Taking EU energy security seriously

The third Russian energy cut-off in eight years should rouse the European Union’s member states to take action to protect Europe’s energy security.

Last Monday (16 June), the Russian energy giant Gazprom cut off its supply of gas to Ukraine for the third time in eight years. Günther Oettinger, the European commissioner for energy, had been seeking until the early hours of that morning to broker a deal, to no avail.

At first sight, this shut-off does not seem as serious as the last two interruptions in 2006 and 2009. It is occurring in summer, when gas stocks in most EU countries are quite high and the Ukrainians themselves have almost six months’ supply in storage, providing plenty of time to do a deal. However, it is clear that Russia’s decision to turn off the tap has already started to hit Europeans. Gas prices immediately rose on the NBP, the major British (and European) exchange. If no deal is reached within the next couple of months, prices will rise and Europe will be heading for a major energy disruption.

The Ukrainians, not unreasonably, were seeking a price closer to the European average price of $387 per thousand cubic metres. They also wanted a price that took into account Ukraine’s lower costs of transit, and they wanted any deal to be legally secure (ie, written into the contract and not subject to a Russian government concession which could be withdrawn). Oettinger had proposed a deal that would have created a market-based, legally secure price of $300 for supplies of gas during the summer and $385 for winter. He also suggested that Ukraine immediately pay $1 billion of its gas debts. This was rejected by Moscow.

Hopefully, a deal can be done before the summer ends. However, if the dispute is seen by Moscow as a means to destabilise Kiev and paint the Ukrainians as unreliable, a deal may be very difficult to reach.

Traditionally, the European Union and the member states have assumed that Gazprom and Russia have an interest in maintaining a reputation as a reliable and reasonable gas supplier. It is often said that throughout the Cold War, there was no disruption of gas supply to western Europe. This is correct. From at least the late 1960s, when gas started to flow westwards to its end, the Soviet Union was a conservative power interested merely in holding on to what it had and in earning money from its energy resources.

However, since the annexation of Crimea and President Vladimir Putin’s speech on 18 March, Russia appears to have morphed into a revanchist revisionist state.

If Russia continues on a revanchist path, as it looks like it is doing so (at least in eastern Ukraine), can the EU rely on Russia feeling incentivised enough to continue to supply the continent with gas? It is notable that during his annual four-hour phone-in programme this year, Putin mentioned that oil revenues added $191 billion (€140bn) to the Russian budget, and gas only $28bn (€21bn). Ultimately, for the Kremlin, oil provides the money, and gas the power – or, at least, deployable political advantages, such as the possibility of withholding supplies.

The EU and the member states have the means to deal with potential supply threats from Moscow. Completing the single market in gas, both legally (through enacting and enforcing the ‘third energy package’) and by installing physical interconnectors, would significantly reduce any supply threat. Withholding supplies to one state or reducing the price for potential EU client states is much less effective in a single gas market, as gas can be supplied from elsewhere and special deals for favoured states will come undone.

Rapid completion of the single market in gas needs to be reinforced by the EU and the states seeking new sources of supply. This would include seeking liquefied natural gas (LNG) supplies from the United States, developing Europe’s own shale-gas resources, as well as seeking to maximise production from existing conventional offshore production. Europe does not need to replace Russian gas supplies entirely; it merely needs to ensure that all parts of the market have access to a number of different gas suppliers. Once the market reaches that degree of coherence and liquidity, Gazprom will find it very difficult to maintain its leverage across the countries of central and eastern Europe and the Baltic states.

In order for the single market to function fully, the European Commission needs also to ensure that the EU’s rules are actually applied across the EU. The Commission has recently taken steps to ensure, for instance, that Bulgaria fully applies the Union’s energy liberalisation rules. The Bulgarian government have sought to exclude South Stream, an alternative route through which Russian gas could reach the EU, from the jurisdiction of EU liberalisation rules. As a result of EU and US pressure, the Bulgarian government has now suspended its participation in South Stream.

Another glaring example in the same region is Croatia. Zagreb is currently undermining the EU’s free movement and liberalisation rules in the energy sector. Protectionist measures, such as declaring almost the entire infrastructure a ‘special interest’ and inserting state-owned businesses into the retail gas market, do not just infringe EU law; they also undermine EU energy security. Protectionism in one sector of the EU gas market disrupts the ability of gas flows, and reduces investors’ incentives to build vital interconnectors. This is particularly true in respect of Croatia as the deep-water port on the island of Krk could provide an entry point for LNG, which could then flow northwards into central Europe and into Ukraine. The Commission has now initiated infringement proceedings against Croatia, but, as yet, there is no positive resolution of the case, as in Bulgaria.

The Commission also needs to ensure full application of the EU’s antitrust law in the energy sector. Gazprom is negotiating with the Commission over the investigation into Gazprom that the Commission’s competition department launched in December 2013. Six months later, Gazprom has still offered no commitments to settle the case. If Gazprom does not provide commitments to meet the Commission’s concerns, the Commission should be prepared, as in any other case, to prosecute and, ultimately, to adopt a prohibition decision. Any Commission decision that reinforced third-party access and introduced more market transparency into gas pricing would significantly assist the development of a liquid and functioning single gas market.

The EU and the member states have the means to reduce their supply dependence on Russian gas. The latest energy cut-off is a wake-up call to take energy security seriously. The Union has the means in its treaties and its body of legislation – the acquis communautaire – to protect and enhance or supply security it should use them.

Alan Riley is a professor at City University in London.

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