The impact of EU law on Gazprom and its implications

Transcription

1 Platts 7th European Gas Summit, Vienna The impact of EU law on Gazprom and its implications Dr. Jonas Grätz Center for Security Studies (CSS) 1 Dr. Jonas Grätz 20. September 2013

2 Theses 1. The EU s key goal is to lower the economic and political costs of gas supply. 2. The EU Commission has learned to leverage the buying power of the internal market. Regulations and their enforcement are being used as a bargaining tool to assert the EU s political and economic interests. 3. EU policy is creating greater uncertainty, but this is partly intended. It does not necessarily jeopardize security of supply. 4. Gazprom is fighting a rearguard battle. A change of Gazprom s strategy is likely after a management change. 5. Ukraine will stay the major transit corridor. 2 Dr. Jonas Grätz 20. September 2013

3 The strategic setting EU: Interest: uninterrupted, affordable supply at a low political cost Tools: large demand base, rules and regulation Russia: Interest: maximize the product of resource rents and political control Tools: resources, state monopoly capitalism mutual dependence 3 Dr. Jonas Grätz 20. September 2013

4 The rationale of the EU s marketisation agenda Leveraging domestic demand by setting rules for suppliers is the only way to lower political and economic costs in current strategic setting. Backward vertical integration would be ideal, but is politically impossible. Traditional bilateral monopoly faded away (Gazprom made inroads into German market, already captive markets in CEE). due to lack of reciprocity, the consequence would have been forward vertical integration by suppliers. This is especially problematic in the gas industry due to high entry barriers. CEE / Baltics as a showcase. Organising a market by way of regulation is ideal to fend off growing supplier power and diversify supply. Attractiveness of the EU market and rigidity of gas supply-demand relationships are a plus. Substitutability of gas as a fuel is a further case in point. 4 Dr. Jonas Grätz 20. September 2013

5 Arena I: Unbundling in the Baltics (I) Traditional Gazprom supply monopoly Baltics accepted Gazprom as shareholder in their utilities in return for long-term supply contracts and reduced price. But: Prices are among the highest in EU, for Lithuania the highest This was major trigger for EU antitrust case Source: EU Quarterly Report on European Gas Markets Q Dr. Jonas Grätz 20. September 2013

6 Arena I: Unbundling in the Baltics (II) Lithuania and Estonia went for full ownership unbundling and were supported by Commission. Spin-off of TSOs from gas utilities realised in August 2013, Gazprom voted for spin-off amid protests about robbery and expropriation from Gazprom. Gazprom still owns part of the TSOs. Sell-off of TSO to be completed in 2014 in Lithuania, 2015 in Estonia. BIT with Lithuania may protect Gazprom, currently challenges Lithuania before UNCITRAL tribunal. EU jurisdiction over common market is being leveraged jointly by small Baltic States and the EU Commission. Implementation of EU rules may run counter to legal obligations towards third countries (but BITs often allow for compensated nationalisation). 6 Dr. Jonas Grätz 20. September 2013

7 Arena II: Third Party Access for Nord Stream Exemptions from unbundling and TPA are possible for new pipelines, but must meet a range of criteria, inter alia that risk would be prohibitive without exemption. Gazprom and its partners applied for exemptions for OPAL and NEL pipelines. OPAL: 35 bcma capacity Source: Wingas NEL: 20 bcma capacity 7 Dr. Jonas Grätz 20. September 2013

8 Arena II: TPA for OPAL and NEL NEL was not exempted, as it is not a cross-border pipeline. 65% of capacity are allowed for long-term capacity booking. No upper bound for bookings from Gazprom under shorter-term contracts. OPAL was granted a conditional exemption (legally shaky) Gazprom is allowed to use full capacity if it organizes annual gas release programme of 3 bcm. Otherwise 50% of capacity have to be auctioned off to third parties. Gazprom shunned gas release, currently uses only 50% of the pipeline. Hence, Nord Stream goes underutilised (mostly 40% of capacity). Gazprom has been in negotiations with the Commission to amend the decision, purported breakthrough in last week As investment has been sunk before exemption decision, Gazprom is in weak position. EU tried to further its interests in this context. Conditional exemption from TPA may actually be worse than TPA. 8 Dr. Jonas Grätz 20. September 2013

9 Arena III: TPA for South Stream onshore (I) Russia advanced US-$ 39 billion project to thwart Nabucco, circumvent Ukraine, and enhance influence in the Balkans So far, it is not more than a project no financing for offshore section Source: South Stream Pipeline has value as strategic investment only with exemption from TPA, but legal preconditions may not be present 9 Dr. Jonas Grätz 20. September 2013

