The Tug of warRussia’s Response to changes on the euRopean gas maRket

szymon kardaś

50

The Tug of war Russia’s Response to changes on the euRopean gas maRket

szymon kardaś

numBeR 50WaRsaWseptemBeR 2014

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Contents

THESES /5INTRODUCTION /7

I. CHaNgES TakINg plaCE ON THE EUROpEaN gaS maRkET aND THEIR CONSEqUENCES fOR RUSSIa /10

1. The legal and institutional changes and their consequences for Russia /10

2. market changes in the EU’s gas sector and their consequences for Russia /142.1. Changes in supply and demand /142.2. The evolution of the gas trade rules /18

II. THE RUSSIaN STRaTEgy IN RESpONSE TO THE CHaNgES TakINg plaCE ON THE EUROpEaN gaS maRkET /21

1. The offensive actions /221.1. Criticism of the legal and institutional changes /221.2. Investments in the gas storage and trade segment /251.3. The pipeline expansion /281.4. The diversification of the directions in Russian gas exports /301.5. Torpedoing the plans for shale gas extraction in the EU /312. The defensive actions /332.1. Changes in the Russian gas sector /332.2. Overcoming backwardness in the lNg sector /352.3. price discounts for EU customers and the restricted modification

of the contract policy /372.4. The partial adjustment to the EU’s market liberalising regulations /43

III. SCENaRIOS fOR THE DEvElOpmENT Of gaS RElaTIONS bETwEEN RUSSIa aND THE EU /45

1. possible resolutions to the legal problems in Russia-EU relations /452. The implications of the Ukrainian crisis for Russia–EU gas relations /463. The limited possibilities of change in supplies on the EU gas market /484. The lack of cohesion in EU member states’ energy policy with regard to

Russia /49

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THESES

• SignificantchangesontheEuropeangasmarkethavetakenplaceoverthepastfewyears.Theliberalisationprocesshasgainedmomentum;onees-sentialelementofitcomprisesthenewlegalregulations,inparticular,theso-called thirdenergypackage.TheEuropeanCommission’ssignificanceinenergyrelationsbetweentheEUanditsmemberstatesandRussiahasgrown.EffortsaimedatdiversifyingthesourcesofgassupplytoEuropearebeingcontinued,inparticularthroughimportsofliquefiednaturalgas(LNG).Furthermore,gastraderulesaregraduallyevolving.

• Therecentchanges,especially in theareaof legal regulations,areunfa-vourabletoRussia.Asaconsequenceofthesechanges,thelong-liveden-ergyinter-dependencebetweenEuropeandRussia,whichhasbeenasym-metricallybeneficialforMoscow,hasbeengainingbalanceoverthepastfewyears.AsaresultofimprovingcompetitivenessontheEuropeanmar-ketandprogressinbuildingthecommonenergymarket–atatimeofpo-liticalstability–theroleofnaturalgasasaninstrumentinRussianforeignpolicyislessening.Ontheotherhand,doubtsastowhethertheliberalisa-tiontendencieswilllastlong(delaysintheimplementationofEUregula-tionsinsomememberstates)andthedecreaseinLNGsuppliesobservedin2012–2013,alongwiththeexpecteddeclineinEurope’sownproduction,provideRussiawithachanceofmaintainingitspositioninrelationswiththeEUandpossibly evenof reinforcing itwithin thenext threeor fouryears.

• Russia,beingawareoftheevolutionoftheEUgasmarketandthefluctua-tionsintrendsthataccompanyit,andinanattempttomaintainitsposi-tionontheEuropeangasmarket,isstickingtoadichotomousstrategy.Ontheonehand,Moscowhastakenanoffensive approach tothechallenges.Firstly,itcontinuesitstraditionallycriticalrhetoricwithregardtothelegalandinstitutionalchanges;andthisrhetoricislikelytostrengthenfurtherasRussiawillcapitaliseonthemarkettrendswhichhavebeenbeneficialto it (especially in2013).Secondly,bynegatingthe legitimacyof thenewrules, ithasbeenmakingefforts toundermine thembyemploying legalinstruments(forexample,contestingtheregulationsofthethirdenergypackage on 30 April 2014 through theWTO Dispute SettlementMecha-nism)andpoliticalmeasures(especiallybyenhancingbilateralenergyre-lationswithselectedEUmemberstates,thusmakingitmoredifficultfortheEUtoconductacohesiveenergypolicy).Thirdly,Russiahasusedsuch

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traditional economicmeans as investments in assets (transmission net-works,gasstoragefacilitiesandcompaniesactiveonthegastrademarket)andpushingthroughtheimplementationofnewgaspipelineconstructionprojects (SouthStreamandpotentially the thirdand fourthbranchesofNordStream).Ontheotherhand,theevolutionoftheEUgasmarkethasforcedRussiatotakesteps to adapt toacertainextent.Thisis illustrat-edbybothpartialchangesintheoperationoftheinternalgassector(theliberalisationofgasexportrulesregardingLNG)andpromisestofurthercurbGazprom’sdominantposition.Anotherproofof thisaretheconces-sionsmadeintradenegotiationswithEuropeanpartners(modificationsofcontractterms,includinggaspricereductions)andadjustmentstotheEU’smarketliberalisingregulationstoalimitedextent.

• GiventhespecialcharacteristicsofRussianpolitics,aboveallthenatureofthedecision-makingmechanisms,oneshouldnot,however,assumethattheevolutionoftheEUgasmarketwouldbringaboutanydurablesystemicchanges in the Russian gas sector within a short timeframe. Neverthe-less, the intensifying rivalrybetweenRussian energyfirms (suchas ac-tionstakenbyso-calledindependentproducers,RosneftandNovatek,toconsistentlyreduceGazprom’spositionontheRussiangasmarketandingasexports)mightserveasacatalystforsuchchanges.Asregardsthegasstrategyforforeignmarkets,itcannotberuledoutthatinthecaseofle-galconfrontationwithEUinstitutionsakeychangeinthisstrategywouldincludeakindofgasrebranding involvingdemonopolisationof theRus-sianpresenceontheEUgasmarket(inadditiontogassuppliedbyGazpromusingthepipelinesystem,LNGcouldalsobesuppliedfromRussiabyso-calledindependentgasproducers,aboveallNovatek).

• However,Moscowhopesthat theunfoldingsituationonthegasmarketswillcontributetoslowingdowntherecentliberalisationtendenciesintheEU.Furthermore, it isvery likely that theKremlinwill try to capitaliseon theUkrainiancrisis and theEU’spreviousdependenceonUkrainiantransittorevisetherulesofgasco-operationwithBrusselsmoresubstan-tially(bytotalorpartialexclusionofinternalEUregulationsconcerningthegasmarketandthroughreachingapoliticalagreementthatwillsetthegroundsforRussia-EUenergyco-operationinacomprehensivemanner).Moscowisthuspreparingitselfforthe‘longgame’ingaswithitsEuropeanpartners.SincetheEUmemberstatesandinstitutionshavenotdevelopedacommonstanceonthisissue,Moscowdoesnotseemsettolosethisgame.

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INTRODUCTION

TheEuropeangasmarketistheworld’sthirdlargestregionalgasmarket(af-terNorthAmericaandtheformerSovietrepublics)1.Sincethe1950s,ithasin-variablybeenviewedasaprioritymarketinRussianexternalenergypolicy.Atpresent(fulldatafor2013),93%oftotalRussiangasexports(98.5%in2012)gototheEuropeanmarketwithinthebroadmeaningoftheterm(includingTurkey),wheretheEuropeanUnionaccountsfor67%ofthesupplies(56.8%in2012),EuropeancountrieswhichdonotbelongtotheEUorCISaccountfor14%(around14%in2012,aswell),andtheEuropeannon-EUmemberstateswhichbelongtoCISforaround15%(27.7%in2012).DetaileddataconcerningEUmem-berstatesispresentedinTable1.

Table 1.ThevolumeofRussiangasexportstoindividualEUmemberstates234

CountryGas consumption (bcm)3 Volume of gas imported

from Russia (bcm)4

2010 2011 2012 2013 2011 2012 2013

Germany 83.3 74.5 83.2 88.5 34.02 33.16 40.18

Italy 76.1 71.3 73.4 68.7 17.08 15.08 25.33

United Kingdom 99.2 82.8 79.2 79.2 8.16 8.11 12.46

Poland 15.5 15.7 16.3 16.3 10.25 9.94 9.8

France 47.4 40.9 45.6 46.1 9.53 8.04 8.21

Czech Republic 9.3 8.4 8.0 8.1 7.59 7.28 7.32

Hungary 10.9 10.4 10.1 9.3 6.26 5.29 6.0

1 In2011,gasconsumptioninNorthAmericawasat869bcm,informerSovietrepublicsat703bcm,andinEuropeat525bcm.WorldEnergyOutlook2013,page103.

2 DatafromTable1coversbothgasexportedfromtheRussianFederationandgasboughtbyGazpromfromothersourcesandsuppliedtoEuropeanrecipients.

3 DatafromEurogas.4 DatafromtheofficialwebsiteofGazpromExport.

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CountryGas consumption (bcm)3 Volume of gas imported

from Russia (bcm)4

2010 2011 2012 2013 2011 2012 2013

Slovakia 5.6 5.2 5.1 5.1 5.89 4.19 5.42

Austria 10.1 9.5 8.9 8.3 5.43 5.22 5.23

Finland 3.9 3.4 3.6 3.4 4.19 3.48 3.56

Bulgaria 2.6 2.9 2.6 2.5 2.81 2.53 2.76

Lithuania 3.1 3.4 3.2 2.6 3.4 3.32 2.7

Greece 3.7 4.5 4.4 3.8 2.9 2.5 2.62

Holland 43.6 38.1 39.5 40.3 4.37 2.31 2.13

Romania 13.6 13.9 13.4 11.6 2.82 2.17 1.19

Latvia 1.5 1.6 1.5 1.4 1.25 1.12 1.13

Estonia 0.5 0.6 0.6 0.7 0.69 0.64 0.73

Slovenia 0.8 0.9 0.8 0.7 0.53 0.5 0.54

Denmark 5.0 4.2 3.5 3.3 0.05 0.33 0.33

Croatia – – 2.9 2.8 – – –

EU total 502.9 453.1 405.8 402.7 127.22 115.21 137.64

Author’scalculationsbasedondatapublishedbyEurogas,GazpromExportandBPStatisticalReview.

ThoseEUmemberstateswhichtraditionallyformthemaingroupofRussiangasrecipientsplayaspecialrole.Fromamongthem,Germanyisthemostim-portantpartnerforGazprom:in2013,Germanybought40.18bcmofRussiangasandItalybought25.33bcm,accountingfor29.1%and18.4%ofRussiangasexports toRussia, respectively. In turn, as regardsEuropeannon-EUmem-berstates,Turkey,withimportsat26.61bcmin20135,isaparticularlyimpor-tantoutletforRussiangas.AccordingtodatapublishedbyGazpromExportinmidFebruary2014,Russia’s share in theEuropeangasconsumptionmarket

5 Data from the website of GazpromExport: http://www.gazpromexport.ru/statistics/(accessedon:30January2014).

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(theEU,TurkeyandotherEuropeanrecipientsofRussiangastakentogether)reacheditshighestlevelinhistoryat30%6.

GassaletoEuropeaccountsformorethanhalfofGazprom’sincome.Althoughincomefromgassalesdoesnotcontributetothestatebudgetasmuchasincomefromoilexports7,itisstilltreatedasanimportantsourceofincomefortheRus-siangovernmenteliteandusedtofinancecost-intensivesocialprojectsorspe-cialorganisationalprojects,suchasSochi2014Olympics8.Therefore,changestakingplaceontheEuropeangasmarket,whereGazpromistheonlyRussianentityasyet,poseaveryseriouschallengetothegovernmentinMoscow.

Chart 1.TheshareofgassuppliedbyGazpromintotalgasconsumptionintheEU

0

100

200

300

400

500

20122011 2013

26.7% 127.22 24.6% 29.7%

476.0

115.21

468.3

137.64

462.0[bcm] Imports from Russia

gas

cons

umpt

ion

in th

e EU

Sources:www.eurogas.org;www.gazpromexport.ru

6 ‘Доля «Газпрома» на рынке Европы достигла исторического максимума’,Ведомости,18 February 2014, http://www.vedomosti.ru/companies/news/22888731/dolya-gazproma-na-rynke-evropy-vozrosla-v-2013-godu-s-254-do(accessedon:18February2014).Gassup-plyvolumesreachedarecordhighin2006–2008:166.4bcmofgasin2006,173.8bcmin2007and171.7bcmin2008.‘GazprominFigures2005–2009’,page56.

7 Incomefromoilandgassalesin2013accountedfor46.1%oftheRussianFederation’sbudget(oilsalesgeneratedUS$194billionandgassalesUS$28billion).

8 Gazpromdirectors’wagesandbonusesin2013werewortharoundUS$49.7millioninaggre-gate. ‘Газпром себя не обделил’,http://www.gazeta.ru/business/2014/02/15/5908845.sht-ml(accessedon:16February2014).Accordingtomediareports,GazprominvestedaroundUS$5-6 billion in the construction ofOlympic infrastructure in Sochi; http://1prime.ru/Finance/20130226/761411889.html(accessedon:17October2013).

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I. CHANGES TAKING PLACE ON THE EUROPEAN GAS mARKET AND THEIR CONSEqUENCES FOR RUSSIA

TheevolutionoftheEuropeangasmarketcovers:legislative changes (aboveall, the enactment of the so-called energy packages, including directivesand regulations aimed at liberalising theEU energymarket); institutional changes (the increasing significance of the European Commission as re-gardsenforcementofapplicableregulationsintheenergysector,forexamplethrough theuseofmeasuresaimedat legalprotectionofcompetition in theEU’s internalmarket);economic changes linked to change in the market structure (attemptsatdiversifyingthesourcesofoilandgassupplies,thede-velopmentofinfrastructureusedtotransportandstoreoilandgasinsidetheEU,andtheevolutionofgastraderules).

1. The legal and institutional changes and their consequences for Russia

Oneof themost serious changeson theEUgasmarket are thenewenergy law regulations, andinparticulartheso-calledthirdenergypackage,whichasyetincludesthreeregulationsandtwodirectives9(andnetworkcodesarebeingdeveloped),aimedatdeepening the liberalisationof theEuropeangasandelectricitymarkets.Regulationswhichprovideforunbundlingofgaspro-ductionfromtheirtransportanddistributiontoendusersisamongthekeyelementsofthethirdenergypackage.EUregulationsoffermemberstatesthechoiceofoneofthethreemodelsofunbundling:(1)ownership unbundling(oneandthesameentitymaynotatthesametimeproducetherawmaterialandcontrolitstransitanddistribution);(2)theso-calledIndependent System Operator (ISO)model,wheretheownerofthetransmissionnetwork(averti-callyintegratedentity)hastheobligationtoindicatethetransmissionoperatorwho is formally independent from theowner (meets theownershipunbun-dlingcriteria);(3)theso-calledIndependent Transmission Operator (ITO)

9 Directive2009/73/ECoftheEuropeanParliamentandoftheCouncilof13July2009concern-ingcommonrulesfortheinternalmarketinnaturalgasandrepealingDirective2003/55/EC;Directive2009/72/ECoftheEuropeanParliamentandoftheCouncilof13July2009concern-ingcommonrulesfortheinternalmarketinelectricityandrepealingDirective2003/54/EC;Regulation(EC)No.713/2009oftheEuropeanParliamentandoftheCouncilof13July2009establishinganAgencyfortheCooperationofEnergyRegulators(ACER);Regulation(EC)No.714/2009oftheEuropeanParliamentandoftheCouncilof13July2009onconditionsforac-cesstothenetworkforcross-borderexchangesinelectricity;Regulation(EC)No.715/2009oftheEuropeanParliamentandoftheCouncilof13July2009onconditionsforaccesstothenaturalgastransmissionnetworksandrepealingRegulation(EC)No.1775/2005.

