The Impact of New EU Energy Policies on the Gas Trade with Russia:
Is the EU Headed Towards Protectionist Policies?
by Sergei Komlev
Head of Contract Structuring and Price Formation, Gazprom Export
Groningen – May 6, 2009
© ZMB 2GIE Annual Conference in Groningen, 6-7 May 2009
What Protectionism Is:
“Protectionism is the economic policy of restraining trade between nations, through methods such as tariffs on imported goods, restrictive quotas, and a variety of other restrictive government regulations designed to discourage imports, and prevent foreign take-over of local markets and companies. This policy is closely aligned with anti-globalization, and contrasts with free trade, where government barriers to trade are kept to a minimum”.
(Source: Wikipedia)
© ZMB 3GIE Annual Conference in Groningen, 6-7 May 2009
Overview
New Energy Policy as presented in the Second Energy Review of November 2008;
Energy Security Regulations and plans to decrease the so-called ‘energy dependence on Russia’; and
Third Energy Package
Issue 1
Issue 2
Issue 3
© ZMB 4GIE Annual Conference in Groningen, 6-7 May 2009
Overview
New Energy Policy as presented in the Second Energy Review of November 2008;
Energy Security Regulations and plans to decrease the so-called ‘energy dependence on Russia’; and
Third Energy Package
Issue 1
Issue 2
Issue 3
© ZMB 5GIE Annual Conference in Groningen, 6-7 May 2009
Projected Market Displacement of Natural Gas in the New Energy Policy
2020 Natural Gas Primary Energy Demand, EU Production and Net Imports, bcm
Source: Adapted from the “Europe’s Energy Position - Present and Future”, European Commission, November 13, 2008
2005 Baseline scenario New Energy Policy scenario
Oil price $61/bbl Oil price $100/bbl Oil price $61/bbl Oil price $100/bbl
Primary Demand
516 586 514 463 400
EU Primary Production
218 134 131 125 116
Net Imports
298 452 383 338 284
Import Dependence
57.7 77.2 74.6 73.1 71.1
© ZMB 6GIE Annual Conference in Groningen, 6-7 May 2009
Comparative Capital Costs per kW, Euro
Source: CERA
3 060
2 300
1 400
1 665
746
0
500
1 000
1 500
2 000
2 500
3 000
3 500
Nuclear PP Off-shore wind On-shore wind Imported Coal PC CCGT
© ZMB 7GIE Annual Conference in Groningen, 6-7 May 2009
The Economist magazine notes in a recent editorial, "Wasting Money on Climate Change," that each tonne of emissions avoided due to subsidies to renewable energy such as wind power would cost somewhere between $69 and $137.
The German Renewable Energy Federation (BEE) has outlined a future where Germany could be generating nearly half of its entire electricity supply from renewable sources. A target of 47% could be reached by 2020, according to the industry association, assuming that the current level of subsidies for renewable energy development continues to grow in the years ahead.
“Big things are expected of offshore wind but this fledgling sector could be at risk given ongoing increases in capital costs, especially if government subsidies do not keep pace,” said Matt Brown, CERA senior director and head of the European power service . “Further increases of 20 percent in offshore wind capital costs over the next few years should be expected. That means capital costs will increase from €2300 per kilowatt to €2800 per kilowatt.”
Will Subsidies for Renewable Energy Be Needed in the Future?
© ZMB 8GIE Annual Conference in Groningen, 6-7 May 2009
Types of Government Intervention in Inter-Fuel Competition
Grants to producers. Grants to consumers. Low-interest or preferential loans to producers.
Direct Financial Transfers
Rebates or exemption on royalties, duties, producer levies and tariffs. Tax credit. Accelerated depreciation allowances on energy supply equipment.
Preferential tax treatments
Quota, technical restrictions and trade embargoes.Trade restrictions
Direct investment in energy infrastructure. Public research and development.
Energy-related services provided by government at less than full cost
Demand guarantees and mandated deployment rates. Price controls. Market-access restrictions. Preferential planning consent and controls over access to resources.
Regulation of the energy sector
Environmental externality costs. Energy security risks and price volatility costs.
Failure to impose external costs
Source: European Environment Agency, 2004
© ZMB 9GIE Annual Conference in Groningen, 6-7 May 2009
Support Policies for Renewable Technologies in the EU 15
Source: European Environment Agency, 2004.
© ZMB 10GIE Annual Conference in Groningen, 6-7 May 2009
Overview
New Energy Policy as presented in the Second Energy Review of November 2008;
Energy Security Regulations and plans to decrease the so-called ‘energy dependence on Russia’; and
Third Energy Package
Issue 1
Issue 2
Issue 3
© ZMB 11GIE Annual Conference in Groningen, 6-7 May 2009
EU and Gazprom Inter-Dependence
Gazprom is a reliable supplier for 40 years; Gazprom has already supplied more than
3 trillion cm of gas to European customers; Gazprom guarantees suppliers of additional
almost 3 trillion cm up to 2035 under long-term contracts;
Gazprom is world biggest source of gas (proved reserves are 29.8 trillion cm).
EU is the main export market for Gazprom; Supplies to EU ensured steady Gazprom’s
revenues for 40 years; Contract arrangements with EU customers till
2035 valued at around 1 trillion dollars; Good business relations with major
counterparties in EU.
Gazprom Gas Sales Gazprom Gas Sales Structure
Gazprom for EU
EU for Gazprom
Basic Information
© ZMB 12GIE Annual Conference in Groningen, 6-7 May 2009
Gazprom Represents No Threat to Energy Security in Europe
- Only reason to decrease European energy dependence on Russia is political and not based on sound economic arguments
- We will never agree with a verdict that Gazprom is unreliable supplier. We consider it unfair, and are insisting on an objective investigation of the January transit crisis that will show Gazprom’s complete innocence. Before it is done, EU has no right to accuse Gazprom of unreliability.
