Russia Eyes Exemptions to Third Energy Package

Russian Ambassador to the EU Vladimir Chizhov

Vladimir Chizhov has explained that the European Union's Third Energy Package is harming European energy markets and customers, in remarks he made before the 3-4 June EU-Russia summit.  "There is a paradox now in the EU energy market.  We see that major companies involved in infrastructure projects are prepared to invest only in those projects, which are guaranteed to be exempted from the provisions of the Third energy package," he said.  "This is a clear indication that this particular set of rules runs counter the interests of business and I would add, of consumers, too." 

Chizhov insisted that the countries holding back on investment were not just Russian.  Faced with the negative reprecussions to the EU's actions, Chizhov speculated on the EU's inability to reverse course:  "I understnad it might be difficult for the EU to backtrack on its own decisions.  Well, some people compare the EU with a crocodile," he said sarcastically.  "Not because of its teeth, but because of its inability to move backwards."

Chizhov continued to lobby for the EU to make exceptions that benefit Russian oil and gas interests.  He insisted that the EU should name South Stream a TEN-E project, which would accord the pipeline the status of a "project of European interest" and therefore eligible for EU assistance.  Russia in the past has lobbied for this status, which was enjoyed by the Russian-sponsored Nord Stream project and by South Stream's rival, the Nabucco pipeline.  The EU has maintained that Nabucco, and not South Stream, is the preferred project because Nabucco gives the EU access to additional sources of energy other than Gazprom.

Despite the opposition in European corners, however, Gazprom plans to ask that South Stream be exempted from the Third Energy Package.  "we have a legal opportunity to do so," Alexey Golubnichiy, Deputy Head of Gazprom's subsidiary Gazprom Export, told RT.  "Commissioner Oettinger indicated the European Commission will look at the possibility of granting South Stream these exemptions."  (Gunther  Oettinger is the European Commission's Minister of Energy.)

Golubnichiy worries that the appeal will take to long.  "The main problem is that giving us such exemptions will take from four to eight years.  And this is too long for South Stream."  South Stream is currently scheduled to go on line in 2014-2015.

While Russia has continued to push its campaign to have its oil pipelines exempted from the Third Energy Package, Europe has remained resolute in denying the exemption.

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.

Europe Preaches Competition to the Russians

Russian Prime Minister Vladimir Putin came to Brussels on 24 February 2011, and accused the European Union of trying to confiscate Gazprom's private property. He was accompanied by 13 members of the Russian cabinet of ministers, underlining the importance of his presentation. Putin's ire was reserved for the EU's Third Energy Package, which went into effect on March 4. The plan is designed to break-up energy monopolies and encourage competition in the European markets. Putin's response was emphatic: "We consider that the full and mechanical implementation of this package could lead to a rise in energy prices on the European energy market...The third energy package, it is quite clear, will harm the activities of our energy companies. We are talking in practice about the confiscation of property," reported Reuters. Putin separately described the rules as robbery. "Our companies, together with German partners, legally acquired distribution assets. Now they are being thrown out. What is this then? What is this robbery?" he said according to Iranian PressTV.

Under the new rules, Russia might have to sell off some of its pipeline network, to meet EU demands for the "unbundling" of energy asset ownership, including the divestment of Gazprom stock ownership in the Lithuanian gas company Lietuvos Dujos. There are a number of ways of interpreting "unbundling," but under the most severe interpretation suppliers would have to sell their gas transport businesses. Other possibilities include the suppliers maintaining ownership, but an independent operator taking over the transportation arm, or an independent board be appointed to make decisions (such as pricing) on gas transport questions.

In response to the Putin barrage, European Commission President Jose Manuel Barroso did not retreat. "We believe our third internal market energy package is non-discriminatory...What we are asking of foreign companies is to accept the same rules that we are implementing for our own companies," reported Reuters. He said that the rules would not be changed: "Thanks to Russian gas, many of our institutes work and our houses are warm. But we pay for it. We pay for it well...Let me say very frankly, we believe our Third Energy Package is fully compatible with WTO rules, is non-discriminatory and is fully compatible with our bilateral agreements...I'm sure we will find an acceptable solution, but...we have adopted the Third Energy Package. For us and for the member states, it is now binding legislation," Hurriyet quoted him as saying. Interestingly, the Russian press reported Barroso was conciliatory. According to RIA Novosti, Barroso was unusually sympathetic to Putin's presentation.

Putin's visit had been heralded in advance as confrontational. Russian Ambassador to the EU, Vladimir Chzhov, warned that the talks would be detailed but "possibly unpleasant." In addition, the president of the Russian Gas Society paved the way for Putin's visit with an in-depth analysis of the Third Energy Package. Valery Yazev, who is also deputy chairman of the Russian State Duma, told the Russian media that the new law would cause the Russian state-controlled pipeline monopoly Gazprom "direct economic prejudice...the Russian company would be deprived of the right to use a gas transport network it had been establishing in Europe for a long period of time for the purpose of achieving the same energy security the "package" talks about," acccording to the website euractiv.com. Yazev continued his verbal assault on the energy package in a video conference with the Brussels press corps in which he said the new rules would disrupt Russian investments in prospecting and building pipelines. He claimed that plans to build a second, parallel pipeline to Nordstream were being suspended, and implied the suspension was the direct result of the Third Energy package. He also implied that Russia would not be able to meet future European energy needs under the new regulations. Gazprom would have to reasses its long-term supply contracts with European customers, meaning Europe would only be able to purchase gas on the spot market. Deprived of a guaranteed income, Gazprom would pull back on investing in new oil fields so--when European energy demand returns--Gazprom would not have the gas to meet the demand. Yazev concluded his analysis with the threat of an OPEC-like consortium of gas producers that would peg the price at levels higher than Europeans would otherwise have paid. The Asia Times reports that Yazev reiterated these points in a letter to Eurogas, in which he warned that Gazprom would reorient exports toward more attractive markets if it had to relinquish control of pipelines in EU member countries.

British attorney Alan Riley analyzed the situation in the Wall Street Journal. He opined that no one in the European Union should be considering legal exemptions for Russian companies operating on EU territory, because the equal application of the rule of law is a fundamental European value. Further, Mr. Riley implies that the Russians may cave on their position, stating that Gazprom needs the EU more than viceaversa. Sale of gas to the EU represents one-third of Gazprom's production and two-third's of its revenues.

Russian Energy Minister Sergei Shmatko has proposed a compromise. "We proposed to the EU to differentiate between gas pipeline systems for the EU local market and transboundary trunks from outside...We sent our proposals and are waiting for the reply," he said according to Reuters. His call may not be falling on deaf ears, despite Barroso's strong defense. Russia already has exemptions to the law for two offshore stretches of the Nordstream pipeline, according to Radio Free Europe. Further, RFE says that due to the complexity of the new legislation, EU Energy Commission Gunther Oettinger has postponed legal action against member states who do not implement the new rules. His spokeswoman, Marlene Holzner said , "There is some discretion of maneuver within a law. It is possible under certain conditions to make exemptions, and this can be explored."

Last week, at the 27th Annual EU-Russia summit, European Council President Herman van Rumpoy confirmed that bilateral negotiations were continuing. The president struck a middle road between hard-line and conciliatory. According to CNC World, he said the EU would follow the rules, but was willing to hold "pragmatic talks" with Russia over its concerns.

Russia clearly wants exceptions made to the European law, which would allow them to maintain Gazprom's partial ownership of a number of European pipelines. This is the sort of arrangement that the Third Energy Package was specifically created to prevent. It would appear that Europe will make an accommodation, because of its growing need for Russian energy supplies.