The EU Threatens Gazprom’s Monopoly in Europe

2010/10/18

source: STRATFOR

“As Gazprom and the EU draw their lines in the sand over the issue, Poland is dealing with far less grandiose concerns, namely its natural gas supply.”

Gazprom Deputy Chairman Alexander Medvedev (no relation to the Russian president) used the Russian gas giant’s website Thursday to publish a strong condemnation of EU initiatives to reform the European natural gas industry. Medvedev called EU efforts to separate production and transportation assets a “threat” to both Gazprom and its European customers. Medvedev was referring to the EU’s attempts to force its member states to transfer ownership of energy infrastructure from producers, such as Gazprom, to independent regulators who would guarantee equal access to the energy infrastructure for other, smaller producers — a process that the EU refers to as unbundling.

At the heart of Medvedev’s comments is the Russian-Polish long-term natural gas deal negotiations, held up since February 2010 by European Commission — the union’s bureaucratic wing — insistence that the unbundling of production and transportation be applied to the deal. The episode has pitted the EU against Poland and Russia, leading the two countries, traditionally suspicious of one another, to join in vociferously attacking the commission’s meddling.

The natural gas deal itself is a rather mundane affair. Poland needs natural gas — a lot of natural gas — and Polish consumption is expected to rise as the EU pushes Central European states to use less coal based on environmental grounds. Warsaw was therefore attempting to pre-empt the shift from coal to natural gas by looking to secure supplies from Russia, particularly as Gazprom’s Nord Stream pipeline under the Baltic Sea threatens to divert a considerable amount of Russian natural gas to Germany. Until Poland develops alternatives to piped natural gas — such as its liquid natural gas terminal set for completion in 2014 or development of potential domestic shale deposits — it has no where to turn to but Russia. It therefore begrudgingly decided to sign a long-term deal through 2037 expanding its consumption of Russian natural gas from 7 to 11 billion cubic meters (bcm) annually.

The story at this point would be over were it not for an apparent difference of opinions inside the Polish government between the Foreign and Economic Ministries. The Foreign Ministry — led by Radoslaw Sikorski, not known as a friend of Russia — forwarded the deal negotiated by the Economic Ministry to the European Commission for review, unsatisfied by the terms to which Poland was agreeing, according to STRATFOR sources in Poland. The commission then sent the deal back to Poland, telling Warsaw that the transportation infrastructure — in this case the massive 33 bcm capacity Yamal-Europe pipeline — had to be placed under the supervision of an independent regulator as demanded by the unbundling rules. This highly irked Gazprom and Polish state-owned energy giant PGNiG, which jointly own the Yamal-Europe pipeline, as well as Polish Economic Minister Waldemar Pawlak, who was hoping to use the successfully negotiated deal to resurrect his slumping political fortunes.

The domestic dynamics of the story end here, with Warsaw’s staunchly pro-EU forces vying with far more ambivalent actors for political points. But there is a geopolitical angle as well.

Both Russia and Poland have maintained that the European Commission is unfairly applying the unbundling regulation to their deal. There may be truth in that claim. The commission, which first proposed unbundling legislation in 2007, has since been forced to water it down due to lobbying from Europe’s own powerful utility companies and to allow producers to keep the proposed independent regulator on their books as an asset. That way utility companies would not feel that they were simply donating their pipelines to regulators without compensation.

However, Russian and Polish negotiators have expressed angst that the European Commission is forcing on them the “strictest” interpretation of the unbundling rules, with hints that they are not being offered the compromise solution. This frustrates both Poland and Russia. For Poland, it means that the EU is apparently applying double standards, letting German and French utilities keep ownership of assets while Poland is forced to turn over the pipeline completely to the independent regulator. Gazprom feels that by giving up control of the pipeline — regardless of whether it gets to keep it on the books as an asset — it is losing control over who gets to use it, which means that non-Gazprom producers in Russia or eventual Polish shale gas producers could have access to its pipeline. What annoys Gazprom even more, and Medvedev alluded to this in his critique, is that Yamal-Europe was originally a $15.6 billion Russian investment. To now have it offered to other producers seems tantamount to — ironically — Soviet-era private property appropriation.

The battle lines being drawn between Russia and Europe go even further, beyond just this deal. If Europe demands that energy infrastructure be made available to all producers via an independent regulator, then Gazprom’s planned pipelines such as Nord Stream or South Stream may need to be opened to competition, including potential competition from fellow Russian producers one day.

This is exactly the EU’s intention, since it would break Gazprom’s monopoly over Europe’s natural gas imports from Russia. But as Gazprom and the EU draw their lines in the sand over the issue, Poland is dealing with far less grandiose concerns, namely its natural gas supply. If the natural gas deal with Gazprom is not concluded by Oct. 20, Poland will begin to experience natural gas shortages. Simply put, Warsaw wishes Gazprom and the EU would take their fight elsewhere.

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