A small lexicon of an immense issue
As a concept, energy security was originally tied to gas delivery in Central Europe. Now it is part of a broader discussion that in many ways defines this region. This small lexicon of gas geopolitics will attempt to suggest a few new angles through which to view the issue. It is not exhaustive, but should function as a handbook for those trying to orientate themselves in the ever – changing “gas field” of Central Europe
January of 2009 was cold. Not simply in meteorological terms, but also with respect to politics. Central Europe experienced a genuine shortage of gas due to the Russian-Ukrainian gas dispute. Experts and analysts similarly cite this event as a turning point in thinking about energy security, which is a relatively new discipline primarily concerned with gas delivery, although the field is constantly expanding and can now be studied for an M.A. title – it recently appeared, for example, as an English-language offering at Masaryk University in Brno, Czech Republic.
Numerous studies have been published. In collaboration with other institutions in V4 countries and with the support of the Visegrad Fund, the Kosciuszko Institute has even established an Energy Security Index for the Visegrad countries. It suggests that its methodology could only be used for three of the V4. For uncertain reasons, Hungary, dependent on gas for domestic and heating purposes and with significant domestic resources, does not fit into the categories of the index. The Index has unsurprisingly shown that the Czech Republic is in the most secure position, followed unexpectedly by Slovakia and then Poland. This small lexicon of gas geopolitics will attempt to suggest a few new angles through which to view the issue. It is not exhaustive, but should function as a handbook for those trying to orientate themselves in the ever changing “gas field” of Central Europe. The players are almost always the same, but the conditions – political and economic – are often rapidly transforming. Finally, the lexicon is arranged logically, rather than alphabetically.
Cooperation or competition
Last year, Visegrad Four energy security was closely tied with gas, even as the issue of nuclear energy became increasingly important. Post-communist members of the EU have approached Russian gas deliveries differently than their older EU colleagues, which has been an important impediment to the formation of a common EU energy policy. And in fact, this is an issue where greater Visegrad cooperation might prove more efficacious, as even things so basic as interconnectors are extraordinarily difficult to agree upon and build. A meaningful solution would involve a functioning internal and liberal EU market, in which the issue of unbundling (separation of different companies dealing with gas trade, delivery and transport) will be of particular importance. According to Urban Rusnák, Slovak special envoy for energy security, the interplay between cooperation and competition contains three layers: 1) The State, which has mostly limited competence over the energy mix, 2) The EU, where the most important discussions take place, although it is unrealistic to expect common policy in short and medium term 3) Companies or the corporate sector, which implements policies but has different interests. While the state is believed to be interested in energy security, private companies are interested in profits. And since we have seen an outflow of the big Western companies from Central Europe in the last ten years, the only solution is to put a stress on the national level, with national and then regional solutions.
The EU’s role
In an article by Friedbert Pflüger, the European Centre for Energy and Resource Security at King’s College in London, gas relations between the EU and Russia were described as a difficult balance in which Gazprom attempts to increase its share of downstream (customers), as it is simultaneously subjected to investigations and raids conducted by the EU authorities. Pflügler wrote that Gazprom’s investments in the European gas markets, whether upstream or downstream, should not be discouraged as long as it adheres to the EU market rules and regulations and operates on a level playing field. Recently, the EU Energy Commissioner Gunther Oettinger unveiled a new EU External Energy Policy proposal that he said will “establish a new mechanism to ensure proper ex-ante and ex-post coordination and cooperation for the conclusion of intergovernmental agreements.” One of the key elements of the proposal would require EU Member States to report all new and existing bilateral energy deals with partner countries to the EU Commission. Hence, before an agreement enters into force, the Commission would have the right to confirm in advance if the bilateral agreement is compatible with EU law. Poland remembers well when the Commission entered into new long-term contract with Gazprom in the fall of 2010, considered too pro-Russian and not corresponding with an emerging EU approach.
Should the proposal be accepted by member states, before entering into any future agreements Gazprom and other foreign investors would have to comply with EU’s transparency and industry accounting standards, as well as market liberalization policies. In theory, this would deter monopolistic activity and enhance competition, simultaneously allowing investors to avoid potentially costly litigation resulting from non-compliance issues. Although the proposal is viewed by some as a potential deterrent to Russian investments in the EU, the added legal security it provides could in fact stimulate Russian investments. Friedbert Pflüger concluded that a greater Russian stake in the European energy markets would, in turn, make future gas supply disruptions less likely, as this would harm its own business interests.
