Natural gas diversification in the European Union

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Natural Gas Diversification in the

European Union

Author: Lex Vaassen 11260610

Supervisor: Dr. S. Krapohl

Second reader: Prof. Dr. J.H. Zeitlin June 2017

Master Thesis Political Science: International Relations Research Project: The Political Economy of Energy Word count: 16679

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Introduction

On the 1st of January 2009 Russian natural gas exports towards Ukraine were shut off, a week later natural gas deliveries towards Moldova and 16 European Union member states were first drastically diminished and on 7 January shut off. Natural gas deliveries were restarted only on the 20th of January after it had caused a humanitarian emergency in the Balkan countries and hit Hungary and Slovakia economically (Pirani, Stern & Yafimava, 2009: 4). This wasn’t the first Russian-Ukrainian gas dispute to occur in the last decade, in 2006 a similar dispute occurred between the two states and severely affected the natural gas supply of European states (Stern, 2006b: 8-9). It is often prophesied that the natural gas cut offs were a way of the Kremlin to reassure Europe of their power over the natural gas deliveries to the EU (Stern, 2006a: 4). This approach stems from the thesis written by Putin in which he states that a potential Russian superpower has to assert power over the Russian raw materials, and use this power (Balzer, 2005).

Figure 1. EU-28 Natural Gas Imports by Country of Origin

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The gas disputes and the effect it had on the economies of EU member states has kindled the need for a more comprehensive strategy on EU energy security (European Commission, 2014). An important long-term measure in the EU’s energy security is the diversification of natural gas suppliers, as this would limit the effect of supply disruptions in the future. Currently the EU is primarily dependent on three states for her natural gas imports Russia, Norway and Algeria. As figure 1 shows the share of Russian imports has not been greatly affected after the gas disputes. The supplies fluctuated between 43.6 percent in 2004 and 37.5 percent in 2014, while in 2010 the share of Russian imports was the lowest at 32.1 percent. Russia remains despite the gas disputes thus the largest natural gas supplier to the EU.

In 2012 some European nations namely; Estonia, Finland Latvia and Lithuania, were dependent for 100 percent of their natural gas consumption on Russian gas. While for Bulgaria, Czech Republic, Slovakia, Poland, Greece, Hungary, Slovenia and Austria, Russian imports accounted between 95 and 50 percent of their natural gas consumption (Clingendael International Energy Programme, 2014). According to Eurostat data, in 2015 the EU consumption of fossil fuels was for the first time lower than in 1990 and 11.6 percent lower compared to its all time peak in 2006. However the dependency on foreign imports between 1990 and 2015 has increased, this is primarily the case in the United Kingdom; the Netherlands; Poland and Czech Republic (Eurostat, 2017b). This is partly explained by the plummeting natural gas production in the EU, whereas in 2006 182 Mtoe natural gas was produced in 2015 this was decreased to 108 Mtoe (Eurostat, 2016b).

The supply security, and thus diversification, of natural gas of the EU will become more important the coming years as natural gas consumption will likely rise. This is the case because natural gas is seen as a less polluting source of fossil fuel, and thereby suitable for the necessary energy transition (European Commission, 2006; European Commission, 2013b; IEA, 1995). Generation of electricity via natural gas has a low capital cost and is thereby favoured in competitive and deregulated electricity markets such as those in the EU (IEA, 1995, p. 20). The crux here is thus, since natural gas is thought to become a more important energy source, and indigenous EU natural gas production is plummeting which means that the import dependency of EU member states will further increase. Whereof Russia will be the most important natural

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gas supplier to the EU, but gas disputes between Russia and various European states have created tensions in the energy relations. Creating the imperative to diversify supplies to enhance EU energy security. But European diversification efforts away from Russian natural gas sources have however been lacking, or as with the Nord Stream pipeline between Russia and Germany even increased the Russian supply lines towards the EU. So the central research question in this master thesis will be: why is the European Union lacking in diversifying her natural gas supplies?

As electricity and natural gas are increasingly being traded at the internal EU energy market. The well functioning of the internal energy market is one of the eight key areas in the energy security strategy as laid out by the European Commission in 2014. The other key areas are respectively: 1) the immediate increasement of EU capacity to overcome major energy supply disruptions during the 2014/2015 winter; 2) the strengthening of emergency and solidarity mechanisms; 3) the encouragement of moderating energy demand; 4) increasing energy production in the EU; 5) fostering research and development in energy technologies; 6) diversifying external supplies and related infrastructure; 7) and finally the improvement of national energy policy coordination and the improvement of unanimous cooperation on external energy policy (European Commission, 2014). However, moving energy from a political realm to a more market-based realm via the creation of a competitive internal energy market might have negative consequences for natural gas diversification. It might be possible that certain economic considerations will triumph over political ones. Taking this into consideration, the possible effect of the internal energy market on natural gas diversification will be the scope of this master thesis.

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Relevance

Academic Relevance

Studies in the diversification of natural gas supplies primarily focus on the geopolitical factor, which here means: the division of global space by institutions (states, firms, social movements, international organizations, armed forces, terrorist groups, etc.) into discrete territories and spheres of political-economic influence through which the international political economy is regulated materially and represented intellectually as a natural order of ‘developed’ and ‘underdeveloped’, ‘friendly’ and ‘threatening’ areas. (Agnew & Corbridge, 1995, pp: 4-5). An example of such a study is that of Ratner, Belkin, Nichol and Woehrel (2013); whom discuss different possible supply states and projects on the basis of relations between possible suppliers, the EU and Russia. While this thesis will have an inside EU approach, it will look at how the economic integration of the European has influenced the possibilities of diversification of natural gas sources. The research is therefore located in the realm of the political economy of energy, as well as european and economic integration theories.

Social Relevance

As discussed in the introduction of this thesis natural gas is seen as an important fuel capable of assisting in the necessary energy transition, because it is less environmentally damaging as oil and coal. However the indigenous EU natural gas production is in decline (Eurostat, 2016b; BP, 2017b). An important factor to the immediate decline in EU production is the production cap applied in the Netherlands (Gilblom & Van Der Schoot, 2016). While at the same time EU-Russia energy relations are under strain because of the natural gas cutoffs from Russia to Ukraine. Therefore energy security has become a large part of the EU’s energy policy. Diversification of natural gas supplies is one of the primary goals in a successful energy security programme (IEA, 1995). Understanding the extent to which the EU’s internal natural gas market influences the possibilities for diversification is therefore of vital importance to understanding the interaction between political goals and policy and economic outcomes.

