Gazprom has asked that the EU not slap them in the face with an energy directive

19.07.2010 — Analysis

It looks like Europe may have new fuel problems in 2011 with Gazprom.  The Russian holding company is claiming that the European Union’s third energy directive will seriously impede the transportation of gas to EU countries. The company’s management is painting a gloomy picture of the future should the European commissioners’ plan be implemented. Experts, however, have persuaded this columnist from RusBusinessNews that the gas monopoly is primarily afraid of losing its control over the transportation network that it uses to keep other countries dependent on Russian gas supplies.

The third gas directive, adopted in 2007, requires EU countries to unbundle their gas transmission services by 2011, creating independent companies. In other words, the supply and transportation aspects of the energy business should be separated.   In addition, EU states are forbidden from giving control of their gas transportation systems to “other” countries. There was sharp criticism of these new provisions by the Russian participants in the tenth forum of the Petersburg Dialog, which took place in mid-July in Ekaterinburg.

Gazprom’s deputy chairman, Valery Golubev, told panelists that Lithuania had decided to forgo gas supplies from Russia, in order to abide by the European Commission’s directive. And thus, all of Gazprom's investments in that country's infrastructure had become meaningless and likely would be wasted. A similar process has begun in Ukraine, the only difference being that that Slavic country is trying to outsmart everyone by dividing Naftogaz into several smaller companies, all owned by the same individual. A number of countries (Finland, Estonia, Latvia, and others) are still on the sidelines, but Valery Golubev believes that if they go the way of Lithuania, then the Southern Corridor, Nabucco, and other transportation projects will become meaningless and the European market could be destabilized.

This senior executive recalls that Russia has already had some negative experiences transferring ownership of its low-pressure gas networks to gas-distribution companies. Valery Golubev predicts that this provision of the directive is going to cause a real mess. The situation will become dangerous, since smaller companies are not renovating the gas transmission networks, some of which were installed 50 years ago. If Gazprom unbundles the transportation component of its business, it could result in the privatization and fragmentation of the gas transportation network. This would be a bad scenario for both Russia and the European Union, because of the unpredictability of gas deliveries based on contracts.

Valery Golubev does not see any need to restructure the monopoly and claims that all independent gas producers have free access to the pipelines. In the event of a decline in gas consumption, all the companies have agreed to a proportional decrease in production.   In addition, Gazprom today is in a more complicated position than the private gas producers, since the state company is required, for example, to bring pipelines into mountainous regions of Dagestan in order to supply two villages whose residents have no money to pay for the gas. Private companies unencumbered by public social obligations prefer to supply gas to the industrial Sverdlovsk region, conveniently located near the gas deposits. Independent producers are not required to supply gas consumers who have empty pockets.

Aleksandr Shokhin, the president of the Russian Union of Industrialists and Entrepreneurs, advised Gazprom not to try to take the place of the state. The practice of supplying fuel at lowered prices to a few chosen regions and friendly countries means that the government is deprived of taxes and dividends. Instead, Ukraine and Belorus should be subsidized through the state budget and taxpayers should be aware of it. Gazprom should operate under market conditions. The Russian Ministry of Economy was working from exactly these assumptions in the early 2000's, when it proposed that the company be reformed.

Valery Golubev has no objection to the transition to market prices, but notes that the Russian government itself is standing in the way of this by regularly taking money out of Gazprom to fund social obligations. Money was also taken out of the company when taxes (the MRT—Mineral Resources Tax) were raised on mining operations. The gas company is now forced to review its investment programs and reduce the amount of equipment it orders from Russian manufacturers, which is again upsetting some officials. 

Valery Yazev, the president of the Russian Natural Gas Society and vice-speaker of the Russian State Duma, claims that the Russian authorities will never reorganize Gazprom, especially not to benefit the EU. As he put it bluntly, it is the EU who “is using their energy charter to slap Russians in the face just because the State Duma hasn’t ratified it, while the EU itself is adopting a gas directive contrary to the charter.”   One of the articles of the treaty to this document, clearly states that countries must create favorable conditions in their countries for outside investors. Based on this, Valery Yazov concluded that the European Union is “scheming” and asked the German politicians and businessmen participating in the form to try to influence the European commissioners’ position, since the third energy directive complicates the working relationship between Russia and Germany.

In his opinion, Europe’s dependence on energy imports and their negative trade balance (255 billion euros in 2008 and 104 billion in 2009) means they will be forced to reduce their energy use. Russia, on the other hand, is interested in increasing its sales of gas, since the export of energy is one of the main sources of budget funding.  Thus, Russia is interested in the emergence of new markets. Gazprom plans to expand these markets by increasing energy consumption both domestically and abroad.

Experts note that the gas company's strategy can only work in Russia, where there are still many areas without gas service and installing new pipelines does not present a problem. Abroad, Gazprom’s plan to invest capital in local energy companies is not paying off, because foreign governments are quite leery of Russia’s desire to keep stretching its tentacle-pipes farther and farther.  Hence, the emergence of the EU energy package, which essentially forbids the Russian gas monopoly from increasing its fuel sales by acquiring foreign gas transportation systems. 

In the meantime, Gazprom’s management’s strong reaction has collided with the German businessmen’s cautious stance. Jurgen Mepert, the head of Wintershall Holding GmbH’s representative office in Russia, agrees that the holding company loses some advantages if its gas transportation components are unbundled from the production part of its business. But the European Union has made its decision and the Germans are now engaged in talks with the headquarters in Brussels. Jurgen Mepert believes that this is a very complicated issue and the outcome of these talks is not yet clear.

Vladimir Terletsky