The effect of LNG and newly sourced gas in the Southern Gas Corridor will spread across the CEE and the SEE and put the heat on Russia’s gas monopoly. In other words, if hidden and overt preferential treatment for Gazexport is revoked, this will result in lower prices or market shares for the incumbent monopoly. Reverse supplies via the Trans-Balkan Pipeline could start as early as January 1st, 2020, bringing gas from Turkey, Greece, and the Southern Gas Corridor to clients in Romania, Moldova, Ukraine, and Slovakia even before Turk Stream gas crosses the Bulgarian border.
Demand for Nord Stream-2 south and eastbound gas exports via Opal and Eugal gas pipelines should wane with lower price differentials amid rising competition from the Southern Gas Corridor and LNG.
Increased gas supply options for CSEE countries and Third Directive limitations on long term capacity booking could lead to lower capacity utilization by Gazprom in both ‘streams’, concurrently resulting in investment recovery quandaries and Russian gas becoming one more in a lineup of competing suppliers, a commodity like crude oil.
Getting smarter with sanctions
Sanctions are a geopolitical instrument mostly imposed on security grounds, rarely accommodating an active business context. They have inflicted much pain in Russia, but with time companies learn to adapt. Therefore, the need for greater precision and upgrades, targeting higher cost-benefit ratio, is essential to keep them efficient.
As a counter to the Nord and Turk Stream logic, the US and the EU should prioritize fostering clearing and leveling the field for greater competition and alternative gas entry to the CSEE region, which would deny Gazprom exclusive control and dominance.
The prime task is to remove the bottlenecks and even out transit tariffs to par levels with Gazexport, allowing direct and reverse free gas flows to Ukraine. So far SGC gas and LNG have reached Bulgaria and Romania and it is a matter of time for it to reach further north. It is an end product of a dedicated effort from regulators and governments to align and bundle exit and entry terms to and from Ukraine, alongside similar shipments of LNG to Ukraine via Poland.
Then the US should use WTO levers on Germany to press for level playing treatment of LNG vs. Russian pipeline gas. The US has used the WTO to push its case of what it deems ‘unfair trading practices’ with a range of goods from Airbuses to Scotch whiskey, Italian cheese, Spanish olives, and French wines. After the WTO panel ruling, the US is likely to increase tariffs on EU car imports on grounds on national security. Now it is time to revisit the case for the lack of level playing field for US and global LNG in the EU gas market following a long list of privileges and preferential treatment for Russian gas by German, Austrian, and other EU energy companies.
The level of penetration of LNG in Turkey – 11 billion cubic meters in the last year alone, plus the rise of Azeri and Iraqi gas imports, unequivocally demonstrates the potential for competition and diversification, effectively denying Gazprom any unique role in the CEE and SEE gas markets.
Sanctions and higher tariffs won’t stop the Nord Stream-2, but a focused attempt to even out the treatment of Russian and SGC-LNG gas should effectively wipe out the implied strategic gains for Russia. Suffice it to expose and address as undue non-market benefits, the state aid and other hidden subsidies Gazprom receives in Russia. They distort and affect competition in the EU gas market.
Russia has consistently attempted to challenge EU legislation by taking the case to the WTO ever since 2014 claiming that the EU’s “Third Energy Package” and its energy policy overall unfairly restrict and discriminate against Russia’s gas export monopoly. If, however, the headlights are turned on the non-market incentives, it will be made crystal clear that the Russian state monopoly receives from the state budget – from well to border. The transit tariffs Gazexport pays in Bulgaria are twice lower than those paid by all other shippers, including the Bulgarian State company Bulgargas and 3-4 times below tariffs for shipments via the OPAL gas pipeline.
Although the WTO rules are ambiguous on state aid, the EU can renew its anti-trust investigation anytime, if gas sold in the EU by Gazprom is found to profit from unfair Russian state subsidies or hidden privileges. If the EC fails to act, then the case could quickly be brought up to the US-EU high level and possibly considered within the WTO format.
The sales of Russian gas via the Nord Stream – 2 and Turk Stream – 2, bypassing Ukraine/CEE, are a classic zero-sum game – what the German/Austrian companies gain is a loss to CSEE companies – the fundament of Kremlin’s divide and rule playbook.
For Gazprom clients, the total costs for accommodating the new delivery points via the ‘streams’ are higher, in some scenarios considerably.
Transit via Ukraine, due to its unrivaled storage capacities, spared importers the need to book additional storage and balance peak demand, to say nothing about insuring against techno genic gas supply cuts. All these substantial costs are passed over to importers as both the Turk and Nord Stream are not meant to provide peak supplies and backup in case of supply interruptions, which is a risk that the Ukrainian transit system, due to its alternative transit lines and unrivalled UGS capacity, is currently mitigating.