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Theoretical Framework

Negative and Positive Integration in the European Union

In the European Union the economic integration has progressed so far that firms are now legally and effectively free to buy at the most affordable and attractive location of production (Scharpf, 1999: 41). The creation of the internal energy market is part and parcel of the greater goal of economic integration in the EU. In the economic integration theory a categorization between negative- and positive integration is often made (Tinbergen, 1965: ch.8). Negative integration in the European context, entails measures meant to increase market integration by eliminating national constraints on trade and distortions of competition such as tariffs, quantitative restrictions and other barriers. The other side of the coin is the so called positive integration, common European policies which are meant to shape the conditions under which markets operate (Scharpf, 1996: 15, 1999: 45). At the minimum level positive integration refers to measures needed to avoid a distortion of the process of free competition. While more general, it should refer to the creation of all institutions and instruments necessary for the creation of a welfare optimum handled in a centralized way. Meaning, structuring the market so that every actor reaps the benefits. These institutions and instruments are not only located in the integrated community, they also apply to a larger area (Tinbergen, 1965: 78-79). The logic behind the need for positive integration in a larger area is the influence of the world economy on the integrated community as the integrated community does not function in a vacuum. This is also seen in the European natural gas market, as natural gas is primarily produced in states outside the integrated European community, therefore to truly structure the market this has to be done at the global level.

Exceptions to negative integration are generally permitted when there are certain strategic or social reasons, for instance in agriculture or energy. One could however argue, whether or not import tariffs should always be avoided and that industries can be supported via subsidies (Tinbergen, 1965: 78). With regards to the energy market, diverging interests between member states prevented liberalization for a long time (Schmidt, 1998: 181). It is likely that member states had certain strategic or social reasons for their aversion towards liberalization.

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Economic Integration Problems

Free-trade areas usually cope with three distinct types of problems: first, when external tariffs differ significantly, third countries will direct their exports to low-tariff countries from where the goods will find their way to all the other member states part of the free-trade are. Consequently, regional free-trade areas were significantly different levels of external tariffs exist will push toward adopting common policies regarding the outside world. The second problem known to free-trade areas arises when members have significantly different levels of product-quality regulation. To solve this, member states could agree on the mutual recognition of product regulations, or engage in harmonization of product regulations where each state remains free to apply its own product standards untill common agreement on standards is achieved. The final problem is the issue that the institutional capacity for negative integration is much stronger than that for positive integration. While the more negative integration progresses, the greater the political inclination for positive integration becomes (Scharpf, 1999: 48-49).

The process of negative integration is very much a supranational EU affair, when for example a common transport regime could not be achieved between the member states, the European Commission and the Court of Justice proceeded the liberalisation of the transport sector on their own (Héritier, 1997; Scharpf, 1999: 64). The primacy of the supranational EU actors in negative integration was made possible by the ‘constitutionalization of European competition law’, as the european law was championed over the national legislations of member states (Scharpf, 1999: 54-60). In the internal energy market the Commission plays a vital role in the creation of a ‘liberalized level playing field’ via the EU competition law, here authorization by the Council and the European Parliament is not required (Pollak & Slominski, 2011: 94-95).

Positive integration in the EU generally requires explicit approval by the Council of Ministers and the European Parliament, consequently the expansion of positive integration measures is constrained by the need to achieve consensus among a wide range of involved actors; such as the member states, the Council, European Parliament and Commission, for its problem-solving capacity (Scharpf, 1999: 71; Pollak & Slominski, 2011: 95). EU member states are capable of reaching consensus on a broad range of issues, there are however three types of policy conflicts which severely challenge the problem-solving capacity of positive integration. The first conflict is the ideological conflict , which arises from fundamentally opposed normative or ideological

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positions, primarily conflicting views regarding the role of public policy opposite to market forces. Secondly, fundamental conflicts of economic self-interest are important examples of non-negotiable conflicts. And finally, institutional conflicts which are derived from differences among administrative practices, policy patterns and institutions in member states (Scharpf, 1999: 77-80).

Special Interests in an Integrated Economy

The question remains then how this relates to the diversification of natural gas suppliers. Majone states that negative integration is very much capable of protecting the fundamental rights and the broad range of diverging interests of consumers, while certain economic and other special interests are better supported by positive integration measures (Majone, 2005: 145). One could argue that diversification, as a key component of energy security (Yergin, 2006: 75-76), and energy security being vital for the economic welfare of import dependent states (Lesbirel, 2004: 1; Bohi & Toman, 1996: 1). Is more reliant on positive integration, as it is more capable of protecting certain economic and special interests. While possibile fundamental conflicts of economic self-interest limit the possibility of positive integration. In this regard rules for the diversification of natural gas can be seen as a form of process regulations. Instead of product regulations which have an effect on the quality of a product, process regulations alter the ways in which a product enters the market, such as environmental regulations and production processes regulations. Product regulations can count on support by the consumer when it increases the quality of a good, process regulations can when they increase the cost not rely on support from the same consumers. Therefore a race to the bottom may occur in which the lowest cost product triumphs over products better suited of supporting non-consumer interests (Scharpf, 1999: 97). The diversification of natural gas is such an interest not supported by consumers as it does not have an effect on the quality of the product, and will most likely not lower consumer prices.

Table 1 shows the negative versus positive integration debate schematically, Where there is exists no negative or positive integration, the European member states have full authority over their markets. Here a state can support her own special interests, such as diversification as they are not constrained by the European market. While a situation where there is full negative and positive market integration the European Union and especially the Commission has the

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authority over the market. Here the EU is also more capable in supporting special interests, as it has the sole authority over the market. The theorised current situation lies however in the realm where there is a negative integrated internal market, with limited positive integration measures. There thus exists a regulatory gap, which limits the diversification of natural gas supplies. This regulatory gap exists as process-regulations can not count on the support of the consumer. Since diversification is a special interest, it is not supported by market opening measures. These necessary positive integration measures are however difficult to implement because of the policy conflicts at the basis of positive integration.

Table 1. Economic Integration in Negative and Positive Terms

Negative Integration

+ -

Positive Integration + European Union/ European

Commision

Non Existent

- Regulatory Gap Member State Authority

A possible hypothesis that can be formulated in trying to answer the research question, why natural gas diversification is lacking in the EU goes as:

H1: Diversification is lacking because of a gap in regulation between the amount of

negative and positive integration measures in the natural gas market

Meaning the internal natural gas market is more profoundly integrated via negative integration measures by the EU, while the market structuring measures of positive integration have been inadequate to support the goal of diversification of natural gas supplies.

