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1 | Dr. Jonas Grätz | 20. September 2013
The impact of EU law on Gazprom and its implications
Platts 7th European Gas Summit, Vienna
Dr. Jonas Grätz
Center for Security Studies (CSS)
2 | Dr. Jonas Grätz | 20. September 2013
1. The EU’s key goal is to lower the economic and political costs of gas
supply.
2. The EU Commission has learned to leverage the buying power of
the internal market. Regulations and their enforcement are being
used as a bargaining tool to assert the EU’s political and economic
interests.
3. EU policy is creating greater uncertainty, but this is partly intended.
It does not necessarily jeopardize security of supply.
4. Gazprom is fighting a rearguard battle. A change of Gazprom’s
strategy is likely after a management change.
5. Ukraine will stay the major transit corridor.
Theses
3 | Dr. Jonas Grätz | 20. September 2013
EU:
Interest: uninterrupted,
affordable supply at a low
political cost
Tools: large demand base, rules
and regulation
Russia:
Interest: maximize the product of
resource rents and political
control
Tools: resources, state monopoly
capitalism
The strategic setting
mutual dependence
4 | Dr. Jonas Grätz | 20. September 2013
Leveraging domestic demand by setting rules for suppliers is the only
way to lower political and economic costs in current strategic setting.
Backward vertical integration would be ideal, but is politically impossible.
Traditional “bilateral monopoly” faded away (Gazprom made inroads into
German market, already captive markets in CEE).
due to lack of reciprocity, the consequence would have been forward
vertical integration by suppliers. This is especially problematic in the gas
industry due to high entry barriers. CEE / Baltics as a showcase.
Organising a market by way of regulation is ideal to fend off growing
supplier power and diversify supply.
Attractiveness of the EU market and rigidity of gas supply-demand
relationships are a plus.
Substitutability of gas as a fuel is a further case in point.
The rationale of the EU’s marketisation agenda
5 | Dr. Jonas Grätz | 20. September 2013
Traditional Gazprom supply
monopoly
Baltics accepted Gazprom as
shareholder in their utilities in return
for long-term supply contracts and
reduced price.
But: Prices are among the highest in
EU, for Lithuania the highest
This was major trigger for EU
antitrust case
Arena I: Unbundling in the Baltics (I)
Source: EU Quarterly Report on European Gas Markets Q 2 2013
6 | Dr. Jonas Grätz | 20. September 2013
Lithuania and Estonia went for full ownership unbundling and were
supported by Commission.
Spin-off of TSOs from gas utilities realised in August 2013, Gazprom
voted for spin-off amid protests about “robbery” and “expropriation” from
Gazprom.
Gazprom still owns part of the TSOs.
Sell-off of TSO to be completed in 2014 in Lithuania, 2015 in Estonia.
BIT with Lithuania may protect Gazprom, currently challenges
Lithuania before UNCITRAL tribunal.
EU jurisdiction over common market is being leveraged jointly by
small Baltic States and the EU Commission.
Implementation of EU rules may run counter to legal obligations
towards third countries (but BITs often allow for compensated
nationalisation).
Arena I: Unbundling in the Baltics (II)
7 | Dr. Jonas Grätz | 20. September 2013
Exemptions from unbundling and
TPA are possible for new
pipelines, but must meet a range
of criteria, inter alia that risk
would be prohibitive without
exemption.
Gazprom and its partners applied
for exemptions for OPAL and
NEL pipelines.
OPAL: 35 bcma capacity
NEL: 20 bcma capacity
Arena II: Third Party Access for Nord Stream
Source: Wingas
8 | Dr. Jonas Grätz | 20. September 2013
NEL was not exempted, as it is not a cross-border pipeline. 65% of
capacity are allowed for long-term capacity booking. No upper bound
for bookings from Gazprom under shorter-term contracts.
OPAL was granted a conditional exemption (legally shaky)
Gazprom is allowed to use full capacity if it organizes annual gas release
programme of 3 bcm. Otherwise 50% of capacity have to be auctioned off
to third parties.
Gazprom shunned gas release, currently uses only 50% of the pipeline.
Hence, Nord Stream goes underutilised (mostly 40% of capacity).
Gazprom has been in negotiations with the Commission to amend
the decision, purported breakthrough in last week
As investment has been sunk before exemption decision, Gazprom is
in weak position. EU tried to further its interests in this context.
Conditional exemption from TPA may actually be worse than TPA.
Arena II: TPA for OPAL and NEL
9 | Dr. Jonas Grätz | 20. September 2013
Russia advanced US-$ 39
billion project to thwart
Nabucco, circumvent
Ukraine, and enhance
influence in the Balkans
So far, it is not more than
a project – no financing
for offshore section
Pipeline has value as
strategic investment only
with exemption from TPA,
but legal preconditions
may not be present
Arena III: TPA for South Stream onshore (I)
Source: South Stream
10 | Dr. Jonas Grätz | 20. September 2013
Legal preconditions for exemption not present
It is a new route for “old” gas – no diversification
It does not enhance security of supply – lack of Ukrainian storage
facilities, new non-EU transit country, technological risk of subsea pipeline
But: It may be a promising project for concerned EU member states.