”Time and time again, the clear feeling from Russia is that they are irreplaceable and can do what they want," …'We can get away from you; We can live without gas from Russia; It will be costly, difficult; it will take 10 years. But we can do it.”
Bartuska, Ambassador at large at the Czech foreign ministry
© ZMB 13GIE Annual Conference in Groningen, 6-7 May 2009
Prices of Russian gas are fully competitive.
Quality of Russia’s gas is high, it has the highest methane content.
European customers are perfectly protected by long-term oil-indexed contracts against any form on monopoly abuse of power.
With long-term contracts in place any form of OPEC-style cartel in gas is impossible. It is a European buyer not a supplier who defines daily volumes within the range provided by the contracts (DCQ).
Presence of Gazprom’s affiliated companies in Europe only increases competition.
Gazprom is investing enough money to provide EU with a reliable supply for years ahead.
There is no Economic Reason to Discriminate Against Russian Gas
© ZMB 14GIE Annual Conference in Groningen, 6-7 May 2009
Gas Prices under Long-Term Oil-Indexed Contracts and Spot Prices
0
100
200
300
400
500
600
Ma
r-9
9
Jul-
99
No
v-9
9
Ma
r-0
0
Jul-
00
No
v-0
0
Ma
r-0
1
Jul-
01
No
v-0
1
Ma
r-0
2
Jul-
02
No
v-0
2
Ma
r-0
3
Jul-
03
No
v-0
3
Ma
r-0
4
Jul-
04
No
v-0
4
Ma
r-0
5
Jul-
05
No
v-0
5
Ma
r-0
6
Jul-
06
No
v-0
6
Ma
r-0
7
Jul-
07
No
v-0
7
Ma
r-0
8
Jul-
08
No
v-0
8
Ma
r-0
9
NBP German Border Contract Avg
NBP price is Monthly Average for Day-Ahead Prices. All prices converted for Russian gas quality.
© ZMB 15GIE Annual Conference in Groningen, 6-7 May 2009
Russian Gas Price Compared to Average Gas Price at German Border (PIRA assessment)
100
150
200
250
300
350
400
450
500
Jan
-08
Fe
b-0
8
Ma
r-0
8
Ap
r-0
8
Ma
y-0
8
Jun
-08
Jul-
08
Au
g-0
8
Se
p-0
8
Oct
-08
No
v-0
8
De
c-0
8
Jan
-09
Fe
b-0
9
Ma
r-0
9
Ap
r-0
9
Ma
y-0
9
Jun
-09
Jul-
09
Au
g-0
9
Se
p-0
9
Oct
-09
No
v-0
9
De
c-0
9
European Day Ahead Average German Border Contract Avg Russian Gas at German Border
We expect that in the fourth quarter of 2009 Gazprom’s prices will reach parity with the spot market prices or even be lower.
PIRA forecasts that gap between oil-indexed and spot prices will narrow down by the end of 2009.
All prices converted for Russian gas quality.
According to PIRA, Russian gas price at German border is below the Average.
© ZMB 16GIE Annual Conference in Groningen, 6-7 May 2009
Overview
New Energy Policy as presented in the Second Energy Review of November 2008;
Energy Security Regulations and plans to decrease the so-called ‘energy dependence on Russia’; and
Third Energy Package
Issue 1
Issue 2
Issue 3
© ZMB 17GIE Annual Conference in Groningen, 6-7 May 2009
• Basic question for Gazprom is the future of our investments in the European gas infrastructure. Third energy package is a strategic document that leaves many details unclear.
• Another major concern is our ability to meet long-term commitments for the European clients in cases when our transportation contracts expire earlier that those commitments. Right of ‘first refusal’ has to be introduced.
• ‘Open season’ procedures for transit capacity rights and tender provisions for spare transit capacity have to be drafted in a way not creating ‘paradise’ for speculators at the expense of shippers and their European clients.
Open Questions in the Context of the New EU Legislation
© ZMB 18GIE Annual Conference in Groningen, 6-7 May 2009
• The fact that Russia and EU employ different market models in the gas industry does not give legal, or any other ground to create barriers for Russian investments in the European gas under pretext that Russia does not share liberal values.
• All Gazprom subsidiaries active in Europe are subject to EU rules and regulations, including TPA and anti-trust regulation. Gazprom has only a small percentage of Western European domestic market share – Germany, less than 7%; Italy, France, UK and Turkey, less than 2%.
• Third Country Clause has a potential of blocking any European projects involving Gazprom participation by a single EU member. It is especially true as the ‘solidarity principle’ in the EU is treated one-way, as defense of the “New Europe” from the perceived Russian threat.
• Russia and Gazprom will defend their legitimate interest using the existing intergovernmental agreements, international law provisions, and commercial law.
Third Country Clause has Potential of Becoming a Widely Used Instrument of Protectionism
© ZMB 19GIE Annual Conference in Groningen, 6-7 May 2009
Our major concern is that the EU energy policy is becoming protectionist and that is against the European interests in the long run.
The EU’s energy policy has not yet been finalized and this means there is still time for finding vital compromises.
Let us continue our dialogue to minimize risks of Europe and Russia moving apart.
Our disagreements can be overcome if both sides show enough political will
Way Forward
© ZMB 20GIE Annual Conference in Groningen, 6-7 May 2009
THANK YOU FOR YOUR ATTENTION