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Methodology

Case Selection

Research of the highly complex EU brings its own problems, over its sixty years of existence the institutional basis has increasingly thickened, the scope of policy extended and studied more narrowly making it increasingly difficult to study in comparison. With regards to European energy policy this is especially true, the creation of a regulated internal european energy market brings its own unique problems. As federal systems with their own internal energy market, such as the US, do not face the diversification problems and diverging interests the EU 1 confronts. That is why a single case study is most appropriate to investigate the research question, the EU is here an example of a typical case. A case study can be defined as an in-depth study of a single unit with the aim to illuminate features of a larger class of comparable phenomena (Gerring, 2004: 341). The unit here is the EU, and the phenomena the case-study tries to research the lacking diversification of natural gas supplies. The conventional knowledge on case-studies is so that they can not provide reliable information about the broader class, and should be primarily used as a pilot study to generate hypotheses. These assumptions stem according to Flyvbjerg from five misunderstandings about case-studies: 1) theoretical knowledge is supposed to be more valuable than practical context-dependent knowledge; 2) one can not generalize from a single case-study therefore they posses no relevance for further scientific development; 3) case studies are more suitable for generating hypotheses while other methods are more suitable for hypotheses testing and theory building; 4) case studies contain a verification bias, which means a tendency to confirm a researcher's preconceived assumptions; and 5) summarizing, developing of general propositions and theories is difficult on basis of single case studies (Flyvbjerg, 2006: 221-223).

As stated earlier, the EU is such a unique political institution that creating comparative, rule-based, knowledge is an impossible feat, especially when looking at the European energy policy. But this should not limit the importance of the case-studies result, as the context-dependent knowledge it is able to provide can be of great importance to the EU. But also for economic integration studies, especially since energy is a neglected area of research in

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this school of political science. As Flyvbjerg put it ‘the force of example is underestimated’, meaning that in depth knowledge is able to support scientific generalization as a supplement or alternative to other scientific methods (2006: 231).

The unit, the EU, will be observed over a certain timespan, which makes this case study design a within-unit synchronically and diachronically case study (Gerring, 2004: 343). The timespan researched will be from the start of energy as a policy field part of the internal european market, which is the late 80’s and early 90’s, till now. In order to rationally explain a causal relationship in a within-unit synchronical case study the unit, the EU, has to be divided in subunits. In this case subunits are the internal energy market before and after liberalisation.

Method of Causal Inference

This thesis will use the method of process tracing to come at a causal conclusion. Process tracing here is defined as “the examination of ‘diagnostic’ pieces of evidence within a case that contributes to supporting or overturning alternative explanatory hypotheses” (Bennett, 2010). Process tracing is regarded as particularly well suited for measuring and testing hypothesized causal mechanisms (Bennett & Checkel, 2014: 3-4). Which is precisely what will be done in this thesis. In the previous chapter on the theoretical framework a hypothesis was established, namely the existence of a gap in regulation in the internal energy market which limits the diversification of natural gas. Via careful intermediate steps this gap will be unraveled, afterwards it will be shown which policy tools the EU and her member states has at their disposal to close this gap.

Bennett and Checkel have formulated ten best practices when conducting process tracing as a research method. 1) a wide net for alternative explanations has to be cast, this is especially relevant during the research design phase. 2) the researcher has to be equally tough on these alternative explanations. 3) when dealing with evidentiary sources one has to consider the potential biases present. 4) one has to take into account if a case is most or least least likely for alternative explanations. During data collection, special interest goes out to 5 ) making a justifiable decision when to start, and 6) being determined in gathering diverse and relevant evidence, however a justifiable decision on when to stop has also to be made. 7) combine process tracing with case comparisons when useful for the research goal and feasible. 8) the researcher should be open to insights derived from inductive reasoning. 9) deductive reasoning

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has to be used to answer the question: “if my explanation is true, what will be the specific process leading to the outcome?” And finally, 10) the researcher has to remember that compelling process tracing is good, but not all good process tracing is compelling (Bennett & Checkel, 2014: 21). These best practices do not have to be addressed all at the same time, but can be addressed sequentially and over time. However, not all criteria may be relevant for every study using process tracing. Therefore these best practices have to be used as a starting point and a checklist to augment the likelihood of conducting good research using process tracing (Bennett & Checkel, 2014: 22).

Method of Data Collection

Natural gas consumption and import data will be gathered from official EU statistics by Eurostat, but also from the European wholesale gas market association, Eurogas and the international group of liquefied natural gas importers (GIIGNL). Data on the inner workings of the internal energy market and her regulation shall be gathered via secondary academic literature, (EU) policy documents, EU law, data from intergovernmental- or governmental organisations such as the International Energy Agency and data from IOCs such as BP. But also articles from EU and energy-focused news organisations such as Euractiv, EU-Observer and Bloomberg. These types of data are suspect to the aforementioned third best practice, the potential bias of the author. Therefore, data from these sources have been handled carefully in order to not give them the same evidentiary weight as other sources of data.

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Analysis

Natural Gas in the European Union

The gross inland consumption of energy in the EU was 1606 million tonnes of oil equivalent (Mtoe) in 2014. The consumption of energy per member state depends for a large part on the2 structure of the energy system, the availability of natural resources for primary energy production, and the economic structure and development of the state (Eurostat, 2017a). Natural gas together with electricity and oil are important forms of energy. Natural gas is a primary source of energy, which means that it can be directly consumed or converted into something else such as electricity. Natural gas was in 2014 with 21 percent the second most important source of energy in the EU, only surpassed by petroleum and petroleum products (34 percent), while solid fuels (17 percent), nuclear (14 percent), renewables (13 percent) and non-renewable waste (1 percent) accounted for the rest of energy consumption in the EU (European Commission, 2016b: 22).

As discussed in the introduction of this thesis, natural gas will likely be an important fuel during the energy transition as it is less environmentally damaging than oil or coal. Natural gas, as with other fossil fuels, is increasingly imported from far-away places abroad, this means that the EU’s economic prosperity is more and more dependent on market forces beyond its control. Yet, the EU is capable of influencing these market forces, as the EU has taken a multitude of measures to reduce demand of certain energy sources while increasing the demand for others. The EU has done this via regulatory and legislative policies prioritizing energy efficiency, environmental concerns and energy cooperation (Schubert, Pollak & Kreutler, 2016: 13). An important example here of is the creation of the internal energy market in the EU.

