Date: 25 July 2017 Author: Janusz Kowalski
Gazprom’s Web Will Ensnare Europe
In recent months, two alarming decisions have been made by the European Commission (EC). First, in October 2016, the European Commission accepted, at the request of a German regulator, a further exemption from allowing third-party access (TPA) to the OPAL gas pipeline connecting northern Germany and the Czech Republic. Next, in March 2017, the European Commission expressed a desire to end antitrust proceedings against Gazprom that had been ongoing for five years.
The EC’s intention was for the proceedings to be closed with the issuance of a binding decision. Both resolutions threaten the energy security of not only Poland, but also other East-Central European countries. That is why these undertakings were met with sharp opposition from Polskie Górnictwo Naftowe i Gazownictwo S.A. (PGNiG), the companies co-responsible for ensuring the energy security of the Polish state. The Polish government also officially came out against the OPAL decision, as did Ukraine’s and the Ukrainian gas giant Naftogaz. According to media reports, the idea of ending antitrust proceedings against Gazprom also aroused opposition from the governments of East-Central Europe.
Crucial to understanding the root of this opposition and the harmfulness of the EC’s policy, is knowing the role that Gazprom plays in the European gas market and how this role is used to achieve the strategic objectives of the Russian Federation. Russia is currently the second largest natural gas producer in the world and the largest producer in the region. Russia is also the largest exporter of natural gas to the EU, responsible for over 37.5% of supplies. Of all the Russian natural gas producers, the most important role is played by Gazprom, which is controlled by the Treasury of Russia. Also among the smaller, “independent” producers and exporters of gas are companies dominated by the Russian government, a good illustration of which is Rosneft’s primary position among independent companies, whose majority stake is in the hands of the state. Russian companies control not only gas production and its sale to Europe, but also most of the key infrastructure such as gas pipelines and warehouses. The complete picture of Russian domination in the European gas market can be seen in the complex mosaic of business ties with the largest European corporations and political groups, with just one example being the involvement of former German Chancellor Gerhard Schröder in the construction of the Nord Stream 1 and 2 gas pipelines.
What is also very important is that Russian involvement in the gas trade is primarily political rather than economic in character. An excellent example of this argument is Gazprom’s involvement in projects whose economic profitability is clearly debatable, such as the construction of the Nord Stream pipelines and attempts to extract gas in the Arctic (Prirazlomnoye oil field). Another example is the practice of arbitrarily pricing gas, which is clearly more closely correlated with Moscow’s preferences than with any objective circumstances (in some periods Poland paid several dozen percent more for gas than Germany). This argument is also confirmed by the practice of the discretionary limitation of gas supplies, applied by Russia against Poland and its neighbors. Actually, the threat of limiting gas supplies has recently appeared in the context of the OPAL gas pipeline dispute.
At the same time, all signs point to European Union gas demand increasing in the coming years. What is more, as a result of declining extraction within Europe, the demand will have to be increasingly satisfied by imported gas. This makes the key to the European Community’s energy security the increased diversification of supply sources and the building of a unified energy policy in case of fossil fuel supply threats. Actions in both of these areas are being undertaken by the Polish government, which is manifested, for example, in activities aimed at launching the Norwegian Corridor, increasing the capacity of the Polish gas port in Świnoujście (from the current 5 billion to 7.5 billion cubic meters) and entering into new LNG contracts or developing cooperation with the Baltic states and the “Three Seas Initiative” states. These actions seem to be particularly important in the context of the impending expiration of the Polish-Russian gas supply agreement, the Yamal contract, on December 31, 2022. In this context, the EU should strive for a diversified, stable supply of fossil fuels. Unfortunately, contrary to the declarations recently made by European Commissioner Maroš Šefčovič, on the occasion of presenting the State of the Energy Union progress report, these goals are not only not being implemented, but actions being undertaken by the EC are obviously undermining them, as in the aforementioned OPAL decisions.
