Russian oil and gas analysts, spurred on by the Ministry of Energy, are trying to create the impression that energy negotiations between Russia and the EU are moving full steam ahead. At conferences and seminars in Moscow, they tout Russian negotiators’ supposed success in convincing their European counterparts that the EU misunderstands the Third Energy Package – the legislative foundation for promoting competition on the European energy market.
The problem is that these successes have nothing to do with actual decision-making in the European Commission or other EU regulatory bodies, where negotiators can actually make real decisions. At present, Russia-EU energy negotiations don’t go beyond communication at the expert level, and are, therefore, absolutely pointless.
The main obstacle to energy negotiations between Russia and the EU is the clash between their perceptions of energy security. Moscow claims that the biggest threat to European energy security is Ukraine’s unreliability as a gas transit country.
The EU points out that Ukraine has never violated its gas transit obligations. Rather, Russia shut off the tap in 2006 and 2009, and then sharply cut the volume of exports to Europe in late 2014, each time for political reasons. Brussels believes that the real threat to energy security is the unpredictability of Russian authorities.
As a result, the EU is looking elsewhere for its gas. It has started constructing the Southern Gas Corridor to bring gas to Europe through Turkey from new sources, including Azerbaijan and, eventually, Iran, Iraqi Kurdistan, and possibly Turkmenistan. The Corridor’s pipelines are also being linked across national borders so that gas can be transported from one country to another if Moscow decides to suspend deliveries again.
The next step is the establishment of a European energy union that institutes standards for the sale of gas and electricity and can coordinate action in the event of a supply crisis. Some experts have even suggested a new model for the European market in which the EU would unify its gas transportation networks and formulate a single and transparent system of tariffs on imported gas. These kinds of ideas are growing more popular in Europe, but face resistance in Russia.
In the coming years, the gas market will also be increasingly shaped by liquefied natural gas (LNG), which can be traded as a regular commodity worldwide, without contracts linked to the availability of long-distance pipelines.
Europe is well prepared to replace pipeline gas with LNG: Existing terminals currently operate at less than 20 percent capacity. Gazprom, which missed the proverbial LNG boat, has already been forced to rely on price dumping to hold on to its position in Europe. It is unclear how long the Russian monopoly can afford to sell gas at a loss.
Gazprom decided to take its usual approach to fend off the LNG offensive: dispatching speakers to international conferences to argue that U.S. gas is losing the price war with Russian gas in Europe. There are two problems with this position: The math they use to calculate the prime cost of Russian gas is a stretch, and suppliers outside the United States are being ignored. Even if gas from North America is used primarily in other markets, Middle Eastern producers will look to Europe to sell their excess gas. Thus, the EU is likely to be flooded with cheap gas for years to come. In Europe, as in the rest of the world, Gazprom’s strategy is a dead end.
Mikhail Krutikhin is a partner in the independent RusEnergy consulting agency.
This article originally appeared on Carnegie Moscow's Energy Security blog.