No. 1, 2008

There are political barriers to further development of economic cooperation between the European Union and Russia

In September 2007, senior European Commission officials Neelie Kroes and Andris Piebalgs presented a set of five legislative initiatives designed to further liberalize the gas and electricity markets of the European Union. In particular, it includes obligatory requirements on division of the assets of all energy companies into production and transportation, and a ban on acquisition by energy companies of third countries of European companies operating the energy transport infrastructure: gas pipelines and power transmission lines. The proposed legislative measures have aroused varied reactions, both on the part of some leading EU countries and the Russian business community.

Gas directive versus common sense

The EU gas directive adopted in 1998 was intended to stimulate competition on the gas market by major gas purchasers entering the market and choosing their source of supply. For this purpose, the practice of signing long-term gas supply contracts between gas corporations and consumers had to be rejected. The plan was for companies to compete for customers and for this competition to bring gas prices down. This was paralleled by a similar process on the electricity market. This reform of national gas and power industries was to bring about a unified EU market. The actual result was, however, unexpected.

In 2003, the European Commission revised its directive, requiring vertically integrated gas companies to separate out sales and transportation into different legal entities. This was to create market access conditions for competitors to the national monopoly companies – but this did not happen.

Before the beginning of liberalization in the European countries, the gas market was traditionally dominated by national companies: Ruhrgas (Germany), ENI (Italy), Gaz de France (France). As soon as the European Commission announced its policy of creating a unified energy market within the framework of the European Union, the electric power corporations began consolidating. As a result, the degree of monopolization on the market is actually growing rather than falling. Moreover, the corporations of the leading EU countries (Germany, France and Italy) are gaining strength by buying up assets in smaller, economically weaker states. This is happening virtually with the support of the European Commission, which is thus fighting to “create a unified market within the framework of the European Union.” In Germany, where there has already been a certain liberalization, the prices of gas and electric power are the highest in Europe.

In spite of the era of “full liberalization,” the advent of which has been widely announced since July 1, 2007, with every natural gas and electricity consumer (right to the level of the individual resident) being entitled to choose its supplier, practice is markedly lagging behind theory. The proportion of consumers that have changed their supplier is just a few percent and pipeline systems linking individual EU countries are expanding very slowly. In 2004, the European Commission initiated proceeding against 20 countries in connection with delays in actual implementation of the electricity and gas directives, meaning, if not a total collapse of the reforms, at least serious difficulties in their implementation.

Cornering yourself

The main postulate of the reform is a ban on direct acquisition by foreign companies of European energy assets. These energy assets, obtained as a result of the split-up of European concerns into smaller companies, were, as conceived by the project designers, to be put on free sale.

The scheme, drummed up as a strong autimonopoly move, is simple enough: once energy resources become freely accessible, Europe will get rid of over-inflated holding companies, and foreign companies will be able to close deals only on the basis of a preliminary agreement with Brussels. The unpleasant surprise is that, in accordance with the declared intentions to promote competition, potential buyers will also have to split up like the European energy companies.

In its desire to depend as little as possible on Russia, the Europeans have obviously gone over the top and cornered themselves. On the national level, they encourage mergers of energy companies and formation of mighty operators – after all, it is these that are capable of competing worthily with Russian business. Yet, this runs counter to the Brussels liberalization policy, supposedly called on to protect Europe against Gazprom.

It is indicative that, in September 2007, the markets reacted to the news of the merger of Gaz de France and Suez not by a rise (which would be logical) but a fall in their share quotes by 4%. It is as if the Europeans fear that the energy giant formed on the basis of these two companies will be split up before having time to fight Gazprom.

Realizing that the ban on the purchase of assets in a liberal Europe appears too harsh, the European Commission representatives left themselves a loophole. Their proposals state that companies from third countries can acquire capacity in the European Union if they provide European companies access to their own markets. That is precisely what Gazprom has been doing recently.

Initially, the Russian corporation created, on a par with the German firm Wintershall (a subsidiary of BASF), JV Achimgaz for developing the Achim deposits of the Urengoy field. Then it agreed with Wintershall and E.ON on joint development of the Yuzhno-Russkoye field. In exchange for access to resources, these companies shared their assets in Europe and North Africa with Gazprom. In addition, in partnership with the Italian companies ENI and Enel, Gazprom will develop the Arktikgaz and Urengoil gas companies. The Russian corporation will develop the Shtokman field in conjunction with the French company Total.

Thus, even if the European Commission proposals are accepted, Russian companies should not be affected by the restrictions since they share their assets with European partners. Yet, the European Commission’s plans to break up the energy giants should not be totally written off. So far, only the Dutch company Gasunie has followed this line, by splitting into N.V. Nederlandse Gasunie (which owns the gas transport and storage infrastructure) and Gasunie Trade & Supply B.V. (gas production, purchase and sales). The former is wholly owned by the Government of the Netherlands, ensuring equal access to the infrastructure for all companies.

Consultations go on

In the fall of 2007, a forum was held in the Russian capital entitled “Second Moscow Energy Week” (MEW-2007). On the opening day of the forum, a meeting took place between the Russian Federation Minister for Industry and Energy, Viktor Khristenko, and the European Union Energy Commissioner, Andris Piebalgs, at which they tried to clarify the situation surrounding the initiatives. In addition, within the scope of MEW-2007, the first round took place of the “special consultations” between the European Commission delegation, Russian officials and representatives of Gazprom and JSC United Energy Systems of Russia.

Andris Piebalgs recognized that the new rules will not apply to strategic new projects for importing gas into Europe, including to the North European Gas Pipeline. He later admitted outright that “Russia is the biggest and reliable supplier of energy resources to the European Union.” According to Piebalgs, the European Union does not need any political guarantees of uninterrupted Russian supplies. The Russian Federation has sufficient reserves of energy resources and Mr. Piebalgs has no doubt as to the reliability of energy supplies. In turn, Russian Minister for Industry and Energy Viktor Khristenko stated that the main thing was to gather round the negotiating table and begin discussing the opportunities and the risks that might derive from implementation of the European Union’s set of energy regulations.

These questions were also raised at the Russia-EU Summit in Lisbon in late October 2007. In addition, these were the first official Russian-European negotiations since the European Union made its initiatives public.

Regarding the results of this Summit, the President’s special envoy for relations with the European Union, Sergey Yastrzhembsky, stated that Russia was negative toward the European Union energy industry reform projects but that they were not worth crossing swords over. Russia has notified the European Union of its negative attitude toward the European Commission initiatives and informed its EU colleagues that “in the event of their implementation, new adverse factors might emerge in Russia-EU relations which we will be unable to influence.” Even so, Russia’s position consists in there being no need for any actions to be taken until the EU finds an internal compromise on this problem.

Production of traditional energy resources in the EU countries is declining, but their consumption is going up despite all efforts to increase energy efficiency. The EU countries have to compete on the energy markets not only with their traditional rivals – the United States and Japan, but also the growing appetites of India and China. The situation is further exacerbated by the planned reduction in the share of nuclear power, while any substantial strengthening of the role of renewable energy sources will require tremendous investments and, in essence, a change in the entire structure of the energy sector.

The interest of the European partners in an energy dialogue with Russia gives hope of the contacts resulting in mutually acceptable solutions. A continuation of the energy dialogue will make it possible to coordinate the interests of the parties in elaborating solutions directly affecting aspects of the energy security of both Russia and the European Union.