Russian gas supply into the European
Union: quantifying the risks from 2003
to 2013 of member states
Keywords: European Union, Security of Supply, Natural gas, Russia, index
Supervisor: Dr. M.P. Amineh Second reader: Dr. R. J. Pistorius Student: Sven Lucas
Email: sven.lucas@student.uva.nl Student number: 10887407
Master thesis Political Science, specialisation International Relations Course: Political Economy of Energy
Table of content
Political Maps of the countries ... 4
Map 1: European Union and Member States... 4
Map 2: Russian Federation ... 5
Acknowledgements ... 6 List of Abbreviations ... 7 List of Illustrations ... 8 Maps ... 8 Figures ... 8 Tables ... 8 Chapter One ... 9 1 Introduction ... 9 1.2 Literature review ... 11 1.3 Theoretical framework ... 14 1.3.1 Neoliberalism... 14
1.3.2 Classical geopolitics & Critical geopolitics ... 14
1.4 Brief Argument & Hypothesis ... 16
1.5 Research Methods ... 17
1.5.1 Operationalisation ... 17
1.6 Division of the chapters ... 19
Chapter Two Gas in the European Union: role, facts and strategies... 21
2 Introduction ... 21
2.1 Natural gas contracts dependency and demand ... 22
2.1.1 EU natural gas statistics ... 22
2.1.2 Exchange mechanisms ... 29
2.1.3 Liquefied Natural Gas ... 29
2.2 Energy Policies ... 32
2.2.1 EU-Russia energy negotiations ... 35
2.3 Future of natural gas within the EU ... 38
2.4 Conclusion ... 41
Chapter Three: The role of natural gas in Russia ... 42
3.1 Understanding the Russian energy policy background ... 43
3.1.1 Brief History Russian federation ... 43
3.1.2 Relationship between Putin and Gazprom ... 45
3.2 Russia’s energy power toward the EU ... 49
3.3 The tango of the EU and Russia ... 53
3.3.1 Importance of gas export and trade with EU ... 53
3.3.2 Transport diversification ... 57
3.3.3 Gas prices ... 59
3.3.4 The Ukraine ... 60
3.4 Conclusion ... 60
Chapter Four: Gas Index ... 62
4 Introduction ... 62
4.1 Indicators of gas vulnerability ... 63
4.1.1 Construction of Gas index ... 66
4.2 Results and Discussion ... 68
4.3 Conclusion ... 74
Chapter Five: Conclusion ... 76
References ... 80
Political Maps of the countries
Map 1: European Union and Member States
Source: European Union, 2015, 'EUROPA - Countries', accessed May 24, 2015, from <http://europa.eu/about-eu/countries/index_en.htm>.
Map 2: Russian Federation
Source: Gazprom, 2015, 'Unified Gas Supply System of Russia', accessed May 24, 2015, from <http://www.gazprom.com/f/posts/15/301731/map_transport_eng_1.jpg>.
Acknowledgements
This thesis is the result of over five months research on the EU’s security of supply of natural gas. First of all I would like to thank Dr. Mehdi Amineh for his support and dedication. Without his input and patience the completion of this thesis would not have possible. Secondly I would like to thank Dr. Nicola Zaccarelli of the JRC Institute for Energy and Transport for his time and in clarifying the current state of the natural gas network in the EU. Thirdly I would like to thank Dr. Pistorius, as the second reader of this thesis, for taking time to do so. Last but certainly not least, I would like to thank Marloes Vlind Msc and Guido for their help throughout the years in keeping me motivated and my studies on track.
Sven Lucas,
List of Abbreviations
BBC British Broadcasting Corporation bcm Billion Cubic Meters
BP British Petroleum
CO Carbon Dioxide
CERE Contribution to EU Risk Exposure ECT Energy Charter Treaty
ECSC European Coal and Steal Community
EC European Commission
ENTSO-G European Network of Transmission System Operators for Gas
EU European Union
GIE Gas Infrastructure Europe GHG Green House Gasses GCV Gross calorific value GDP Gross Domestic Product
GIIGNL International Group of Liquefied Natural Gas Importers LNG Liquified Natural Gas
LTC Long Term Contracts
MS Member States
NOC National Oil Company
NATO North Atlantic Treaty Organization PCA Principal Component Analysis REES Risky External Energy Supply
RT Russia Today
RUB Russian Rubel SOS Security Of Supply SEM Single European Market SFI State Fragility Index TWh Terra Watt Hour
TOE Tonnes of Oil Equivalent TRI Transit Risk Index
TOC Transnational Oil Companies TcF Trillion cubic Feet
TNK Tyumenskaya Neftyanaya Kompaniya USSR Union of Soviet Socialist Republics
UN United Nations
List of Illustrations
Maps
Map 1: European Union and Member States p. 4
Map 2: Russian Federation p. 5
Figures
Figure 1: Production of primary energy by source, EU28 in 2003 and 2013 p. 23 Figure 2: Natural gas imports by supplying nation for the EU28 in 2003 and 2013 p. 24 Figure 3: Nations in Transit scores from 2003 to 2013 for Russia p. 48 Figure 4: Russian trade balance in billion US dollars in 2013 p. 55 Figure 5: Computed gas index scores from 2003 to 2013 p. 71
Tables
Table 1: Energy consumption of the EU28 in 2003 and 2013 p. 22 Table 2: EU Import dependency of the EU in percentages p. 26 Table 3: Exports from Russia to the EU and partners (in billion cubic meters) p. 28 Table 4: EU28 Share of LNG imports from 2003 to 2013 p. 31 Table 5: LNG capacity Eastern EU realised and planned p. 32
Table 6: Shareholder of Gazprom in 2014 p. 46
Table 7: Share of Russian fossil fuel imports 2013 p. 50 Table 8: Top 5 export commodities Russia from 2011 to 2013 p. 54
Table 9: Descriptive statistics 2013 p. 68
Table 10: Correlation matrix 2013 p. 68
Table 11: Eigenvalues and Eigenvectors 2013 p. 69
Table 12: Computed index scores of Member States 2013 and normalised indicators p. 70 Table 13: Production of electricity from natural gas, 1990 to 2005 p. 73
Chapter One
1
Introduction
The European Union’s (EU) prosperity and security relies on an abundant and continues supply of energy (EC 2014, 330). The EU’s energy consumption relies on imports, 53 percent of the total energy consumption and 66 percent of natural gas originates from outside the European Union (EC 2014, 330). Since the foundation of the European Coal and Steal Community (ECSC), in 1951, the supply of energy has been a cornerstone of the European Union as such. A steady and reliable flow of energy is crucial to ensure and maintain economic growth (Amineh 2007). Furthermore the worlds energy resources are located in a limited number of mostly unstable regions, creating risks of the disruption of supply to the European Union Members States. The key supplier of natural gas within the EU with a share of over two fifth, is the Russian Federation, which also possesses the largest reserve of natural gas in the world (EC 2014; IEA 2014).