Table 2 shows that natural gas fuels 21.4 percent of total energy consumption in the EU member states in 2014. Some states do not use natural gas at all in their energy mix such as Cyprus and Malta, yet for others such as Italy, Lithuania, the Netherlands and the United Kingdom natural gas accounts for more than 30 percent of total energy consumption. The table also shows that most states are highly dependent on imports for their natural gas demand, only

2 _{Tonne of oil equivalent is an energy-unit defined as the amount of energy one tonne of crude oil releases}

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Denmark and the Netherlands remain net-exporters of natural gas. In states where natural gas constitutes only a small portion of their energy consumption natural gas import dependency constitutes no problem. However, it might entail a security concern for states which are both highly dependent of natural gas and on natural gas imports. Yet, the data does not show us how diversified these imports are thus it is difficult to say the extent to which the import dependency constitutes a possible security concern. Total natural gas imports increased from 164 Mtoe in 1990 to 320 Mtoe in 2014. While natural gas consumption increased from 298 Mtoe in 1990 to 344 Mtoe in 2014. Natural gas import dependency of consumption was in 1990 55 percent, while this increased in 2014 to 93 percent (Eurostat, 2016a).

Table 2 also shows the primary production of natural gas of the EU member states. It is clear that there are only two large scale natural gas producers in the EU namely, the Netherlands and the United Kingdom. Whereof the UK primarily produces for her own consumption, Denmark and the Netherlands are the only net-exporters as we have already seen. It is important to note the difference between energy-exporters and energy-importers as they have a large part in shaping the political interests of states (Matláry, 1997: 25).

Table 2. Energy and Natural Gas Consumption in the EU-28 Member States

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3

Member State Energy Consumption (Mtoe) in 2014 Natural Gas Consumpti on (Mtoe / Bcm) in 2014 % of Natural Gas in Energy Consumpti on in 2014 Primary Natural Gas Production (Mtoe / Bcm) in 2014 4 % of Natural Gas Import Depende ncy in 2014 5 Austria 32.7 6.4 / 8.0 19.6 1.1 / 1.4 96.8

3_{Eurostat natural gas data was given in the Mtoe unit, in favor of readability with the other natural gas units in}

this thesis a choice has been made to convert the Eurostat data in Bcm (Billion cubic meters), for the natural gas consumption and production. This conversion is based on the assumption 1 Mtoe = 1.25 Bcm. This is not an entirely accurate conversion as the Gross Calorific Value of Natural Gas consumed in every state is different.

4_{Some very marginal primary natural gas production values are considered as zero to enhance the readability}

of the table.

5 _{Eurostat calculates energy dependence using the following equation: Energy dependence = Net imports / ∑}

Gross inland energy consumption + International maritime bunkers.

Energy dependency can be negative in the case of net exporters, a percentage over 100 indicates the accumulation of stocks. See more at http://ec.europa.eu/eurostat/cache/metadata/EN/tsdcc310_esmsip.htm

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Belgium 53.4 12.7 / 15.9 23.8 0.0 / 0.0 101.2 Bulgaria 17.7 2.4 / 3.0 13.6 0.2 / 0.3 94.1 Croatia 8.2 2.0 / 2.5 24.4 1.4 / 1.8 28.6 Cyprus 2.2 0.0 / 0.0 0.0 0.0 / 0.0 0.0 Czech Republic 41.5 6.2 / 7.8 12.5 0.2 / 0.3 96.3 Denmark 16.9 2.8 / 3.5 16.6 4.1 / 5.1 -46.6 Estonia 6.7 0.4 / 0.5 6.0 0.0 / 0.0 100.0 Finland 34.6 2.5 / 3.1 7.2 0.0 / 0.0 99.9 France 248.5 32.6 / 40.8 13.1 0.0 / 0.0 103.6 Germany 313.0 63.4 / 79.3 20.3 6.9 / 8.6 89.4 Greece 24.4 2.5 / 3.1 10.2 0.0 / 0.0 99.3 Hungary 22.8 6.7 / 8.4 29.4 1.4 / 1.8 97.7 Ireland 13.6 3.7 / 4.6 27.2 0.1 / 0.1 96.5 Italy 151.0 50.1 / 62.6 33.2 5.9 / 7.4 89.7 Latvia 4.5 1.1 / 1.4 24.4 0.0 / 0.0 72.1 Lithuania 6.7 2.1 / 2.6 31.3 0.0 / 0.0 104.1 Luxembourg 4.2 0.8 / 1.0 19.0 0.0 / 0.0 99.5 Malta 0.9 0.0 / 0.0 0.0 0.0 0.0 0.0 Netherlands 76.8 29.1 / 36.4 37.9 50.1 / 62.6 -73.1 Poland 94.3 13.4 / 16.8 14.2 3.7 / 4.6 72.0 Portugal 22.1 3.5 / 4.4 15.8 0.0 / 0.0 100.0 Romania 32.3 9.3 / 11.6 28.8 8.8 / 11.0 5.0 Slovakia 16.2 3.8 / 4.75 23.5 0.1 / 0.1 104.8 Slovenia 6.7 0.6 / 0.8 9.0 0.0 / 0.0 99.6 Spain 116.7 23.7 / 29.7 20.3 0.0 / 0.0 103.5 Sweden 48.2 0.8 / 1.0 1.7 0.0 / 0.0 99.1 United Kingdom 189.3 60.1 / 75.1 31.7 33.1 / 41.4 44.9

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EU-28 1607.4 343.5 / 429.4

21.4 117.2 / 147.0

67.3 Data from Eurostat (2016a)

The large natural gas import dependency is due to the nature of the natural gas market. Gas is primarily transported via a network of high-pressure pipelines which create a more regional market in comparison to the globally traded oil. The EU natural gas imports from non-EU suppliers stem primarily from three regions, Russia, Africa and the North-Sea. Russian natural gas is transported through the Yamal-Europe pipeline, from Western Siberia through Russia and Belarus towards Germany, the Nord Stream pipeline through the Baltic sea towards Germany, and various pipelines from Russia through Ukraine to various EU member states. Natural gas supplies from Africa through pipelines primarily stem from Northern-Africa. The Greenstream pipeline runs from Libya to Italy, the Maghreb-Europe gas pipeline from Algeria, to Morocco and ends in Spain, while the Medgaz pipeline runs directly from Algeria through the Mediterranean Sea towards Almeria, Spain, the last pipeline currently supplying Algerian natural gas is the Trans-Mediterranean Pipeline via Tunisia towards Sicily and mainland Italy. Norwegian natural gas constitutes together with Russia and Algeria the primary non-EU natural gas supplies. The following Norwegian pipelines supply natural gas from the North Sea towards the EU: Europipe I and II towards Dornum, Germany; Norpipe towards Emden, Germany; Franpipe towards Dunkirk, France; and finally Vesterled towards St. Fergus, Scotland.

