Key Issues in EU-Russia Energy Relationsa

Conference on EU-Russia RelationsSt Petersburg State University

28th June 2016

Dr Jack Sharples

European University of St Petersburg

https://eu-spb.academia.edu/JackSharples

Contemporary Research on EU-Russia Energy Relations

• This presentation will highlight the three most important issues in contemporary research on EU-Russia energy relations:

1. The EU antitrust investigation into Gazprom

2. Nord Stream

3. Transit of Russian gas via Ukraine to the EU

• Material is derived from the Gazprom Monitor, which is published monthly by the European Geopolitical Forum (Brussels)

European Commission Antitrust Investigation into Gazprom

• Sep 2011: Investigators raided the offices of energy companies in 10 EU member states

• Sep 2012: Investigation formally launched

– Gazprom suspected of breaching Articles 101 (restriction of competition) and 102 (abuse of dominant position) of the Treaty on the Functioning of the EU (TFEU)

• Apr 2015: ‘Statement of Objections’ issued by EC

• 21st Sep 2015: Gazprom proposes out-of-court settlement

• 28th Sep 2015: Gazprom formal response to SoO

• As of June 2016, talks remain ongoing

Timeline of the Investigation

• European Commission ‘Statement of Objections’:

– First, Gazprom may be hindering cross-border gas sales, by preventing the re-export of imported gas (‘destination clauses’ in contracts)

– Second, Gazprom may have imposed unfair prices on its customers, and may have used formulae linking the price of gas to oil prices in order to do so. This includes charging unreasonably high prices for some countries and lower countries for others, despite having similar supply (e.g. transportation) costs

– Finally, Gazprom may have abused its dominant position by making the supply of gas “conditional on obtaining unrelated commitments from wholesalers concerning gas transport infrastructure”

EU Antitrust Investigation in Gazprom

• European Commission ‘Statement of Objections’:

– Regarding 1st point, Gazprom removed destination clauses from its supply contracts with customers in Western Europe almost a decade ago

– Comments from representatives of Gazprom & EC suggest Gazprom is prepared to do the same in Baltic, Central, and SE Europe as well

– Regarding the 3rd point, since the abandonment of South Stream and sale of its share in Amber Grid (Lithuania), Gazprom appears to be separating wholesale gas trading from infrastructure negotiations

– Which means that pricing remains the key issue

Analysing The Case

• European Commission ‘Statement of Objections’:

– European Commission is not opposed to oil-indexed prices per se

– It is their use in contractual formulae that result in higher prices for some countries than others, despite similar delivery costs

– Gazprom has consistently argued that this is normal, that companies with a diverse portfolio of suppliers may negotiate a better price than a company with a limited range of suppliers – It all depends on the extent of market development in the given country

– E.g. Lower price for Lithuania after launch of Klaipeda LNG

– Key question: Is this abuse of monopoly? If so, can the EC decide upon a ‘fair market price’ for countries without a developed gas market?

Analysing The Case

Nord Stream II

• Nord Stream constructed in two phases:

– 1st line: Nov 2011; 2nd line: Oct 2012

• Final shareholder structure:

– Gazprom (51%); BASF Wintershall (15.5%); E.On (15.5%); Nederlandse Gasunie (9%); GDF Suez (9%)

• Nord Stream feeds into two pipelines, OPAL and NEL

– If exemption is not granted by European Commission, 50% of OPAL & 35% of NEL must be reserved for TPA

– This limits Gazprom’s ability to use Nord Stream at full capacity

Nord Stream

Russian Gas Deliveries to Europe: Routes (bcm p.a)