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model,wherethetransmissionsystemoperatorandownerisaverticallyinte-gratedcompany,whichhoweverundertakesthatitstwoparts(oneinchargeofsalesandtheotherinchargeoftransmission)willinpracticeoperateinde-pendently,andtheirindependencewillbecontrolledbyaspecialsupervisorybody.Anotheressential itemistheso-calledGazpromclause10,whichenvis-ages that third-country entitiesmaybe allowed to control the transmissionsystemortransmissionsystemoperatoronlyiftheymeettherequirementsofeffectiveunbundlingsetunderoneofthethreeaforementionedunbundlingmodels.OneimportantelementoftheregulationsistheTPA(Third-PartyAc-cess)principle,whichformerlyappliedinearliermarketliberalisingdirectivesandwasextendedtothegasstoragesectoraspartofthethirdenergypackage.Thisprincipleimposestheobligationonoperatorstoguaranteeequalaccesstoinfrastructuretoallmarketparticipants,includingtransitgaspipelinesandgasstoragefacilities,andallowsexclusionsonlyinstrictlydefinedcases.Thenewregulationswereintroducedabovealltoimprovecompetitivenessandtosubsequentlycauseareductioninenergyprices.Theseregulationsareofspe-cialimportancebecausetheyareinforcenotonlyintheEU;thememberstatesoftheEnergyCommunityarealsoobligedtoimplementthem11.

ThetrendinregulatorychangesontheEUmarket(demonopolisationinindi-vidualmemberstateswhichisaimednotonlyatimprovingcompetitivenessinthehorizontaldimension-havingnumerousgassupplierspresentinthemar-ket-butalsointheverticaldimension,i.e.unbundlingsuppliesfromtransitanddistribution)contradictstherulesaccordingtowhichtheRussianmarketoperates.OnecharacteristicoftheRussianmodelislowcompetitiveness,withGazpromholding thedominantposition.Thestate,andespeciallyPresidentVladimir Putin, holds a strict political control over this company. GazpromfunctionsasaverticallyintegratedstructureandisnotonlyinchargeofthegreaterpartoftheRussiangasoutputbutalsofullycontrolsthetransmissionnetworkandstillhasastatutorilyguaranteedmonopolyoverRussiangasex-portsviathepipelinesystem12.

10 Thisregulationconcernsallentitiesfromthirdcountriesbutinfactwasintroducedpri-marilywithaviewtoGazprom.

11 Moldova,Ukraine,BosniaandHerzegovina,Serbia,Montenegro,Kosovo,MacedoniaandAlbania.

12 TherestrictionsonGazprom’sexportmonopolyimposedon1December2013concernonlyliquefiednaturalgas.Formoresee:SzymonKardaś,‘Afeignedliberalisation:Russiaisre-stricting Gazprom’smonopoly on exports’,OSW Commentary, 28 November 2013, http://www.osw.waw.pl/sites/default/files/commentary_121_0.pdf

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AsthememberstatesoftheEuropeanUnionandtheEnergyCommunityadoptthethirdenergypackage,Gazprom’spositionontheEuropeanmarketmightbetangiblyundermined.TheimplementationoftheEUregulationsisputtingatstakeRussianassetssincethisentailstheintroductionoftheunbundlingprincipleinthememberstates.Furthermore,itisunclearwhethersomein-frastructuralprojectswillbecarriedthroughnowthat theTPArule(third-partyaccess to transport infrastructureandgas storage facilities)hasbeenintroduced.

Theobligationtoreservetransportcapacitytoensureadequatelevelsofsup-ply,whichhasbeenimposedaspartofregulationsliberalisingtheEUgasmar-ket,isviewedasanotherseriouschallengebyGazprom.TherouteviawhichRussiangasissuppliedtoEuropeanrecipientsunderlong-termcontractscur-rentlyinforcerunsthroughmorethanoneEUmemberstate(withtheexcep-tionofFinland,Hungary,Poland,Slovakia,RomaniaandtheBalticstates).TheimplementationofthenewregulationswillmeanthatGazpromwillhavetoreservethecapacityforeachterritorialsectionthroughwhichtheexportedgasflowsseparately.

Most long-term gas supply contracts with Gazprom will expire between2025and2036.Inturn,thecontractswhichregulategastransitissueswillexpirebetween2015and2025.Theintroductionofthenewgastrademodelwill forceGazprom to reserve transport capacitiesofferedbyoperatorsonauctions to be able to comply with the long-term contracts binding uponit.Gazpromhas found itself inasignificantlymoredifficultsituationthanotherexistinggassupplierstotheEuropeanmarket.Thenumberofborderpoints,andthusterritorialsectionsthroughwhichRussiangasflowstothegasreceptionpointsagreedinthecontracts,ismuchlargerthaninthecaseofgassuppliesfromNorwayorAlgeria.ForGazpromthiswillentailtheneedtoreservetransportcapacityvestedinallthecountriesthroughwhichtheRussiangastransitrouteruns.Anotherproblemcouldbethat,pursuanttothenewregulations,thevolumeoftransportcapacityofferedonauctionsforlong-termreservationswillbelowerthanthevolumeofthetransportcapac-ityofexistingnetworks.This is sobecause transmissionsystemoperatorshavebeenobligedtoreserveatleast10%ofthetransportcapacityofagivenpointforshort-termproducts,withatermnotlongerthanthreemonthsandatleast10%ofthetransportcapacityformedium-termproducts,withatermofuptooneyear.Theremainingcapacity(80%)canbesoldaspartoflong-termcontracts,withatermofupto15years.

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TheregulatorychangesarealsoaccompaniedbytheEuropeanCommission’sbecomingmore determined inenforcingEUlawasregardsliberalisationoftheenergymarketintheEUandobservingcompetitionrulesapplicableintheEU.ThisinparticularconcernstheDirectorate-GeneralforEnergyandtheDi-rectorate-GeneralforCompetition.ItturnedoutthatthisprocesshasaffectedRussiaverymuch.InSeptember2012,theEuropeanCommissionlaunchedoffi-cialantitrustproceedingsagainstGazpromonchargesofabusingitsdominantpositionintenCentralEuropeancountriesbymeansof(1)limitingthefree-domofmovementofgasbetweenEUmemberstates,(2)preventingattemptstodiversifygassuppliestoEUcountriesand(3)imposingunfairpricesuponcontractors.TheEuropeanCommission’sactionswereprecededbyaninvesti-gation,initiatedinSeptember2011,involvingthesearchforandexaminationofdocumentsin20EUgascompaniesaffiliatedwithGazprom(bothsubsidiar-iesandjointventures),aswellasinGazprom’scontractorsandtransmissionoperatorsinsomeEUcountries13.

ThistrendhasalsobeenillustratedbythestancetheEuropeanCommissionhastakenontheintergovernmentalagreementsconcludedbyRussiawithEUmemberstatesandSerbiainconnectionwiththeimplementationoftheSouthStreamproject.Brussels isquestioningtheagreements’compliancewithEUlaw,suggestingthattheyshouldbeamendedaccordingly.TheEuropeanCom-missionhashighlightedthreemajorelementsaspartofitsreservations:thefailure toensure third-partyaccess to theplannedgaspipeline,contrary totheprincipleapplicableintheEU,Gazprom’sexclusiverighttosetthetransittariffsandthemanagementofthenewpipeline.

BrusselshasdeclareditsreadinesstoembarkuponnegotiationswithRussiaasregardstheagreementsonSouthStreamonbehalfoftheEUmemberstatesconcerned14,andthushassetaprecedentwhichisunfavourableforMoscowasitunderminesbilateraltalkswithEUmemberstates,theformofcontactswhichRussiaprefers.

13 Szymon Kardaś, ‘The European Commission opens antitrust proceedings againstGazprom’,OSW Analyses,5September2012,http://www.osw.waw.pl/en/publikacje/analy-ses/2012-09-05/european-commission-opens-antitrust-proceedings-against-gazprom

14 ThelegalgroundswhichenabletheEuropeanCommissiontobecomeengagedinsuchtalksareprovidedbytheDecisionNo.994/2012/EUoftheEuropeanParliamentandoftheCoun-cilof25October2012establishinganinformationexchangemechanismwithregardtoin-tergovernmental agreementsbetweenMemberStates and third countries in thefieldofenergy.

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2. market changes in the EU’s gas sector and their consequences for Russia

TheEuropeangasmarkethasseenmajorchangesinsupplyanddemandoverthepastdecadeorso.Ontheonehand,periodicalgassupplyfluctuationshaveoccurredinEurope:theconsistentdecrease in own production, increased competition anddiversification ofsupplysources(mainlyLNG).Ontheoth-erhand,variability in demand forgashasbeenobservedoverthepastfewyearsinEuropeduetothedifficulteconomicsituation.Inadditiontoallthis,thegas trade rules have been evolving (thecontractingpracticehaschangedandhubsandgasexchangeshavedeveloped).

2.1. Changesinsupplyanddemand

OneimportantfactorwhichhasaffectedthesituationintheEUgassectoristheregular decrease in own natural gas production in the EU. Whilein2011gasoutputreachedaround185bcm,in2020itisexpected15tofallto135bcm,andin2035evento104bcm.GasproductionforecastsforNorway,oneofthekeysuppliersofnaturalgastotheEU,arelesspessimisticbutstillun-favourableinthelongerterm.In2011itsgasoutputreached101bcm,in2020itisplanned16togrowto121bcmannually,andin2035itisexpectedtofallto111bcm.

ThechancesthattheEUwillincreaseitsgasoutputthroughshalegasextrac-tionareuncertain,tosaytheleast.ThiscanbeconcludedfrompreliminarygeologicalworkandexplorationdrillingcarriedoutinBulgaria,RomaniaandPoland.Thelackofacommonstanceontheecologicalimpactofpossibleshalegasextraction insidetheEuropeanUnion(somememberstatesareopposedtoitduetothepotentialthreattothenaturalenvironment) isanadditionalimpediment.

TheincreasingshareofLNGontheEuropeangasmarketseeninthefirstdec-adeofthe21stcenturyhasbeenanessentialelementofthechanges;aconsist-entgrowthinLNGsuppliestotheEuropeanmarketcouldbeobservedfrom

15 ThisinparticularconcernstheUnitedKingdomandHolland(in2013,theoutputofHolland’slargestfield,Groningen,reached54bcm,andisexpectedtofallto42.5bcmin2014–2015).http://media.argusmedia.com/~/media/Files/PDFs/Samples/Argus-Gas-Connections.pdf(accessedon:20January2014).

16 ‘WorldEnergyOutlook2013’,page109.

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45bcmin200517 toaround90bcmin2010.Thisupwardtrendwasreversedin2012,andLNGimportstoEuropefellnoticeablyto66.75bcm,i.e.asmuchas26%ascomparedtotheprecedingyear18.ThegreatestfallsinsupplylevelswereseeninthecaseofthelargestLNGimporters:Spain(by16%,importsat19.95bcm),theUnitedKingdom(by44%,to14.32bcm)andFrance(by32%,to9.89bcm).LNGimportsshrankevenmorein201319,30.25%,reachingthelevelof46.56bcm.

Table 2.LNGimportstoEuropein2010–2013(bcm)

2010 2011 2012 2013

EuropeQuantity 90 90.47 66.75 46.56

Changein% +1 -26 -30.25

AsiaQuantity 185.4 211.09 229.85 244.23

Changein% +13.85 +8.8 +6.2

Author’scalculationsbasedonIGUWorldLNGReport–2013Edition;IGUWorldLNGReport–2014Edition.

Table 3.RegasificationpotentialofEUmemberstates(asofApril2014)

Country No. of terminals Total regasification capacity (bcm)

Belgium 1 9

France 3 23.75

Greece 1 5.3

Spain 6 60.1

17 http://www.eurogas.org/uploads/media/statistics_2005_01.01.05.pdf(accessedon30April2014).18 D.Bonhomme,‘Competitionpipelinegasvs.LNGinEurope’,apresentationannounceddur-

ingthe17thInternationalConference&ExhibitiononLiquefiedNaturalGas,http://www.gastechnology.org/Training/Documents/LNG17-proceedings/06_03-D-Bonhomme-Pres-entation.pdf

19 WorldLNGReport–2013Edition,http://www.igu.org/gas-knowhow/publications/igu-pub-lications/IGU_world_LNG_report_2013.pdf;WorldLNGReport–2014Edition,http://www.igu.org/gas-knowhow/publications/igu-publications/igu-world-lng-report-2014-edition.pdf

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Country No. of terminals Total regasification capacity (bcm)

Holland 1 12

Portugal 1 7.9

United Kingdom 4 52.7

Italy 3 14.71

Total 20 185.46

Author’scalculationsbasedondatapublishedbyGasInfrastructureEuropeandWorldLNGReport2014

OnecharacteristicfeaturewhichhasaccompaniedtheemergenceofLNGontheEuropeangasmarketistheincrease in competition, namelyahighernumberofcountriessupplyinggastotheEU(from14to23between2000and2010).InadditiontoRussia,Norway,AlgeriaandHolland,exportersofgastotheEuropeanmarketnowincludeEgypt,Qatar20,andNigeria.Otherexporters,suchasOman,PeruandTrinidadandTobagoalsoholdasmallmarketshare.

Changes in demand onthegasmarkethasbeenanimportantfactoraffect-ingthemarket’sstructure.TheeconomiccrisisinEuropeancountriesandtherelatedsloweconomicgrowthhavebeenthemaincauseoffallingdemandforgasintheEU.OtherimportantfactorsincludemaintainingthesignificanceofcoalintheenergysectorsofmanykeyEUcountries(incontrasttotheUSA,wherecheapgashasbeenreplacingcoaltoanincreasingextent)andmoreandmoreinterestintheuseofrenewableenergyseenamongEUmemberstates.TheEU’senergyandclimatepolicyisalsoanimportant,albeitnotakey,factor.TheEU’splantoreduceCO2emissionsandcoalusageenvisagesanincreaseindemandfornaturalgas.