Pipelines and pipeline routes are subject to political rivalry as they assert some degree of power and income to the owner and the transit states. Poland for instance sees further Russian pipeline expansion as a threat to her neighbourhood (Buras & Balcer, 2016). As the expansion of the Nord Stream pipelines circumvents Poland as a transit state. This is an example where the perceived security threats of a member state's natural gas import dependency influences the 6 member state’s interests. It is clear that energy policy interests are influenced by a wide range of factors such as: 1) energy consumption, 2) energy mix, 3) size of the import dependency, 4)

6 _{Whether the EU-Russia relationship is one of dependence or interdependence, and whether the high import}

dependency constitutes a security risk is out of the scope of this thesis. Casier (2011), states for instance that there is primarily an economic interdependence which shouldn’t be a reason to frame the EU-Russia energy relations as problematic. It seems that the perceptions of the Russian state have changed, as the Kremlin, fueled by high oil prices could become more assertive on the international stage.

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domestic production and 5) perceived intentions of energy suppliers. As Gusev and Westphal put it, the EU member states face a dilemma between political interests and economic interests. As the purely economic, geopolitical and geographical factors still exist; the EU remains dependent on close by and abundant Russian resources and existing and planned natural gas infrastructure. While on the other hand the actions of Russia in Ukraine increases the perceived security threats to some fragile EU member states (Gusev & Westphal, 2015: 8).

Natural gas can however also be transported in liquid form, LNG (Liquified Natural Gas) is treated and condensed natural gas which takes up around 1/600th of the same volume as normal natural gas. LNG can be shipped via large specialised tankers from distant locations to regasification terminals, which creates a more international market in comparison to the regional natural gas pipelines (van Esch, de Jong & de Ridder, 2014: 56). Table 3 shows the current LNG terminals in operation in the EU, striking is that Germany as the largest natural gas consumer does not own a LNG terminal. Which is likely to be explained by the extensive pipeline network from Russia towards Germany, and the good relations Germany has with the Russian gas sector as a large importer and important transit state (Westphal, 2008).

Table 3. EU-28 LNG Terminals in Operation as of 2016

Country Terminal

Belgium Zeebrugge (1987)

France Fos-Tonkin (1972), Montoir-de-Bretagne

(1980), Fos Cavaou (2010), Dunkerque (2016)

Greece Revithoussa (2000)

Italy Panigaglia (1971), Porto Levante (2009),

Toscana (2013)

Lithuania FSRU Independence (2014)

The Netherlands Gate Terminal (2011)

Poland Świnoujście (2016)

Portugal Sines (2004)

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(1989), Bilbao (2003), Sagunto (2006), Mugardos (2007)

The United Kingdom Isle of Grain (2005), Dragon (2009), South Hook (2009)

Source: Gas Infrastructure Europe (2016).

Table 4 shows the natural gas imports of the EU by country of origin between 2004 and 2014. Most natural gas imports stem from three states: Russia, Norway and Algeria, all of these states are connected to the European union via an extensive pipeline network. Whereas natural gas from the smaller exporters, Qatar, Nigeria, Trinidad & Tobago, Peru, Egypt, and Oman are shipped via LNG carriers. LNG is in total only a small fraction of EU natural gas imports. Figure 2 shows the total EU natural gas imports and the corresponding trendline. The total natural gas import trend between 2006 and 2015 has been flat, the LNG import trend is also primarily flat with a slight downward motion. Which means that LNG has had roughly the same market share between 2006 and 2015.

Table 4. EU-28 Natural Gas Imports in Bcm

2006 2008 2010 2012 2014 2015 Total 404 421 440 415 385 411 Of which: LNG 52 49 79 60 43 47 Russia 135 133 120 116 115 122 Norway 87 100 101 103 97 107 Algeria 54 51 50 44 36 35 Qatar 6 8 35 28 21 25 Libya 8 10 10 6 7 7 Trinidad and Tobago 4 6 5 3 3 2 Egypt 8 6 5 2 0 0 Nigeria 14 13 14 11 4 6

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Peru 0 0 0 2 1 1 Turkmenis tan 1 5 0 0 0 0 Uzbekistan 3 0 0 1 0 0 Oman 1 0 0 0 0 0 Not Specified 16 18 24 13 20 20

Source: Eurostat (2016a). Countries with the color red ship primarily LNG.

Figure 2. Total Natural Gas Imports

Source: Eurostat (2016a).

Natural Gas Diversification

Diversification of natural gas supplies means something different for every region in which natural gas constitutes an important energy source. In North America diversification is seen as the number of producers and transport options, while in Japan it is seen as the number of

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independent supply trains. The definition important for this thesis is that of Europe, where diversification is seen as the number of supplying countries. Yet the key concept here is that the more diverse a resource supply base is, the less interruption it can face (IEA, 1995: 28). Which makes it an important aspect of energy security.

Traditionally the security of European natural gas supplies is seen with regards to four important aspects: the reserves and reserve-to-production ratios of European- and external-suppliers; long-term supply arrangements in liberalized markets; long-term contracts; and multi-billion-dollar investments in order to obtain new large scale natural gas supplies (Stern, 2002, pp. 6-9). In a liberalized energy market the long-term contracts and multi-billion-dollar investments are especially salient issues, as it is possible that market liberalization undermines the ability and willingness of actors on the energy market to enter in long-term take-or-pay contracts in order to support large investments in natural gas infrastructure outside Europe (Stern, 2002, p. 9). This unwillingness is caused by the mandatory third party access to natural gas infrastructure, therefore a natural gas undertaking that invests in new infrastructure can not guarantee that she is the only user of this infrastructure. In order to facilitate natural gas diversification, the European energy policy should thus strive to guarantee an investment climate in which natural gas undertakings are willing to enter in long-term contracts to support infrastructure projects. This can be done via exemptions, for a limited time period, given by the EU and national regulators for the access to multi-billion-dollar greenfield projects in order to facilitate large scale investments (Stern,7 2002: 10).

European Energy Policy

Energy policy has been a central part of European integration since its beginning with the European Coal and Steel Community Treaty and Euratom Treaty. Even though energy sectors other than coal and nuclear energy weren’t incorporated in the treaty, the creation of an integrated European energy market was a constant policy objective (Pollak & Slominski, 2011: 94). This is to be explained by the dominance of coal and the expected importance of nuclear energy in post-war Europe. After the Second World War, Europe was desperate for energy necessary for the reconstruction of the continent, at that time coal fueled 80 percent of the

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primary energy use. In Europe a shortage of coal existed which was eased with American imports. Yet the European steel industry also relied on German coal, which created the imperative for a integration of the French and German, steel and coal industry (Matláry, 1997: 14-15). The importance of coal in Europe fell drastically as cheap Middle-Eastern oil became between 1955 and 1969 quickly the most important fuel (Clark, 1990) . During the oil crisis of 1973/74 the further development of a common energy policy came to a standstill as European Community member’s opted for bilateral agreements with the Arab oil producers (Matláry, 1997: 17).