In recent years the strong dependency on the supply of energy from Russia has proven to be a challenge as multiple disruptions in the supply of gas have occurred. In January 2006 and 2009 Gazprom cut gas supplies to and through Ukraine, which subsequently led to the halt of natural gas supplies in the rest of the European Union. In 2007 this was also the case for oil deliveries to and through Belarus. In this research, I will examine the relations between Russia and the European Union, as Russia is the largest supplier of natural gas of the EU. Further the goal is to quantify the vulnerability of all member states of the European Union of the fossil fuel natural gas. As gas is a relatively clean fossil fuel with less greenhouse gas emissions, compared to oil and coal the expectations are that the share that natural gas in the energy mix of the EU will increase. The quantification will be done through the creation of a gas index, in chapter four, by using a set of gas related indicators.
Since January 2006, Russia is no longer seen as a reliable supplier of energy towards the European Union because of the supply disruptions in 2006, 2007 and 2009. Furthermore tensions have risen between Russia and the EU after the toppling of the Yanukovych regime in Ukraine, the annexation of Crimea by Russia and thereafter the diplomatic sanctions by the West imposed on Russia. For this research it will be interesting to see if any changes
have occurred for the EU members when it comes to their security of supply of natural gas. As the supply disruptions might have encouraged member states dependent on natural gas from Russia to change their import habits. In order to map vulnerability of the EU members an index will be created by using a set of seven indicators. The index data will be collected for the years from 2003 until 2013, as data for the year 2014 was not available for all indicators this year was not incorporated. This index will enable us to see if the vulnerability of natural gas of the member states has shifted over these years. All natural gas consuming member states of the European Union will be indexed over this time period, which in total are 26 nations. As natural gas plays no role in the EU members, Malta and Cyprus, they will be left out. Main focus will be on members such as the Baltic states, Romania, Bulgaria and Greece due to their connections with Russia and their limited alternative gas routes within the gas network.
Although the timeframe of this research will be 2003-2013, it is crucial to understand the influence of past events such as the Cold War. This historical context is essential to understand Russia, after the fall of the Soviet Union, and the Putin doctrine since the election of Vladimir Putin in 2000. Gazprom in Russia is state-owned, as the Russian government possesses over 50 percent of the shares of Gazprom (Gazprom 2014). In 2006 the lower parliament , the Duma, passed a law which gave Gazprom the monopoly position to export all forms of natural gas from Russia (Moscow Times 2006). According to Larrabee energy is seen as a political weapon and as such Russia tries to maintain its position as the largest supplier of natural gas (2010). In this thesis the political state-class of Russia will be examined as Gazprom is not an independent actor, but is influenced by the Russian government.
In the European Union, France and Germany seem to play a key role, an example of this is attempted creation of a “balanced energy partnership” in 2006 on behalf of the EU with Russia (Schwirtz 2006). Also the bypassing of transit nations like Ukraine and Belarus by the Nord stream gas pipeline can be seen as a strong position of Germany and their relations to Russia. But in this research the EU will be seen as a regulatory state due to the structures of the institutions, resources and policy tools (Goldthau & Sitter 2014; Jordana & Levi-Faur 2005).
The European Union faces a series of challenges in their relationship with Russia, as briefly described above. In particular the energy import dependency of the EU raises question on the security of supply. Hence the central research question of this thesis is:
What are the challenges and impediments facing the European Union’s natural gas supply security with Russia as its largest supplier of natural gas?
In order answer this research question several sub questions need to be answered. Firstly, what are the objectives of EU energy policies when it comes to Russian gas supply? Second, what is the energy policy of Russia towards the European Union? Thirdly, what are the challenges of natural gas supply from Russia into the EU? Fourthly, which Member States within the European Union face the greatest risks regarding the security of supply of natural gas? These sub-questions will help to answer the main research question.
1.2
Literature review
European Union policy and energy security
The EU can be seen as an actor trying to complete a liberal single European market and projecting this market model onto their external relations according to Goldthau & Sitter (2014). Goldthau and Sitter focus on the energy policies, in order to create a functioning market, as these regulations can greaten the security of supply of oil and natural gas on which the EU relies. In their articles of 2014 and 2015 they view the EU as a regulatory state, because of the policies tools the EU has. These ‘soft power’ tools are argued to come with a hard edge as the have led to changes not only in the domestic energy market but also forced adoption of these rules in EU trading partners such as Norway. In order for the EU to use its hard power, consensus of all 28 members is needed which is daunting and slow process. Thus when looking at the EU, the attention should go the soft power tools it uses to secure the supply of fossil fuels.
Energy security is a key part of our economic prosperity, several studies have tried to incorporate both short- and long-term indicators to account for disruptions of supply (Calabu 2010). Studies by Kruyt et al.(2009) and Sovacool et al. (2011) show that there is no general consensus on which indicators are relevant. But all indicators can be roughly classified within four categories, with some overlap between these categories for several
indicators (Kruyt et al., 2009). Availability, accessibility, affordability and acceptability are the main areas in which indicators can be classified according to Kruyt et al. (2009, p. 2167). The origins of these indicators originates from the risk assessment of oil, as this was the key energy source, the oil crisis in 1973 further highlighted the need for indicators. Gupta (2007) created an oil vulnerability index in order to determine which indicators measure the security of supply of nations. Three areas of risk to the economy of a nation according to Gupta are market risk, supply risk and environmental risk (2007). These three areas due to overlap, are able to cover all four elements as described by Kruyt et al. (2009). The gas index that will be formed aims to also cover these areas. Multiple lines of researching the security of supply can be found, some focus on all energy sources and accumulate them into one index (De Jong et al. 2007; Constantini 2007), others look at individual energy sources such as gas (Le Coq et al. 2009, 2012; Biresselioglu et al. 2015).
Constantini et al. (2007) formed two groups of indicators; the first group representing dependency, and the second group vulnerability. Vulnerability was operationalised as degree of supply concentration and dependency gas in total energy supply, among others. Subsequently these indicators were tested for multiple energy scenario’s. But this research integrated gas and oil which can be complicated due to the discrepancies between both as members states have different energy mixes.
De Jong et al. (2007) tried to assess the energy supply security by making use of both quantitative and qualitative indicators. The quantitative indicators addressed crisis capability index which takes into account short-term disruptions and ability to manage them. The second quantitative indicator of De Jong et al. looks at the supply and demand balance. Qualitative indices that were examined focussed on the safeguarding of routes and consumer relations with producers of energy. Although this research contains two quantitative indexes in order to quantify and comprehend the chain of energy supply, the weakness of this particular research is that subjective expert opinion is used to weigh the set of indicators. In order to get a more objective weighing of indicators it is of the essence to make use of a principle component analysis.
Le Coq et al. in 2009 constructed two indexes in order to measure security of external supply in the EU. The first was the “Risky External Energy Supply”-index (REES) index which
measures short-term risks of energy supply (2009, p. 4475). This index is not an aggregated index but separates energy types coal, gas and oil. The “Contribution to EU Risk Exposure” (CERE) is the second index which weighs the REES by the share of the member states in relation to the total EU energy imports.
Cabalu has created a gas security supply index for the Asian gas market using four indicators namely “gas intensity, net gas import dependency, ratio of domestic gas consumption to total gas consumption and geopolitical risk of supplier nations” (2010, p.220). The political risk analysis is done by using data of the Center for Systemic Peace (2014). Within this research the main natural gas supplier Russia and transit nations will be categorised along the lines of this method.