However,thedecreaseinconsumptionabatedin2011–2013inEurope.In2011,gasconsumptionfellby10%incomparisontotheprecedingyear,in2012–by2%year-on-year,andin2013–byonly1.4%21.Long-termforecastsarealsoveryoptimisticforsuppliers;itisexpectedthattheshareofnaturalgasinelectric-

20 In2003–2010,Qatar’sLNGexportstoEuropegrewalmost17times.21 ‘Dropin2013EUgasdemandemphasisesneedforswiftchange’http://www.eurogas.org/

uploads/media/Eurogas_Press_Release_-_Drop_in_2013_EU_gas_demand_emphasises_need_for_swift_change.pdf(accessedon:21March2014).

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ityproductionintheEUwillgrowfrom25%in2010to28%in2035inthebasescenario(upto33%inthecasewhereEUclimatepolicyguidelinesarerapidlyimplemented).Furthermore,theoveralllevelofdemandforgasintheEUisex-pectedtogrowfrom486.6bcmin2010to523.2bcmin2035inthebasescenario(up to 585.4bcm in the casewhereEUclimatepolicyguidelinesare rapidlyimplemented)22.

ThedecreaseindemandforRussiangasintheEUhasforRussiabeenapal-pable consequence of the changes on the EUmarket. Gazpromhad consist-entlymaintaineditspositionontheEUgasmarket,onebasicmanifestationofwhichwasEurope’scontinuingdependenceonRussiangasimports23.Russiangassuppliesreachedtheirpeak (173.8bcm) in2007.Since then,demandforRussiangasinEuropehasbeenfallingonaregularbasis.Oneofthemainrea-sonsforthisfallwastheregularincreaseinLNG’sshareintotalgasimportstoEuropeseeninthesecondhalfofthe2000s.Furthermore,afewotherfac-torsplayedanimportantrole:thesloweconomicgrowthinEUcountries,theimprovementofenergyefficiency inEuropeancountriescombinedwiththepolicyofdiversificationofenergysources,andtheincreaseinunconventionalgasproduction,includingshale(mainlyUSA)24.

Russiangassuppliesincreasedin2011(importsfromAfricafellduetotheArabSpring)and in2013 (164.24bcm jointlyEUwithTurkey),which in turnwasmainlyaneffectoftheunusuallycoldwinterinthe2012/2013season,atem-porarydecrease insupplies fromNorwayand theredirectionof largerLNGbatches(inparticular,gasfromQatar)toAsianmarkets.PessimisticforecastsregardingEuropeanownproductionandthedecreaseinLNGsuppliestotheEuropeanmarketoverthepastfewyearsareviewedinRussiaasanopportu-nitytoregularlyincreaseitsgassuppliestotheEU,bothviathepipelinesys-temandinliquefiedform.

22 ‘Eurogas, Long termOutlook for Gasto 2035’, October 2013, http://www.eurogas.org/up-loads/media/Eurogas_Brochure_Long-Term_Outlook_for_gas_to_2035.pdf;WorldEnergyOutlook2013,page103.

23 Until1974,theshareofimportsfromtheSovietUnionaccountedforlessthan10%oftotalgasimportstoEurope.Inlate1970s,itwas25%,inthe1980sitwas40%,inthe1990s–50%,reach-ingarecord-highlevelof60%in2007.S.V.Zhukov(ed.),‘Глобализация рынка природного газа: возможности и вызовы для России’,IMEMORAN,Moscow2010,pages68-87.

24 ‘Экспорт российского газа: ограничения и перспективы’, Центр макроэкономического анализа и краткосрочного пргнозирования,http://www.forecast.ru/_ARCHIVE/Analit-ics/Resources/Gas/GasTrade_13.04.24-1.pdf(accessedon:12May2014).

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2.2. Theevolutionofthegastraderules

Thegas trade rules ontheEuropeanmarkethavealsobeenevolving.Long-term contracts,with a price formula based on prices of oil and petroleumproducts,werethepredominantwayofensuringgassuppliestoEuropeinthepastfewdecades.Sinceoilpriceswerehighin2002–2008,gaspricesin-creasedsignificantly.Asaconsequenceofoversupplyofgasseensince2009,what was the predominant indexation model started to be replaced withahybridmodel:partofsuppliesareindexedonthebasisofoilandabasketofpetroleumproducts,andpartisorientedtopricesonspotmarketsaspartofgashubs,bothreal(physical)andvirtual.Furthermore,short-termcon-tractsareusedmoreandmorefrequentlyforensuringgassupplies.Asig-nificant increase ingas tradeonspotmarketshasbeenseenover thepastsixyears:from15%in2008toover50%in2013,andevenuptoabove70%inNorth-WesternEurope25.

AconsistentincreaseingastradeaspartofgashubsisanoveltyinEurope(inthefirsthalfof2013,turnoversaspartofthethreecontinentalgashubs:TTFinHollandandGaspoolandNCGinGermanygrewyear-on-yearby27%,23%and22%,respectively)26.Thecreationofgashubshasalsocontributedtotheemer-genceofnewgasexchangesinEurope.Spotcontractsandfuturescanbecon-tractedonthekeyenergyexchanges(ICE,APX-ENDEX,EEX,EPEXSpot,NBP,TTF,PEGNordandPEGSud,andNCG).

TheeverhighersignificanceofspotcontractsposesaseriouschallengetoRus-sia.Long-termcontractsforgassupplyandtransitareGazprom’spreferredop-tion,sincetheyusuallyincludeclauseswhicharebeneficialforit,suchasthe‘takeorpay’clause,whichwasastandardincontractssignedwithEuropeanrecipientsin2005–201027.

AnotherchallengeforRussiaistheincreasingsignificanceofspotmechanismsindeterminingthepriceformulaincontractsconcludedbyotherkeysuppliersofgastotheEUmarket.OneexampleisNorway,thesecondmostimportant

25 ‘Paying the piper. Gazprom and European gas markets’, The Economist, 4 January 2014,http://www.economist.com/news/business/21592639-european-efforts-reduce-russian-state-owned-companys-sway-over-gas-prices-have-been(accessedon:10January2014).

26 QuarterlyReportonEuropeanGasMarkets,DGEnergy,Vol.6,Issue2,http://ec.europa.eu/en-ergy/observatory/gas/doc/20130814_q2_quarterly_report_on_european_gas_markets.pdf

27 Thusconcernsbothgassupplyandgastransitcontracts.

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exporterofgas to theEUmarket.Norwayhasessentiallymodified its tradepolicy;atpresent,Statoilsuppliesalmost50%ofgas toEUrecipientsatspotprices28.

TheevolutionofthesituationontheEuropeangasmarket,seensincethebe-ginningofthenewcentury,oneconsequenceofwhichhasbeenachangeinthecontractingpractice29,hasencouragedGazprom’skeyclientstoassumeamoreassertivestanceduringnegotiationsandforceGazpromtomodifyitscontractswiththem.Themodificationsinclude:gaspricediscounts,andevendemandstocancelthe‘takeorpay’formulaincontractsmadebyItaly’sENI30.

Asaconsequenceofthemarketchanges,Europeanrecipientsbeganusingar-bitrationproceedingsatStockholmandViennaarbitrationcourtsasameansofforcingGazpromtomakepriceconcessions31.TheawardpassedbytheViennaarbitrationcourtinOctober2012,whichwasunfavourableforGazprom,hashadaspecialimpact.GazpromlostthesuitithadbroughtinSeptember2011against theCzech companyRWETransgas.Gazpromclaimed that itsCzechcontractorhad topayUS$500million for receiving less gas than contractedin 2008–2011. Thisdecision set aprecedent – itwas thefirst timewhen thecourtruledthataunilateralwaiverofthe‘takeorpay’clausedidnotconstitutebreachof contract.One indirect consequenceof thearbitrationproceedingsisthereinforcementofEuropeangascompanies’negotiatingposition,whichinsist that the long-termcontracts signedwithGazprom,andespecially theprovisionsconcerningthepricepolicy,needtoberevised.TheunfavourablecourtdecisionshaveunderminedGazprom’spositioninotherarbitrationcases

28 Nerijus Adomaitis, ‘Norway challenges Russia with new European gas pricing in Eu-rope’,http://www.reuters.com/article/2012/11/20/statoil-wintershall-idUSL5E8M-K0W320121120(accessedon:20August2013).

29 In2003,theEuropeanCommission,GazpromandENIsettledtoremovemarketdivisionanddestinationclausesfromgascontracts.Inturn,in2005,destinationclauseswereleftoutofGazprom’scontractswithOMV.

30 ‘От Газпрома требуют отменить принцип Take or Pay’, http://news.eizvestia.com/news_abroad/full/ot-gazproma-trebuyut-otmenit-princip-take-or-pay(accessedon:25October2013).

31 Forexample,theproceedingsinitiatedinDecember2010byRWETransgasattheViennaarbitrationcourtconcerningchangeofthepriceformula(thedecisionpassedinJune2013wasunfavourabletoGazprom);theproceedingsinitiatedbyPGNiGinFebruary2012attheStockholmarbitrationcourt concerningchangeof theprice formula (therequest forar-bitrationwaswithdrawnafterapricediscountwasgrantedinNovember2012);proceed-ingsinitiateduponrequestfromLithuaniasubmittedtotheStockholmarbitrationcourt,inwhichLithuaniademandeditshouldbegivenbackthemoneyoverpaidforRussiangasin2004–2012(thesuitislikelytobewithdrawnsinceLithuaniawasgrantedadiscountinMay2014).

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broughtbyEuropeancompaniesandalsointalksconcerningrenegotiationofthe gas contracts already in force. In turn, themore flexible interpretationof the ‘takeorpay’clause–oneof thepillarsofGazprom’scontractpolicy–adoptedby theEuropeancustomersmaymake itmoredifficult for theRus-siancompanytodefenditsstanceduringtheantitrustproceedingslaunchedbytheEuropeanCommission inSeptember2012 (theEuropeanCommissionisconsideringwhetherthe‘takeorpay’clausecomplieswithEUcompetitionprinciples).

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II. THE RUSSIAN STRATEGy IN RESPONSE TO THE CHANGES TAKING PLACE ON THE EUROPEAN GAS mARKET

OneofthestrategicgoalsaspartofRussianenergypolicyistomaintain,andif possible reinforce, its position as a gas supplier to Europe. EmphasisingmoreoftenthanbeforethesignificanceofexpansiononAsianmarketsandtheactivation in the liquefiednaturalgassector isanessential revisionofthispolicy.Asaconsequenceofthis,Russiaisexpectedtograduallychangeitspositionfromadominantregionalsupplier(Europe)intothatofa‘rotat-ing’regionalproducer,capableofsupplyinggasnotonlytoEuropebutalsotoAsianmarkets32.

Ontheonehand,MoscowwantstomaintainthemarketforthegassuppliedbyGazprom,andontheothertokeepthepricesatasufficientlyhighleveltoensurethatexpectedprofitsaregenerated.Furthermore,thecertaintyofim-portsisviewedasaguaranteeofcost-effectivenessofinvestmentsinRussiangasfields,especiallythoselocatedintheYamalPeninsulaorEasternSiberia,whereproductionmuststartifRussiawantstocomplywithitsexistingandplannedcontractualobligations.

The tools which are expected to help Russia achieve its strategic goal are:maintainingcontrolofthetransitroutes,diversificationofgasexportroutescombinedwithmarginalizingthetransitcountries’roleandinvestinginEu-ropeanassetswhicharestrictlyconnectedwiththegassector,includingthosefromthepowersector(ithasdeclaredaninterestininvestinginEuropeangaspowerplants)33.

Russia has reacted to the changes taking place on the European gas mar-ket dichotomously: offensively and defensively. Asregardsoffensive action, Russiahasmanifesteditsunwillingnesstoaccepttheneedtoadjusttothechangingreality,andhasrespondedmostaggressivelytothelegalandinstitutionalchallenges.Thishasbeendemonstratedbothonthelevelofpoliticalrhetoricandinthelegalsteps,takenandannounced.Mos-cowiscontinuingitseffortstomaintainandultimatelyincreaseitsshareinthe

32 TatianaMitrova,‘RussianGasSuppliestoEurope’,theelectronicversionofthepresenta-tionmadeinOsloon5June2013,http://www.eriras.ru/files/Mitrova-European-Gas-Con-ference-2013-June-5.pdf(accessedon:10November2013).

33 ManfredHafner, ‘Russian Strategy on Infrastructure andGas Flows to Europe’, POLIN-ARESworkingpaperno.73,December2012,page1.

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EuropeangasmarketthroughtheacquisitionofassetswhichmakeitpossibleforittogainagreatershareingastradeintheEU.Russiahasalsobeencon-sistentlypushingthroughnewinfrastructuralinvestmentsaimedatcreatingmoreopportunitiestotransportgastoEurope,thusreducingitsdependenceontheexisting transitroutes (includingtheonerunningthroughUkraine).TheKremlinhasintensifieditseffortstoturntheannounceddiversificationofmarketsforRussiangasexports(Asiancountries,andinparticularChina)intorealaction,andhasconsistentlypresentedtheseasanalternativetotheEuropeanmarket.

Ontheotherhand,defensive action hasbeenseen,suchas:someeconomicdecisionsandlegislationchangeslinkedtotheoperationofthegasmarketinRussia,andactionstakenaspartofinternalgaspolicy.Alltheseareproofof a certain evolution of theRussian strategy, suggesting at least a partialadjustmenttothechangingmarketreality(pricediscountsforEuropeangasrecipients).

1. The offensive actions

1.1. Criticismofthelegalandinstitutionalchanges

Russiahasreactedhighlycritically,andinsomecasesveryemotionally,tothelegalandinstitutionalchangestakingplaceontheEuropeangasmarket.ItssharprhetoricisaccompaniedbyannouncementsthatconcretelegalstepstoprotectRussianinterestswillbetaken.

RussiahasrespondedespeciallynegativelytotheregulatorychangesmadeaspartoftheliberalisationoftheEUgasmarket.Critical rhetoric with regard to the third energy package hasbeenheardinthestatementsofmanyRus-sianseniorofficials,aboveall,VladimirPutin.BoththeconservativemembersoftheRussianelite(SergeyIvanov34andSergeyLavrov35)andthosewhoare

34 SergeyIvanovinaninterviewforRussia-1TVchannelinDecember2012threatenedthatthethirdenergypackagecouldcauseadecreaseingassuppliestoEurope.Source:http://www.oilcapital.ru/industry/188211.html(accessedon:7July2013).

35 SergeyLavrovconcludedattheendoftheEuropeanUnion–RussiasummitinBrusselsinDecember2012thattheEuropeanUnion,byintroducingtherequirementsofthethirden-ergypackage,hadbreacheditsobligationwithregardtoRussianottoworsenthecondi-tionsofdoingbusinessforRussiancompaniesintheEU.Source:http://www.interfax.ru/business/news.asp?id=282275(accessedon:7July2013).

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seenasholdingmoreliberalviews(ArkadyDvorkovich36)havespokenoutinthiscontextinasharptone.MoscowarguesinitsofficialstatementsthattheEUregulationsareaboveall anti-Russian.VladimirPutinhas concludedonnumerousoccasionsthatthemainintentionofthethirdenergypackageistoforceRussiatoreducethepricesofgassuppliedbyGazpromtotheEuropeanmarket,andultimatelytobringaboutachangeinthepriceformulausedingascontracts37.Likewise,theantitrustproceedingslaunchedagainstGazpromareviewedbytheRussiangovernmentandthecompany’smanagementasanil-lustrationofthepoliticisationofenergyrelationsbetweenRussiaandtheEU38.