114.4118.0

109.5

129.9

116.2

125.4

83.786.6

66.569.2

45.651.8

30.8 30.8 31.837.1 36.6

36.0

0.0 0.6

11.3

23.5 33.9

37.7

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

2010 2011 2012 2013 2014 2015

Total Ukraine Belarus Nord Stream

Share of Russian Gas Deliveries to Europe

73.1% 73.4%

60.7%

53.3%

39.3% 41.3% 42.7%

26.9% 26.1%29.1% 28.6%

31.5%

28.7% 27.8%

0.0% 0.5%

10.3%

18.1%29.2%

30.0%29.5%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

2010 2011 2012 2013 2014 2015 2016 Q1

Ukraine Belarus Nord Stream

• Sep 2015: NS-II shareholder agreement signed:

– Gazprom (50%), Wintershall, E.On, ENGIE, OMV, and Shell (10%)

• Issue of access to OPAL & NEL not yet resolved

• Gazprom ‘abandoned’ NS-II in Jan 2015, and ‘revived’ the project in June 2015 to put pressure on Turkey during negotiations over Turkish Stream

• With TS effectively abandoned, does Gazprom need NS-II?

• What would be the impact of NS-II on gas transit via Ukraine?

• Implications for European energy security?

Nord Stream II – Key Questions

Gazprom and Ukraine

• Gazprom-Naftogaz contract agreed in January 2009:

– 10 years, oil-indexed, 52 bcm 80% TOP, 20% price discount in 2009

– Price of Brent Crude rebounded from $43 to $76 Jan ‘09-Jan ’10

– Higher oil price + end of discount = High prices for Naftogaz

• Kharkhiv Accords (‘Gas For Fleet’) of Apr 2010:

– Customs Duties on Russian gas exports to Ukraine ($100 per mmcm) cancelled in exchange for Sevastopol lease extension

• Volume of imports vs. TOP obligation also a problem:

– Naftogaz imports from Gazprom far below TOP obligation

– Impact of economic recession in Ukraine 2009-10

Roots Of The Dispute: A Perfect Storm

Gazprom Exports To Ukraine, BCM (2003-2015)

26.0

34.3

37.6

59.0 59.256.2

37.836.5

44.8

32.9

25.8

14.5

6.1

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

• Discounts were offered & then cancelled during winter 2013-14

• Gazprom switched to ‘pre-payment’ and Naftogaz suspended imports of Russian gas (16th June 2014)

• Both sides file for arbitration (July 2014) – Verdict in 2017?

• Winter Package (Oct 2014 to March 2015)

• Naftogaz suspended imports from Gazprom on 1st July 2015

• Imports briefly resumed 12th Oct-23rd Nov 2015

• Both sides now effectively ignoring the existing contract with regard to TOP volumes and prices/short-term discounts

• Both sides remain committed to stable gas transit

The Dispute Deepens (2013-16)

• Gazprom no longer rules out transit via Ukraine after 2019:

– "We will never sign a contract on unacceptable terms… We still have 4.5 years. We will hold corresponding negotiations with our Ukrainian partners before the contract expires"

– Turkish Stream frozen, unlikely to be revived in near future

– NS-II unlikely to be launched by 2019 even if it is implemented

• The next 5 years are likely to see the division of Russian gas exports to Europe into two groups:

– Northern: To North-West Europe via Nord Stream and Belarus

– Southern: Via Ukraine to Central and South-East Europe

Prognosis: Ukrainian Gas Transit

Conclusions

• EU antimonopoly investigation into Gazprom: Pricing remains the key issue, and a final decision by the EC will have significant impact on Gazprom and the European gas market

• Nord Stream reduced transit via Ukraine, and divided Gazprom’s European customers into ‘North’ and ‘South’ – NS-II would strengthen this divide, but how to overcome problem of OPAL/NEL?

• Gazprom & Naftogaz have effectively abandoned their contract & we await results of arbitration (2017). Gas transit via Ukraine is falling, but both sides seem committed to secure transit, and transit via Ukraine will likely continue after 2019

Conclusions

Thank you for your attention

For More Information Please Contact:Dr Jack Sharples

European University at St PetersburgEuropean Geopolitical Forum

jsharples@eu.spb.ru

https://eu-spb.academia.edu/JackSharpleshttp://eu.spb.ru/en/professors/13154-sharples-jack

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