10 Arena III: TPA for South Stream onshore (II) Legal preconditions for exemption not present It is a new route for old gas no diversification It does not enhance security of supply lack of Ukrainian storage facilities, new non-eu transit country, technological risk of subsea pipeline But: It may be a promising project for concerned EU member states. Jobs and future transit revenues, while financing provided by Russia Slightly lower border price as a carrot Russia concluded IGAs with Bulgaria and Hungary that promise exemption from TPA and unbundling to South Stream. In reply, EU Commission threatened to sue member states. Information exchange mechanism on energy IGAs (Decision 994/2012) On Russia s request, all partners except Slovenia have declared the project to be a national priority. Exemption might be granted against concession, f.ex. new Russian suppliers or transit of Central Asian gas 10 Dr. Jonas Grätz 20. September 2013

11 Arena IV: Capacity allocation under TPA Long-term contracts require long-term capacity booking at several border points MECO-S gas target model proposes bundling of capacities at different border points Market coupling to further remove edge of the problem CAM NC allows for bookings of up to 15 years, for up to 90% (or more) of capacity Bundling of capacities not just exit-entry, but at different BP can be offered PRISMA seems to be heading into that direction Hence, congestion rules to bear the brunt of ensuring market access UIOLI for long-term capacity bookings comes into effect on 1 Oct Day ahead UIOLI only from 1 July 2016 Gazproms LTC concerns have been accommodated in CAM NC EU Commission caved in to resistance from ENTSOG 11 Dr. Jonas Grätz 20. September 2013

12 Arena V: Pricing (I) Although LNG volumes decline, gap between hub prices and longterm contracts continues to decline, at least in NWE This is inter alia due to Statoil s embrace of the hub As a result, Gazprom had to backtrack on oil-linked pricing Source: EU Quarterly Report on European Gas Markets Q Dr. Jonas Grätz 20. September 2013

13 Arena V: Pricing (II) Gazprom s pricing concessions (selected, public sources) 10-15% spot indexation 10-15% off base price other ENI * % off base price E.ON * GdF Suez increased spot RWE WIEH/ Wingas 2013 increased spot, less t-o-p (amount of reductions unclear; Gazprom JV) Econgas, SPP 2012 GasTerra PGNiG 2012* Bulgargaz * retroactive arbitration cancelled arbitration ruling 2010: spot indexation raised to 45%, 2012: further spot increase % off base price (in return for South Stream support) 13 Dr. Jonas Grätz 20. September 2013

14 Implications for Gazprom (I) Less revenue from export because of significant price concessions Domestic market cannot compensate for this. End-user prices for 2014 have been frozen, netback parity is way off, increased competition Lower sales to EU, but the trough for Gazprom might have been reached Gazprom gas getting more competitive Russian gas exports to EU and Turkey, bcm Source: CBR, Rosstat Share of domestic vs. export revenues Source: Gazprom 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% net sales Russia net sales FSU net sales EU 14 Dr. Jonas Grätz 20. September 2013

15 Implications for Gazprom (II) Rising CAPEX and OPEX South Stream, Nord Stream and Gold Stream to the Pacific mean very high CAPEX (Gold Stream and Pacific LNG estimated at $ 65 bn by Sberbank analysts) OPEX rise rapidly as well, severance tax increase is only a small part of the increase This raises pressure to maintain high gas price and is out of sync with gas market developments Rising domestic discontent with Gazprom (esp. among patriots ) Channel 1 news anchor Leont ev called Gazprom-head Miller a dangerous lunatic and direct threat to our national interests for ignoring shale gas revolution. Miller should be sent to psychiatric ward. Scholar and leader of party Homeland common sense Delyagin says Gazprom s strategy resembles energy-feudalism, as it ignores economic development of customers. Deems rearguard actions as unsustainable. Russia should rather train traders to manipulate spot markets. 15 Dr. Jonas Grätz 20. September 2013

16 Conclusions Gazprom is between a rock and a hard place at home and on foreign markets Rising taxes and a freeze on energy prices at home, while political mission continues (Sochi 2014, South Stream, Gold Stream ) EU market is to stay most important, home market not so promising South Stream has lost momentum. It is likely to be downsized, delayed, or shelved completely. Possibility of stranded investments in Balkans Main remaining rationale is jobs in steel / construction Ukraine will remain the main corridor, also because of storage flexibility The EU Commission has leveraged the EU s market power skilfully Contested regulations and decisions have increased uncertainty Exemptions are negotiable a larger agreement is in the cards We have to think about the consequences of Gazprom embracing hub-based pricing 16 Dr. Jonas Grätz 20. September 2013

17 Thank you for your attention! Questions? Contact