Le Coq et al. (2012) specifically looked at the transit risk of Russian natural gas through transit nations like Moldova Ukraine and Belarus into the European Union, in order quantify this the “Transit Risk Index” was developed (TRI) (p. 642). Indicators gas dependency, route diversification, political risk of transit, pipeline rupture probability and balance of power were used. This research and index specifically focussed on the gas routes and the pipelines from Russia. In this regard it neglected the supply alternatives of LNG and other suppliers such as Algeria, Qatar and Norway among others.
Biresselioglu et al. (2015) use the principle component analysis method in order to construct their gas supply security index for 23 gas importing nations worldwide. Which focusses on two elements namely, supply risks and market risks. This is done by using six indicators: volume of natural gas imported, number of gas suppliers, fragility of supplier, level of dependency on one single nation, import dependency and share of gas as primary energy consumption. According to this study the first three indicators are more effective when it comes to quantifying the security of supply and the creation of this index. Weaknesses of this study are that only looking at the volume of imported natural gas instead of the ratio will give a skewed image when it comes to constructing such an index for European Union Members. Furthermore acceptability factor or environmental risk as describe by previous authors is not taken into account.
Thus in order to make a complete and comprehensive gas index the CO2-emmission of natural gas will be taken into account. Furthermore other indexes only provide analysis and
calculations of one year accept the research as done by Biresselioglu et al., this research will differ as calculations over one decade will be done for the EU natural gas consuming members (2015).
1.3
Theoretical framework
In this thesis different theories will be used in order to research the different subject under study in this thesis, as Robert Cox described theory “is always for someone and for some purpose” (1981, p. 128). In order to understand why critical geopolitics is viewed as most appropriate in the context of this research, shortfalls must be pointed out. First classical geopolitics and radical geopolitics will be introduced and subsequently critical geopolitics. This will help to see what these other theories lack and why critical geopolitics is helpful to understand the current energy cooperation.
1.3.1 Neoliberalism
The regulatory state is seen as an analytic construct, neoliberalist view it as a normative ideal (Yeung 2010, p. 5). As neoliberalist view minimal state intervention in as the ideal and only in the case of a market failure, the normative ideal of the regulatory state can be understood. The regulatory state core characteristics are policy instruments to steer the economy in order to grow, changes in the institutions and its resources (Jordana & Levi-Faur 2005; Yeung 2010, p. 1). After the period of liberal and western dominance after the Cold War, the EU got challenged in the new millennium by realist power such as Russia (Goldthau & Sitter 2014). The presumption is that the EC will follow its liberal norms by making use of its regulatory nature and change these external market threats. In this thesis I assert that the this regulatory state will coincide with the international political open market approaches.
1.3.2 Classical geopolitics & Critical geopolitics
After the Cold War it was challenging for many theories to explain the “new world order” that had emerged. Geopolitics during the Kissinger era revived, as the strict geographical notion at the time, shifted toward a more ideological notion (Ó Tuathail 1998). Multiple strands of geopolitics can be identified namely, classical, radical, critical geopolitics. Within the classical form the incentives behind foreign policy are that physical factors play a key role when creating foreign policy. The main actors are statesmen who’s decisions are based on cost-benefit analysis. Structural realism also solely focusses on the state. So the
geographical reality of a nation determines the choices of state leaders as they aim to put national interests first. As the state is seen as the sole actor it leaves no room for analysing the decision-making process nor the multiple actors behind it and their incentives (Kelly 2006, p. 26). This problem is overcome in radical and critical geopolitics which does not have the same limited scope of tools when analysing state decisions.
Critical geopolitics that was formed after the Cold War and tries to unveil the politics behind the so called geo-political knowledge (Ó Tuathail, 1998). The disintegration of the USSR (Union of Soviet Socialist Republics) caused a crisis within the field of International Relations, as realist, liberalist, Marxist and classical geopolitics could not explain this event satisfyingly. Critical geopolitics emerged as a reaction to explain these events. It helps to understand the current international relations through the ”why” an “how” (Mercille, 2008, p. 570).
According to Amineh and Houweling “Realist theory has been unable to explain why a militarily capable contender for world power such as the former USSR was ‘defeated’ without the outbreak of war” (2005, p. 1). Realism has a state centric approach which neglects the role of non-state actors which is not the case with critical geopolitics. Critical geopolitics uses the domestic-society schools that are liberalism, Marxism and constructivism in order to describe political realism (Amineh & Houweling 2005). Both these domestic-society schools, bring forward the actor’s intent to control the built-in process of development (2005, p.1) Liberalism and Marxism differ a great deal on the class dimension. Amineh and Houweling point out that this process for liberals will lead to progress whilst Marxist would argue that this would be a destructive process. Both theoretical approaches ascribe a similar role to private interests and social forces which influences and shaper foreign policy of governments. The behaviour of the state is shaped by the these sub-state actors, but critical geopolitics argues that still the state plays a key role and thus not a secondary role (2005, p. 8). Amineh and Houweling (2005, p. 8), describe that these theories have a missing variable namely the role of identity which is the main weakness of these lines of thought. In order to overcome this missing dimension, constructivism helps, as it rejects the neutral world outside the minds of agents. Thus the focus is on state-society complexes in critical geopolitics.
Critical geopolitics focusses on the process through which foreign policies are constructed, taking into account the incentives of the actors that are involved which in return determine the final outcome. This also makes it possible to take into account non state actors like TOCs, lobby-groups and non-governmental organisations, among others.
Amineh and Guang find that major powers such as Russia follow a geoeconomical logic and a geopolitical logic (2014, p. 498).The geoeconomic logic stems from the hunger for capital in order to extent its geographical influence. These major states will try to maximize control over natural resources beyond their borders, as they are finite goods. In order to protect the domestic power-wealth structures of the state class it is critical to make sure control over these scarce resources is established. Furthermore these domestic ruling elites seek a continues and affordable supply of energy as this ensures order in the domestic society. As Russia has vast natural resources it is likely that price arrangements for the domestic market will be present, as well as efforts in order to increase its sphere of influence on less powerful nations, and in particular those with fossil fuel reserves.
1.4
Brief Argument & Hypothesis
At the end of my thesis I will be able either to confirm or discard the hypothesis in this research. Based on the theoretical framework the hypothesis are:
Hypothesis One: Both the European Union and Russia depend on each other, the EU on Russia’s natural resources and Russia on the EU’s market, and therefore will try to intensify cooperation in the field of natural gas.
Hypothesis Two: Member states of the European Union with a higher share of dependency on Russia as their natural gas supplier, are more vulnerable with regard to the security of natural gas supply.
The former hypothesis should be answered by the first 2 explanatory chapters within my thesis which focus on the energy policies of the European Union and Russia. The growth of the capitalist world has led to increasing consumption of fossil fuels. As these fossil fuels eventually will become depleted and the EU has little or no fossil fuel reserves it will seek to secure the access to such resources. The access to the Russian market in particular is vital, for the EU, as it possesses huge fossil fuel reserves and is in close proximity. In order to ensure the growth of the capital system the EU depends on Russia as a partner. The most
cost-effective transport of natural gas is by pipeline networks. Russia is linked via such pipeline networks to the wealthy EU, and its national economy relies the trade of natural resources. Thus the both the EU and Russia should aim to increase their cooperation in order to secure both wealth and natural resources. By examining and assessing the actors involved and the policies the “how and why” that radical geopolitics tries to reveal will be used to confirm or discard the first hypothesis (Mercille 2009).
