Date: Tue, 21 Mar 2006
From: Sergey Slobodyan <Sergey.Slobodyan@cerge-ei.cz>
Subject: Re: WSJ, Gas/JRL #66.
Sergey Slobodyan, CERGE-EI, Prague
Re: WSJ, Gas/ JRL #66.
Gregory White states that “…European Union officials have renewed calls for Russia to liberalize access to its gas-pipeline network…”. In addition, calls for the ratification of the Energy Charter which would regulate third-party access to pipelines, were largely dismissed. Instead, Russia is pushing for “… broader use of long-term supply contracts, particularly in the gas industry, where Gazprom argues such contracts are critical given the large amounts of up-front investment needed for fields and pipelines.” Taken at the face value, the arguments are perfectly reasonable on both sides: European Commission is engaged in a long-run effort to liberalize EU energy market and does not need a monopoly just outside of it, while Gazprom does need guaranteed demand to undertake such gigantic projects as Schtokman. The problem is that the two arguments are not exactly compatible, as liberalization of pipeline access will depress prices and make recovering huge investments uncertain.
Another problem comes from the EU side: despite urgent efforts at liberalization, European gas market is not competitive and is hardly expected to become such anytime soon. The EU document entitled “Energy Sector Inquiry Issues Paper” lists a litany of complaints, from the non-transparent nature of the market, almost complete contracting of major pipelines’ capacity till at least 2017, and lack of spare capacity in the gas storage, all the way through persistent rumors of preferential treatment given to traders affiliated with Transmission Service Operators and similarity of prices received by different wholesale traders from the same gas field. Add to the mixture a recent wave of intended mergers among European energy giants. A net result is stronger buyers, the market which looks even less competitive, and correspondingly fewer incentives for Gazprom to liberalize.
Of course, this is exactly what one should expect from buyers, given such a large dependence on two monopolistic suppliers (Russia and Norway). Pushing for buyers’ liberalization in the sellers’ market is not the best idea. This was recognized by the European Commission: the latest Green Paper “A European Strategy for Sustainable, Competitive and Secure Energy” calls for, among other things, a “coherent external energy policy”, which should include a “true partnership [with Russia which] would offer security and predictability for both sides, paving the way for the necessary long-term investments in new capacity. It would also mean fair and reciprocal access to markets and infrastructure including in particular third party access to the pipelines”.
It might seem we are finally getting somewhere near a compromise point: beside an implicit recognition of long-term predictability (read contracts), “reciprocal access to markets” might to a certain degree alleviate urges to monopolistic behavior by Gazprom, at the same time raising sufficient funds in the lucrative Western European gas distribution business which will reduce the need for long-term contracts. However, a recent howl of protests over alleged Gazprom’s interest in Centrica, British retail gas trader, makes me doubt that happy times of energy security are upon us. No reported breakthrough after the meeting of EU and Russian Presidents leads to the same conclusion. I would wait for a report which would recommend “including in particular producers’ access to the retail and wholesale markets in the Western Europe” before throwing a party. At the moment, everyone is well advised to follow Otto’s “Don’t Call Me Stupid” bit of wisdom: “Avoid the green ones. They are not ripe yet”.