Dependency on gas
Gas is based on long-term contracts and the use of pipelines, making it the least flexible part of the national energy mix. Together with nuclear energy it enables European countries to fulfill Kyoto criteria for lower emissions of greenhouse gases. The price to be paid for this is an increased dependency on imports from third parties. In 2009, 45% of EU gas consumption was covered by non-EU imports (from Norway, Russia, Algeria and Libya). The importance of gas will grow in the future as coal and nuclear-fueled power stations end their production cycles and Norway’s production declines. The growing importance of gas also coincides with the decision of the German government to phase out all nuclear reactors. For the EU, gas is the third most important source of energy (after oil and coal). The International Energy Agency (IEA) projects that over the next decade, despite concerted efforts by EU countries to expand renewable energy capacity and enhance energy efficiency, natural gas (alongside coal) will become the second most important energy source in Europe, behind oil.
After the fall of communism, gas geopolitics in Central Europe has become a peculiar game. Governments officially support market deregulation, but are not able to invest in interconnections. This unwillingness is incited, supported and exploited by major European players, especially Gazprom. The recently opened Nord Stream and planned South Stream are not driven by market logic or viable business plans, but only by forces “from behind” who might have hidden interests. Major Western companies are leaving Central Europe (consider the attempt by Gaz de France and E.On Ruhrgas to sell their minority share in the Slovakian transport company SPP, or RWE selling Czech operator Net4Gas), as the Nord Stream and South Stream allows the Russians to determine gas delivery. The original idea behind Nord Stream was to export gas from the Shtokman field, which was never developed, meaning that the same amount of gas can now bypass Ukraine and Central Europe. Within the EU, the Slovaks feel especially vulnerable and are already counting on the construction of the South Stream. For them, this would mean – not having any alternative routes and stocks – being totally dependent on Russia via Ukrainian deliveries. Again, South and Nord Stream are not modeled on market rules. Therefore, Western market logic should not be applied to their function and use. It is not only that Central Europe could be blackmailed politically, but also different vested interests could enrich various elements in the energy food chain. Part of this logic, which is not purely economic or political, is that Russians are not investing in the development of new gas fields, the infrastructure is in poor shape, and there are even some estimates that Russia itself will not have enough gas to meet demand. Where has all the money gone? According to some unofficial estimates in Russia, 30 to 50 % of prices are eaten by kickbacks for various groups feeding on the projects.
With unpredictable behavior, vast resources, creaking infrastructure and dependence on the EU market, Russia is an uncertain partner. In short, the relationship between the EU and Russia is based on mutual dependency and distrust. Nevertheless, the EU’s dependence on Russian gas deliveries is growing and will continue to grow due to the German decision to close nuclear power stations and a desire to meet emissions reduction criteria. The EU’s gas imports from Russia are now 40,8 % of all total imports, and this share will grow as the total import of gas into the EU grows. At present, imports account for about 60 % of gas consumption. According to some estimates, 73 to 79 % of total consumption will be imported by 2020, while the Russian share would grow to around 50 %. “What we need is to depoliticize the relation between gas and the EU,” said Iana Dreyer, an energy issues expert who formerly worked in European think tanks and is now in the Institute Montaigne. According to her analysis, shale gas (in Poland) might have an important role to play in integrating the EU gas market, where is there is marked “capacity underinvestment in transport.” Until the EU market is interconnected and liberalized, as a functioning market with a wider variety of sources, Russia will not feel pressure to reform, even if the EU develops an excellent common energy policy. Making the issue even more complex, if China develops its own shale gas, Russia might lose China as an important market and the EU would remain the only serious market for Russian gas exports. But this is a long-term prospect, and perhaps only a product of wishful thinking of some European analysts and politicians.
From their website, “Gazprom’s strategic goal is to become a leader among global energy companies by developing new markets, diversifying business activities and securing the reliability of supplies.” This official quote from the Russian company provides at least one essential insight concerning their overall strategy: they will focus on downstream, pipelines, storage facilities and delivery, not on the development of new fields and sources. As other entries in this lexicon demonstrate (see “Nord Stream”, “South Stream” and “Russia”), gas and pipelines are used as political tools, and economic and business logic does not fully apply to Gazprom. On the other hand, Gazprom has increasingly, at least since 2010, been forced to adapt its traditionally rigid strategy to changing conditions, changing long-term contract conditions with some of its Western customers, decoupling gas prices from oil and connecting them with spot market, which reflects actual price developments. This new flexibility might be used to demonstrate greater differentiation among European customers, as well as to fill Nord Stream pipes and also be flexible in the “political use” of gas deliveries.
Price of gas
The price of the gas was traditionally connected to the price of oil. Moreover, contracts have usually been arranged for the long-term (in 2010 Poland signed a contract with Gazprom for delivery until 2022). In 2011, when the Arab Spring brought rising of oil prices, Russian gas rose accordingly. The most recent trend is leaning toward the disconnection of oil and gas prices, especially when shale gas in the USA has changed the balance in North America. The Polish gas company PGNiG filed suit against Gazprom during the autumn of 2011, based on the fact that Gazprom uses its near monopoly on gas imports to Poland to avoid negotiating lower prices.