In order to confirm or discard the second hypothesis the creation of a gas index is crucial. If Russia is a major determinant in the scores of the gas index, nations with no dependency on Russian natural gas will score lower in their overall scores than nations such as the Baltic States. The gas index determines the level of vulnerability of member states within the European Union on natural gas by making use of seven indicators and one of these indicators is the share of Russian natural gas imported per member state.
1.5
Research Methods
In order to answer the first part of my thesis data of EIA, BP statistical reviews, Eurostat, UN Comtrade and of the World Bank will be used as well as annual reports from Gazprom. In order to answer the political aspect of the relationship between the EU and Russia in the first part of my thesis, articles of journals, newspapers and (inter)governmental publications will be used focussing on diplomatic, security and cultural ties.
For the second part and main focus of my thesis a gas index will be constructed with various indicators. In order to form an index from a set of individual indicators the methodological approach to weigh these indicators will be to use principle component analysis. Within the method PCA individual indicators can be valued among the pool of indicators. Higher values of members states within this index will indicate a higher vulnerability of natural gas.
1.5.1 Operationalisation
This thesis will consist of roughly two parts namely, first the assessment of the policies and actors involved in the natural gas relationship between the EU and Russia. Secondly, the more quantitative part of the making of a gas vulnerability index for Members of the European Union.
For the first part of my thesis I will look at the European and Russian natural gas relations in from a qualitative perspective. Data for the qualitative part will consist of primary sources, being, official reports, policy papers, refereed reports as well as secondary sources, books, newspapers and websites. When looking at the from a regulatory state perspective the policy papers by the EC need to be researched. The EU was founded in order to create stability and prosperity, EU policy papers are aimed to control or steer markets rather than directly intervene in the markets. Interesting will be to see how the policies affect Gazprom and thus the Russian government in its relations and influence in the EU, and if these policies directly intervene or rather try to govern through regulation. Russia, on the other hand, can be seen as an authoritarian regime and the national oil company Gazprom can be seen as a tool for the foreign policy from the Russian government. In this respect the relations between the board of directors and the government needs to be researched also the share-holders of Gazprom. Furthermore trade and investments in relation to the EU and Russia will be mapped. Trade data for the relations between the EU and Russia will be retrieved from the United Nations Comtrade.
For the second part of my thesis and the main focus, the creation of a gas index, the method principal component analysis (PCA) will be used. As weights will be assigned to the chosen variables by PCA, these indicators will be accumulated within the index. The method of PCA weighs the indicators from a mathematical perspective rather than subjectively by some scholars. The ideal outcomes for these individual indicators would be that they are as uncorrelated as possible as then, they would best describe their own areas. The higher the score of these indicators for a member state the greater the risk or volatility when it comes to the security of natural gas. The indicators that will be used for this index will be: gas dependency, number of gas suppliers, geopolitical risk of supplying nation, transit/transport risk, level of dependency on one nation, Carbon dioxide emission, gas consumption per unit of GDP, ratio of value of gas imports to GDP. With these indicators this research tries to cover all aspects of the security of supply, as described by Kruyt et al., namely affordability, accessibility, acceptability and availability (2007, p. 2167).
Gas dependency – will be the share of gas within the total energy consumption. Data for this variable will be collected from Eurostat (2014) through their Natural Gas Consumption statistics database.
Geopolitical risk – for the geopolitical risk of supplying of natural gas, data from both Eurostat and the Center for Systemic Peace will be used (2014). This indicator will be constructed as done by Biresselioglu et al. (2015) by multiplying the risk scores of supplying nations with the imports from these nations and subsequently dividing the sum of all these score by the total natural gas consumption.
Carbon dioxide emission – data of for this variable was gathered from Eurostat and was converted to the level of CO2 emission for natural gas. This variable should cover, to some extent, the level of acceptability.
Level of dependency on single nation – this calculation will be done by using data from the ENTSO-G and Eurostat (2014) and the share gas represents of this single supplier within the total energy mix.
Gas consumption per unit of GDP – will be calculated by using data from the World Bank (2014) and the gas consumption data from Eurostat (2014).
Ratio of value of gas imports to GDP – this indicator will use the same data as the previous variable but looking at gas imports rather than on gas consumption.
Number of gas suppliers – Data of Eurostat will reveal the number of gas suppliers which will transformed into a score between zero and one. The score of one will be for those nations that only rely on a single supplier, the higher the number of supplier the closer the score of the member state will move to zero. In chapter four the formula for these calculations can be found.
The calculations of the above mentioned indicators and the formulas are provided in the fourth chapter as well as the sources and datasets used for these calculations.
1.6
Division of the chapters
In Chapter One the a brief description of the issues concerning the relationship between the EU and Russia was given. Also theory, hypothesis, operationalisation and relevance of this research have be addressed. In the remaining chapters the complexity of this relationship will be analysed in order to main research question and the sub question. Enabling to answer the research question and the hypothesis in the final chapter of this thesis.
Chapter Two, will explore the European Union energy strategies over the last couple of years until the most recent developments. The focus of this chapter will be on the Russian gas supply on which the European Union strongly depends. In order to understand this relation with Russia figures on the dependency of Russian energy will be elaborated, but also the capital from Europe on which Russia relies.
Chapter Three, will focus on the Russian energy policy towards the European Union with focus on natural gas. The state class in Russia is the dominant force as the market is structured by this class. Furthermore a description of the structure of Gazprom, its shareholders and its influence within the EU energy sector will be clarified.
Chapter Four, will provide a model in order to assess the risk of supply to member states of the European Union. In order to quantify this a newly formed gas index will be created. Several indicators as provided in the operationalisation will be the basis of such an index. With the statistical method of principle component analysis these individual indicators will be weighed. As this will be done over a period of eleven years for all EU natural gas consuming nations changes might prevail.
The closing chapter, Chapter Five, an answer to the main research question will be given and the hypothesis posed in this research will either confirmed or discarded. After providing a brief summary of the results and theoretical interpretation of these findings, the shortcomings of this research will be addressed and possibilities for future research will be given.
Chapter Two Gas in the European Union: role, facts and strategies
2
Introduction
As the European Union is dependent on energy supply from outside the Union, energy remains to be one of the main political concerns. Gas is used in multiple ways directly by consumers, industry and transformed into electricity and heat. Within the European Union natural gas plays a key role, in the past coal dominated the market as it was available and thus was argued that coal was a too valuable source to generate electricity. With the increasing environmental awareness gas is seen as a relatively clean fossil fuel (Helm 2014). Because of the technical progress, improved transportation possibilities and the potential of being the lowest carbon emitting fossil fuel, gas will continue to shape the EU’s future. When comparing gas to coal in the process of electricity generation, per kilowatt-hour natural gas produce 350 grams of CO2, hard coal more than double and lignite even more than 1 kilogram of CO2 (Deutsche Emissionshandelsstelle, 2007).