Latest signals from some energy experts in Moscow like Konstantin Simonov, the head of the National Energy Security Fund, reveal a potential change of mind- ‘reputation matters most; clients should regard Gazprom as a dependable supplier”.
Maintaining market shares and revenues base come next on Moscow’s priority list. A far cry from the imperial hiatus with trigger-happy Putin ordering gas supplies cut-offs.
One of the first venues to optimize sanctions is to make them more focused – to target specific companies and specific vessels involved in financing and constructing Nord and Turk Streams. Regrettably, the time has passed, and with 80% of the pipes already laid in Nord Stream 2, sanctioning All Seas Group or Saipem comes too late.
On top, the whole logistical backup is well beyond Gazprom’s league. Ultimately, the Russian gas monopoly could buy into some of the established companies, but success, as in this case, is not forgone as Saipem or All Seas group might be considered all too important for the EU and NATO.
Had they been imposed two years earlier, the precision sanctions could have done the job. Pipe-laying ships are not readily available, and mobilizing substitutes is not a quick-fix job. Gazprom’s claims that it can forego external help is a bogus. The Akademik Cherskyi pipe-laying vessel (now stationed east of Sakhalin) is no match for the vessels-in-use Solitaire, Audacia, or the Pioneering Spirit.
Merkel’s vs. Erdogan’s strategy
When comparing Erdogan’s and Merkel’s approaches to dealing with Russia significant discrepancies loom. Erdogan is currently in a strong position – final agreement on Turk Stream 2 is still pending, yet Gazprom has already spent $ 25 billion. Turkey enjoys a diversified supply of gas, with 5-6 billion in excess at the end of September. In the interim, Gazprom’s share dropped by almost 20% in less than 18 months. Azeri gas and LNG dramatically increased their share in Turkey at the expense of Gazprom.
More non-Gazprom gas is due and Erdogan is no hurry to negotiate a deal on Turk Stream 1 and 2.
Germany’s dependence on Gazprom will only increase.
Berlin intentionally ignored the need to diversify with LNG terminals, placing all its eggs in Moscow’s basket. Besides the need to level the field for fair competition in the gas market, the EU and the US should encourage reciprocal treatment of EU/CEE companies in Russia when it comes to the right to assign new delivery points and access to the respective grids for transit.
At present, Russia does not allow gas transit through its territory while it enjoys the reciprocal liberty in Ukraine and on EU. As a consequence, EU and CEE companies can’t buy and transit Central Asian gas via Russia. The legal excuse Gazprom uses is the lack of ratification of the Energy Charter and the unverifiable lack of free capacity. While it is true that at least until 2025 there will not be a supplier to match Russia’s gas role in the EU, the combination of global LNG and multi-sourced SGC gas, will suffice to deny Gazprom any privileged status.
If the EU allows Gazprom to operate freely and sell gas in the Union, then EU based companies should enjoy a reciprocal right to trade and ship gas in Russia. EU politicians still treat with priority a self-induced fear that Russia could always resort to supply cuts. As argued above, the days of Gazprom’s omnipotence have irreversibly gone.
Gazprom is far more dependent on access to the EU gas grid, storage capacities, to end clients than the mirror EU and CEE’s reliance on Russia’s gas grid and clients. The gas markets have shifted vulnerabilities from buyer to seller.
The ECJ ruling as precedent and impact on OPAL and EUGAL
Germany’s regulator has ordered Gazprom and Wintershall DEA controlled Opal gas pipeline to immediately stop the auctioning of 15.9 million kilowatt-hours per hour of capacity following a ruling by Europe’s top court.
Gazprom will have to find alternative routes to deliver on its contracts. The total Opal capacity amounts to 40 million kWh/h.
One option to circumvent the ECJ ruling is for Gazexport to sell its gas at the Russian border or allow other Russian and international companies operating in Russia to share access to the Nord Stream-2. Should this happen – Gazprom to sell its gas at Russian border – then the EU should aim to level the field for delivery points and strive to encourage companies to buy gas at Russian-Ukrainian border – possibly even introducing an analog to German border price, insisting on par prices with the entry of Nord Stream. Then it will be up to traders to decide whether to buy gas at the Russian border and ship it via the Nord Stream or use the Ukrainian grid and UGS.
At any rate, the geopolitics of Russian gas as a foreign policy tool and level will wear thin.
Alternative gas supply infrastructure – pipelines, interconnectors, terminals, storage facilities, trading platforms – beyond Gazprom’s reach, are not going to happen overnight.
They won’t fix immediate short-term supply problems in the CEE, but are critical in determining future strategic options and market balances.
Slowly and patiently expanding the response base to Gazprom ‘streams’ trap and Kremlin geopolitical overtures, using market levers, will permanently destroy the logic behind the Nord and Turk Stream – turning them into yet another Kremlin business failure.
After all, the Soviet Union did not collapse because it failed militarily. The accumulated economic flops surpassed a critical mass, triggering a destructive chain reaction.