European states favored a system of national energy monopolies over one where energy was sold at a competitive market. A national energy company bought here for instance natural gas directly at the producer. In such a system the state had much larger authority over the origin of natural gas supplies. Figure 3 shows how monopoly price setting works, instead of a market generated price a monopoly price is asked, which results in a higher price but a lower supplied quantity, the monopoly quantity instead of a market generated quantity. The monopoly price setting results in a loss in efficiency which makes the price paid higher than necessary.

The imperative behind these monopolies was that of “public service through monopoly” (Talus, 2013: 18). Most commonly the generation, transmission, supply and cross-border trade where all monopoly undertakings, and the market was regulated by the government (Jamasb & Pollitt, 2005: 7). The security of supply responsibility of natural gas was task of the monopoly, and the states where the primary natural gas undertaking was not responsible for all distribution, such as in France and Italy, the responsibility resided with the undertaking closest to the end consumer. The definition of security of supply the companies followed was defined by themselves, or in cooperation with the government (IEA, 1995: 101). As the contemporary discourse surrounding energy security includes for a large part the diversification of natural gas sources, it could be assumed that monopolies would be able to invest their monopoly rents in diversification efforts. As these are not necessarily supported by the economic interests. All in all, the situation prior to the internal energy market corresponds primarily with the low negative and low positive economic integration spectrum, thus a market over which the European member state had most authority.

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Figure 3: Monopoly Price Setting

This status quo changed however during the late 80’s - early 90’s, the most important cause thereof was a new political and broadly accepted attitude of deregulation, meant to achieve efficiently functioning markets, entered the stage. The deregulation trend gained widespread acceptance at the national level first in Tory Great Britain, during the Thatcher Age, but also in Mitterand France. Which planted the political basis for the launch of the EU’s internal market (Matláry, 1997: 19). Besides the deregulation trend there was another cause for liberalisation of the energy market, as it became apparent that energy was capable of being sold at a competitive liberalized market as the United Kingdom and the United States shower. Thereafter consumers realized that the monopolies charged them energy tariffs which were way higher than necessary as the monopoly rent was not distributed back to the public but went into the pockets of the monopoly undertaking (Talus, 2013: 18).

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Yet, in the first proposals and directives on the internal market energy had no place, this changed in 1988 with the European Commission working document on the internal energy market (COM 88/238). The first efforts for the IEM were introduced in a package in 1989 and subject of a communication by the Commision: gas and electricity price transparency (COM 89/123); gas- (COM 89/334) and electricity transmission proposals (COM 89/336). Only the natural gas transmission directive did not pass initially, and a new proposal in 1991 by the Commission caused large disagreement over the open access to pipelines (Matláry, 1997: 48).

The Council of Ministers made with the adoption of Directive 96/92/EC in December 1996 and Directive 98/30/EC in July 98, which together constitute the first legislative package, a true start with the internal electricity and internal gas market in the EU. The 1996 Electricity Directive created rules on four areas the generation of electricity; retail supply; transmission and distribution; unbundling and regulation. While the 1998 Gas Directive was in essence comparable to the 1996 Electricity Directive as it established rules for the construction of gas facilities; transmission and distribution; unbundling; and regulation. It created no rules on the tendering process for new gas facilities and an equivalent to the Single Buyer Option was not 8 possible. This is due to the nature of natural gas, as production facilities are determined by the physical location of natural gas resources (Thomas, 2005: 10). The first legislative package was criticised for being not effective enough to tackle market abuse by energy companies. Also there were not enough provisions in creating a competitive field of companies in the generation and retail of energy, the prospects of a new companies entering the market were slim and the perspective of consumers to choose their own supplier were also very small as only the largest companies were allowed to shop for a new supplier every six years (Thomas, 200b: 10-11).

Even though the content of the first legislative package was criticized for being not effective enough, the member states succeeded in adopting more liberal options than necessary which gave the Commission incentives to introduce new directives. These new directives constituted the second legislative package in 2003 for electricity (2003/54/EC) and gas (2003/55/EC). The directives created rules on the same four areas as the first package, namely generation or production and import; retail supply; transmission and distribution; and unbundling and

8_{A Single Buyer Model means in the broadest sense a system where a centralised agency has some degree of}

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regulation. But it also introduced rules on the security of supply (Thomas, 2005b: 11). All in all the second legislative package was more stringent and set clearer goals than the first, all retail consumers were allowed to choose a supplier by 2007 (2004 for industrial consumers), more demanding rules on Third Party Access were created as tariffs have to be approved by a regulatory body, energy companies had to implement a full legal unbundling between their Transmission and distribution undertaking, and the Commission was to establish the European Regulators Group on Electricity and Gas which was meant to increase cooperation between the newly established national regulators. Yet, the desired amount of competition on the European energy market remained to be seen. As a consequence the Commission initiated the Third Energy Package, the latest round of energy market legislation (Schubert et al., 2016: 152-153). The Third Energy Package contains a directive (2009/73/EC) and four regulations . The 9 contents have been influenced by a large array of legal, geopolitical and economic factors. Waloszyk states that the 2004 and 2007 EU enlargements; the anticipation of the adoption of the Lisbon Treaty; the reinforcement of EU consumer protection; global environmental challenges; and the strengthening of the use of EU competition law were the primary legal factors influencing the contents of the third package. While the large natural gas import dependency on Russia of the new eastern- and central-european EU member states and the increasing international competition for fossil fuel supplies shaped the geo-economic considerations (Waloszyk, 2014: 23-24).

The Third Package covers six main areas: the unbundling of energy suppliers from network operators, strengthening the independence of regulators, the establishment of the Agency for the Cooperation of Energy Regulators (ACER), increasing cross-border cooperation between transmission system operators and the creation of the European Networks for Transmission System Operators and increasing transparency on the energy and natural gas retail markets in order to benefit consumers (European Commission, n.d.). While the first two energy packages focused primarily on the opening of the gas market, the third package moved to a pursuit of a fully integrated EU gas market (Waloszyk, 2014: 26).

