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Only a single European gas market can counter Russia's 'Gazprom Diplomacy', says new report

Only a single European gas market can counter Russia's 'Gazprom Diplomacy', says new report

For immediate release

7 November, 2008 - Building a single European market in natural gas is the most effective strategy for the European Union to counter Russia's divisive energy diplomacy, according to a new report by European Council on Foreign Relations analyst Pierre Noel.

The analysis is published a few days prior to the release of the EU Strategic Energy Review and the next EU-Russia summit. It also comes two months before the start of the Czech EU presidency which will work on energy security as one of its priorities.

Based on extensive original research, Pierre Noel's paper shows that the current obsession over the EU's dependence on Russian gas misses the point; instead, the problem is that Russia uses gas to divide and weaken Europe politically. It argues that the current EU approach to Russia's energy diplomacy - championing alternative energy sources, encouraging non-Russian gas, and attempting to bind Russia with energy treaties - will be ineffective without a single European market in natural gas.

The recent war between Georgia and Russia has added a sense of urgency to the EU's search for a better Russia policy, fuelling fears that Moscow might use its power as a major energy supplier to blackmail Europeans into submission. Noel's paper argues that such concerns are exaggerated. Russia does not have a monopolistic stranglehold over Europe. Its share of EU gas imports has roughly been halved since 1980, from 80% to 42%. Russian gas represents only 6.5% of the EU's primary energy supply, essentially unchanged in twenty years. And dependence is unlikely to start growing soon as Gazprom is not in a position to increase its exports to Europe significantly.

Noel argues that "the gas relationship with Russia has become an extremely divisive issue among the EU member states and is a major reason for the failure to develop an ambitious common foreign policy towards Moscow, at a time when Europe badly needs one. But, reducing Europe's imports from Russia, or building a pipeline from Central Asia, would not solve this problem. During the past decade, European gas supply has become more diversified, yet at the same time Russian gas has become much more divisive. What is needed is a single, integrated and competitive European gas market".

The report demonstrates how Europe's segmented and defective gas market empowers Russia's divisive diplomacy. The bulk of Russian gas, it shows, is imported by a few countries in Western Europe (Germany, Italy and France) where supply is diversified, while several member states in Central and Eastern Europe consume relatively little Russian gas but have no other suppliers. There is little cross-border trading within the EU, and when supply disruptions occur - as in January 2006 at the height of the gas crisis between Ukraine and Russia - gas cannot be reallocated easily from one European country to another. 

Because gas cannot flow easily across European borders, Gazprom's strategic partners like Germany and Italy can capture the economic benefits of their cosy political relationship with Moscow. Eastern European countries are left in a state of complete economic dependence; some react by acting as Russia's "Trojan horses" in Europe (like Bulgaria), some by acting as "new cold warriors" (like Poland or Lithuania) - none of which helps Europe develop a common foreign policy towards Russia.

According to Noel, only the emergence of a single, integrated and competitive European gas market can create real solidarity between consumers and 'Europeanise' the large bilateral contracts with Gazprom. Eastern European countries could access non-Russian gas and feel less insecure. It is therefore one of the preconditions for the European Union to be able to speak to Russia with one voice.

Noel argues that the main obstacle to reform is a lack of political will from key countries like Germany, France and Italy, where gas companies have had an interest to resist market integration.  He calls for a "leap of faith" in single European energy markets, comparable to the one that led to the creation of the single currency. "The European political elite", writes Pierre Noel, "must wake up to the geopolitical costs associated to the fragmentation of the European gas market".

Recommendations to the EU and its member states

1. The forthcoming "third European gas package", especially the new regulatory provisions to ensure independence of network operators from gas supply companies, and the creation of the Agency for the Co-operation of Energy Regulators (ACER) should be supported. However, there should be much stronger pan-European regulatory oversight. Because Russia has a vested interest in market segmentation, its investments in European transmission and storage assets must be screened by ACER and EU competition authorities - not by national authorities as has been agreed by the European Council.

2. There should be much more aggressive action from the EU to improve gas security in Central and Eastern European countries where supply is concentrated, market and regulatory institutions are underdeveloped or weak, and energy insecurity is a major determinant of foreign policy attitudes towards Russia. Brussels should commission in-depth economic analysis of the gas security situation in new member states, negotiate national action plans and offer co-financing of the needed investment in exchange for accepting an ambitious security of supply standard.

Link to full report: http://ecfr.eu/page/-/documents/Russia-gas-policy-brief.pdf

NOTES TO EDITORS

1. The report entitled "Beyond Dependence: How To Deal with Russian Gas" was written by Pierre Noel, Senior Policy Fellow at the European Council on Foreign Relations (ECFR).
2. This report, like all ECFR publications, represents the views of its author, not the collective position of ECFR or its Council Members.
3. Pierre Noel can be reached for comment at .(JavaScript must be enabled to view this email address), or 0044 7506 568 705
4. Launched in October 2007, the European Council on Foreign Relations is a pan-European think tank and advocacy group, co-chaired by Martti Ahtisaari, Joschka Fischer and Mabel van Oranje.

European Council on Foreign Relations - www.ecfr.eu