As far as the OPAL pipeline is concerned, it is a land-based extension of the Nord Stream pipeline linking northern Germany with the Czech Republic. Building Nord Stream has contributed to increasing the EU’s dependence on Russian gas. Moreover, Nord Stream may hinder the implementation of certain diversification projects such as the Polish project of the Norwegian Corridor. There is also no shortage of opinions that the project was completely unjustified economically. Its sole purpose was to create the opportunity to skip the Yamal and Brotherhood pipelines, thus obtaining the ability for Gazprom to freely shape the supply routes to Germany, which has become its main gas hub in Western Europe, bypassing the transmission routes through Ukraine and Belarus. This was the goal that the architects of Nord Stream had in mind. This alone should be a sufficient argument for OPAL to not benefit from the conveniences provided by EU law such as the exemption from TPA. The case for not granting OPAL exemptions is also made, in that, as the EC itself argued in its 2009 decision, limiting TPA on this pipeline would contribute to a restriction of competition in the Czech market. Despite these arguments, OPAL received an exemption for 50% of its transmission capacity in 2009. What is also important is the 2009 decision, which allows Gazprom to obtain further exemptions, provided that it launches a gas and transmission capacity release program. The launch of these programs would mean that out of the 36.5 billion cubic meters of gas that could be sent by OPAL, Gazprom would have to allow independent entities to purchase and send 3 billion cubic meters via the OPAL pipeline. The Russian company has decided not to use this option because it would make it difficult to reach its goal of achieving complete and long-term domination over the gas supply market in the region.
Given this situation, it is impossible to find any arguments for further concessions to the Russian side. Attempts to introduce such concessions are all the more astonishing as they are clearly in conflict with existing EU law. Exemptions from TPA can only be granted to new infrastructure, which, in the absence of the exemption, would otherwise not exist. Undoubtedly, the OPAL pipeline that has existed for 6 years, does not meet this requirement. Moreover, given the amount of spare capacity, it is clear that the decision on OPAL is not needed by Gazprom for any other purpose than bypassing Poland and Ukraine in the transmission of fossil fuels.
The allegations raised by the European Commission in the course of antitrust proceedings are a perfect illustration of the way Gazprom operates. As stated by the European Commission, Gazprom has taken steps to break up the common gas market in the EU. Gazprom introduced clauses against re-export into its contracts for this purpose. This, in turn, allowed the Russian monopoly to arbitrarily dictate prices for individual states. As revealed by the Interfax agency in 2013, rates were set more according to Moscow’s political sympathies and antipathies than on the basis of market factors. At the same time, Gazprom used its monopoly position in the gas supply market to make its infrastructure network more accessible and thereby made Europe more dependent on it. It is also significant that we are dealing with many years of violations that have caused losses in the billions of euros for countries like Poland and Lithuania. Also important, these clauses have not been seen for many years in agreements concluded with the countries of Western Europe. Thus Moscow’s practice contributed to the creation of a two-speed Europe in terms of energy. Perhaps it is because Gazprom’s practices were targeted only towards some countries and that the illicit gains from these countries were used to carry out projects to win favor in Western Europe, that it is possible to explain why Brussels has gone soft in its treatment of Gazprom.
The direction in which the EC is headed, seeking to issue a binding decision, is dependent on ending antitrust proceedings. This was done on the basis of the acceptance by Gazprom, purportedly infringing on its obligations to competition law, of the charges alleged by the Commission, without the possibility of appeal as to whether those allegations were valid or not. The commitments that Gazprom has proposed, which it would seem that the EC is prepared to adopt, are primarily related to the introduction of amendments to gas supply agreements, which are to eliminate the re-export restrictions and to redefine (in an unspecified manner) flexible price formulas. It seems that many of these modifications would be forced by regulatory or market changes in Europe anyway. The beneficiaries of the few, further-reaching obligations, are primarily Bulgaria and, to a lesser extent, the Baltic States. It seems that Gazprom’s obligations are glaringly weak, if they were to be compared to, say, the commitments made in the past by ENI, RWE, or E.ON, and this despite the fact that the scale of the infringements alleged against these companies was much smaller than those Gazprom is accused of. What is also important is that one of the key reasons for which decisions are binding are the considerations of the economics of trials. On the other hand, in the case of the actions against Gazprom, antitrust proceedings have already been carried out for many years, and most of the infringements of the company seem to be sufficiently blatant, that the EC should be able to prove it in court if necessary.
Given this situation, it is also worth mentioning the doctrine that obligatory decisions should be applied primarily to less serious infringements of competition law. And although in practice the European Commission has also concluded serious matters in this way, its use in relation to Gazprom must cause amazement. We are talking about long-term, deliberate actions taken by a market-dominator, to distort fair competition in the natural gas market, one of the most important markets for economic development.
The above-described activities of the European Commission clearly appear to undermine one of the EU’s fundamental objectives of energy cooperation and the creation of a unitary market. It seems that too many Western European leaders forget that gas is something more than an export commodity for Russia. It is one of the key weapons in the Russian arsenal of hybrid warfare, and although less visible, it is in many respects no less dangerous than cyber attacks, propaganda or the use of paramilitary groups.
