Tuesday, January 10, 2012

Russia Offers Possible Compromise on Third Energy Package

The European Union's Third Energy Package, demanding the "unbundling" of energy production from energy distribution, had been headed for an impasse between Russia and the EU. As of December, however, it appeared that a Russian compromise may be finding traction.

The low point came in early October, when the European offices of Gazprom were subjected to anti-trust raids. The EU seized files to determine if Gazprom was engaged in anti-competitive practices. While the Russians may have been angered, they recognized they were in a confrontation from which there could be no winners. Russian President Dmitry Medvedev told Gazprom and the Russian Ministry of Energy to submit proposals on how to operate under European laws.

The results were a disaster: the Russian Energy Ministry proposed an intergovernmental agreement establishing a special legal regime for major international infrastructure projects. The EU rejected the proposal. Energy Minister Sergei Shmatko told the press, "Talks with the European Comission on the third energy package...have hit a dead end," according to Reuters. The Russians threatened to legally challenge the Third Energy Package in court, and to shift their energy business to the Far East.

In the end, however, despite the diplomatic setback, Russia continued to look for a compromise. "What does this mean? Nothing terrible," Shmatko continued. "All the obligations that the Russian Federation and Russian companies have taken on with regard to supplies of energy under long-term contracts will without doubt be fulfilled." He also said Russia is committed to being a stable and reliable supplier of energy to the EU, and maintenance and increase of supply natural gas transport capacity is a top Kremlin priority, according to Deutsche Presse-Agentur. In early December, Shmatko offered hope. "I would not rule out resolving a fair number of regulatory conflicts at the level of national regulators," he said according to Reuters. At the same time, top EU energy officials said the dispute between Russia and the EU could be worked out under existing law.

The nature of the possible compromise was finally revealed by Russian Ambassador to the EU Vladimir Chizhov. As reported by ITAR-Tass, the Ambassador suggested that the ownership of Gazprom-controlled projects such as Nord Stream and South Stream be reinterpreted, so that ownership and transportation of the gas had already been "unbundled." "South Stream does not fall under the Third Energy Package, because its owner will be not Gazprom, but an international consortium. That is, it will be under an independent operator," he said. "The same applies to Nord Stream, because its operator--Nord Stream AG--is a consortum registered in the Canton of Zug of the Swiss Confederation."

While the Third Energy Package problem may be solved, EU energy commissioner Gunther Oettinger is creating more problems with the Russians. Gazprom has been highly successful in negotiating bilateral agreements that have hurt other countries in their ability to negotiate with the Russians. Thus, the bilateral Russian-German agreement to build Nord Stream has left Poland vulnerable to energy cutoffs; the bilateral Russian-Turkish agreement to allow South Stream to use Turkish waters in the Black Sea could leave Ukraine vulnerable to the same pressure. To solve this problem, the European Commission approved in September an Oettinger proposal requiring national governments to notify the European commission of international energy negotiations. "The ...mechanism is set to strengthen the negotiating position of member states vis-a-vis third countries, while ensuring security of supply, proper functioning of the internal market and creating legal certainty for investment," said the commission.