Jobs and future transit revenues, while financing provided by Russia
Slightly lower border price as a carrot
Russia concluded IGAs with Bulgaria and Hungary that promise
exemption from TPA and unbundling to South Stream.
In reply, EU Commission threatened to sue member states.
Information exchange mechanism on energy IGAs (Decision 994/2012)
On Russia’s request, all partners except Slovenia have declared the
project to be a national priority.
Exemption might be granted against concession, f.ex. new Russian
suppliers or transit of Central Asian gas
Arena III: TPA for South Stream onshore (II)
11 | Dr. Jonas Grätz | 20. September 2013
Long-term contracts require long-term capacity booking at several
border points
MECO-S gas target model proposes bundling of capacities at
different border points
Market coupling to further remove edge of the problem
CAM NC allows for bookings of up to 15 years, for up to 90% (or
more) of capacity
Bundling of capacities not just exit-entry, but at different BP can be offered
PRISMA seems to be heading into that direction
Hence, congestion rules to bear the brunt of ensuring market access
UIOLI for long-term capacity bookings comes into effect on 1 Oct. 2013
Day ahead UIOLI only from 1 July 2016
Gazproms LTC concerns have been accommodated in CAM NC
EU Commission caved in to resistance from ENTSOG
Arena IV: Capacity allocation under TPA
12 | Dr. Jonas Grätz | 20. September 2013
Although LNG volumes decline, gap between hub prices and long-
term contracts continues to decline, at least in NWE
This is inter alia due to Statoil’s embrace of the hub
As a result, Gazprom had to backtrack on oil-linked pricing
Arena V: Pricing (I)
Source: EU Quarterly Report on European Gas Markets Q 2 2013
13 | Dr. Jonas Grätz | 20. September 2013
Gazprom’s pricing concessions (selected, public sources)
Arena V: Pricing (II)
10-15% spot
indexation
10-15% off
base price
other
ENI 2010 2012*† 2013 7% off base price
E.ON 2010 2012*†
GdF Suez 2010 2013 increased spot
RWE 2013†† increased spot, less t-o-p
WIEH/
Wingas
2010 2012 (amount of reductions unclear;
Gazprom JV)
Econgas, SPP 2012
GasTerra 2010: spot indexation raised to
45%, 2012: further spot increase
PGNiG 2012*†
Bulgargaz 2012 20% off base price (in
return for South Stream support)
* retroactive | † arbitration cancelled | †† arbitration ruling
14 | Dr. Jonas Grätz | 20. September 2013
Less revenue from export because of significant price concessions
Domestic market cannot compensate for this. End-user prices for 2014
have been frozen, netback parity is way off, increased competition
Lower sales to EU, but the trough for Gazprom might have been
reached – Gazprom gas getting more competitive
Implications for Gazprom (I)
0
20
40
60
80
100
120
140
160
180
2005 2006 2007 2008 2009 2010 2011 2012
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
netsalesRussia
netsalesFSU
netsalesEU
Source: CBR, Rosstat Source: Gazprom
Russian gas exports to EU and Turkey, bcm Share of domestic vs. export revenues
15 | Dr. Jonas Grätz | 20. September 2013
Rising CAPEX and OPEX
South Stream, Nord Stream and “Gold Stream” to the Pacific mean very
high CAPEX (Gold Stream and Pacific LNG estimated at $ 65 bn by
Sberbank analysts)
OPEX rise rapidly as well, severance tax increase is only a small part of
the increase
This raises pressure to maintain high gas price and is out of sync
with gas market developments
Rising domestic discontent with Gazprom (esp. among “patriots”)
Channel 1 news anchor Leont’ev called Gazprom-head Miller a
“dangerous lunatic” and “direct threat to our national interests” for ignoring
shale gas revolution. Miller should be sent to psychiatric ward.
Scholar and leader of party “Homeland – common sense” Delyagin says
Gazprom’s strategy resembles “energy-feudalism”, as it ignores economic
development of customers. Deems rearguard actions as unsustainable.
Russia should rather train traders to manipulate spot markets.
Implications for Gazprom (II)
16 | Dr. Jonas Grätz | 20. September 2013
Gazprom is between a rock and a hard place at home and on foreign
markets
Rising taxes and a freeze on energy prices at home, while political
mission continues (Sochi 2014, South Stream, “Gold Stream”)
EU market is to stay most important, home market not so promising
South Stream has lost momentum. It is likely to be downsized,
delayed, or shelved completely.
Possibility of stranded investments in Balkans
Main remaining rationale is jobs in steel / construction
Ukraine will remain the main corridor, also because of storage flexibility
The EU Commission has leveraged the EU’s market power skilfully
Contested regulations and decisions have increased uncertainty
Exemptions are negotiable – a larger agreement is in the cards
We have to think about the consequences of Gazprom embracing
hub-based pricing
Conclusions