RussiahasalsoreactedemotionallytotheincreasingassertivenessofEUin-stitutionsasregardscompliancewithEUlaw.OneproofofthiswasVladimirPutin’sreactiontothelaunchoftheantitrustinvestigationagainstGazprombytheEuropeanCommissioninSeptember2012.TheRussianpresidentpassedaspecialdecreeoneweek later.Under thisdecree,Russiancompanieswererequired to receive prior consent from the federal government of the Rus-sianFederationinthreecases:(1)disclosureofinformationconcerningtheirbusinessuponrequest fromauthoritiesofother countries, internationalor-ganisationsand international structures (inaddition to the information thedisclosureofwhichisprovidedunderRussianlawandinformationlinkedtoissuingsecurities);(2)amendingcontractsconcludedbystrategiccompanies(includingpricechanges);(3)saleofforeignassetsownedbyRussianstrategiccompanies.

PresidentPutin’s reaction in the formofa legalmeasure in fact turned intoapoliticaldemonstrationwhichwasintendedasasymmetricresponsetotheEuropeanCommission’sdecision.TheKremlinsawthelaunchoftheantitrustproceedingsasamovemotivatedbystrictlypoliticalreasonsandanattemptfromBrusselstoforceRussiatoreducethepricesofgassuppliedtoEuropeandthusprotecttheinterestsofEUmemberstates.

36 ArkadyDvorkovichemphasisedinaninterviewon22November2012thatifthenewEUregulationsgaverisetoahigherbusinessrisk,Gazpromcouldreducethesupplies,whichwouldinevitablyleadtoariseingaspricesinEurope.Source:http://www.kommersant.ru/doc/2072892(accessedon:8July2013).

37 VladimirPutin,‘Россия и меняющийся мир’,Московские новости,27February2012.38 ‘В “Газпроме” считают расследование ЕК против него попыткой давления’, http://

ria.ru/economy/20130530/940329650.html (accessed on: 8 May 2014); ‘Путин назвал антимонопольное расследование «Газпрома» Европейской комиссией «прискорбным»’,http://novostiua.net/russia/17884-putin-nazval-antimonopolnoe-rassledovanie-gazpro-ma-evropeyskoy-komissiey-priskorbnym.html(accessedon:8May2014).

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The decree did not prevent the European Commission from continuing theproceedings.However,thefactthatitwaspassedrevealedGazprom’slackofreadiness to co-operatewith representatives of this EU institution and po-tentiallyincreasedthelikelihoodthatthedecisionwouldbeunfavourableforGazprom39.Inthecontextoftheantitrustproceedings,Russiahasontheonehandmanifestedreadiness tomakeconcessions,oneproofofwhichare thedeclarationsmadebyGazprom’sdeputyhead,AlexanderMedvedev,madeinearlyDecember 2013 inBrussels40.On the otherhand, it is conceivable thatGazpromismakingpreparationsforalegalconfrontation,consideringthefactthattheproposedchangesinthetradepolicywithregardtoEasternandCen-tralEuropeancountriesitmadeinDecember2013werenotfullysatisfactorytotheDirectorate-GeneralforCompetition41.

Russiahasalsoemployedtraditionalpoliticalmeasuresaspartofitseffortstocounteracttheconsequencesoftheregulatorychanges.OneproofofthiswastheRussianproposaltoreachaspecialagreementwiththeEuropeanUnionthatwouldcomprehensivelyregulateallcontestedissuesconcerningenergyco-op-eration.ThedraftagreementtothiseffectwassenttoBrusselstwicein2012.

Russiahasalsomadeattemptstomaintaincloseenergyco-operationwithse-lectedEUmember states (agreements concerning the constructionof SouthStream signedwith Bulgaria,Hungary, Slovenia, Austria, Italy andGreece;anddevelopingco-operationintheareaofnuclearenergy,mainlywithHun-gary,butalsowiththeCzechRepublic,SlovakiaandBulgaria).Byintensifyingbilateralcontacts,RussiahasbeentryingtomakeitmoredifficultfortheEuro-peanCommissiontotakecohesiveactiononbehalfofEUmemberstates,thusweakeningBrussels’positioninnegotiationswithMoscow.

Another politicalmeasure in regular use ismaking unilateral declarationssuggesting that Russia is interested in the implementation of previously

39 SzymonKardaś, ‘VladimirPutin issues a decree ‘indefence’ ofGazprom’,OSW Analyses,12September2012,http://www.osw.waw.pl/en/publikacje/analyses/2012-09-12/vladimir-putin-issues-a-decree-defence-gazprom

40 ‘EUsaysGazpromofferstosettleantitrustdispute’,http://uk.reuters.com/article/2013/12/04/eu-gazprom-antitrust-idUKL5N0JJ3UU20131204(accessedon:4December2013).

41 According toastatementmadeby theEuropeanCommissioner forCompetition, JoaquínAlmunia,GazpromhasnotmadetheexpectedproposalsinconnectionwiththeaccusationconcerningofferingunfairpricestogasrecipientsinCentralandEasternEuropeancoun-tries.‘GazpromfailstosatisfyEUinanti-trustcase’,http://euobserver.com/tickers/123052(accessedon:10February2014).

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consideredenergyprojects.OneexampleofthiswasPresidentPutin’sappealinApril2013tothepresidentofGazprom,AlexeyMiller,inwhichhepointedout theneed torevive theprojectenvisaging theconstructionof thesecondbranchoftheYamal-Europegaspipeline42.Suchmovesareaimedprimarilyatprovokingpoliticaldiscussionsinthecountrieswhichtheprojectsconcernand at creating a sort of information noisewhich stresses the difference ofopinionsbetweenindividualEUmemberstates.

1.2. Investmentsinthegasstorageandtradesegment

AnotherconstantelementinGazprom’sstrategyisthedesire to reinforce its position on the EU gas market through supplies to individual customers. Therefore,GazpromhasbeenconsistentlyinvestinginassetsinthegasstorageandsalesegmentoftheEUmarket.Russia’stransactionsareusuallybasedontheassetswapmechanism.OneexampleisthedealstruckbyGermany’sWin-tershallandGazpromon14November2012.Aspartofthistransaction,Winter-shall,asubsidiaryofBASF,willreceive25%plusoneshareinblocksIVandVoftheAchimovfields(Urengoy)inWesternSiberia,whoseestimatedgasreservesare274bcm.Additionally,Wintershallwillhavetheopportunitytoincreaseitsshareinbothblocksto50%;andgasproductionisexpectedtocommencetherein2016.Inexchangeforthis,Gazpromwillhaveexclusivecontroloverthegastradeandstoragecompanieswhichitco-controlledwithWintershalluntilre-cently:WingasGmbH(Wingas)andWintershallErdgasHandelshausGmbH&Co.KG(WIEH),andsharedcontroloverWintershallNoordzeeBV(WINZ)andWintershallServicesBV, the twocompanieswhosesoleowner isWintershallandwhichareinvolvedonarelativelysmallscaleinexplorationandproductionofcrudeoilandnaturalgasintheNorthSea.GazpromwillalsotakefullcontrolovertheOPALgaspipeline,ownedbyWingas,underthisdeal.

Gazprom was interested in buying the Greek state-owned company DEPA43,anditsunexpectedwithdrawalfromthedealinJune2013canbeinterpretedasresultingfromtheconcernthattheEuropeanCommissionwillnotacceptthetransactionduetopotentialnon-compliancewithregulationsoncounteracting

42 In thevariantwithaso-calledperemychka, i.e.an intersystemconnectionrunning fromBelarusviaPolandtoSlovakia.

43 Gazpromisinterestedinthis;oneproofofthisisthelargenumberofnegotiationroundsinwhichthepresidentofGazprom,AlexeyMiller,andtheprimeministerofGreece,AntonisSamaras,haveparticipated.Gazpromallocatedaround900millioneurosforthepurchaseofDEPA.

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excessiveconcentrationofassetsandtherulesofthethirdenergypackage.Fur-thermore, it isconceivablethatGazprom’swithdrawal fromthisprivatisationwasanelementofaninformaldealwithAzerbaijan.InJune2013,SOCARaspartoftheprivatisationprocesswonthetenderfortakingoverDESFA,theGreekgasoperator,andatthesametimemadeadecisionconcerningtherouteofthegaspipelinetobeconstructedaspartoftheEUSouthernCorridor;bychoosingtheTAP/TANAPoptioninsteadofNabucco,itthusrefrainedfromcompetingforthemarketsonwhichRussiawantstosellitsgasfromtheSouthStreampipeline.

ThesuccessfulnessofGazprom’sstrategyisprovenbydataillustratingthein-creaseinitsgasstoragecapacityintheEU.In2006–2010,Gazprom’sgasstor-agecapacityrosefrom1.4bcmto2.6bcm,toreachalmostdoublethelevel,i.e.4.51bcmin2010–2013.Thiswasachievedthroughbuyingassets,theconstruc-tionofnewstoragefacilitiesandrentingtanksownedbyEUfirms.Atpresent,Gazprom uses European gas storage facilities located in Austria, Germany,France,theUnitedKingdomandLatvia.In2014,itisalsoplanningtocompletetheconstructionofagasstoragefacilityinBergemeer,Holland;itstotalcapac-itywillbearound4.1bcm.Inturn,agasstoragefacilityisplannedtobeputintooperationin2016inDamborice,CzechRepublic.

Table 4.GasstoragefacilitiesintheEUusedbyGazprom44

Country Storage facility Capacity (bcm) Gazprom’s share

Austria Haidach 4.333.3%shares(therighttouse1.7bcm)

CzechRepublic

Damborice 0.456(in2018) 50%shares

Holland Bergemeer45 4.14642%shares(therighttouse1.9bcm)

44 In addition to gas storage facilities in EU countries, Gazprom also has one in BanatskiDvor, Serbia. This gas storage has a capacity of around 0.45 billionm3, and is 51% con-trolledbyGazprom. ‘Газпром удвоит мощности по хранению газа в Европе’,http://rbc-daily.ru/industry/562949980275426(accessedon20March2014); ‘Газпром запустил под Калининградом крупного «конкурента» латвийского газохранилища’; http://www.gorod.lv/novosti/206261-gazprom-zapustil-pod-kaliningradom-krupnogo-konkurenta-latviiskogo-gazohranilischa(accessedon:20March2014).

45 Itisexpectedtobeputintooperationin2014.46 Thefullstoragecapacitywillbereachedin2015.

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Country Storage facility Capacity (bcm) Gazprom’s share

Latvia Incukalns 4.47 actuallyinuse2.32bcm

Germany

EtzelRehdenJemgumKatarina

1.24.41.20.629

33.3%shares100%shares100%shares50%shares

UnitedKingdom

HumblyGroveSaltfleetby

0.2540.750

100%shares100%shares

Author’scalculationsbasedondatapublishedbyGasInfrastructureEuropeandtheofficialwebsiteofGazprom

Withoutrelinquishingthepriceformulausedthusfarinlong-termcontracts(accordingtosourceslinkedtoGazprom,theshareofspotpricesinthecon-tractscurrentlyinforceisaround7%,althoughthisshareinthepriceformulaishigher insomecontracts),Gazpromwillmake furtherattemptsat takingoverassetsthatenablegassuppliestoindividualcustomers(aswasthecasewiththeassetsexchangedealwithGermany’sBASF),thuscapitalisingontheopportunitytosellgasaspartoftransactionseffectedongasexchanges.Fur-thermore,while in 2009 theprice inGazprom’s long-termcontractswasonaveragearound70%higher than the spotmarketprices, in 2013 itwasonly5–6%higher. IntheopinionofHowardRogers fromOxfordInstitute forEn-ergyStudies,Gazpromcouldinfluencethepricesbyincreasingitsshareinthespotmarket47.Therefore,itcannotberuledoutthatinvestmentsingasstorageinfrastructure (especially inGermany)and interest inbuyingshares ingashubs48signifyGazprom’sfurtheractivityintheEuropeanspotmarkets.OnesignofthiscouldalsobeGazprom’sdeclaredinterestinreinforcingitspositioninthehighlyliberalisedBritishmarket.

47 ‘Paying the piper. Gazprom and European gas markets’, The Economist, 4 January 2014,http://www.economist.com/news/business/21592639-european-efforts-reduce-russian-state-owned-companys-sway-over-gas-prices-have-been(accessedon:10January2014).

48 ThemostseriousandunsuccessfulattempttoacquiresharesinamajorgashubconcernedtheBaumgartenhubinAustria.ThedealwasblockedbytheEuropeanCommissionin2011aspartofownershipconcentrationpreventionprocedure.

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1.3. Thepipelineexpansion

OneofthemeasuresusedbyRussiatomaintainandevenstrengthenitsposi-tionontheEuropeanmarketisincreasing the transport capacity by build-ing new pipelines whichareintendedtocontributetoboostingRussiangassuppliestotheEuropeanmarket.TheexpectedgrowthindemandforgasinEuropehasbeenusedasanofficialreasonforthis.AccordingtoGazprom’ses-timates,in2020demandwillrisebyaround80bcm,andin2030inaggregatebyaround200bcmincomparisonto201349.

Theconstructionof theSouthStreamgaspipeline,whichwasofficiallyinauguratedon7December2012,isapriorityprojectforRussia.Thenewpipelineconsistingoffourbranches,withaplannedtargetcapacityof63bcm,willrunthroughtheBlackSea,Bulgaria,Serbia,HungaryandSlo-veniatoItaly,withbranchesgoingtoCroatia,MacedoniaandBosniaandHerzegovina. Austria recently declared once again its intention to jointhe project. The representatives of Gazprom and Austria’s OMV signedamemorandumtothiseffecton29April2014inMoscow,andsharehold-ers of SouthStreamAustriaGmbH signed an agreement envisaging theconstructionof theAustriansectionofSouthStreamon24 June2014 inVienna50.ThemanagementofGazpromarestillinterestedinthefurtherdevelopmentoftheNordStreamgaspipeline,declaringthatitspossiblethird and fourth branches could beusedprimarily for supplying gas totheBritishmarket.

On the one hand, the analysis of gas supplies contracted and the existingavailable transport capacities suggests that theRussianpolicy is economi-cally irrational.However, in the longer run, increasing transport capacitymayconstituteasuccessfulmeansforpartiallyresolvingthelegalproblemsexistinginRussia-EUrelations.ThismayalsoenableRussiatoinfluencethe

49 ElenaKhodiakova, ‘Газпром снизит цены на газ ради увеличения экспорта’, Ведомости,5June2013.

50 Accordingtoofficialinformation,theAustriansectionofSouthStream,withaterminalinBaumgarten,isexpectedtocomeintooperationin2017,andwillmakeitpossibletotrans-mitup to32bcmofRussiangasannually (a transportcapacityat this level isplanned tobeachieved in January2018). ‘«Газпром» и Австрия отметили актуальность создания альтернативных маршрутов поставок российского газа в Европу’,http://www.gazprom.ru/press/news/2014/april/article189329/ (accessed on: 26 April 2014); ‘„Южный поток” возвращается в Австрию’,http://www.gazprom.ru/press/news/2014/april/article189898/(accessedon:29April2014);‘OMVseesSouthStreamreturn’,Argus FSUE,1May2014,page5.