Gas produces roughly half as much carbon dioxide as coal. Therefore, gas is generally considered an environmentally friendly fuel. With shale gas fever spreading to Europe, environmentalists have growing concerns about the impact of its exploration. Conversely, nobody seems to care about the conditions of exploration in Russia. Some countries, like Poland and Hungary, are flirting with the decision of building new gas-fired power stations. For Germany, such power stations will become a necessity due to a diminishing nuclear supply. But according to a majority of studies, gas cannot replace coal in the short and medium term, but might serve as a replacement for nuclear, which is being phased out, or uncertain solar and wind sources. Anyhow, ecological concerns will certainly be raised in debates about shale gas exploration, as the method in question, called fracking or hydrofracking, pumps tons of chemicals into rock layers with the potential to cause small earthquakes or endanger underground water reserves.
According to Václav Bartuška, Czech special envoy for energy security, this is just a “bunch of national projects” and ideas, not a single pipe. Theoretically, it could fill the vacuum of networks that were not built during communism, when there was only an East – West network being constructed. Two LNG terminals are being built, one in Poland and one in Croatia. The problem is North-South interconnectivity, given that the main hub is Baumgarten, Austria. So if there are any tubes in the North – South, they lead to Baumgarten. And concerning gas, Austrians are more than friendly to Russians. The solution might be to link Hungary and Slovakia with some significant connection, but a contract has just been signed and there will not be a Slovak-Hungarian tube earlier than 2015. Meanwhile, the Czechs and Poles recently opened a small interconnector in September of 2011.
The name of the Old Persian king is generally invoked as if it had miraculous powers in solving the gas problems of Central Europe. In fact, this EU supported project to bring non-Russian gas to the Baumgarten hub through Turkey has been plagued by difficulties from the outset. As the name suggests, it was originally designed to bring Iranian gas to Central Europe, as counterbalance to Russia. But for the moment, Iran is not considered a viable supplier. Therefore, it is hard to devise a business plan: even if you have a tube, you have to have gas to fill it with. Nabucco is therefore on the hunt for non-Russian gas in Central Asia, which is a very daunting task. So far, only the autocratic government of Azerbaijan was able to promise something more or less reliable. Turkmenistan, which could potentially replace the Iran as the major source of gas, is an even more unpredictable dictatorship. “You should build the pipe to their border and then maybe they will start to discuss the issue seriously,“ said one EU gas official few years ago. Not to mention the fact that Russia has signed a contract for the import of the majority of Turkmen gas for next twenty years. A solution might involve filling Nabucco with Iraqi gas, which might be complicated due to strained relations between the Kurdish North of Iraq and Turkey.
So while a consortium of six companies is struggling to make Nabucco operational by 2017, Russia is preparing direct competition for Nabucco with the South Stream. This is an even more overtly political project, and given the personal involvement of Vladimir Putin it is likely that Russia will put its entire might into completing the project (for more, see “South Stream”). A final investment decision for Nabucco might be made in 2012. Although it would not bring a critical mass of gas for Central Europe, Nabucco has a chance to become an alternative source, and therefore functions as a symbol of the EU disunity in energy policy. There is not enough political power behind it from Brussels, and much heavier involvement from the USA pushes the project forward.
Put briefly, this is a Russian attempt to work directly with Western partners to force Russian political tools onto Central Europe. Originally German, the Russian project now involves French and Dutch partners. It stands out as one of the successes of Russian bilateral diplomacy, in undermining the formation of a common EU energy policy. The first tube of Nord Stream, opened in 2011 and has not caused too much trouble. However, the planned second and third tubes present serious risks for Central European energy security. Upon completion, Russia would be able to decide to which customer it will send its gas, and as collateral success, strip the Czech Republic, Slovakia and Poland of transit fees. The most vulnerable of the EU countries is Slovakia.
A Slovakian nightmare in Turkish hands. Even if it is not economically viable, it will be built because Vladimir Putin has personally promised its delivery to his Italian and Balkan partners. The entire project depends on Turkey, which refuses to work with the Russians until they build a promised oil pipeline, which could relieve the Bosporus from an overload of tankers. It is direct competition for the EU and US backed Nabucco project. The weak Balkan states tend to side with the Russian position. Hungary has a stake in both Nabucco and the South Stream and has not refused either of the projects. Some experts in Budapest have plans to build a new Central European hub of gas deliveries in Hungary, as direct competition for the Austrian Baumgarten.