With this in mind, the actions of Polish Prime Minister Beata Szydło and PGNiG S.A. and its subsidiary, PGNiG Supply & Trading GmbH (PST), to stop Moscow from capturing new footholds in the big energy game, should be assessed very positively. The great success of these entities was the challenge against the OPAL decision and the gaining of, at both the German and the European level, the safeguarding of the claim ordering the suspension of the decision by the EC and the Bundesnetzagentur (German regulatory office). The safeguard granted on the one hand seems to confirm that both the German and the European court have held the assertions of the unlawfulness of those decisions as probable. Also important, thanks to the the safeguard obtained, Gazprom was not able to reserve extra powers freed up by the decision of the Bundesnetzagentur for a period of 15 years, during an auction that took place in spring 2017.
Unfortunately, on July 21, 2017, the president of the General Court of the EU decided to dismiss the motions of the Republic of Poland, PGNiG and PST. It seems that the decision stems primarily from the fact that he considered that the situation did not meet the requirement of urgency, in other words, that in his opinion, allowing Gazprom to take over all the transmission capacity of the OPAL pipeline would not lead to serious and irreparable damage. History shows that the view adopted by the court is completely wrong. For each time when the Russians brought new transmission capacities to Western Europe online, it was at the expense of Poland and Ukraine. This happened in 2011 when OPAL was launched and in 2013 when the NEL gas pipeline was launched (which distributes Nord Stream gas to northern Germany). It should be assumed that this will happen again this time and that what might have inhibited Moscow may have been the desire to obtain a waiver from the provisions of OPAL. In view of this, its interesting to look at the emergency caused by the humidifying of gas by the Russians in June 2017, which deprived Poland of the possibility of using Russian gas. At the same time, this accident did not affect deliveries to Germany, because they have the infrastructure for dehumidifying gas. PGNiG has already announced that it will consider the possibility of building such infrastructure in Poland, but as a result of long-term negligence, until this happens, our country can be deprived of supplies in this way.
Another important field of activity of the Polish side is the struggle to obtain real commitments from Gazprom, which would make it possible to improve the situation on the European gas market. Regardless of this, Poland must take action to release itself as quickly as possible from gas dependence on Russia. It is also important to build the strength of Poland and our region in the gas market. In this context, the Polish government’s return in 2016 to plans to build the Norwegian Corridor, which had previously been torpedoed by the post-communist governments of the Democratic Left Alliance and then the Civic Platform under the leadership of Donald Tusk, should be assessed positively. The implementation of this ambitious plan is currently one of the most important tasks of the government of Prime Minister Beata Szydło in the energy sphere. Initiated at the call of the Croatian President, Kolinda Grabar-Kitarović, and the President of Poland, Andrzej Duda, the “Three Seas Initiative”, a forum for dialogue and cooperation between the twelve ABC countries (located between the Adriatic, Baltic and the Black Seas), on the initiative of the Republic of Croatia, gives hope that the region’s voice will be better heard in the European Union, and that the axis of energy security cooperation will stretch from the north to the south of the continent. It is also important to develop connections and cooperation with our immediate neighbors.
A big success of the current Polish government is the activation in June 2016 of the gas port in Świnoujście, named after the late President of Poland Lech Kaczyński, and the continuous development of Poland’s ability to acquire LNG on world markets. Here, tightening cooperation with the U.S., which in the next few years is poised to become the largest exporter of natural gas in the world, can play a key role. We can point to the receipt of the first LNG transport from the United States in June 2017 or the declarations of closer cooperation with Poland that came straight from the mouth of President Donald Trump during his visit to Warsaw on July 6, 2017. One can also look hopefully at the sanctions already mentioned that are currently being considered by the U.S. Congress, which are to be targeted at Russian export pipelines and those entities which support their construction. Unfortunately, as has already been indicated to the Russians, there is no lack of supporters and defenders of their interests in Europe.
The shape of individual states’ policies in the EU is significantly influenced by their particular interests. For the long term, however, it is important for the European allies of Russia to realize that the building of European security based on Gazprom is like trying to keep a restaurant safe by paying protection money to gangsters. It is also very important for the states of Europe to remember that strong-man-led Russia, will perceive concessions such as the recent EC decisions, as signs of weakness which will only embolden them to further actions. It is critical to remember what was perceived by the late President Lech Kaczyński, in his famous words “today Georgia, tomorrow Ukraine, the day after the Baltic States, and later, maybe it will be time for my country”, that is, every success of Russia leads to further hostile actions, and that after the Czech Republic, Slovakia, Hungary, then it may come time for Germany.
All texts published by the Warsaw Institute Foundation may be disseminated on the condition that their origin is credited. Images may not be used without permission.