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levelofgaspricesontheEuropeanspotmarketsandserveasaninstrumentforachievingitspoliticalgoals.

TheRussianpipelinepolicymay turnoutsuccessful in thecontextofcoun-teractingsomeoftheconsequencesoftheimplementationofthethirdenergypackage.ByintensifyingtheuseoftheexistingbranchesofNordStreamordeveloping it,Gazprommightavoidproblemsresulting fromtheneedtore-servetransportcapacityinthetransitcountries(inparticular,inthecaseofgastransportedviaUkraine).Thenewnetworkswouldofferitgreaterflexibil-ityinthecontextofapossibleredirectionofgassuppliestoEurope51,andulti-matelyaninstrumentformanipulatingtheEuropeangasmarket(themulti-tudeofavailableoptionsforgassupplytoEuropewillallowit,astheneedmayarise, todecreaseor increasesuppliesonthespotmarkets, thus influencinggasprices)52.However,whetheritwillbeabletoachievethisgoalwilldependontheEuropeanCommission’sconsenttothecomplete53exclusionoftheOPALgaspipeline(togetherwiththeNELpipeline,itformstheonshoreextensionofNordStream)fromtherulesofthethirdenergypackage,andespeciallythethird-partyaccessrule54,asrequestedbyGazprom.

Thenewpipelineswillalsobeusedtotorpedotheplanstobuildalternative(toRussian)transmissionnetworks.TheproposaltobuildSouthStreamwascor-rectlyseenasMoscow’sresponsetotheprojectenvisagingtheconstructionoftheNabuccogaspipelineviawhichAzerbaijani(andpotentiallyevenIranian)gascouldhavebeensuppliedtoEurope,whichwasannouncedin2003.ThusAzerbaijan’ssupportfortheconstructionoftheTAPandTANAPgaspipelinesisbeneficialtoRussia;sincethesepipelineswillconstituteonlypartialcompe-titiontoitsSouthStreamproject.Atthesametime,itenablesRussiatobemore

51 Thedeputypresident ofGazprom,AlexanderMedvedev, announcedon 2March2014 inLondonthat thecompany intendedtoreduce the transitofRussiangasviaUkraine thisyearto70bcm(fromthelevelof86.1bcmin2013).‘Ukrainetransitcutexpected’,Argus FSU Energy,vol.XIX,9,6March2014,page13.

52 SadekBoussena,CatherineLocatelli,‘EnergyinstitutionalandorganizationalchangesinEUandRussia.Revisitinggasrelations’,Economie Du Developpment Durable et De l’Energie,Octobre2012,http://lepii.upmf-grenoble.fr/IMG/pdf/CR17-2012_energy-institutional_SB-CL.pdf

53 Atpresent,Gazpromcanuse50%ofthispipeline’scapacity.54 TheGermanregulatorpassedadecisionwhichwasfavourabletoGazpromon18November

2013.ThemotionwasthennotifiedtotheEuropeanCommission,whichwastomakeadeci-sionconcerningthisissueby10March2014–onthatdaytheEuropeanCommissionissuedastatementthatthedeadlineforthedecisionwaspostponed.On16July2014,theEuropeanCommissionagainpostponeditsdecisiontothiseffectsinedie.TheRussianministryforenergyhasannouncedthatitexpectsthedecisiontobetakeninmidSeptember2014.

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flexibleindecidingonthefinalshapeofSouthStream55.Inturn,thecontinuedinterestindevelopingNordStreamcanbeviewedasaresponsetotheinten-sificationofEUcountries’efforts(especiallyintheBalticSearegion)aimedatdevelopingLNGterminals.

Moscowhasusedtheimplementationofpipelineprojectsinco-operationwithselectedEUmemberstatesasameansofstrengtheningitspoliticalinfluenceinEurope.OneproofofthisisinRussia’srelationswiththecountriesengagedintheconstructionoftheSouthStreampipeline,especiallywithHungary.BydemonstratingwarmpoliticalrelationswithBudapestandofferingitfavour-ableconditionsforeconomicco-operation(notonlyinthegassectorbutalsointhenuclearsector)MoscowispresentingitselfasanappealingpartnerwhocangrantsupporttothoseEUmemberstates,especiallyinCentralandEast-ernEurope,whichare in conflictwith theEuropeanCommissionandsomeEUmemberstates.Anotherfactorwhichbringsthetwocountriescloseristheattachmenttoconservativevaluesmanifestedbytheirleaders;andthisfitsinwiththetrendsindomesticandforeignpolicysetbytheKremlin56.Thereadi-nesstoenhancerelationswithRussiashownbythecountriesengagedinSouthStreamismakingiteasierforMoscowtopursueitspolicybasedonbreakingtheunityofEUcountries.Onedirecteffectofthispolicy,whichisbeneficialtoRussia,isthefactthatBrusselsisunabletoadoptafullycohesivepolicywithregardtoMoscow.ThelackofacommonstanceintheEUontheimpositionofreallypainfulsanctionsonRussiainconnectionwiththeUkrainiancrisiswasjustoneexampleofthis.

1.4. ThediversificationofthedirectionsinRussiangasexports

GiventhemountingregulatorychallengesontheEuropeanmarket,represent-ativesofGazpromhaveannouncedtheywouldcontinueeffortstodiversifyex-portmarkets.TheyhavedeclaredthattherapidlydevelopingAsianmarkets,andespeciallytheChinesemarket,couldbecameanalternativetoEurope.ThedeterminationmanifestedbyVladimirPutin,whoviews theenergyexpan-sion inAsianotonly in economicbutalso ingeopolitical terms,hasagreatimpactontheeffectivenessoftheimplementationoftheEasternprojects.

55 JudyDempsey,‘VictoryforRussiaAstheEU’sNabuccoGasProjectCollapses’,CarnegieEurope,1July2013,http://carnegieeurope.eu/strategiceurope/?fa=52246(accessedon:10September2013).

56 SzymonKardaś,AndrzejSadecki, ‘Russian-Hungariannuclearagreement’OSW Analyses,15January2014,http://www.osw.waw.pl/en/publikacje/analyses/2014-01-15/russian-hun-garian-nuclear-agreement

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ThesigningoftheRussian-ChinesegascontractinShanghaion21May2014-aftermorethantenyearsofnegotiations57-representswhatisinfactonlyamoderatesuccessonthepartofGazprom.Firstly,thevolumeofsuppliesen-visagedunderthecontract(38bcmastheultimatelevel)isincomparabletotheexportstotheEuropeanmarket(EUandTurkey-164.24bcmin2013).AlthoughthesignificanceoftheChinesemarketmayincreaseifRussianLNGprojectsarecarriedout(additionallyaround40bcmofgasintheoptimalversionandaround82bcminthemostoptimisticscenario),butthiswouldrequireaccel-erationofworkandobtainingguarantees for the investments to enable theprojectstoreachmaximumcapacities,whichappearstobequiteunrealisticnow.Giventheaforementionedfacts,itisdifficulttotreattheexpansionofgassupplytoAsiaasagenuinealternativetoEurope;theEuropeanmarketwillremainthekeyoutletforRussiangasexportedviapipelines.

Secondly,RussiamayalsofinditdifficulttogaintheexpectedmarketpositioninChinaorotherAsiancountries.WhileinEuropeRussiaalreadyhasawell-establishedpositionasagassupplierresultingfromdecadesofco-operation,itwillhavetofightforanequivalentstatusontheChinesemarket(orotherAsianmarkets)andfacebittercompetitionwithsuchmajorexportersoflique-fiednaturalgasasAustralia,QatarandpossiblyalsowiththeUSAwithinafewyears’time.Thirdly,thiscontractisimportantforRussiamainlyforpoliticalreasons.ThefuturediversificationofgasexportrouteswillbeusedbyRussiaasaninstrumentduringnegotiationswiththeEU.However,sinceitisimpos-sibleforgassuppliestobereroutedfromEuropetoAsia,theeffectivenessofthisinstrumentappearstobelimited.

1.5. TorpedoingtheplansforshalegasextractionintheEU

Seeing theattempts takenbysomeEUcountries to implementshalegasex-traction plans and thus improve their independence in the energy sector,Russiahasbecomeengagedin‘anti-shale’lobbying,employingbotheconomic

57 Firstofall,itisunclearwhetherthiscontractwillbringGazpromexpectedlong-termeco-nomicbenefits.ThegaspricerangingbetweenUS$350andUS$390per1000m3,giventhehighcostsof thefieldoperationandthedevelopmentofproductionandtransport infra-structuremaymeanthatthesupplieswillbemadeonthevergeofprofitability.TheShang-haicontracthavenotdefinitelyclosedthenegotiationprocess,sincenobindingagreementonthegaspipelineconstructionhasbeensignedandnotallfinancialaspectsofthispro-jectshavebeenarrangedasyet.Formore,see:SzymonKardaś,‘Theeastern‘partnershipofgas:GazpromandCNPCstrikeadealongassuppliestoChina’,OSW Commentary,16June2014,http://www.osw.waw.pl/sites/default/files/commentary_139_1.pdf

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(overlyhighproductioncosts,lessercompetitivenessofshalegasascomparedtogaspurchased fromconventional sources)andenvironmentalarguments(claiming that theuseof thehydraulic fracturingmethodwillhaveamajordetrimental impact on thenatural environment).Thishas beenmanifestedthroughboththeofficialdocumentationofGazprom(resolutionsbytheboardofdirectorsandannualstatementsonthecompany’soperation)andthroughpublicannouncementsbyitsmanagement(forexample,theopenletterpub-lishedbythedeputypresidentofGazprom,AlexanderMedvedevinthePolishdailynewspaperGazeta WyborczainFebruary2014).

Russiaisalsoengaged–usuallyviaitsEuropeanbusinesspartners,hiredcon-sultingfirmsorpoliticalforcesfromEUcountrieswhicharefavourablydisposedtoMoscow–inintensivelobbyingagainstshalegasextractioninEUmemberstates.OneproofofthishasbeentheinformalsupportgrantedbyRussiatotheanti-shalecampaigninBulgaria.Asaresult,BulgariapassedalawinJanuary2012imposingacompletebanontheuseofhydraulicfracturingtechnologiesforexplorationandproductionofshalegasandoil58.TheSocialistParty(whichistraditionallyfavourablydisposedtoRussia)playedakeyroleinpassingthislaw,andtheprotestcampaignsprecedingthepassingofthislawweremostlikelyin-spiredbytheOverGasfirm,aBulgariantradepartnerofGazprom59.Anotherex-ampleistheactivityofthelobbyingfirmGPlusEurope,withwhichGazpromEx-porthasco-operatedsince2007.Thisfirm’sofficialtaskistoimproveGazprom’simage. However, themedia have suggested on numerous occasions that it isalsoengagedinintensivelobbyingfortheRussiancompany,andinparticularagainstinitiativeswhichcouldputatstakeGazprom’spositionintheEU(shalegasprojectsandtheconstructionofLNGterminalsincountriesheavilydepend-entonRussiangassupplies)60.EuropeanenergycompaniesarealsobecomingGazprom’s‘allies’intheanti-shalecampaign.Theintensivegasco-operationofGermanandFrenchcompanieswithGazpromisoneofthemajorfactorswhichcontributetoblockinglegalsolutionsthatwouldenabletheimplementationofshaleprojectsinFranceandGermany61.

58 Formore,see:TomaszDąborowski,‘Bulgariaisnolongerinterestedinshalegas’,EastWeek,25 January2012,http://www.osw.waw.pl/en/publikacje/analyses/2012-01-25/bulgaria-no-longer-interested-shale-gas

59 John Daly, ‘Russia Behind Bulgarian Anti-Fracking Protests?’, 4 February 2012, http://oilprice.com/Energy/Natural-Gas/Russia-Behind-Bulgarian-Anti-Fracking-Protests.html(accessedon:10May2014).

60 Robert Zubrin, ‘Putin’s Anti-Fracking Campaign’, 5 May 2014, http://www.nationalreview.com/article/377201/putins-anti-fracking-campaign-robert-zubrin(accessedon:12May2014).

61 KeithC.Smith,‘UnconventionalGasandEuropeanSecurity:PoliticsandForeignPolicyof

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2. The defensive actions

2.1. ChangesintheRussiangassector

Thechangesinregionalgasmarkets,includingthoseseenoverthepastfewyearsintheEU,havetriggeredacertainevolutionintheRussiangovernment’sapproachtowardsissuesregardingtheorganisationoftheirdomesticgassec-tor.PresidentelectVladimirPutinstatedduringasessionoftheStateDuma(Russianparliament)inApril2012thatthechangesontheglobalmarkets,andinparticulartheshalerevolutionintheUSA(anupsurgeinshalegasoutputfrom81bcmin2008to240bcmin2012)couldchangetheglobalenergymarket,andthesenewchallengesneededtobeaddressedbyRussianenergyfirms62.Putinhas spoken ina similar spiritduring themeetingsof thepresidentialCommissionforStrategicDevelopmentoftheFuelandEnergySectorandEn-vironmentalSecurity.Russiabecameconcernednotonlybecauseofhurtam-bition(thehardtoacceptlossofstatusastheworld’slargestgaspowerduetotheshalerevolutionintheUSA)butalsoforstrictlyeconomicreasons(thefallingasexportstoEurope)63.

TheevolutionoftheRussianapproachhasbeensignifiedforexamplebytherestrictionsimposedonGazprom’sexportmonopolyandplansforfurtherlib-eralisationoftheRussiangasmarket,whichalsoprovidefortherestructuringofGazprom.

TheliberalisationofgasexportrulesregardingLNGcameintoeffecton1De-cember2013,mainlyowingtointensivelobbyingfromGazprom’scompetitors:RosneftandNovatek64.Notwithstanding the individual interestsof these twocompanies,oneofthemainreasonswhyVladimirPutinbackedthisconceptwastherapiddevelopmentoftheLNGmarketonbothaglobalandregionalscale,includinginEurope,whichRussiaviewsasitsstrategicmarket.WhileinitiallytheliberalisationwasintendedtocoveronlytheLNGexportedtoSouth-Eastern

FrackinginEurope’,CentreforStrategicandInternationalStudies,http://www.usubc.org/site/files/Unconventional_Gas_and_European_Security.pdf(accessedon:8May2014).

62 JavierBlas,‘Russiafaceschallengetogassupremacy’,Financial Times,17April2012.63 Thestenographicrecordsofthecommission’smeetingsarepublishedontheofficialwebsite

of the President of theRussian Federation: http://state.kremlin.ru/commission/29/news(accessedon:13December2014).