So far, this is only a dream. Any eventual realization of the project rests in the hands of the Turkish government, which must support both Nabucco and the South Stream. Turkey wants to become one of the key countries for future gas trade, not simply a transit country. According to the German expert Roland Götz, the South Stream would not be as favorable as for Turkey as originally thought, because Ankara would only collect a transit fee. Revenues for Turkey would be much higher using existing pipes (“shorter version of Nabucco”), buying gas from Central Asia (mainly Azerbaijan) and re-selling it to the EU market.
Amongst the the V4 countries, Hungary is the most dependent on gas. It has the highest share of residential consumption, which cannot be disrupted. Therefore, its need to secure the delivery of gas is the highest in the region. This is probably one of the main reasons why the Hungarian government plays all sides when discussing different routes for gas delivery, focusing mainly on the two southern projects, Nabucco and the South Stream. Hungary also has the highest domestic reserves of gas in the V4, and domestic consumption covers around one third of the overall consumption. Hungary is very active in building interconnectors with Romania and Croatia, where it supports the building of a LNG terminal on Krk Island. Under the Hungarian presidency of the EU, there was a breakthrough in February of 2011 when a new EU strategy was adopted, which says that all “energy islands” within the EU must be interconnected by 2015.
From the point of view of gas politics, Ukraine is a black hole. Three years after the infamous crisis, measure stations are still not installed on the entry side into Ukraine (even though the EU invested in this project after the 2009 crisis). Nobody has control on the amount of gas being pumped into Ukraine. Only for the “maintenance of the system”, during last period of each year Russia has imported an amount of gas close to the yearly consumption of the Czech Republic. Yulia Tymoshenko, sometimes portrayed as the last democratic hero of Ukraine, has made her fortune in the shadow gas business. With gas, Russia can hold Ukraine at its mercy, especially when the second and third tube of Nord Stream are open.
Shale gas in Poland
It has the potential to be a game changer, at least in Central Europe. But there are still several big questions marks. First, will extraction be economically viable? The availability of the Polish shale gas is perhaps half that of the USA, which is so far the only country in the world with a developed unconventional gas industry. Second, will the Polish and American gas lobby be able to defend itself against all kinds of attacks by environmentalists? There are serious doubts that Gazprom would use the entire means at its disposal in Brussels to undermine shale gas in the whole European Union. Is there an example of how this might be done? And even the search for shale gas was outlawed in France, due to environmental concerns. Even if energy mix is a national issue, there still might be some push to take care of it on the EU legislative level. Third, if there will be a functioning market with gas in Central Europe (see “North-South Connection” and “Cooperation and Competition”), and the American and Polish companies invest enormous amounts of money into the search and testing of wells, they would need a return on their investment. Estimated reserves are enormous, so a functioning market and infrastructure, not just domestic, but at least on a Central European level would be key for success and further investment, especially if Polish shale gas proved to be more expensive than Russian imports. Fourth, it remains to be seen if Poland is interested enough in having its own gas resources to risk environmental disaster or damage to the countryside. So far, there were only a few demonstrations against the shale gas exploration. Politicians and experts are not as enthusiastic as they were when the possibility emerged two years ago, but the chance to make an energetic (and political) swipe against historical enemies in Russia and Germany is perhaps too tempting not to try. The Polish government wants to resolve the legislative issues surrounding shale gas exploration in 2012, in particular the issue of tax would be very sensitive in making Polish shale gas economically viable (the conservative opposition has spoken about a 40% tax, which would probably kill all interest). Last September at the Economic forum in Krynica, the deputy minister of the state treasury (who has stake in two Polish major energy companies PGNiG and Lotus), now minister, Mikolaj Budzanowski mentioned 2014 as the first year in which Polish shale gas might arrive on the scene. Experts are much more skeptical and are looking at the frame of eight to ten years.
As a concept, energy security was originally tied to gas delivery in Central Europe. Now it is part of a broader discussion about the future of nuclear energy, renewables and coal. The Lisbon Treaty states that energy mix is a national issue. But while the Lisbon Treaty can be reworked to adapt to changing eurozone economic rules, no one has suggested that it can be reopened to formulate new energy rules. Germany is pushing hard for new EU rules on budgetary matters, and with the Greens possibly forming part of a ruling coalition in 2013, a push for clean energy might grow louder. This would include a move to abandon dangerous nuclear and dirty coal-based energy. On the other side, Russia should see an increasingly demanding market and be in search for better income sources for exports. However, investment into new fields will remain almost non-existent, given that foreign companies are not allowed to play according to normal rules in Russia. Unquestionably, gas – and energy in general – will be one of the hottest topics in the future of Central Europe.
The author is chief editor of International Section in a Czech daily Hospodářské noviny.
The article was originally published in Visegrad Insight vol. 1 (1) 2012.