Derek Brower in London -
Europe's energy security dilemma seems increasingly to be as much a question of semantics as a reaction to what is happening on the ground.
Not long ago, the European Commission was obsessing about "supply diversification" - code for a strategy to break Gazprom's domination of gas supplies to Eastern Europe and its increasing market share in the rest of the EU. Member states must "speak with one voice" in dealing with the Russian gas monopoly, the Commission implored. Furthermore, companies should build fresh infrastructure to open new supply routes - pipelines, gas storage and liquefied natural gas terminals - that could bring non-Russian gas to consumers.
But while the Commission's attention has turned to fighting carbon emissions - the energy obsession of Western European governments but hardly of the newer member states - events on the ground continue to weaken its diversification drive.
In January alone, Gazprom has signed three agreements that will consolidate its grip on energy markets in Central and Eastern Europe.
The first, establishing Bulgaria as the landing point for gas that the Russian company will export to Europe through the South Stream pipeline, puts more momentum behind a project that could stymie the Commission-backed Nabucco gas pipeline. Gazprom now says that South Stream will split into two north and south trunk lines that terminate in Austria and Italy. The company's second agreement gave it control of Serbia's energy sector and enlisted that country as another transit route for South Stream. The third agreement will see Gazprom share half of the Central European Gas Hub in Baumgarten with Austria's OMV. The two companies say the hub will become one of the continent's largest. It already handles around 1.5bn cubic metres (cm) a month of gas, but OMV says that it will create a "stock market" for the commodity as capacity increases - to as much as 2bn-3bn cm a month. Part of the deal between the two companies also includes joint investment in unnamed storage facilities outside of Austria.
The agreements all put Gazprom in the driving seat and show how distant from reality the Commission's dream of a common strategy towards the Russian company remains. Bulgaria, Austria and non-EU member Serbia all negotiated their deals bilaterally with Moscow. Brussels was merely an observer. And diversification of supplies away from Russia isn't just stalling - the policy has gone into reverse.
The 31bn cm a year (cm/y) Nabucco project has been an EU pipedream already for several years. But South Stream, announced by Gazprom and its partner Eni in June 2007, is already well ahead of it. Crucially, while the OMV-led Nabucco consortium has struggled to find sufficient supplies of gas to make the project viable, Gazprom says it has enough gas to fill South Stream (31bn cm/y), as well as the complementary northern Nord Stream project (55bn cm/y), which will run under the Baltic Sea. Ironically, if Nabucco is to come on stream, OMV acknowledges that in the absence of gas supplies from the Middle East and North Africa, Russian gas could help fill the line.
As for new gas storage and LNG infrastructure, a host of companies complain that without long-term contracts it's difficult to raise finances to build. Yet the Commission remains relentlessly opposed to long-term contracts. That leaves projects like OMV's proposed Croatian liquefied natural gas (LNG) terminal on the drawing board. So much for diversification.
But does more Gazprom gas enhance or detract from the Continent's - and especially East European - energy security? Listen to the companies and Gazprom has never been the problem, whatever the Commission said in the wake of the so-called "gas war" between Ukraine and Russia in 2006, which resulted in reduced supplies to Europe.
"Gazprom is not just a pillar of energy security in Europe," Paolo Scaroni, chief executive of Italy's Eni, told bne last year. "It is the pillar of security."
That's why his company has signed long-term contracts with Gazprom that will keep Russian gas flowing to Italy for the next 30 years, and give it access to Italy's downstream. German energy companies E.On and Wintershall, partners in the Nord Stream pipeline with Gazprom, also want more, not less, Russian gas, even if it means Gazprom's share of the German market increases to 65%.
OMV takes a similar approach. Far from compromising the region's energy security, the Baumgarten deal will increase it, the head of the company's gas division, Werner Auli, told bne in an interview. "The Commission says we need short-term liquidity [in the natural gas market]. Now we plan to offer this liquidity." And Gazprom, he says, would not own any natural gas infrastructure as part of the deal.
More liquidity might be what the Commission wants in its liberalized energy markets, but whether Baumgarten will supply it is debatable. Jonathan Stern, of the Oxford Institute for Energy Studies, questions whether there will be sufficient participants in Baumgarten to develop the trading centre that OMV envisages. "Gas hubs are like hotels," he says. "You need lots of people staying in them to make them work."
In the background to the whole "security of supply" conundrum are the EU's declining domestic gas production and its rising demand. OMV's Auli says up to 150bn cm/y of new imports will be necessary within the next decade. The implication is that Europe can't afford to turn down more supplies - and infrastructure to handle it - from Gazprom. Indeed, exposing Gazprom to Europe's downstream by allowing it to sell directly to customers in the EU - something the Baumgarten deal might allow - could arguably enhance energy security. Gazprom is hardly likely to cut off supplies to its own local distributors. Nonetheless, the Commission is opposed to that, on the grounds that Gazprom won't allow such reciprocal access in its own domestic market to European companies.
It all leaves Brussels' vision of energy security increasingly detached from that which the EU's own firms have adopted. For the Commission, diversification in the upstream part of the sector and liquid markets based on short-term contracts are central to both the liberalisation programme and the continent's energy security. For the companies - and for many politicians who want their voters to live in heated homes and gas-fired generation to power new growth in their economies - energy security is about long-term supplies of natural gas. As Hungarian Prime Minister Ferenc Gyurscany said last year about EU's moribund pipeline project, "Nabucco is a dream, and you can't heat homes with dreams."
Ironically, Gyurscany now supports Nabucco, having seen Hungary jilted by Gazprom in favour of a hub in Austria - but he must wonder if he has backed the right horse.
Indeed, the spate of deals with Gazprom doesn't just show the company's speed of execution; it might also reflect the firms' wish to tie up contracts with the key supplier before a window closes.
What's the rush? One explanation is in the upstream. Gazprom might be the EU's dominant supplier and the only one with any real potential to increase exports. But its own production is suffering. As Vladimir Milov, a former deputy energy minister of Russia and now president of Moscow's Institute for Energy Policy, has repeatedly been saying, underinvestment in the upstream means the company could face a production shortfall in coming years. In January, Gazprom announced that 2007 production fell slightly to 548.5bn cm. That shouldn't worry Europe, the Russian firm says, because it has capacity to increase exports to as much as 250bn cm/y by 2020. That remains to be seen - and the unseemly haste to make deals with the Russian company might betray an ambition to secure gas contracts while they are available.
The real security of supply question might not be whether Europe can diversify away from Russian imports, but whether Gazprom's own production can increase sufficiently to meet rising demand.
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