CEE must do better says Energy Union report card as Nord Stream II lurks

CEE must do better says Energy Union report card as Nord Stream II lurks
By Benjamin Cunningham in Prague November 24, 2015

Central and Eastern Europe remains the centre of attention in the EU's push towards an Energy Union, an update of the strategy on November 18 reveals.

In addition to key infrastructure projects, a legislative blitz in early 2016 will look to revise gas market regulation, a topic that remains divisive amid the proposed expansion of the Nord Stream pipeline pumping Russian gas to the bloc.

Maros Sefcovic, the European Commissioner charged with the Energy Union portfolio, presented an update of the plan, but most notable was the extensive accompanying documentation. Report cards for the 28 EU member states illustrate that continued instability in Ukraine and tension with Russia still casts a shadow over EU decision making.

“The geopolitical challenges that we faced this year will not go away,” Sefcovic said.

Much of CEE remains disproportionately reliant on Russian gas. Slovakia, the Czech Republic and Hungary import close to 90% of their gas from Russia; Bulgaria and Finland remain 100% dependent. Meanwhile, although Lithuania’s floating liquified natural gas terminal at Klaipeda has diversified supply to the Baltic states somewhat, they continue to rely heavily on Russian flows, and Brussels urges urgent integration with Central European networks.

"Ukraine has made regional leaders think more deeply over what energy security means," Sefcovic noted in October at a roundtable in Poland.

Strong language

Those challenges run parallel with the controversial proposal to expand the Nord Stream pipeline that carries Russian gas under the Baltic Sea directly to Germany. The joint venture of Russia’s Gazprom, Austria’s OMV, Royal Dutch Shell, France’s ENGIE, along with Germany’s BASF SE/Wintershall and E.ON began hiring contractors in October.

The project would add two new pipelines to an existing pair, boosting capacity by 55bn cubic metres by 2019. It would also help maintain Russian dominance of CEE gas supplies, and bypass Ukraine; a potentially crushing blow for the cash-strapped country.

Others, including Slovakia which pumps the gas from the Ukrainian border to the rest of the EU and collects nearly €1bn in transit fees annually, also oppose the deal. Prime Minister Robert Fico accused the projects backers of “making fools” of his country in September. 

Agata Loskot-Strachota, an energy analyst with the Centre for Eastern Studies in Warsaw, recently wrote that the new Nord Stream project would  run contrary to core Energy Union priorities. It divides policy on Russia and hinders progress on energy policy in Ukraine, she writes. In the long run, it would hurt efforts to diversify energy supply and improve cooperation among EU member states, the analyst sums up.

However, although Nord Stream is the only project explicitly named in the EU report, the diplomatic language used is a sign of the intense lobbying and debate that surrounds it.

As a whole, Sefcovic’s latest Energy Union presentation amounted to little more than “a sort of SWOT (strength-weaknesses-opportunities-threats) analysis of the Energy Union policy,” suggests Cillian O’Donoghue, a Brussels-based energy analyst with FleishmanHillard, to bne IntelliNews.

The core country reports from the EU are for the most part vague, despite “taking note” of the proposed Nord Stream expansion. The Russian project must “comply fully with EU law” and it will be assessed “rigorously against the European regulatory framework,” the commission emphasized. “On previous drafts the critical language was much stronger,” O’Donoghue claims.

Sefcovic has expressed his own misgivings about Nord Stream. "We cannot say at all that we have a liquid gas market in CEE," he claimed back in October. "We have one main concern over projects suggested by Russia, and that is that current infrastructure is only 55% utilized."

Moscow has made it a priority to bypass Ukraine's gas network, which currently carries around 40% of the gas Russia sends to the EU. That would only add to its leverage over Kyiv.

However, the EU's watered down rhetoric reflects the fact that the bloc is “totally divided” on the expansion of Nord Stream, with energy giants and large member states looking to garner support. “[Germany’s Economic Minister] Sigmar Gabriel is really pushing it," O’Donoghue points out.

That could threaten the core action contained in the Energy Union strategy. Legislative proposals set to go before the European Parliament in February could have a direct impact on Nord Stream.

Brussels' big gun would be new powers to oversee intergovernmental agreements (IGAs). Such contracts are commonly signed between states, which nominally serve as cover for energy suppliers to operate outside the bounds of standard EU competition oversight.

The proposed change would see the EU involved in deals even as negotiations are still underway. Previous attempts to expand this regulatory capacity, which currently only allow the commission to review such agreements once complete, have been met with opposition in the European Council.

“Out of order IGAs are what did in South Stream [a Russian project to pipe gas to southern Europe, bypassing Ukraine, that was abandoned a year ago],” O’Donoghue notes. However, the EU's inability to regulate such agreements has also helped allow Gazprom conclude supply contracts with individual EU states that limit pipeline use or the rights of customers to do what they want with gas, even after they have paid for it. 

Common interest

The lengthy list of EU prioritised projects includes a significant number in CEE, most directed at lessening dependence on Russian energy. A pan-Baltic LNG terminal in Estonia remains a target for Brussels despite years of delay and disappointment.

Meanwhile, a series of smaller pipeline projects in the Bulgaria-Romania-Hungary-Austria corridor largely coincide with the "Eastring" project touted by Slovakia’s Eustream. The apparent blessing from Brussels comes despite suggestions from Fico during a trip to Moscow that the project could actually be used to pipe more Russian gas into the region.

An oil pipeline connecting Austria’s Schwechat with Bratislava makes it onto the list. Expanded capacity on the link between the Croatian port of Omisalj with the Druzhba pipeline – the mainline carrying Russian and Kazakh crude across CEE to Germany – is also eyed. A spur on the Druzhba from Litvinov in the Czech Republic to a refinery in Sprugau, Germany is another priority, in addition to a new oil terminal at Gdansk in Poland, to open the way for additional alternative supplies.

The inventory of “projects of common interest” is meant to tempt investors across the bloc to push forwards, dangling the carrot of EU funds. However, in many cases it has had the opposite effect, O’Donoghue suggests. “What you are seeing is investors waiting to see if a project ends up on the list before they do anything,” the analyst says.

In terms of individual CEE report cards, Poland and Hungary are mentioned as likely failing to meet 2020 renewable energy targets. Bulgarian industry is marked as the least efficient user of energy EU-wide, consuming at a pace seven times greater than the bloc's top performers.

Poland and the Czech Republic need more interconnections for their electricity grids to bolster market competition, the EU also reports. Meanwhile, although Slovakia and Hungary have linked their grids, “significant congestions” must be rectified, the EU concludes.