas policy. The Ukrainian-Russian gas stand-off caused a two-week interruption of Russian gas supplies to Europe that left countries like Greece, Bulgaria, and Slovakia in the cold during a strong winter. As the EU sources 80 percent of its gas through the Ukrainian transmission company Naftygaz, this crisis revealed again, and with much further-reaching consequences than the one in January 2006, how vulnerable the EU is in its gas supplies from Russia—and how little prepared it still is to respond. The upcoming EU Summit (March 1012), will probably pass the “Third Gas Package” to foster the European gas market. The separation of gas transmission infrastructure from the supply and marketing business of the “vertically integrated” European gas giants, like ENI, Gaz de France, E.ON and RWE, and the creation of an independent Agency for the Cooperation of Energy Regulators (ACER) that coordinates the national pipeline policies of every single EU member state, shall both improve the conditions of a competitive gas market within the EU and strengthen the EU in its gas relations with Russia. For drawing the adequate “lessons learned” from that serious menace of European gas supply security, the EU will have to make some hard decisions. The quick response of “improving the supply security by improving the gas market integration and competition” along the lines of the “Third Gas Package” doesn’t seem to be sufficient alone.

Summary: The Ukranian-Russian gas stand-off caused a two-week interruption of Russian gas supplies to Europe that left countries like Greece, Bulgaria, and Slovakia in the cold during a strong winter and revealed again how vulnerable the European Union is in its gas supplies from Russia. Jörg Himmelreich suggests four hard decisions that must be made by the EU. Europe needs to address the varying dependencies on Russian gas within member states, the lack of interconnectivity within the market, discuss the need for a European common external energy policy, and establish of a European energy agency. Soccer wisdom tells us that after the match is before the match. This describes the contemporary European gas policy that needs improvement. The upcoming EU Summit provides the continent the opportunity to discuss this pressing issue.

1. Dependence on Russia
The EU imports 29 percent of its gas from the Russian majority-state-owned Gazprom, and European demand for gas should continue to grow. To meet the ambitious EU climate change policy goals of a 20 percent reduction in CO² emission levels by 2020, gas is replacing “dirty” coal as the electricity-generating fuel of preference. The share of Russian gas in the national energy consumption, however, varies sharply within the 27 EU member states. It depends on the share of gas in the national energy mix and on geography. Mediterranean Spain, Portugal, and Cyprus don’t source any gas from Russia. Finland imports 100 percent of its gas from Russia but, because of a more diverse energy mix, depends much less on Russian gas imports than Slovakia or Latvia, which import almost 100 percent from Russia with a gas share of almost 30 percent in their national energy mix. Germany, which imports almost 40 percent of its gas from Russia is, with 78.7 Mtoe (Million tons of oil equivalent), Europe’s biggest consumer of Russian gas. These different dependencies lead to very different relationships and interests with Russia among the 27 EU member states.

1744 R Street NW Washington, DC 20009 T 1 202 745 3950 F 1 202 265 1662 E info@gmfus.org

Foreign Policy Program

Policy Brief
2. Post-war gas transmission structures
The private energy companies from Western Europe that source gas from Russia are played off against each other in bilateral agreements with Gazprom as customers competing for Russian gas supplies. Those companies that have the best chances of being awarded the contract are the ones offering Gazprom shares in the European pipeline distribution network. This greed for the acquisition of stakes in European transmission networks, which in turn leads to direct access to the European end customer, is one reason among others for the ambitious price increases that Gazprom was claiming from Ukraine. Gazprom knows that Naftygaz is unable to pay this price, but it attempts to force Naftygaz to pay with assets, including stakes of its transmission network in Ukraine. Given all the confidentiality and opaqueness of the new Naftygaz–Gazprom agreement, Gazprom is close to getting some stakes in the Ukranian regional networks. In addition, Gazprom has been taking steps to undermine European attempts to find other energy sources, binding by contract alternative gas transport routes and suppliers from Central Asia and Algeria and those for liquefied natural gas (LNG) in Qatar and in North Africa. Russia even promotes a gas OPEC as a close cooperation of gas producers. Norway, as Europe’s second largest gas supplier, obviously has little interest in reducing gas prices by accelerating the exploration of its rich energy resources. not ratify the Energy Charter Treaty or the Transit Protocol, both of which it signed in 1994. It will not accept the demands made in those agreements: to make the structure and dealings of its state-owned companies transparent, and to allow Western companies to take majority stakes in the Russian transport networks. The European-Russian gas pipeline structure deepens the segmentation of the European gas market and individual countries’ relationship with Russia. The present pipeline structure in the EU is the result of bilateral agreements concluded by the national, state-owned energy groups following World War II. The majority of the pipeline infrastructures in Germany, Italy, Austria, and the East-European EU member states are still oriented toward Moscow. The main East-West corridors have few branches southward. A real pan-European pipeline network does not exist. The main impediment for an integrated European market is this lack of interconnectivity. Therefore, the EU needs to establish additional pipelines to complete the existing mainly East-West pipeline structure. In addition, the national gas storage infrastructures have to be improved, and a common set of rules has to be implemented regarding how many days of gas consumption the gas storage shall cover every EU state and under which emergency conditions one country has to supply additional gas to another. The improvement of the interconnectivity with the EU’s Eastern neighborhood and of the gas storage infrastructure and policies could work as a perfect tool of integration, too. Under an EU umbrella, European and U.S. companies should be engaged in buying into existing Ukrainian pipelines or future pipeline systems in the EU and its Eastern neighborhood.