In this chapter the role of gas within the EU will be elaborated, and in the role it will play when realising the energy objectives that are set out. In this chapter the following sub question will be answered: what are the objectives of EU energy policies when it comes to Russian gas supply? The focus will be on Russia as it is the single largest supplier of natural gas to Europe and also has the largest reserves. This chapter will explore the gas strategies and related documents by the European Union. Different types of legally binding acts will be explained, as posed within article 249 of the Treaty of Rome. In order to understand the relation between the European Union and Russia key facts the Energy Charter Treaty and the Energy Dialogue, among others will be discussed. Furthermore the importance of gas within the EU can best be understood when examining the goals of the Energy strategies for 2020 up to 2050. This is because gas is seen as the main fossil energy source in order to reduce Green House Gas (GHG) emissions, as renewable sources are until now not able to replace fossil fuels within the EU. Furthermore the recent developments of the Energy Union package need to be taken into account, as future energy policies will follow these lines. Section 2.1 will focus on the role that gas plays in the energy mix in the EU and will provide key facts in order to understand the background and context of the relations with Russia. In section 2.2 policy documents by the EC will reviewed. Section 2.3 will give an insight in the
negotiations between the EU and Russia. In the final section the future of natural gas will be discussed.
2.1
Natural gas contracts dependency and demand
When focussing on the role of natural gas within the European Union, key facts need to be provided as well as the exchange mechanisms for natural gas as the infrastructural issues. Starting of the first part will be done with key facts on the imports, dependency of natural gas will be provided. This is done in order to get an idea on the level of importance of natural as for the EU Member States. In the second part of this section the exchange mechanisms and the changes that have occurred in recent years will be discussed.
2.1.1 EU natural gas statistics
To understand the role that natural gas fulfils in the EU we need to have figures. Primary energy production will help to understand which energy sources are being used and the role that natural gas plays within this mix. Also the sources of natural gas imports from outside the EU need to be mapped. These figures alone do not provide enough information thus the import dependency of all energy sources will be provided for all European Union members states. The gross inland consumption of the EU28 has gone down since 2003 compared to 2013, this is also the case for natural gas consumption. Table 1 provides data by Eurostat (2015, nrg_100a) in thousand tonnes of oil equivalent (TOE) on the gross inland consumption of the EU28.
Table 1: Energy consumption, all products and natural gas, of the EU28 in 2003 and 2013
Gross inland consumption All products 2003
Gas 2003 All products 2013
Gas 2013
EU (28 countries) 1,796,552.6 424,679.0 1,666,196.4 386,870.3
Source: Eurostat 2015, nrg_100a
The gross inland consumption in the EU has gone down with more than 9 percent, this is also the case for natural gas. The share of natural gas compared to the gross inland consumption has remained almost unchanged. Natural gas almost accounts for more than one fifth of the gross inland consumption in the EU, this means that some nations depend more on natural
17% 29% 20% 25% 9% 0%
Production of primary energy EU28 2013 Natural gas Nuclear enrgy Solid fuels Renewable energy Crude oil other 22% 28% 23% 11% 15% 1%
Production of primary energy EU28 2003 Natural gas Nuclear enrgy Solid fuels Renewable energy Crude oil other
gas as an energy source than others. In this chapter we will also discuss the role natural gas might have in the future of the EU as natural gas is seen by some as a transition fuel in order to bring levels of greenhouse gasses down (Holz et al. 2015).
Primary energy production in the EU
Over the researched time period the energy consumption has decreased and the mix of the primary energy production has shifted within the EU. Under primary production of energy according to Eurostat (2015) fall all extractions of energy products that are usable in the form of natural sources. In total the production of primary energy in the EU28 was 789.6 million TOE in 2013. When comparing this to 2003 in which the primary production was 933.7 million TOE, the production of primary energy is more than 15% lower. This downward trend could be noticed almost simultaneously with the financial and economic crisis. According to Eurostat the downward trend of the share of fossil fuels in the production of energy can be ascribed to raw materials becoming exhausted and the exploitation becoming uneconomical of these resources (2015).
Figure 1: Production of primary energy by source, EU28 in 2003 and 2013 Source: Eurostat (2015), data: ten00076
Figure 1 shows the percentages of the energy sources used for the primary production of energy in 2003 and 2013. Within the EU, France had the largest share of primary energy production followed by Germany and the United Kingdom. Although over the years the
27%
47% 21%
3% 1% 1%
Natural gas import 2003 EU28
Norway Russia Algeria Nigeria Qatar Other 33% 43% 11% 2% 7% 4%
Natural gas import 2013 EU28
Norway Russia Algeria Nigeria Qatar Other sources of primary energy production have changed and the total output has decline the share of nuclear energy has not changed. In Belgium, France and Slovakia over 60% of the primary energy production was because nuclear energy.
These shifts over the years indicate that the European Union steaming ahead with its plans, namely to reduce the levels of GHG emitted when it comes to the supply of energy. The total energy consumption has gone down and the share of natural gas has remained almost the same. But in the primary energy production shifts can be noticed in the usage of the fossil fuels. Furthermore the share of primary energy production of renewable energy has more than doubled over the last decade. These trends are in line with the policies, these will be elaborated in section 2.2, that are set out by the EU and its members in order to reduce GHG emissions but also to reduce the dependency on energy suppliers outside the EU.
EU natural gas imports
Natural gas reserves in the European Union are not able to supply the whole union. Therefor natural gas must be imported. Most natural gas is imported via pipeline from outside the EU.
Figure 2: Natural gas imports by supplying nation for the EU28 in 2003 and 2013 Source: Eurostat 2015, data: nrg_124a
Calculations show a great dependency on Russia natural gas throughout the past decade. Although in 2012 the percentage of Russian gas imports was 34 percent and imports from
Norway accounted for 33 percent of the EU’s imports. Over the past decade the share of natural gas imports from Norway has increased, but these imports have almost reached maximum capacity because of transportation limits of the current network from Norway into the EU. Although numerous efforts have been made, Russia still remains the key provider of natural gas.
EU natural gas import dependency
Natural gas is seen as one of the key components in order to reduce the level GHG emission, but the total consumption of natural gas has declined. This is also the case for other fossil fuels since 1990, but the import dependency on natural resources from outside the EU has nevertheless increased (Eurostat, 2015). The table below provides percentages, as calculated by Eurostat (2015, tsdcc310), on the total level of import dependency and the level of gas import dependency. Nations with a negative level of import dependency such as Denmark and the Netherlands are net exporters. Percentages that exceed 100% are due to the imports being stored in bunkers thus having a higher level of import than the actual annual consumption.