9_{Regulation (EC) 713/2009; Regulation (EC) 714/2009; Regulation (EC) 715/2009 and later Regulation (EU)}

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Table 4 summarizes the most prevailing practices before the liberalisation of the EU energy market, and the practices in the internal energy market after the three legislative packages. The transmission of natural gas was before the internal energy market most commonly a monopoly, while after the second legislative package regulated third party access to distribution networks became obligatory. The supply of natural gas was also a monopoly before the internal energy market, now natural gas undertakings have to separate generation and transmission effectively, which means that a separation on paper (accounting) or only legal does not suffice. Customers have gained the right to choose their own supplier, from a situation in which they had no choice whom their natural gas supplier would have been. With the liberalisation of the energy market, the compulsory unbundling of integrated energy companies became increasingly imported to allow successful competition. This is also clear when looking at the different steps taken in the legislative packages, first there was only accounting unbundling, in the second legislative package legal unbundling, and in the third energy package effective ownership unbundling. The cross-border trade of natural gas was prior to the internal energy market arranged by a monopoly, while it is currently regulated by the ACER and ENTSOG. Quite logical was the overall regulation of the markets prior to the liberalisation a task for the member states, now national regulatory authorities and the ACER work in cooperation regarding regulation.

Table 4. The Internal Energy Market Legislative Packages

Most Common Pre- IEM 1996 Natural Gas Directive 2003 Natural Gas Directive 2009 Natural Gas Directive Transmission/ Distribution

Monopoly Regulated TPA Negotiated TPA Single Buyer

Regulated TPA Regulated TPA

Supply Monopoly Accounting

Separation Legal Separation from Transmission and Distribution Effective Separation from Generation and Transmission Customers No Choice Very Limited

Number of Consumers Eligible to Choose own Supplier All Commercial Undertakings in 2004, All in 2007 All free to choose natural gas supplier

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Unbundling None Accounts Legal Ownership Unbundling, Independent System Operator (ISO) or Independent Transmission Operator (ITO) Cross-Border Trade

Monopoly Negotiated Regulated Regulated via ACER and Collaboration via European Network for Transmission System Operators Regulation Governmental Not Specified Regulatory

Authority

National Regulatory Authority and ACER

Natural Gas Investments in the Liberalized Market

Whereas in the era of a non-liberalized energy market the publicly owned or publicly supported monopoly dealt with the purchase and sale of natural gas, this has been entirely altered after the continuous progression of liberalization of the internal energy market. From the commonly three actors in the gas value chain, there are now five actors active : producers, network 10 operators, wholesale markets, suppliers and end-consumers. The producer supplies raw natural gas and have to ensure competitive short- and long-term natural gas supplies. For the producers the availability and access to transmission grids, access to wholesale or retail markets, long-term investments signals, market power collusions and lastly security of supplies are critical areas to perform their task in the internal market at a sufficient way. Examples of suppliers of natural gas active in the European market are (partly) National Companies such as Gazprom (Russia), Statoil (Norway), Sonatrach (Algeria) and Nederlandse Aardolie Maatschappij (the Netherlands), Qatargas (Qatar), National Oil Company Libya (Libya) and the Nigerian

10 _{See Egenhofer & Gialoglou (2004) for a very comprehensive overview of the EU internal electricity and gas}

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National Petroleum Company (Nigeria) or International Oil and Gas Companies such as Shell, BP, Total and Chevron. Network operators are possibly the most important actors in the internal market as they have to ensure non-discriminatory and cost-reflective transmission of natural gas supplies in the market. Important for network operators in a working internal market is the need for investment incentives and their independence from producers and importers of natural gas. The European Network of Transmission System Operators for Gas (ENTSOG) is the association for network operators in the EU. 45 Transmission System Operators and 2 associated partners from 26 european states are members of ENTSOG, there are also 4 observers from the EU affiliated states Norway, Macedonia, Ukraine and Switzerland (ENTSOG, n.d.). Most European states have either one or two network operators, Germany most notably has 13 this is due to the German federal system. Competition in transmission and distribution is not suitable because these are natural monopolies, it is possible to opt for competition for the authority to run the grid for a period of time (Egenhofer & Gialoglou, 2004: 11-12). Yet this option is not usual. The third actors are the wholesale markets of natural gas, they ensure the efficient dispatch to the suppliers and are involved in the risk management and pricing of natural gas. Transparency of data and a sound framework for the wholesale of natural gas are critical for their functioning. Suppliers buy their natural gas from the wholesale markets and deliver the gas to the end consumers, they have to ensure the reliable delivery and good quality of natural gas to the consumer. Suppliers are also dependent on a good framework for the wholesale market for their functioning. Small and industrial end-consumers are the final actor in the European natural gas market value chain as they are the recipient of the service. End-consumers are able to demand differentiated services, this entails differences in price or quality, end-consumers are dependent on the reasonable pricing and physical availability of natural gas (Egenhofer & Gialoglou, 2004: 21-22).

For simplification purposes we assume that the EU’s goal is to create a market with perfect competition in the EU natural gas internal market. This is based on the liberalisation process the EU has enacted in the natural gas market. Natural gas undertaking unbundling, regulated Third Party Access and mandatory consumer choice are examples of efforts by the EU to create a competitive market. The price in a perfect competition is determined by the intersection of supply and demand in the market. In such a market, as figure 4 shows, a firm is a price taker instead of a price maker in a monopolistic market. The quantity a firm supplies is at the short

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term determined at the point in which the market price intersects with the firm’s marginal cost . 11 At this point the incumbents make so called supernatural profits. In theory these profits encourage other firms to enter the market as well. These new entrants cause the supply to increase which lowers the market set price. In the long run the firms will take the price where the market demand intersects with the firm's Average Total Costs . 12

Figure 4. Price Setting in a Perfect Competition

In practice the internal energy market that is created, is not one of perfect competition. Perfect competition markets have various fundamental characteristics, one of the most important ones according to Robinson (1934: 104) is that a single firm can not set the price. Other economists also include assumptions as firms having perfect information of the market, no barriers to enter the market and rational behavior of actors active in the market (Knight, 1921: 76-80). Even though it is unlikely that a single producer of natural gas is capable of setting the price of natural gas in the EU , the limited number of suppliers and the dominance of large suppliers as Russia show that the producers are more of an oligopoly than a market of perfect competition. It is also very difficult for natural gas undertakings to enter the market in various stages of the

11_{The marginal cost in economics is the cost added by producing one additional unit of a product.}

12_{In economics the Average Total Costs (ATC) equals the sum of all production costs divided by the produced}

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value chain, especially the production and transmission stages. As the distribution and transmission of natural gas is regarded a natural monopoly in the EU. And also the production of natural gas is dominated by state monopolies such as Gazprom in Russia and Norway’s Statoil. While the reliance of perfect information with no information failure or time lag in a perfect competition cannot be guaranteed in the natural gas market as demand is dependent on various structural and nonstructural13 factors, while supply is dependent on geological, technological and geopolitical factors. The EU natural gas market is therefore not a market of perfect competition but one of imperfect competition. This however still means that most companies active in the internal gas market have to determine their actions primarily on the basis of commercial interest, such as costs minimization, as a firm which makes losses has to leave the market. This is in stark contrast with publicly-owned or -supported monopolies which were meant to act upon the public interest, and have to fulfill their obligations to society.

