Gazprom shuts up EU talking shop

By bne IntelliNews November 21, 2006

Derek Brower in Brussels -

Brussels was doing what it does best Monday - talking about new initiatives to rescue the EU from the next energy crisis. Europe, said European Commission President Manuel Barroso, "needs to speak with one voice on energy" through an "integrated policy that maintains Europe's competitiveness, safeguards our environmental objectives and ensures our security of supply."

On Tuesday, though, Russia's Gazprom was doing what it does best - stealing the show. In just a three-minute-long speech to commissioners and senior energy executives, Alexander Medvedev, general director of the company's export arm Gazexport, claimed that moves in Europe to unbundle, or break up, the continent's largest energy firms would allow "speculators" into the market and undermine Europe's security of supply.

That was a direct contradiction of the commission's central message at this two-day meeting: that internal liberalisation, including unbundling, is key to ensuring security of supplies. Gazprom, and not liberalisation, said Medvedev, "is the guarantor of supply."

In an interview with bne, Medvedev, referring to remarks from Competition Commissioner Neelie Kroes about stripping the major utilities of their infrastructure assets, said that Gazprom must know who its partners in Europe would be.

"For us, this is a very big concern," he said. "Until we get an answer, we don't know who will be the new actors [in the market]."

However, Medvedev said that when the EU breaks up these companies, Gazprom would be interested in buying their assets. "If you don't like the operators, we are ready to replace them, now," he said, adding rather darkly, "We are the guarantors of supply."

Medvedev also dismissed an EU-backed plan to build a pipeline, known as Nabucco, to take Central Asian and Middle Eastern gas to Europe as unlikely to happen. "Unlike the real Nabucco," he said, in a reference to the Verdi opera, "there will be no execution of this one".

Gazprom thinks that it has dealt a deadly blow to Nabucco - which was conceived of as an "anti-Russian" line that would lessen Europe's dependence on Gazprom - by signing a contract to build another pipeline into the same Central European market that Nabucco would supply.

Gaz guy Medvedev

Medvedev's words are certain to undermine much of the effort the EU put into its meetings here. Barroso and Energy Commissioner Andris Piebalgs repeatedly emphasised Europe's need for a common foreign energy policy with further liberalisation at its core.

If that sounds like the kind of thing Europe has been saying for some time, that's because it is. Gazprom's decision in January briefly to cut natural gas supplies to Ukraine - which transits some 70% of Russia's exports to Europe - caused panic in Brussels. The hand wringing is still going on, but the EU increasingly seems to be offering tardy solutions to a problem that it still doesn't understand.

If anything, Monday's speech from Barroso - reinforced later in the day by Piebalgs - gave listeners an insight into what the commission's new energy policy will look like when it is unveiled early next year. It looks long on rhetoric and short on specifics.

Unbundling the policy

To have a "successful external policy", Barroso said, "we must have a strong internal policy". That was understood to be a reference to plans for legislation covering the unbundling.

The companies targeted would include Germany's E.On and RWE. But the Commission's efforts to force through legislation next year affecting either of them could be difficult, given that Germany takes over the rotating EU presidency at the beginning of January.

Furthermore, any common energy policy seems already to have its limitations. On nuclear power, Barroso said it would be the responsibility of member states, not the Commission, about whether to build new capacity. Meanwhile, Poland is still threatening to derail a summit between Russia and the EU in Helsinki on Friday, demanding that Russia lift a ban on meat imports and ratify the Energy Charter Treaty before partnership talks between Brussels and Moscow can go ahead. Russia is likely to do neither (To read more on this click here).

And in light of Medvedev's comments Tuesday, Barroso's challenge to Russia to open its oil and gas transit network to foreign investment is almost certainly going to be dismissed by the Kremlin, just as it ignores the same message every time the EU sends it.

The EU thinks it has sound business logic on its side. Russia's energy infrastructure, over 30 years old, badly needs investment of the kind Gazprom is unwilling to spend. According to the International Energy Agency, an energy body representing consumer nations, Gazprom must invest some $10bn a year in its upstream, just to fill its export commitments. As long as the company is unwilling to do that - and willing to spend $14bn buying unrelated assets, as it has done in the last few years - the EU is barking up the wrong birch tree.

For its part, Gazprom knows it still has the EU where it wants it: hungry for Russian energy, and without a policy that will seriously challenge that dependence. For all the talk Monday in Brussels, events on the ground seem to be moving ever beyond the control of the Commission.

Divide and rule

Gazprom outfoxed Brussels in 2005 when it signed a bilateral agreement with Germany to build the $6bn Nord Stream pipeline under the Baltic to deliver up to 55bn cubic metres a year of gas into the heart of Europe. Germany's willingness to put its interests above those of its Baltic neighbours angered Brussels, which hadn't so much as seen a feasibility study before the deal was announced.

That pipeline will increase Germany's dependence on Russian imports to more than 60% when the second phase of the pipeline comes on stream in 2012. When it enters Germany, the gas will also find its way through pipelines into the Netherlands, the UK, and other markets.

Given the EU's worries about rising dependence on Russian gas, Nord Stream was startling evidence of Brussels' inability to persuade one member state to act in the interests of the Union. For Gazprom, its success in creating a "hub country" in the EU, as it now refers to Germany, was more proof that it understands the cracks in the EU's common energy market better than the EU does itself.

Now Gazprom is exploiting the same policy void as it attempts to create a second "hub country", this time in Hungary. In the summer, it announced a supply deal with Mol that could see development of a new pipeline ("South Stream") into Central Europe.

If Gazprom does that, it would be particularly galling for the EU, given the backing it has given to Nabucco. Europe's development banks, the EIB and EBRD, have in principle agreed to fund up to 70% of the development, which Piebalgs regards as "Europe's most important gas supply project."

Yet while the consortium that wants to build the project has dawdled, Gazprom has pounced. Its pipeline project with MOL would target the same markets in Central Europe and follow a similar path in the Balkans and Turkey. Furthermore, Gazprom already has part of its infrastructure in place, including the Blue Stream pipeline across the Black Sea to Turkey, which has spare capacity. It also has the gas to fill it.

Nabucco doesn't. Although gas from Central Asia would fill part of the pipeline, the EU's hopes that supplies from Iran or Egypt would account for the rest is wishful thinking, say analysts. Iran's ability to export is seriously compromised by politics, and Egypt has other priorities, among them growing domestic demand and the option to export liquefied natural gas at a higher price than piped gas.

That is why Nabucco's lead company, Austria's OMV, is now talking about filling the line with Russian gas, meaning the EU's development banks seem likely to fund another project to bring Gazprom's gas into Europe. For Gazprom, that is probably the outcome it sought when it broached the deal with Mol.

When Piebalgs spoke to bne Monday he accepted that Gazprom's involvement in Nabucco would destroy its strategic purpose. But recognising that Gazprom is outthinking the EU doesn't mean that Europe has a policy to stop it happening again. If it wants advice about developing a policy and executing it, Brussels should be phoning Moscow.

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