Table 2: EU Import dependency of the EU in percentages
Nation Overall 2003 Gas 2003 Overall 2013 Gas 2013
EU (28 countries) 48.8% 52% 53.2% 65.3% Belgium 79.6% 98.9% 77.5% 100.5% Bulgaria 46.3% 94.2% 37.8% 93.2% Czech Republic 25.1% 98.2% 27.9% 100.2% Denmark -31.3% -55.5% 12.3% -23.1% Germany 60.5% 78.7% 62.7% 87.2% Estonia 26.7% 100% 11.9% 100% Ireland 89.4% 85.8% 89% 95.9% Greece 67.5% 98.8% 62.1% 100% Spain 76.7% 99% 70.5% 98.6% France 50.6% 95.5% 47.9% 97.4% Croatia 56% 27.6% 52.3% 31.8% Italy 84% 80.3% 76.9% 88.1% Cyprus 96.1% - 96.4% - Latvia 63.2% 104.3% 55.9% 115.6% Lithuania 43.8% 100% 78.3% 100% Luxembourg 98.4% 100% 96.9% 99.6% Hungary 62% 83.6% 52.3% 72.1% Malta 99.8% - 104.1% - Netherlands 37.2% -45% 26% -86.8% Austria 70.5% 78.7% 62.3% 75.5% Poland 13.2% 66.6% 25.8% 74.2% Portugal 85.5% 100.3% 73.5% 101.5% Romania 25.4% 28.8% 18.6% 11.9% Slovenia 53.6% 99.5% 47% 99.6% Slovakia 64.5% 97% 59.6% 95.6% Finland 58.9% 100% 48.7% 99.9% Sweden 42.8% 94.5% 31.6% 99.1% United Kingdom -6.4% -8.2% 46.4% 50.1%
Data: Eurostat 2015 (tsdcc310), calculation by Eurostat net imports divided by gross inland energy consumption with bunkers.
The level of import dependency within the EU has increased; this is the case for all energy types as well as for natural gas. The two Member States Cyprus and Malta do not consume natural gas and thus will be left out of chapter four. That energy resource will become more and more depleted in the future can also be seen in the United Kingdom which has shifted from being a net exporter to a big net importer within a decade. This table helps to understand that EU depends on the supply of natural gas outside the Union. Although the Netherlands and Denmark are net exporters, they are unable to supply the whole of the EU of natural gas.
As Russia is the largest supplier of natural gas the next table provides the amounts of natural gas that are exported to continental Europe and partners in billion cubic meters. The table also provide the amount of natural gas delivered by Russia under long term contracts (LTC).
Table 3: Exports from Russia to the EU and partners (in billion cubic meters) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Austria 5,5 5,5 6,3 6,1 5,0 5,3 5,0 5,2 5,0 5,0 4,8 Belgium 0,0 0,0 1,8 2,9 4,0 3,1 0,5 0,5 0,0 0,0 0,0 Denmark 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,3 0,3 Estonia 0,7 0,8 1,2 0,6 0,8 0,6 0,7 0,4 0,6 0,6 0,6 Finland 4,7 4,6 4,1 4,5 4,3 4,4 4,0 4,4 3,9 3,4 3,2 France 10,3 12,9 12,1 9,2 9,3 9,6 7,6 8,2 7,8 7,5 7,9 Germany 32,2 37,6 33,1 31,7 31,8 34,9 30,8 32,5 31,4 31,3 37,7 Greece 1,7 2,0 2,2 2,5 2,9 2,6 1,9 1,9 2,7 2,3 2,4 Ireland 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,3 0,5 Italy 18,2 19,9 20,2 20,3 20,2 20,6 17,6 12,1 15,7 13,9 23,3 Latvia 2,2 1,1 1,3 1,3 0,9 0,6 1,0 0,6 1,1 1,0 1,0 Lithaunia 2,7 2,7 2,6 2,6 3,1 2,6 2,3 2,6 2,9 2,9 2,2 Netherlands 2,1 2,5 3,8 4,3 5,1 4,9 4,0 4,0 4,1 2,7 2,7 Switzerland 0,3 0,3 0,4 0,4 0,4 0,3 0,3 0,3 0,3 0,3 0,4 Turkey 11,9 13,3 16,6 18,3 21,5 21,9 18,4 16,6 23,9 24,8 24,6 United Kingdom 0,0 0,0 3,5 8,0 14,0 7,1 11,0 9,8 11,9 10,8 15,3 Bosnia 0,2 0,3 0,4 0,4 0,3 0,3 0,2 0,2 0,3 0,3 0,2 Bulgaria 2,7 2,8 2,4 2,5 2,6 2,7 2,0 2,1 2,3 2,3 2,7 Croatia 1,1 1,0 1,1 1,0 1,0 1,1 1,0 1,0 0,0 0,0 0,2 Czech Republic 6,8 6,3 6,8 6,8 6,6 7,3 6,4 8,3 7,5 7,6 7,3 Hungary 9,6 8,6 8,3 8,1 6,9 8,2 7,0 6,4 5,8 4,9 5,5 Macedonia 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1 Poland 6,8 5,8 6,4 7,1 6,4 7,3 8,3 10,9 9,5 12,1 11,9 Romania 4,7 3,8 4,6 5,1 4,1 3,9 2,3 2,4 2,9 2,3 1,3 Serbia 1,7 2,1 1,8 1,9 1,9 2,0 1,6 1,9 1,9 1,7 1,8 Slovakia 6,7 7,2 6,9 6,4 5,7 5,7 5,0 5,3 5,4 4,0 5,1 Slovenia 0,6 0,6 0,6 0,6 0,6 0,6 0,5 0,5 0,5 0,5 0,5 Other nations 0,0 0,0 0,0 0,4 0,5 0,6 1,1 1,9 1,2 0,7 1,1 TOTAL 133,6 141,7 148,7 153,1 159,9 158,0 140,5 139,9 148,8 143,4 164,4 LTC 146,1 155,1 131,4 127,6 138,3 128,7 152,8
Source: Dickel et al. 2014, p. 3.
As seen in the previous section Russian natural gas export accounted for more than 40 percent of the natural gas imports in the EU. The table above shows the total amounts Russia exports to the EU as well as other nations in Europe. Furthermore this table provides and insight in the exchange mechanisms with Russia. Almost all exports from Russia were under so called long terms contract and will these will be explained in the next section.
2.1.2 Exchange mechanisms
The first large natural gas export project worldwide was in the Netherlands with the exploration of the Groningen gas field in 1962, where a pipeline infrastructure to West-Germany was created. As of this time, LTCs were the key for allocating risk and in order to return investments made in the transportation infrastructure (Neumann, 2015). Pipeline transport became the key element when transporting gas as it is not profitable to transport in its gaseous state. Also a pricing mechanism was introduced by Dutch producers which coupled the gas prices to the oil prices.
The general aspects of these LTCs were a take-or-pay clauses, oil-linked pricing and a regional-destination clause (Konoplyanik, 2010). The first aspect obliges the importer to withdraw a minimum of 80 to 90 percent of the annual gas as laid down in the predetermined contract. The oil-linked pricing mechanism generally entails adjusting the prices every half year (Fernandez & Palazuelos, 2014, p. 499). The regional-destination clause prohibited importers to resell or export to other nations within such bilateral contracts .
Contract types and durations of contract have changed, also other pricing mechanism have been adapted for natural gas. This is due to technological advancements, EU policies and threats to a steady natural gas supply as there have been disruptions in the gas supply from Russia. EU policies will be discussed in section 2.2 and will elaborate on the changes in the gas market that have followed. Technological advancements have led to the diversification of supply routes through LNG. No longer pipelines are the only route in order to transport gas from one nation to the other, coastal nations can quite easily be provided with LNG if a regasification station is present.
