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14 March, 2016  ▪  Anna Korbut

Wojciech Jakobik: “Russia has been trying to do all it can to stay on the European market”

Polish energy analyst and chief editor of BiznesAlert, an online business and industry analysis publication, spoke to The Ukrainian Week about the new gas infrastructure in Europe, attempts of Gazprom to preserve its influence in it, and the dangers of Nord Stream 2

How would you describe Russia’s share on the European energy market now as compared to, say, two years ago?

It has been rearranged to preserve the Russian influence on the European energy market in the tough environment of changing laws and attitudes of countries which are afraid of its aggression. Russia has been trying to do all it can to stay on the market, to keep the biggest share possible. The stance of Gazprom becomes more flexible. It proposes to sell more gas on auctions. It talks about some changes in long-term contract when it comes to oil index contested by some customers.

One of the tendencies we see is an initiative aimed at keeping the Russians in Central Europe gas industry through getting support from countries of Western Europe which favor cooperation with Russia even in spite of aggression against Ukraine and the fact that Russian troops are still present there.

What the Kremlin is trying to achieve is to divide EU countries in their stance on sanctions and economic cooperation with Russia. Some countries are hesitant about breaking the current strong stance against cooperation Russia. Others are actively supporting cooperation with Russian companies and going back to business as usual in relations with it.

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Russia is also feeling the effect of the oil factor. In that regard, the conditions are pretty bad for it: the prices keep going down, the price war between Russia, Saudi Arabia and other suppliers is aggravating, and the Russians are endangered by the prospect of diversification of fuel supplies in European countries. Poland, for example, is trying to achieve a contract to buy oil from Saudi Arabia and seeking supplies of fuels from Iran. So, the Russians feel that their influence in this part of the word is waning. In response, they are trying to achieve the most presence possible in infrastructure: they are looking for shares in crucial facilities in Germany, Austria. This applies not only to natural gas infrastructure, but also to refineries, oil pipelines and so on. That is why the European Commission has to go with antimonopoly motions against Gazprom to check if there were any unlawful proceedings concerning such activity.

We also see that Russia tries to use business relations with Western European companies to introduce corruption schemes. The pattern seems to be as follows: the Kremlin is taking diplomatic trips to Berlin or Helsinki, for example. A few weeks or months afterwards, we see deals that are used as a fundament for pressing the EC into quitting strict policies on Russia. Also, we see asset swaps: these deals introduce Gazprom into certain countries’ infrastructure. In exchange, the companies of those countries, such OMV, Shell and BASF/Wintershall,  get shares in Siberian gas fields, such as Urengoy.

These are ways that Russian energy policy is dividing Europe, and it is quite effective even in the harsh conditions that Gazprom and Rosneft have found themselves.

What tools does the European Commission have to resist these attempts?

The EC can apply the EU law to Gazprom and other such companies: those are the same for every subject working on the European market. The other way of stopping or changing Russian behavior is through political decisions. But the European Council is divided on how to treat Russian business in Europe right now. Western member-states are supportive towards further cooperation. Eastern members, which have more experience with Russian influence, are strongly against that. There is also a factor of individual gains that Gazprom offers to states from all over the EU. It is really complicated. Some countries that are verbally against Nord Stream 2 will stop blocking it if they get something in exchange. So we have long discussions about what to do. The most compromise so far has been about keeping sanctions and preventing unlawful conduct on the energy market.

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What are the threats of Nord Stream 2 in this context?

Nord Stream 2 is investment which will provide good money to Western European energy companies. But this is a shortsighted view. In the long run, there are some real security threats connected to the project. That’s why NATO and EC are criticizing it: it makes Gazprom’s presence in Europe more stable, and increases dependence on Russian gas, as well as Gazprom’s presence in Central and Eastern Europe, thereby preventing it from diversification. Unfortunately, NATO and EC don’t have any political instruments to block Nord Stream 2. The EC can only assure that it is following the rules.

What the countries of Central and Eastern Europe, including Ukraine, can do in this situation is deepen their integration, create more interconnectors to facilitate gas flows from new directions, and diversify the process of gas supply through, for example, LNG terminal in Świnoujście, Caspian gas in the future, and their own infrastructure between each other which could change the gas market in this region.