64 Formoreontheregulationitselfanditsconsequences,see:SzymonKardaś,‘Afeignedlib-eralisation:RussiaisrestrictingGazprom’smonopolyonexports’,OSW Commentary,28No-vember2013,http://www.osw.waw.pl/sites/default/files/commentary_121_0.pdf

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Asia, thedecisionwasultimatelymadenot to imposeanygeographic restric-tions,andthusthewaytoexportingLNGtotheEUmarketwasopened.

ThesuggestiontodeepentheprocessofliberalisationoftheRussiangasmar-ketisheardmoreandmoreofteninpublicdiscussions,bothwithinthesector65andamonggovernmentcircles66.TheCEOofRosneft,IgorSechin,appealedforthe right toexportgasvia thepipeline system to the so-called independentproducers (thedominant companiesbeingNovatekandRosneft)during themeetingofthepresidentialCommissionforStrategicDevelopmentoftheFuelandEnergySectorandEnvironmentalSecurityon4JuneinAstrakhan,whichwasattendedbyVladimirPutin.ThisproposalconcernedtheoutputofthegasfieldslocatedinEasternSiberiaandtheFarEasttobesoldtoSouth-EasternAsianmarkets(inparticular,toChina).VladimirPutin,whohadpreviouslycriticisedtheideaofdemonopolisationofgasexportsviathepipelinesystemonnumerousoccasions(atpresent,thisrightisvestedonlyinGazprom),didnotexpresshisopenobjectionthistime,whichshouldbeinterpretedasachangeinhisstance;andthispracticallypresupposes thatSechin’s ideawillbeputintopractice.TheamendmentstotheMainStatementsoftheEnergyStrategyofRussiafortheperiodupto2035publishedon23January2014onthewebsiteoftheMinistryofEnergyoftheRussianFederation67isanothersignindicating

65 InJanuary2014,ITAR-TASSagencypublishedareportonitswebsitesuggestingthatRos-nefthadput forwardamotion for adeepeneddemonopolisationof thegas sector to thegovernmentoftheRussianFederation.Initsfirststage,thedomesticandexportgaspriceswouldbegraduallyaligned,andallRussiangasfirmswouldbegrantedequalaccesstothegaspipelinenetworkandwouldbeallowedtoexportgasusingthepipelinesystemasapi-lotproject.Establishingaseparate–inorganisationalandlegalterms–entitythatwillbeputinchargeofmanagingthegastransportinfrastructurewouldbeakeyelementofthesecondstage.Astate-controlledcompanywouldensurefairaccesstothegasnetworktoallparticipantsoftheRussianmarket.Thesecondstagewouldalsocoverfurtherdevelop-mentofthegastradesystemusingtheexchangemechanismandvestingallmarketpartici-pantswiththerighttoexportgasusingthepipelinesystem.‘Роснефть предложила план отмены монополии Газпрома на экспорт газа’,http://itar-tass.com/ekonomika/926789,(accessedon:30January2014).

66 Accordingtounofficialopinionsofdecision-makersfromtheRussianMinistryofEnergy,ifOPALandNELandSouthStreamarenotexcludedfromthethirdenergypackage,itispos-siblethatotherRussianfirms,Gazprom’scompetitors,willbegivenaccesstothepipelines.ThiswouldinfactmeandemonopolisationofRussianexports.Thissolutionhasneverbeenputforwardofficially.However,apparently,thisoptionisbeingconsideredunofficially.TheideatosplitGazpromintotwocompanies,whichwouldbeputinchargeofgasproductionandtransport,whichwassuggestedsometimeago,isalsobeingmentioned.AsourceoftheRussiannewspaperKommersantatthePresidentialAdministrationhasconfirmedthattheGazpromsplitissuehasbeenbroughttoahighlevel. ‘Роснефть готовится к разделению Газпрома’,Коммерсантъ,19April2013.

67 ThefinalversionoftheamendedEnergyStrategyofRussiafortheperiodupto2035isto

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thatGazprom’spositionisverylikelytobefurtherreduced.Accordingtothisdocument,themaingoalsofRussianenergypolicyinthecomingyearsshouldincludestimulatingthedevelopmentoftheso-calledindependentgasproduc-ers,providingallgasmarketparticipantswithequalaccesstothetransportinfrastructure operated byGazprom and ending the process of unbundlingthevarious,mutuallycompeting,kindsofactivitybeingconductedaspartofthestate-ownedcompanyGazprom68(thisambiguousformulais interpretedpartlyasasuggestiontounbundleproductionfromtransportandentrusttwoseparateentities,inorganisationalandlegalterms,withthesetasks).

Furtherliberalisationisalsobecomingmorelikelyastheso-calledindepend-entgasproducersareconsistentlygainingsignificance.Theseare,aboveall,NovatekandRosneft,whicharemakingeffortstostrengthentheirpositionathomeandonforeignmarkets.Thesetwocompanieshaveannouncedthattheirgasoutputby2020willincreaseto115–120bcmand100bcm,respectively.Al-thoughRosneftdemandsatpresenttobegiventheopportunitytoexportgastotheChinesemarket,itisverylikelythattheprocessofdemonopolisationofgasexportsaspartofthepipelinesystemwillalsocovergassuppliestotheEuro-peanmarketinthelongerrun.Thiswillbeaneffectofnotonlylobbyingfromtheso-calledindependentgasproducers(aboveall,Novatek,oneproofofwhicharethewordsofGennadyTimchenko,whoannouncedduringtheinternationaleconomicforuminSaintPetersburgthathiscompanywasreadytosupplygastoEurope throughthepipelinesystem)butalsoofastrategicdecisiontakenbytheRussiangovernmentinresponsetoGazprom’sdecreasingefficiencyandmountingchallenges(aboveall,regulatory)ontheEuropeanmarket69.

2.2. OvercomingbackwardnessintheLNGsector

Oneconsequenceofthedevelopmentoftheliquefiednaturalgasmarketontheglobalscale(includingthepromisingopportunitiesforthedevelopmentofre-gasificationinfrastructureinEuropeandAsia)isRussia’smoreactiveengage-mentintheLNGsector.Overthepastyearorso,Russianenergycompanies

bepresentedtothegovernmentbytheministerforenergyon1October2014,http://www.energy-experts.ru/news13094.html(accessedon:12May2014).

68 ‘Основные положения проекта энергетической стратегии России на период до 2035 года’,http://minenergo.gov.ru/documents/razrabotka/17481.html(accessedon:23January2014).

69 Szymon Kardaś, ‘The creeping ‘de-Gazpromisation’ of Russian exports’, OSW Analyses,11 June 2014, http://www.osw.waw.pl/en/publikacje/analyses/2014-06-11/creeping-de-gazpromisation-russian-exports

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havedemonstratedhighdeterminationasregardstheimplementationofLNG projects in an attempt to catch up with other countries active in this sec-tor (Australia,NewZealandandQatar, tobe followedsoonby theUSAandCanada).Interesthasbeendemonstratedbybothgas(GazpromandNovatek)andoilfirms(Rosneft).AlthoughAsianmarkets(China,JapanandSouthKo-rea)areplannedtobethemaindestinationsforexports,thefinalversionoftheactliberalisingtherulesofLNGexportssuggeststhatRussianfirmsattachsimilar significance to Europe as an export destination. This has been con-firmedbyboththeguidelinesadoptedaspartoftheLNGprojectsinprogress(Novatek,TotalandCNPCaspartoftheYamal-LNGprojectorGazprom’splansto build a gas liquefyingplant in LeningradOblast andLNG infrastructureinKaliningradOblast)andthecontractsconcludedthusfar(NovateksignedacontractenvisagingLNGsuppliestoSpainon23November2013).Aspecifica-tionofplannedandexistingprojectsisprovidedinTable5.

Table 5.ThespecificationofexistingandplannedRussianLNGprojects

Project name Key shareholder from Russia

Launch date Production capacity(bcm)

Initial / ultimate

Sakhalin-2 Gazprom 2012 15/20.7

Vladivostok-LNG Gazprom 2018 6.9/20.7

Baltic-LNG Gazprom 2020 4.1/4.1

Sakhalin-1 Rosneft 2018 6.9/13.8

Yamal-LNG Novatek 2017 7.6/22.8

Total 40.5/82.1

Author’scalculations

ConsideringthecurrenttrendsandthedevelopmentpotentialoftheEuropeanliquefiednaturalgasmarket,itisverylikelythattheLNGsectorwillbecomeanewvitalareaofRussianactivityinEuropeinthelongerrun.Thishasbeensuggested,forexample,intheofficialreasonsgivenforthegasexportliber-alisationactconcerningLNG(therapidlydevelopingLNGmarketintheEU)andtheofficialmovesandstatementsfromNovatek.On1November2013,onedayafterthebillhadbeenapprovedbythegovernment,Novatekannouncedthatithadsigneda25-yearcontractwithSpain’slargestimporterofliquefied

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naturalgas,GasNaturalFenosa,andhassincethendeclaredinterestinmoreextensiveLNGexportstoEurope.

By demonopolising gas exports, which have been traditionally associatedwiththeGazprombrand,whichislessandlessusefulinbothpoliticalandeconomicterms,andbyprovidingGazprom’scompetitorswithaccesstoex-portinfrastructure,Russiaismakinganattempttomaintainitspositiononthisstrategicmarket.Theincreasinglylikelyextensionofexportliberalisa-tionrulestogassuppliedviapipelines,albeitdisadvantageoustoGazprom,maybringtangiblebenefitstotheRussiangasmarketasawhole.AcompletedemonopolisationofRussiangasexportsandaccesstopipelineinfrastruc-ture guaranteed to other, competitive, Russian gas firms, combined withrestructuring of Gazprom,might on the one hand contribute to resolvingthelegalproblemsingasrelationsbetweenRussiaandtheEU(thepossiblesplitofGazpromintoseparatecompaniesinchargeofgasproduction,tran-sit andexportswouldmatch the liberalisation changes takingplace inEUcountries).Ontheotherhand,thedemonopolisationwouldmakeiteasierforRussiatoretainitspresentpositioninEurope,whichitviewsasastrategicmarket(RussiaexportsgasnotonlyviathepipelinesystembutalsointheformofLNG,carriedoutbybothGazpromandotherso-calledindependentgasproducers).

2.3. PricediscountsforEUcustomersandtherestrictedmodificationofthecontractpolicy

InanattempttocounteractthenegativeconsequencesofthefallingdemandforRussiangas,andgiventheoversupplyofnaturalgasinEurope,Gazpromhasbeenforcedtopartlyreviseitspricepolicy.Oneproofofthishasbeenthe reduction of gas prices aspartofsuppliestoselectedEuropeancustomers(thelistofentitieswhichhavebeengranteddiscountsisprovidedinTable6).ThediscountsofferedbyGazpromtoitsEuropeanrecipientscostUS$2.7billionin2012(accordingtoGazprom’ssources,US$3.2billion70),andUS$4.7billionin2013.

70 http://www.bloomberg.com/news/2013-06-04/gazprom-cuts-2013-gas-export-price-fore-cast-amid-contract-talks.html

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Table 6.GaspricediscountsgrantedbyGazpromtoEuropeancustomers(estimateddata))7172737475

Country Company Discount date Size

Austria Econgas17January201210December2013

10–15%10–15%

Czech Republic

RWETransgas

Arbitrationproceedingslaunchedin2011

ThecourtpassedadecisionunfavourabletoGazprominJune201371

France GDFSuez 17January2012 10–15%

Greece72 DEPA February2014 15%

Holland ShellEuropeGasTerra

June2011

Modificationofthepriceformula(45%ofthepriceisorientedtospotmarketprices)

Lithuania LietuvosDujos

ArbitrationproceedingslaunchedinOctober2012AdealonpricediscountannouncedinMay2014

around20%(asannouncedbyLietuvosDujos)73

71 The size of thispricediscounthasnotbeen revealed. ‘ArbitrationCourtRules InRWE’sFavorInGasPricingDisputeWithGazprom’,27June2013,http://www.rttnews.com/2142717/arbitration-court-rules-in-rwe-s-favor-in-gas-pricing-dispute-with-gazprom.aspx(accessedon:7May2014).

72 DEPAinitiallyinsistedona20%discount(fromthepresentlevelofUS$460per1000m3toUS$370per1000m3).Inturn,theRussiansideatthebeginningagreedtoreducethepricetoUS$389-399per1000m3,i.e.byaround13%.DEPAwasoneofthefirstcompaniestohavesucceededinobtainingapricediscountinnegotiationswithGazprombackin2011;‘Греция настаивает на большем’, Коммерсантъ,13February2014,http://www.kommersant.ru/doc/2406797

73 Accordingtoreports,thediscounthasbeengrantedwithinthetimeframefrom1July2014to31December2015,andthediscountedpricewillbeUS$370per1000m3.‘Литва договорилась с Газпромом о снижении цены на газ’,http://1prime.ru/gas/20140508/784473530.html(ac-cessedon:8May2014).

74 ‘E.Оn подал новый арбитражный иск к Газпрому’, Ведомости, 4 July 2014, http://www.vedomosti.ru/companies/news/28582871/eon-podal-novyj-arbitrazhnyj-isk-k-gazpromu#ixzz37RZDc8xX(accessedon:10July2014).

75 Thecontractprovidesforsuppliesof1.5billionm3ofRussiangasannuallyuntil2021.‘Rus-sia,SerbiaSignLong-TermGasSupplyDeal’,http://en.ria.ru/business/20130327/180283903/Russia-Serbia-Sign-Long-Term-Gas-Supply-Deal.html(accessedon:8June2014).

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Country Company Discount date Size

Germany

WinGasGmbH

17January2012 10–15%

E.ON

July2012(precededbythelaunchofarbitrationproceedings)

10%

April2014–arbitrationproceedingsconcerningafurtherpricediscountwerelaunched74

–

RWEJune2013(asaconsequenceofarbitrationproceedings)

15%

Poland PGNiGNovember2012(precededbyarbitrationproceedings)

10–15%

Serbia Srbijagas 27March2013 13%75

Slovakia SPP17January2012April2014

10–15%10–15%themodificationofthe‘takeorpay’formula

Italy

SinergieItaliane

17January2012 10–15%

Eni

2010 15%

201215%(probably)US$1.15billionannually

23May2014changeinthepriceformulaandtheintroductionoflessstrict‘takeorpay’rule

Edison22July2011(precededbythelaunchofarbitrationproceedingsin2010)

changeinthepriceformulaandtheintroductionoflessstrict‘takeorpay’rule

Author’scalculationsbasedoninformationpublishedintheRussiandailiesВедомости and Коммерсантъandinspecialistenergyportals

Mostofthediscountshavebeengrantedasaconsequenceofbusinessnegotia-tionsandonthebasisofthepricerevisionclausesincludedinthecontracts.AlthoughtheaveragepriceofRussiangashasfallenacrosstheentireEU(in2013,itwasUS$402per1000m3ascomparedtoUS$ 416.8per1000m3in2012)76,

76 DatamadepublicbyGazpromExportattheendofDecember2013http://www.vestifinance.ru/articles/37532(accessedon:13June2014).

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thecountrieswhichhavebenefitedmost fromtheconciliatorystance takenbytheRussiancompanyarethosefromWesternEurope.InthecaseofCen-tralEuropeancountries,whichareheavilydependentonRussiansupplies,thediscountshavebeengrantedonaselectivebasis,oftenunderthreatoforfol-lowingthelaunchofarbitrationproceedings,mostofwhichendeddisadvan-tageouslytoGazprom77.The‘division’ofEuropeanclientsintothosewhocanbetreatedonpreferentialtermsandthosewhocanbediscriminatedagainstisalsoevidentwhenonecomparesthepricespaidforRussiangasbyWesternEuropeanandCentralEuropeanstates(Table7).