2.1.3 Liquefied Natural Gas
Thus LNG can be seen as a diversification alternative also the LNG market is broad and multiple suppliers mean that nations no longer are dependent on one supplier. LNG prices are still not as competitive as pipeline gas prices (Dickel et al. 2014, p. 31). This can be attributed to the worlds LNG market were nations within Asia still have the upper hand. When reducing dependency on a single gas supplier, alternative routes should be taken into account. Gas in its natural form is not dense and transportation via ship is seen as not profitable. When condensing gas at -162o C, it is reduced to 1/600th of its original volume,
enabling transportation via ships. As this form does not rely on transnational pipelines and can be regasified on land as well as on floating barges it is seen as an alternative to Russian gas although the price of LNG is higher than natural gas. In this context other major consumers of LNG need to be taken into account. The volume of LNG that was traded worldwide in 2000 by only twelve exporting nations was 137 bcm, the number of importing nations was ten (BP, 2001) . By 2013 the number of LNG importing nations had almost tripled to 29, with Asia having the highest demand for LNG with 75% of all LNG going to Asia (International Group of Liquefied Natural Gas Importers, 2014). LNG demand in Japan, had risen after the nuclear disaster in 2011 of Fukishima, leading to a steep increase in the LNG prices in Asia and other parts of the worlds (BBC, 2011).
This gives the EU a possible alternative to pipeline imports from outside the EU, especially for member states that rely on a single supplier. This can also be seen in the increasing number of planned and operational LNG stations in the EU (ENTSO-G).
Since the last decade the import of LNG from Qatar has boomed. The shale gas revolution in the United States has led to a change in the world’s LNG market as it aims to be self-sufficient, also prospects of potential US LNG exports influenced these prices. Amounts of LNG from Qatar that originally were produced for the US now could be shipped at an attractive price to the EU (Fernandez, 2014, p. 501). Although the number of LNG regasification plants in Europe rises we need to take into account the increasing demand for LNG in Asia which influences the price of LNG. The table provides the annual data of natural gas imports in the 28 European member states and the share of LNG imports (Eurostat, 2015, nrg_124a). The units of total natural gas imports are in Terajoules (Gross calorific value = GCV).
Table 4 : EU28 Share of LNG imports from 2003 to 2013 Year Total Natural gas imports
(in TOE) Of which LNG (in TOE) Percentage of LNG imports 2003 13.254.557 1.575.498 11.9% 2004 13.927.453 1.387.777 10.0% 2005 15.060.482 1.773.095 11.8% 2006 15.629.741 2.109.410 13.5% 2007 15.331.971 1.895.633 12.4% 2008 16.260.048 1.996.067 12.3% 2009 15.746.236 2.482.135 15.8% 2010 17.026.789 3.184.109 18.7% 2011 16.534.475 3.104.553 18.8% 2012 16.069.217 2.397.601 14.9% 2013 15.841.915 1.730.452 10.9%
Data: Eurostat annual import data (10-02-2015), nrg_124a
The regasification capacity in the EU was approximately 185 bcm, 97% of this capacity was in Western and Southern Europe. States such as France, the Netherland but also Spain and Italy, among others were part 97% share. In 2013 only 43 bcm of LNG was imported thus using only a little over one fifth of the total regasification capacity (Dickel et al., 2014 p. 37). This relatively large regasification in itself seems to be a solution to the dependency on Russia of the EU. Nations which depend on natural gas from Russia such as the Baltic states (Estonia, Latvia, Lithuania), Greece and Bulgaria lack sufficient alternatives.
The table below provides data from GIE (2014) on planned and existing regasification capacity in the east of the EU and nations that rely on Russia as the only gas trading partner. Table 5: LNG capacity Eastern EU realised and planned
Nation 2015 2020 Estonia 2,5 6,5 Poland 5 5 Lithuania 4 4 Latvia 5 Finland 8 Greece 5,3 17,3 Croatia 2 Total 16,8 47,8 Source: GIE (2014)
The planned LNG capacity as provided above exceeds the natural gas consumptions of the nations this it is questionable if all facilities will be build. On the other hand in the case of a crisis were the Baltic states would not receive natural gas from Russia, it is questionable if Lithuania with LNG capacity would have solidarity and be willing to share this with the other two states. Thus planning capacity and also realising such capacity in these states would be recommendable. Moving Member States to implement improvements diversification alternatives or improving interconnectivity as well as a functioning EU energy market are key elements of policies by the EU which will be discussed in the next section.
2.2
Energy Policies
In order to understand the hierarchy of documents within the EU and their implications for member states we need to look at article 249 of the Treaty of Rome which was agreed upon in 1957. As article numbers have changed over the years due to the revision by treaties of Maastricht (1992) and Nice (2001), we use the latest article number. The first of the three pillars of the EU provides the institutions the right to draw up or introduce legislation, and provides instruments to enforce these legislations.
According to article 249 of the Treaty the European Parliament acting collectively with the Council and the Commission are able to provide multiple forms of communications to members states, the following types are described (EUR-lex, art. 249):
• A regulation shall have general application. It shall be binding in its entirety and directly applicable in all Member States.
• A directive shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods.
• A decision shall be binding in its entirety upon those to whom it is addressed. • Recommendations and opinions shall have no binding force.
Recommendations should be taken into account when researching the European Commission, although they do not have any legal binding force they can provide an insight into the concerns that need to be addressed by future regulations, directives or decisions. Decisions are a tool for Community Institutions to address persons which are named to comply to the specifics which are elaborated within such a decision. This is specifically helpful in order to address issues within one of the Member states without being applicable to other Member states. Regulations are the strongest tool of the EU institutions and leave little room for interpretation and are thus the most interesting. Directives provide a direction for members states and thus the execution may differ across members state. As member states have different local issues it is understandable that national authorities take different actions in order to address the issues posed in directives. As well as the regulations directives need to be implemented.
It is argued that the institutions, resources and policy tools of the EU form the ideal of a regulatory state (Goldthau & Sitter 2014, Lodge 2008, Jordana & Levi-Faur 2005). The foundation of the European Economic community can be seen as an essential part of implementing a liberal approach of political economy (Milward 1994). Focus within this paragraph is the natural gas which the EU imports and how the EC tries to safeguard the supply of this resource. The next paragraphs will describe the major initiatives by the EC when it comes to the security of supply of natural gas. Thereafter there will be an analysis of the key issues which the EC tries to tackle when it comes to Russia and its NOC Gazprom. Over the years the European Commission has set out to improve the internal energy market in the EU. This is also the case for the gas market when in 1998 a directive was publicized “concerning the rules for the internal market in natural gas”(1998/30/EC). This directive set out to provide room for producers, bulk consumers and distributors to access the
transmission network. This was the preface in liberalising the EU gas market, furthermore it tried to address the take-or-pay clause of the LTCs.
The directive that was published in June 2003(2003/55/EC) obligated members states to make sure that consumers would be free to choose their own provider by 2007. This should be done on a non-discriminatory basis, also the transport network should be a separate entity and should not be related to other gas management businesses. Also states should create independent regulators to monitor the functioning of the gas market.
The directive of September 2009 (2009/73/EC) repealed the directive of 2003. As the system operators had not been successfully and effectively unbundled. In order to achieve a free market further separation of the production, distribution and transmission was needed. Exporting companies were forced to sell ownership in transporting networks and in the case of non-compliance penalties could be imposed. The directive thus aimed at creating a better functioning market by giving more power to national regulatory agency but also by the creation of a EU regulatory agency namely, the Gas Coordination Group.