After the dissolution of the Soviet Union, Russian gas was supplied in the east-to-west direction to Western Europe through Central and Eastern Europe. Creating connectors between Poland, other V4 states, Croatia and Ukraine now would create another axis – from north to south. This changes the way the markets behave in this part of Europe. We will be able to get gas from Caspian, Mediterranean regions, from Scandinavia and even Middle East using gas pipelines. It is especially important, because pipe gas is cheaper than liquefied one.

We are seeing new infrastructure projects here: in addition to the LNG terminal in Świnoujście, another one is working now in Klaipeda, Lithuania. This shows that, even if such projects are costly, they give great results in terms of energy security. A year after the Lithuanian terminal was launched, supplies from Gazprom to the country decreased to less than 50% of total, and the country’s major supplier is now Norway. That was Lithuania’s way to achieve energy independence from Russia.

How is gas from such sources sufficient for the demand of Central and Eastern European countries, and how is it different from Gazprom’s gas pricewise?

Step by step, such countries will reach a point where they could refuse from Russian gas completely. We see that in Ukraine: this year, after the big quarrel with Gazprom, Kyiv decided not to import Russian fuel. And it was only possible thanks to heroic efforts of Ukrainian government, companies and society in cutting consumption of gas in general, trying to introduce energy efficiency measures, and in looking for alternatives on the European market – reverse gas flows from Poland, Slovakia and Hungary. In September 2014, we saw that Gazprom wanted to decrease supplies to Poland and Slovakia, so that those countries wouldn’t have gas to send through reverse flows to Ukraine. As a result, they went to buy gas from spot markets in Germany, even with a discount, instead of buying it from Gazprom directly. This shows how much the market has changed. But the ultimate goal is to neutralize the political impact of gas relations with Russia and recreate it into regular business deal which do not influence political relations, do not make countries take any concessions to Russia. Freedom of choice is the best solution.

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As to the price, gas is cheaper on the markets in Europe than that offered by Gazprom. Gas from Russia costs on average about US $238 for Europe and Turkey except for Baltic States. When on the spot markets in Europe, the price stands at around US $150-200 per 1,000 cu m. Statoil gas going to Lithuania is cheaper than the one from Gazprom. We don’t know the exact sum because it’s in contracts that are confidential. But the Lithuanians say that even LNG which is normally more expensive than conventional gas is cheaper than Gazprom’s offer. That makes the consumption of gas more flexible, and thus less dependent on Gazprom.

We see deals between Gazprom and German companies whereby they exchange stakes in big storage facilities. Could that have any political effect on future decisions regarding countries to which that gas can be sold, and countries to which it won’t be sold? On the possibility to create artificial selective deficit of gas for some buyers?

That might be unlawful influence on European gas infrastructure that was pointed out by the EC during the antimonopoly review. The EC is now checking whether Gazprom thus obtains the right to influence the markets and the infrastructure that would prevent diversification. We already see the influence on the gas reverse in Slovakia on the German infrastructure – it might be in some danger. Gazprom is blocking larger reverse to Slovakia so that Ukraine can’t import greater amounts of gas. Kyiv has pointed out that it is a problem already. The worries in Brussels right now are that if Nord Stream 2 starts working and Gazprom has such influence on regional infrastructure in Eastern Germany, there might be a problem of importing gas from Germany to Poland if we need it, because the priority would be transporting gas from Nord Stream 2. That’s the real danger from having Gazprom inside this infrastructure.

Do you see consolidated efforts by CEE states, including Ukraine, to prevent such prospect?

One option is Polish-Ukrainian gas pipeline. There are talks about it, but we don’t see any progress. In Poland, we are already modernizing the part of infrastructure near the Ukrainian border. What we need is a declaration of building such infrastructure on the Ukrainian side. It would be good to have such infrastructure so that Ukrainians could get energy from Świnoujście, but maybe there is lack of money in the budget for that. However, that is a problem that could and should be solved faster. As a result, you’d have the north-south gas corridor (and the idea is supported by the EC) involving the LNG terminal in Świnoujście, with pipelines to Slovakia, Czech Republic, Hungary and Croatia (the latter supports it as well). European Commission support is a great help. The List of Project of Common Interests (PCI) includes investment crucial for diversification like Polish LNG terminal, gas interconnection between Poland and Lithuania. Maybe Poland-Ukraine interconnection should also be enlisted there.

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