The most recent political sensitive example of this paradigm in the gas market is the Nord Stream pipeline from Russia to Germany through the Baltic Sea. The Nord Stream pipeline is regarded as being cheaper than the existing transport options through Ukraine and Belarus, while it also suspected that it gains a positive economic value from the impact it has on lowering the Ukrainian transit fees and disruptions through the Ukrainian route (Chyong, Noël & Reiner, 2010: 18). Yet, the Nord Stream pipeline was subject to a great amount of political scrutiny. For the Western European stakeholders the economic imperative was clear, Germany, the UK, the Netherlands, France and Denmark are able to satisfy their natural gas demands when they would use the full Nord Stream capacity (Gonchar, Martynyuk & Chubyk, 2009: 57). For states not directly affected by the economic incentives of the project the debate revolved around other interests and concerns, primarily the historic energy-relations, environmental concerns, and military-strategic concerns based on geopolitical considerations (Solum Whist, 2008: 54). In the end the Nord Stream pipeline has been built and opened in 2011, and in this case it seems that the economic considerations triumphed over environmental and geopolitical concerns.

The Orman-Lange pipeline from Norway to the UK can be as regarded another example which shows that economic considerations are at the basis of new natural gas infrastructure, even

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though the project did not face any major political backlash. The Orman-Lange project was a particular capital intensive project. As the pipeline, which can deliver up to 25 Bcm of gas per year, cost $3.2bn the whole project was estimated to cost $8-10bn. Yet the project was in his14 construction face not financed via long-term contracts, which normally would constitute a very large risk. But the investors were reassured as they would sell their natural gas on the largest liquid market in Europe, secondly the UK market was running short of gas supplies and finally most of the Orman-Lange equity holders are active on the UK market, which gives them arbitrage possibilities (Stern & Honore, 2004: 2-3).

Demand is thus an integral part of the possibilities for diversification as it shapes the actions of natural gas undertakings in the market. Therefore it is important to determine how demand in the natural gas market is formed and what the expected future demand in the European market is. The demand of natural gas is influenced by structural and nonstructural factors. Structural factors influencing the natural gas demand are: capacity additions of Renewable Energy Sources which alter the energy mix and drive natural gas demand down; increasing energy efficiency in the residential area which lowers the energy demand and in the industrial area which also lowers the need for natural gas; and lastly shifts in the power capacity mix. These structural factors create long-lasting effects for natural gas demand. While non-structural factors have immediate effects, and stem from transitory conditions. Non-structural factors are for instance the weather; economic and financial crisis; CO2 prices; and the relative commodity prices, or the prices of natural gas substitutes (Pisca, 2016: 16).

Figure 5 shows a graph of competing projections for the EU-28 natural gas demand. What is striking about the graph is that there are very large differences in the projections, the Eurogas Roadmap 2050 has the highest projected demand for 2025 of around 550 Bcm, while the “EC PRIMES Ref 2013 EE27 variant” has the lowest projected demand of 410 Bcm. This graph tells us that there exists an enormous level of uncertainty about future natural gas demand, which is due to the structural factors discussed earlier but also due to technological innovations, uncertainty about environmental policies and political decisions such as decommissioning of nuclear and coal fired plants (Pisca, 2016: 18-19). The main driver of natural gas demand

14_{Source (BBC, 2006) valuta converted based on historical data retrieved from}

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decline is the power generation sector. It is affected not only by an increase in the share of renewables but also by coal. This increase in coal consumption is caused by the US shale revolution, gas consumption increased in the US after which coal supplies were rerouted towards Europe. The US shale revolution caused a collapse of the coal prices, with which European natural gas could not compete (Honoré, 2014: 22-23).

Despite the large difference in projected demand, the trend the graph shows is a more or less flat future EU natural gas demand. This means that there doesn’t necessarily exists an economic incentive for future natural gas investment.

Figure 5. Competing Projections For EU-28 Natural Gas Demand

Source: Pisca (2016).

Controlling a Liberalized Energy Market

The EU member states are in the liberalised energy market however not completely powerless as they can impose public service obligation on the natural gas undertakings. Public service obligations are as defined in Regulation (EEC 1191/69): “obligations which the (...) undertaking in question, if it were considering its own commercial interests, would not assume

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or would not assume to the same extent or under the same conditions”. With regards to natural gas, in Article 3 of the 2009 Gas Directive the following guidelines were established:

(Member States) may impose on undertakings operating in the gas sector, in the general economic interest, public service obligations which may relate to security, including security of supply, regularity, quality and price of supplies, and environmental protection, including energy efficiency, energy from renewable sources and climate protection. Such obligations shall be clearly defined, transparent, non-discriminatory, verifiable and shall guarantee equality of access for natural gas undertakings of the Community to national consumers. In relation to security of supply, energy efficiency/demand-side management and for the fulfilment of environmental goals and goals for energy from renewable sources, as referred to in this paragraph, Member States may introduce the implementation of long-term planning, taking into account the possibility of third parties seeking access to the system.

Public Service obligations are a form of regulation which try to support certain special interests such as security of supply, protection of the environment and consumer protection. Whereas the natural gas undertakings might not have supported these based on their own economic interests. There is however no European wide definition of a public service obligation, therefore based on the subsidiarity principle member states have to define the public service obligations themselves . What is however defined in the 2009 gas directive is that the15 obligations have to be clearly defined, transparent and non-discriminatory, so that they can be verified according to state aid rules (Nowak, 2006: 167). As there is no common European definition, member states are for instance able to implement the need to build new natural gas infrastructure, or impose stringent environmental rules on natural gas supply and production (Nowak, 2006: 157). The Austrian public service obligation in the Natural Gas Act of 2011 is an example of the obligation to build new infrastructure. The Austrian Natural Gas Act establishes the following objective which natural gas undertakings have to adhere to based on their public service obligations:

15 _A _full _list _of _all _public _service _obligations _can _be _found _here:

https://ec.europa.eu/energy/sites/ener/files/documents/list_pso_security_of_gas_supply.pdf.

All European member states except Cyprus, Denmark, Ireland, Malta, Slovakia, Sweden and the United Kingdom have public service obligations for the natural gas sector. Public service obligations whereof English of Dutch translations are available will be discussed in this segment.