In October 2010 a legislative regulation by the parliament and the council went into force “concerning measures to safeguard security of gas supply” (EU 2010). Five main issues can be derived from this regulation. The first is the “responsibility for security of gas supply”, stipulates that the responsibility is a shared one among multiple levels of the competent authorities (EU 2010, p. 6). In addition the commission will make sure that all authorities comply to the regulation. The second is to create emergency plans and to create joint action plans, it is clearly defined how these action plans need to be created and lays down a standard in order to have understandable plans for all MS and the European Commission (EU 2010, p. 7). The third issue is creation of an infrastructure standard and the enabling of bi-directional capacity (EU 2010, p. 9). Moreover different standards and the limitations of the gas flow directions have greatened the impact of the gas disputes between the Ukraine and Russia (EC 2014.a). As this meant that some of the huge gas storages could not be shared with other members. For example Latvia one of the three Baltic states has a storage capacity of 2300 million cubic meters (mcm), Estonia and Lithuania do not have any storage capability (GSE 2015). Due to technical barriers as reverse flow and universal infrastructure standards, effects of supply disruptions become inevitable. This was also the problem that
Bulgaria faced, as LNG regasification in Greece could not be transported to Bulgaria in 2010 (EC 2014.a). The fourth element of the regulation was the description on how to operationalize and calculate the risk assessment within the emergency plans (EU 2010, p. 12). This would lead to a European standard of calculation when it comes to gas assessment. The final point was the Union response in crisis situations through the Gas Coordination Group (GSG) (EU 2010, p. 14/15). In practice when crisis should appear the European Commission should be informed within three days. The GSG is chaired by the European Commission and is composed of competent representatives of Member States, EU gas organisations and consumers in order to coordinate the security of gas supply (EU, 2004, DIR/67).
The EC also has another tool to ensure the correct functioning of the markets. This is not specifically aimed at natural gas, but needs to be addressed as it is a relative powerful tool for the EC namely the Single European Market, which as of 1994 applied to states in the European Economic area (Goldthau & Sitter 2014, p.1458). This in effect posed rules on nations such as Norway to comply to the regulations on energy trade in the EU. The aim of this was to ensure free trade and efficiency but meant that the Norwegians had to dismantle their NOC which coordinated gas trade with the EU. Thus the EC tries to control the external entities that want to take part in the EU’s energy market by forcing its regulations on them. This is the key of the liberal agenda of the EU and the EC tries to make ultimate use of its competences. Problematic is that natural gas is transported via pipeline structures and interconnectivity between EU members is not optimal. This hinders EU wide trade and in practice gas trade remains a regional affair.
Thus the European Commission has become a key player in the European gas network, as they have set out the route to achieve an optimal functioning gas market. Although these directives leave some room for execution, by Member States, they set out the direction of the gas market. In order to understand the role of gas within the future of the Union it is crucial to look at the Energy Union package. This will be done in the last section of this chapter on the future of gas within the European Union.
2.2.1 EU-Russia energy negotiations
The Partnership and Cooperation Treaty which organizes the relations between Russia and the EU went into force in 1997. References in this treaty on energy policies referred to the
Energy Charter Treaty as the negotiation were almost simultaneously. But the Energy Charter Treaty although it was signed by a Russian representative never was ratified. Leaving behind a gap with regard to energy policies between the EU and Russia. Thus in 2000 the EU sought to renegotiate a new treaty for energy relations with Russia. The Energy Charter treaty was a binding treaty, if ratified, and was a multilateral agreement. The newly to be formed, Energy Dialogue, was only between the EU and Russia. Cooperation between the EU and Russia until the 1990s consisted of intergovernmental deals between member states and the Soviet Ministry of Gas, which later became Gazprom. As the EU shifted to a more liberalised market, a dialogue between Russia and the EU seemed to be a logical step. The Energy Charter Treaty (1994) was the first attempt to capture the energy relations, but was never ratified in Russia. The Energy Dialogue, which was an attempt to overcome the failed ratification of the Energy Charter Treaty, was started in 2000 after Yeltsin abdicated his post to Vladimir Putin as president. Russia over the years had shifted view from a ‘liberal’ perspective to a more state capitalism perspective. Both these documents will be discussed in order to understand the relations between the European Union and Russia.
Energy Charter Treaty
As the energy market within the EU was starting to be liberalised, energy dialogues with supplier with suppliers outside the EU were needed. The orientation within Russia at the time was open to liberal market principles and thus the Treaty was signed. Due to the constitutional crisis in 1993, between the Russian president Yeltsin and the Russian Parliament (Supreme Soviet of the Russian Federation), international agreements got blocked by the legislative power in order to oppose the government (Trenin and Lo, 2005). Although the decision to ratify the Energy Charter Treaty was blocked, the Russian Federation in 2009 informed the Energy Charter organization that did not intend to become a contracting party. This means that also the provisional application of the treaty as of the 18th of October 2009 ended.
ECT failed to cope with the supply disruptions in Ukraine when Gazprom cut off gas supply as the Ukrainian company Naftogaz did not pay its bills. The Secretariat of the Charter warned and offered mediation in this conflict but Ukraine ignored this offer (Selinova, 2012). Other members of the Energy Charter Treaty did also not seek the assistance of the Secretariat.
Although the ECT did not get ratified by the Russian Federation the 2009 regulation by the EU sought to address the position of Gazprom in the EU gas market through article 11 known as the ‘Gazprom clause’ (EC, 2009). This stipulates that firms from outside the EU need to comply with the unbundling regulations and provides the national competent authorities with responsibility that these external firms should not form a danger for supply security, this is not a requirement for EU firms (Eikeland 2011). Furthermore the EC has sought to reach bilateral agreements with the Russian Federation through the Energy Dialogue which is discussed in the next section
Energy Dialogue
The Energy Dialogue negotiations started in 2000 and Russia had moved towards state capitalism. Opposed to the Energy Charter Treaty, it does not focus on a single model but rather starts from with equal partners respecting each other’s legislation (Sagers 2007). The aim is to improve energy relations through opening up markets in order to improve investment opportunities. Both Russia and the EU recognize the role energy consumption plays as the current sources being used are finite. The EU focusses on reducing energy consumption as well as environmental pollution that comes with fossil fuels. The Russian strategy is aimed solely at reducing its energy consumption (Harsem and Claes 2013).
In March 2013 the coordinators of the Energy Dialogue signed a roadmap on the energy cooperation between Russia and the EU laying down goals for 2050. Within this document the mutual dependency forms the basis of cooperation between both parties. Russia depends on exports towards the European Union, tax revenues by Gazprom account for 25% of Russia’s total tax revenues (UN Comtrade 2014).
This 2050 roadmap envisions that the decline in demand of natural gas for the EU be permanent and will further decline after 2030. Domestically, EU gas reserves will become depleted thus a higher import dependency for natural gas is expected (Roadmap, p.13). EIA prognoses, like the Energy Outlook 2011) are used for this document. The EIA envisions that gas prices will change due to the increasing energy consumption in Non-OECD nations(EIA, 2012, p. 31 ). Thus prices of natural gas will change in the forthcoming years due to changes in the global energy demand but also due possible LNG supplies from the Americas. The document contains goals for 2020, 2030 and 2050 in order to increase cooperation.