“To meet the ambitious EU climate change goals of a 20 percent reduction in CO2 emission levels by 2020, gas is replacing ‘dirty’ coal as the electricitygenerating fuel of preference.”
There is no reason why Russia should give up this strategy anytime in the near future. It has benefited hugely from it, both in economic and foreign policy terms. Given the firm political leverage that the ownership of large stakes of the European pipeline network offers to Gazprom and the Kremlin, calls for a “de-politicization” of European-Russian energy relations appear to be rather utopian. Russia’s energy business, like in many other countries in the world, always had been politicized. Russia will

3. Supply security as a public good
Since the early 1990s, European energy policy consisted of privatizing national, state-owned energy groups and liberating the markets so as to achieve a greater security of energy supply through increased competition. But gas transport is technically viable only through pipelines. That might change to some little extent in the future, when the technology to liquefy gas makes LNG more economically competitive to gas. But LNG will substitute only for a small part of the gas transport by pipes. Thus, in the near future, a real competitive gas market remains rather incomplete given the high costs of additional infrastructure and, thus, creates only limited alternatives. That is why competition is

2

Foreign Policy Program

Policy Brief
making slow progress, and privatized oligopolies do not pursue any greater competition if there is no discrimination-free access to the distribution networks. Besides this, private European energy companies themselves have, in an oligopolistic energy market, little interest in increasing the competition by building 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 dependent from the Russian state-owned Gazprom. Therefore, the EU Commission should take up the initiative to encourage the European private gas companies to build additional transmission systems, regulate access, and 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 has ignored those that concerned foreign affairs. In the new Millennium, the European Union intends to focus on climate protection. However, the ambitious environmental objectives set by the EU Summit in March of 2007 can only be realized if they are supported by a long-term, secure, uninterrupted supply of oil and gas, on which the European economy depends, and if this supply is protected by a corresponding foreign policy. This means that the EU urgently needs a common external energy policy. Even the EU reform treaty signed in Lisbon leaves it to the individual EU member states to determine their national energy mix.

“The European Union must succeed in establishing a European Energy Agency, an institution with the authority to negotiate a European Energy Agreement with Russia on behalf of all European private energy groups and to permit the sale of European pipeline networks to Gazprom.”
This strategic security implication for the European gas market makes it so decisive that the European Union must succeed in establishing a European Energy Agency, an institution with the authority to negotiate a European Energy Agreement with Russia on behalf of all European private energy groups and to permit the sale of European pipeline networks to Gazprom. In March, the EU Summit will decide on the creation of the European Agency for the Coordination of Energy Regulators (ACER), which is politically the smallest common denominator among the 27 member states but falls sharply short of what is really needed. The EU Commission’s original proposal would have separated the large pipeline networks from the big European energy giants and subjected their management to a national transmission system operator (TSO), and to introduce and obligate EU permission for sales of pipeline stakes to third non-EU countries – called the “Gazprom Clause.” The German government, together with France, watered down this proposal. The pipeline network can still remain in the legal ownership of the energy company, but it has to be managed by an independent TSO that follows national rules. The energy company may sell its pipeline infrastructure to everyone, but it has to seek the approval of the national government in cases of conflict with European interest. The ACER is only created to coordinate the rules of the national TSOs to the best possible extent and has only an advisory authority to the EU Commission. Instead of such a political dwarf, the EU needs a European organization that has the virtual authority to design and implement a real pan-European pipeline policy. Such an agency should also be empowered to regulate national access to the pipeline network, to implement common

4. ACER as a European Energy Agency
Combining these diverging European interests into one joint energy policy vis-à-vis Russia is of the utmost importance. Moreover, the EU will need to adapt its energy policy to meet new global challenges. These no longer consist of improving the competition within the internal EU energy market only; the issue now is to protect the internal market from third parties outside of the EU, who neither follow the rules of fair competition nor adhere to the principles of a free market. This is not a protectionist violation of the rule of free competition but a necessary security framework to ensure the free market competition against those who abuse it for purely foreign political strategic objectives. Such a governmental security framework in and for the European gas market follows entirely the line of Washington arguments that in 2005 politically forced the management of the Californian Unocal to refuse the higher takeover bid of the Chinese state-owned oil giant CNOOC and to accept the smaller $1.5 billion Chevron bid.

3

Foreign Policy Program

Policy Brief
rules for the creation and management of national gas storage infrastructures and their use in emergency cases, and to design a central pan-European pipeline infrastructure. The main prerequisite for all of this, however, is that the EU member states must learn to give up their national legislative and administrative competencies in energy policy. Only by transferring their national energy policy competencies to a virtual European energy agency will they secure an uninterrupted supply of gas to the European Union—from Russia and elsewhere.
Jörg Himmelreich, Senior Transatlantic Fellow, GMF
Dr. Jörg Himmelreich is a non-resident senior transatlantic fellow of the German Marshall Fund of the United States (GMF). His special focus is on Russia, CIS, global energy security, South Caucasus, Central Asia, and transatlantic relations. Dr. Himmelreich comes to GMF from the German Foreign Office, where he served as a policy planner in 2004. In the year prior, Dr. Himmelreich worked with the DaimlerChrysler Board of Management, where he focused on political and economic relations in Russia, Central Asia, and Eastern Europe. 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 subsidiary 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,

4

Sign up to vote on this title
UsefulNot useful