Table 7.TheaverageannualgaspriceforindividualEUmemberstates

CountryAverage annual gas price (US$)

2011 2012 2013

Lithuania 397 520 480

Greece 414 475 469

Slovakia 333 428 438

Poland 420 433 429

Latvia 397 440 420

Estonia 397 440 420

Hungary 383 416 418

France 399 398 404

Austria 387 394 402

CzechRepublic 419 500 400

77 Arbitrationproceedingswerelaunched,forexample,byPoland’sPGNiGinFebruary2012in order to be granted a price discount. Finally, a business compromisewas reached inNovember2012,and thePolishsidewithdrew itspetition to theStockholmCourtofAr-bitration.Anotherexample isprovidedbytheproceedings initiatedbyGazpromagainsttheCzechcompanyRWETransgaz,demandingpaymentforgasuntakenin2008–2011.ThearbitrationcourtinViennaruledinfavouroftheCzechcompanyandruledthat,giventhesituationonthemarket,RWETransgazhadreasonablyrefusedtocomplywiththe‘takeorpay’clause.

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CountryAverage annual gas price (US$)

2011 2012 2013

Holland 366 346 400

Italy 410 438 399

Slovenia 377 400 396

Bulgaria 356 435 394

Romania 390 424 387

Denmark 480 394 382

Finland 358 373 367

Germany 379 353 366

UnitedKingdom - 313 285

AverageannualgaspriceforEUcustomers

392.3 416.8 402

AverageannualgaspriceforEuropeancustomers(includingnon-EUmemberstates)

398.8 421 387

Source:JamesHenderson,SimonPirani(ed.),‘TheRussianGasMatrix:HowMarketsareDrivingChan-ge’,OxfordUniversityPress2014.

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Chart 2.ThedegreeofEUcountries’dependenceonRussiansupplies,andgaspricesforeachoftherecipients

Austria

0 20 40 60 80 100%Degree of dependence on Russian gas

Bulgaria

Czech Republic

Denmark

Estonia

Finland

France

Greece

Holland

Lithuania

Latvia

Germany

Poland

Romania

Slovakia

Slovenia

Hungary

Italy

PRICE:

United Kingdom

0 100 200 300 400 500 US$

Source:www.eurogas.org,JamesHenderson,SimonPirani(red.),TheRussianGasMatrix:HowMarketsareDrivingChange,OxfordUniversityPress2014.

WhileGazpromisreadytooffertemporarydiscounts toselectedcustomers,inprinciple,withafewexceptions78,it is not willing to accept proposals to change the price formula whichenvisage thatgaspriceswillno longerbebasedon thepricesof crudeoil andpetroleumproductsand insteadbe ref-erenced to spotmarket prices. Gazprom’s representatives have argued thatthevolatilityofpricesonthespotmarketsadverselyaffectsthecertaintyof

78 One example is themodification of the price formula in contractswith recipients fromNorth-WesternEurope,aboveallwithHolland’sGasTerra(inautumn2011,45%ofthepriceformulawasbasedonspotmarketprices).Onaverage,Gazpromacceptstheshareofspotmarketprices in thebasketonwhich thefinalprice isbasedata level rangingbetween15%and25%.‘SpotPriceInsurgency’,http://www.naturalgaseurope.com/spot-gas-pricing-versus-oil-linked-contracts(accessedon:10January2014).

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businessrelationsbetweenthegassupplierandthecustomerand,moreim-portantly,givesnoguaranteethatadequateincomewillbegenerated,whileasignificantpartofthisincomeisallocatedforinvestmentsintheRussianup-streamsector.

However,itisverylikelythattherapiddevelopmentofthespotmarketswillforceGazprom to adjust its trade policy. The evolution of themarket situ-ationwillmakeEuropeangas importersmoreassertive, and theywill be-comebolderinquestioningthecontractingpolicyemployedbytheRussiancompanythusfar.RepresentativesofItaly’sEniannouncedbackinautumn2012thattheywouldinsistonthecancellationofthe‘takeorpay’clauseorachangeintherulesofgaspriceindexation,wherethepriceswillnolongerbebasedoncrudeoilandpetroleumproductpricesbutinsteadonthespotmarketprices.ThedealsignedwithGazprominMay2014providesthatspotmarketpriceswillbetakenintoaccountinthepriceformulawithregardtotheentireamountofgascontracted79.Theoutcomeoftheantitrustinvestiga-tionmayalsoforceGazpromtomodifyitscontractpolicy.Accordingtopressreports,thegreaterpartoftheEuropeanCommission’sreservationsconcernprecisely thepricepolicyadoptedbyGazprom.TheEuropeanCommissionexpectsthatGazpromshouldaspartofitsobligationsoffermoreflexiblecon-tractingterms:achoicebetweenthespotformulaandaformulabasedonoilandpetroleumproductprices80.

2.4. ThepartialadjustmenttotheEU’smarketliberalisingregulations

Gazprom,jointlywithitsEuropeanpartners,hasalsotakenlimitedstepstoadjusttothenewregulationsliberalisingtheEUgasmarket.OneexampleofthisistherestructuringofWingasGmbH&Co.KG(ajointventureofGazpromand Germany’sWintershall) which was finalised inMay 2012. As a conse-quenceofthismove,aholdingnamedWintershall&GazpromBeteiligungs-GmbH&Co.KGhasbeenestablishedandseparateentitiesoperatingaspartofthisholdinghavebeenputinchargeofthevarioussegmentsofthenaturalgasmarket:WingasGmbHwillberesponsibleforgastrading,whileGASCADE

79 ‘Клиенты Газпрома добиваются смягчения условий’, Ведомости,15October2012,http://www.vedomosti.ru/companies/news/4998891/ne_beri_i_ne_plati (accessed on: 8 May2014);‘Газпром согласился увеличить зависимость от спотового рынка газа’,Ведомости,4 July 2014, http://www.vedomosti.ru/companies/news/28561971/gazprom-narushil-tabu(accessedon:10July2014).

80 ‘Газпром и ЕК не находят согласия по вопросу цен на газ для Восточной Европы’,10Feb-ruary2014,http://www.oilcapital.ru/industry/230896.html(accessedon:7May2014).

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GastransportGmbH,OPALGastransportGmbHandNELGastransportGmbHwillbeinchargeofgastransport(independenttransmissionoperators)withAstoraGmbH&CoKG (a subsidiaryofWingasGmbH)operating in thegasstoragesegment.81.

AnotherexampleisthechangeofGazprom’ssituationinLithuania.TheLithu-aniangovernmenthasdecidedtoimplementthegasdirectivewhichprovidesfor the strictest unbundling model, i.e. ownership unbundling. Gazprom,whichalongwithGermany’sE.ONandtheLithuaniangovernmentco-ownedtheLithuaniangascompany,LietuvosDujos,hasbeenforcedtoagreetoitsun-bundlingincompliancewiththeguidelinesoftheEU’sthirdenergypackage(completeownershipseparation).TheLithuanianprimeministerannouncedon17JunethatGazpromhadsolditssharesintwoLithuanianstate-controlledcompaniesinthegassector(blocksof37.1%shareseach)–LietuvosDujos(gasdistribution)andAmberGrid(transmissionandinfrastructuredevelopment)forapriceofaround120.7millioneuros.Threeentitiesoperatinginthreedif-ferentareas(transport,distributionandinfrastructuredevelopment)areex-pectedtobeformedoutofLietuvosDujosbytheendof201482.

Gazprom’s long-standing resistance to actions takenby theLithuaniangov-ernmenthadtobediscontinuedwhenitspreviousally,theGermancompanyE.ONRuhrgas,withdrew from theLithuanianmarket andagreed to sell itssharesinLithuaniancompanies.LithuaniathusbecamethefirstEUmemberstatetohaveforcedGazpromtoadjusttotheleastfavourablevariantofunbun-dlingenvisagedundertheregulationsoftheso-calledthirdenergypackage83.

81 DataasprovidedontheofficialwebsiteofWintershall&GazpromBeteiligungs-GmbH&Co.KGhttp://www.w-und-g.com/home.html(accessedon:10.07.2013).

82 Lithuania sets gas unbundling deadline forOctober 2014, http://www.reuters.com/arti-cle/2011/10/28/lithuania-gas-unbundling-idUSL5E7LS0YQ20111028

83 Formoresee:JoannaHyndle-Hussein,‘GazpromsellsoffitsassetsinLithuania’,OSW Analy­ses 25 June 2014, http://www.osw.waw.pl/en/publikacje/analyses/2014-06-25/gazprom-sells-its-assets-lithuania

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III. SCENARIOS FOR THE DEVELOPmENT OF GAS RELATIONS BETwEEN RUSSIA AND THE EU

Thetensionseenoverthepastfewyears inRussia-EUgasrelationsis likelytocontinuerisinginthecomingyearsduetothecomplexityofexistinglegalproblems,thepoliticalcrisislinkedtothesituationinUkraineanditsimplica-tionsforRussia-Ukraine-EUrelations,thetrendsontheEuropeangasmarketandthedifferenceintheinterestsofindividualEUmemberstatesinrelationswithRussiaasregardstheenergysector.

1. Possible resolutions to the legal problems in Russia-EU relations

ApoliticalcompromiseongasissuesbetweenRussiaandtheEuropeanUnionisnotcompletelyruledoutbut,giventhedifferencesinapproachesadoptedbythetwosides,itwillbeextremelydifficulttoreach.TheEU(andespeciallytheEuropeanCommission)havemadeattemptsoverthepastfewyearstoshowastrongdeterminationinmakingsurethatitsmemberstatesandallentitiesoperatingon its internalmarket complywithEUenergy law.LiberalisationaimedatimprovingcompetitivenessontheEUmarketandalsothedesiretotransfer the rules resulting fromEU law to third countries are thekey ele-mentsofthislaw.Inturn,Gazpromisguidedbytheverticalintegrationlogic(oneentityincontrolofproduction,transmissionandsales),definitelypreferslong-termcontractsandsupportsrestrictionsinaccesstoitsfieldsforforeignentities,andthiscontradictstheassumptionsoftheprojectaimedatbuildingtheinternalenergymarketintheEU84.

The announcement of the outcome of the European Commission’s antitrustproceedings againstGazprom could signify a breakthroughmoment. If it isfoundthattheRussiancompanyhasviolatedEUcompetitionrules,theRus-sianrhetoricwilllikelysharpenandtheEUwillcontinuetobeaccusedofat-temptingtopoliticisethegasrelations.Itisverylikelythat,inadditiontocriti-calannouncementsfromRussianpoliticians,Moscowwillattempttocontestthedecisionsusingallavailablelegalmeans.

Ontheotherhand,anothersignificantblemishonGazprom’sreputationmightacceleratetheimplementationofthestrategyinvolving‘rebranding’Russia’s

84 SadekBoussena,CatherineLocatelli,‘EnergyinstitutionalandorganizationalchangesinEUandRussia.Revisitinggasrelations’,Economie Du Developpment Durable et De l’Energie,Octobre2012,http://lepii.upmf-grenoble.fr/IMG/pdf/CR17-2012_energy-institutional_SB-CL.pdf

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gaspresenceinEuropeundertheKremlin’ssupervision.AnotherfactorwhichmakesthisscenariomorelikelyistheintensifyingcompetitionseenbetweenGazpromandtheso-calledindependentgasproducersinRussia,RosneftandNovatek.

IftheantitrustproceedingsareconcludedwitharulingunfavourabletoRus-sia, the process of building a symmetric energy inter-dependence betweentheEUandRussiawouldbe reinforced. Firstly,Moscowwouldfind itmoredifficult to continue its policy of dividing its clients into privileged groups(like Italy,GermanyandFrance,withregard towhomGazpromhasappliedaconciliatorycontractingpolicy,withlowerpricesandnegotiationsconcern-ingthepartialuseofspotindexationincontracts)andthosewhichitcandis-criminateagainst(mainlyCentralEuropeancountries,whichheavilydependonRussiangasandhavesuffered fromunfaircontractingpracticesusedbyGazprom).Secondly,thekeyEuropeangasbuyers(ItalyandGermany)wouldbecomemoreassertive,questioningevermorefrequentlythecontractingpol-icyadoptedthusfarbyRussia(theexpectedrejectionofthe‘takeorpay’clauseand,atleastpartially,replacementofgaspriceindexationbasedonoilpriceswithindexationbasedonspotprices),thusforcingGazpromtomakefurtherconcessions.Thirdly,theCentralEuropeanEUmemberstateswouldcertainlybecomemoredeterminedtoimplementfullytheliberalisationrulesapplicableintheEUandtomaketheirrespectivecompetitionprotectionauthoritiesactinamoredecisivefashion.

2. The implications of the Ukrainian crisis for Russia–EU gas relations

TheUkrainiancrisisisanotherimportantfactorthatwilladdtothetensioninRussia–EUgasrelations.ThepoliticalinstabilityinUkrainecausedbyKyiv’sinitialwithdrawalfromsigningtheAssociationAgreementwiththeEUdur-ingtheEasternPartnershipsummitinVilnius,furtherdeepenedbyRussianactsof sabotageagainst thenewgovernment inKyivafter theoverthrowofPresidentViktorYanukovych,mightresultinarevisionoftherulesofco-op-erationbetweenMoscowandBrussels.

TheKremlinhascapitalisedontheUkrainiancrisistopresentUkrainetoitsEUpartnersonceagainasanunreliabletradepartner.OneproofofthiswastheletteraddressedbyPresidentPutinonApril10th2014totheleadersofeighteenEuropeancountriesclaimingthatUkraineowedahugedebtforRussiangassupplies (according toMoscow’sestimates, it stoodatUS$35.4billion).Putin

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hasappealedtoEuropeancountriestoholdurgentconsultationsconcerninggasissues.HehasalsothreatenedthatunlesstheUkrainiandebtproblemisresolved,prepaymentswillbeintroducedinRussian-Ukrainiansettlements.ThisinturnmaymeanthatUkrainewillillegallyreceivethegasmeanttobesuppliedtocustomersintheEU,inthecaseofitbeingunabletopayitsdues.

However,thetrilateralEU-Russia-Ukrainegastalksinitiatedon2May2014inWarsawhavebeenfruitless.Asaconsequence,Gazpromintroducedthemech-anismofprepaymentsingassettlementswithNaftogazon16June2014andatthesametimewithheldgassuppliestoUkraineuntilUkrainepaiditscurrentdebtforthegassuppliedfromRussia(almostUS$4.5billionforgassuppliesinNovemberandDecember2013andinAprilandMay2014)85.

VariousactionstakenbyRussiasignifyitsreadinesstoaggravateitsgasdis-putewithUkraine,including:a letterfromPresidentPutin;gassupplycuts;statementsfromrepresentativesoftheRussianpoliticalandbusinesselite,in-cludingtheheadoftheRussianmissiontotheEU,VladimirChizhovandthepresidentofGazprom,AlexeyMiller.Moscowhopesthatitsnon-resumptionofgassuppliestoUkrainewillforceKyivtostartusingthegasexportedviaUkrainetorecipientsintheEUforitsownneeds.ThustheRussian-UkrainiangascrisiswillbeusedbyRussiatomaketheEUchangeitsstanceonRussianin-frastructuralprojectsunderdevelopmentinEurope.Aboveall,RussiawantstheEuropeanCommissiontopassadecisionapprovingtheuseoftheOPALgaspipelineat100%ofitscapacityandtoreceivepoliticalsupportfortheSouthStream.The latterwouldmeanEU institutions refraining fromquestioningthecompliancewithEUlawoftheorganisationalandlegalactionstakenbyRussiainco-operationwiththoseEUmemberstateswhichareengagedintheproject.IftheRussianinfrastructuralprojectswereexcludedfromtheregula-tionsofthesocalledthirdenergypackage,thiswouldnotcauseanysystemicchangesintheEU,butthesignificanceoftheseregulationswoulddefactobeundermined. Furthermore,Russiawould feel encouraged to continue its ef-fortstoreachapoliticalagreementwithBrusselsthatwouldregulatetherulesofcross-borderco-operationintheenergysector.

85 FormoreontheRussian-Ukrainiangasdisputesee:SzymonKardaś,WojciechKonończuk,‘RussiaandUkraine’s‘coldgaswar’’,OSW Analyses, 25June2014,http://www.osw.waw.pl/en/publikacje/analyses/2014-06-25/russia-and-ukraines-cold-gas-war

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3. The limited possibilities of change in supplies on the EU gas market

Russia’sassertivenesswillstrengthenasthepresenttrendsontheEuropeangassupplymarketcontinue,especiallythedecreaseinLNGsuppliestotheEUmarket,theconstantreductioninEurope’sownproductionandthegrowingsupplyofRussiangas,allofwhichhavebeenevidentoverthepastfewyears.

Furthermore,Azerbaijan,Turkmenistan,IraqandIranmightjointhepoten-tial groupofpipelinegas suppliers toEurope.Asa consequenceof this, gassuppliestoEuropecouldriseuptoasmuchas50bcm(aspartoftheSouthernCorridoraround10bcmcouldbesuppliedfromAzerbaijan,10bcmfromIran86andpotentiallyupto30bcmfromIraq)87.However,giventheslowprogressin the implementationof the infrastructuralpipelineprojects supportedbytheEU(theconstructionoftheSouthernGasCorridorproject,althoughitwasfinallyapprovedinJune2013,willbecompletednosoonerthan2018),anyalter-nativetoRussianpipelinegassuppliesseemstoberatherunrealistic,atleastwithinthenextthreeorfouryears.

Thedevelopmentofinfrastructurewhichenablesimportsofliquefiednaturalgasmightplayakeyroleinthediversificationofgassupplysources.There-gasificationcapacityinEUmemberstatesalmosttripledinthe2000s(reach-ing185.46bcmin2014),andisplannedtobedevelopedfurtheruntil2020.Intheoptimisticscenario,thismaymeanincreasingimportcapacitytoaround400bcm;whileinthepessimisticscenario,itwillbepossibletoimportaround378bcmofgasannually88. Israel,CyprusandMozambiquecouldpotentiallybecomenewsourcesofLNGsuppliestotheEUmarket.

However,thepossibilityofimportingliquefiednaturalgasfromtheUSAhasbeen considered especially intensively inEuropeover thepast fewmonths.IntheopinionofcertainsectionsamongtheEuropeanelite,thissourcecouldbe viewed as an alternative to Russian supplies. Regardless of the political

86 Accordingtoforecasts,itwillbeabletoexporteven30-35billionm3ofgasin2020.‘Иран готов соперничать с Россией за поставки газа в Европу’,Ведомости,12August2014,http://www.vedomosti.ru/politics/news/32013951/gazovyj-sopernik-rossii#ixzz3BOR8LYiT

87 AlekseyKhazbiyev,‘Никаких компромиссов’,Эксперт,no.5(884),27January2014,http://expert.ru/expert/2014/05/nikakih-kompromissov/?subscribe(accessedon:7April2014).

88 MyowncalculationsbasedondatapublishedbyGasInfrastructureEuropehttp://www.gie.eu.com/(accessedon:2April2014).

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declarationsmadebyPresidentBarackObama,itwillbeimpossibletosupplyliquefiednatural gas from theUSA toEuropewithin thenext threeor fouryears.This isamatterof legal (UScompaniesarerequired toobtainexportlicences),technical(thefirstLNGexportterminalswillbereadyin2015and2017,andmostofthemonlybyaround2020),andoftenpurelyeconomicas-pects.Acomparisonofgasproductionandconsumption forecasts in theUSindicates thatpotentialmajorexportsof liquefiednaturalgas fromtheUSAwouldnotmaterialisebeforearound2020.WhenanalysingtheUSdatacon-cerninggasconsumptionanddomesticgasoutput,oneshouldnote that thequantitiesofgasproducedintheUSAthatcouldbeallocatedforexportswillbewellbelowthemaximumexportcapacityofUSLNGterminals(providedthatallprojectshavebeencarriedthrough): theproductionsurplus in2020will reach around 15 bcm, and terminal export capacity around 268.2 bcm.Furthermore,sincegaspricesarehigherontheAsianmarket,exportstosuchcountriesasJapan,SouthKoreaandChinamayturnouttobemoreappealingthanexportstoEurope89.

4. The lack of cohesion in EU member states’ energy policy with regard to Russia

Russiawillalsobenefitfromdifferencesintheenergypoliciesadoptedbyindi-vidualEUmemberstatesanduncertaintyaboutthestrategyofactionthenewEuropeanCommissionwilltakefollowingtheelectionstotheEuropeanPar-liamenton25May2014.SomeoftheEUmemberstates,regardlessofthede-terioratingpoliticalclimateinRussia–EUrelations,donotintendtowithdrawfrom developing their intensive and comprehensive economic co-operation

89 In2013, theaveragepriceofUSgasstoodatUS$133.6per 1000m3, i.e. itgrewbyaround34.8%incomparisontotheprecedingyear.Theaveragepriceofliquefiednaturalgassup-pliedtoJapanfromIndonesiareachedaroundUS$627.2per1000m3.Forcomparison,thepriceofRussiangason theborderwithGermanywasUS$402per 1000m3,and thespotmarketpriceswereas follows:onFrance’sPowernext–US$377per 1000m3 (up 11.8% incomparisonto2012)andonGermany’sEEX–US$368per1000m3(up9.3%incomparisonto2012).WiththepriceatUS$133.6per1000m3(US$3.73perMMBtu),thetotalcostofLNGsuppliedtoEurope(liquefaction,transport,regasification)wouldreacharoundUS$296.43per 1000m3.The forecast for2014 indicates that theaverageannualpriceatHenryHubwillbeUS$4.44perMMBtu,i.e.US$160.5per1000m3.ThenthetotalcostofgassuppliedtoEuropewouldreachUS$328.9per1000m3.However,atpresent(dataforJanuary-June2014),theHenryHubpriceisUS$4,9perMMBtu,i.e.US$177.5per1000m3,whichinthecaseofexportstoEuropewouldgivethetotalcostofUS$347.4per1000m3.Furthermore,iftheUSAstartedexportinggastoEurope,thepriceatHenryHubwouldcertainlyincrease,andthusthefinalpriceofUSgasontheEuropeanmarketwouldgoup.ConsideringthepricediscountsofferedbyGazpromoverthepastfewmonths,itmightturnoutthatUSgascouldbelesscompetitivethanRussiangas.

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withMoscow.Examplesofthisinclude:thestatementfromrepresentativesofBulgaria,whohavedeclaredfullsupportfortheimplementationoftheSouthStreamproject;Hungary’spolicytargetedatintensifyingenergyco-operationnotonly in thegassectorbutalso in thenuclearsector (preliminaryagree-mentsconcerningthedevelopmentoftheHungariannuclearpowerplantinPakswas signed in January2014); theunclear stance takenbyBratislava innegotiationswithKyivconcerningthepossibilityofcarryingoutreversedgassuppliesfromtheEUtoUkraine(thelackofSlovakia’spoliticalwill isprob-ablyaneffectofitsfearofdeteriorationofrelationswithGazprom).Thelackofa jointstance isalsoevident inthecaseofGermany,Russia’skeypartnerinenergyrelationswiththeEU.ChancellorAngelaMerkel’scriticalrhetoriccontrastswithhintsfromrepresentativesofGermanbusiness,suggestingthatthemutuallybeneficialco-operationneedstobecontinued.

Thelackofunityseenintheapproachesadoptedinthepoliciesof individu-alEUmemberstatesmakes itveryunlikely thatneweffectivemechanismsreducingthelevelofdependenceonRussiawillbedeveloped.TheEuropeanCommissioninitsconclusionsduringthesummitoftheheadsofstateorgov-ernmentson26–27June2014declaredthereadinesstobuildanenergyunion,albeititdidnotgoasfarastheconceptputforwardbyPolandinApril2014(oneofthekeyideasinthePolishconceptwasthatEUmemberstatesshouldbuygasfromRussiatogetheruntilenergydependenceonRussiahasbeensignifi-cantlyreduced).RussiahasrespondedcriticallytotheconceptsputforwardonthepartoftheEU(theRussianministerforenergy,AlexanderNovak,brandedtheideatobuygastogetherasareturntotheSovieteconomy),andwillsticktoitspolicyofdevelopingbilateralrelationsintheenergysector,hopingthatitwillthussuccessfullyneutraliseactionsattheentirecommunityleveliniti-atedbyEUinstitutions.

***

Russia,beingawareoftheseconditionsandthevolatilityoftrendsontheEu-ropeangasmarket,willattempttocontinueitsdichotomouspolicy,takinginparalleloffensiveanddefensiveactions,albeit theoffensivemoveswillpre-vail.Thecriticismofregulatorychangeswillbeaccompaniedontheonehandbythedeterminationtoupholdthetraditionalstrategicgoalsofexternalgaspolicy(thediversificationoftransitroutesandinvestmentsinassets)and,ontheotherhand,byapartialadjustmenttothechangingreality(forexample,developingLNGprojects,reducinggasprices,amendingtradecontractsandincreasingsalesonthespotmarkets).

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Themutual dependence of Russia andEurope in the energy sector is set tocontinue in the short andmedium term.However, given the differences intheRussianandEuropeanapproaches,itisunlikelytoundergoatransforma-tion,inthemannercalledforbythepresidentoftheEuropeanCommission,JoséManuelBarroso,froma“inter-dependenceoutofnecessityintoainter-dependencebychoice”90.Bilateralrelationswillcontinuetoresemblethoseofatugofwar,whereeachparty,capitalisingonitsbenefits,willtrytopulltherivaltowardsitsownside.However,thereisplentytoindicatethatadefinitivewinnerinthiswarisunlikelytoemergeanytimesoon.

SzymON KARDAś

90 ThestatementmadebyJoséManuelBarrosoduringthepressconferenceattheconclusionoftheEuropeanUnion–Russiasummiton21December2012inBrussels.

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KatharinaRehden

EtzelJemgum

BergermeerSaltfleetby

Humbly Grove

Incukalns

Banatski Dvor

South Stream

Haidach

Damborice

Paris

Madrid

Brno

Brussels

London

DublinDublin

Lisbon

Amsterdam

Luxembourg

Rome

Copenhagen

StockholmOslo

Berlin

Riga

Vilnius

Tallinn

Helsinki

Warsaw

Minsk

Moscow

Kyiv

LjubljanaZagreb

Sarajevo

Prague

ViennaBratislava

Budapest

Belgrade

Pristina

Chisinau

Bucharest

Sofia

Athens

Ankara

Skopje

Podgorica

Tirana

Existing LNG terminals (present import capacity in bcm)

LNG terminals under construction (planned import capacity in bcm)

Gas storage facilities under construction for eventual use by Gazprom

Existing gas pipelines used by Gazprom

Planned gas pipelines for eventual use by Gazprom

EU buyersof Russian gas

Potential buyersof Russian LNG

Existing gas storage facilities used by Gazprom

Zeebrugge (9)

Rotterdam (12)

Isle of Grain (19,5)

Teesside (4,6)

Milford Haven (21+7,6)

Montoir de Bretagne (10)

Dunkirk (13)

Fos -Tonkin (5,5)

Fos-Cavaou (8,25)

Barcelona (17,1)

Sagunto (8,8)

Bilbao (7)Gijon (7)

Mugardos (3,6)

Huelva (11,8)

Sines (7,9)

New Cartagena (11,8)

Revithousa (5,3)

Panigaglia (3,4)

Livorno (3,75)Toscana offshore (3,75)

Świnoujście (7,5)

Klaipeda (4)

Rovigo (7,56)

LNG terminals in the EU, and EU gas infrastructure used by Gazprom

Source:http://www.gazprom.com/f/posts/38/422682/ugs-facilities-abroad-en.jpg

53

OSW

STU

DIE

S 9

/201

4

KatharinaRehden

EtzelJemgum

BergermeerSaltfleetby

Humbly Grove

Incukalns

Banatski Dvor

South Stream

Haidach

Damborice

Paris

Madrid

Brno

Brussels

London

DublinDublin

Lisbon

Amsterdam

Luxembourg

Rome

Copenhagen

StockholmOslo

Berlin

Riga

Vilnius

Tallinn

Helsinki

Warsaw

Minsk

Moscow

Kyiv

LjubljanaZagreb

Sarajevo

Prague

ViennaBratislava

Budapest

Belgrade

Pristina

Chisinau

Bucharest

Sofia

Athens

Ankara

Skopje

Podgorica

Tirana

Existing LNG terminals (present import capacity in bcm)

LNG terminals under construction (planned import capacity in bcm)

Gas storage facilities under construction for eventual use by Gazprom

Existing gas pipelines used by Gazprom

Planned gas pipelines for eventual use by Gazprom

EU buyersof Russian gas

Potential buyersof Russian LNG

Existing gas storage facilities used by Gazprom

Zeebrugge (9)

Rotterdam (12)

Isle of Grain (19,5)

Teesside (4,6)

Milford Haven (21+7,6)

Montoir de Bretagne (10)

Dunkirk (13)

Fos -Tonkin (5,5)

Fos-Cavaou (8,25)

Barcelona (17,1)

Sagunto (8,8)

Bilbao (7)Gijon (7)

Mugardos (3,6)

Huelva (11,8)

Sines (7,9)

New Cartagena (11,8)

Revithousa (5,3)

Panigaglia (3,4)

Livorno (3,75)Toscana offshore (3,75)

Świnoujście (7,5)

Klaipeda (4)

Rovigo (7,56)