Gazprom’s EU Ties Stumble on Reciprocity

Gazprom and the European Union are locked in an uneasy standoff.

EU Industry Commissioner Gunter Verheugen, left, speaking at a news conference Monday as Industry and Energy Minister Viktor Khristenko listens.The EU is working to build an energy market free of monopolies and all the inefficiencies they bring. Yet Gazprom, the continent’s biggest gas monopolist, is strengthening its foothold in the European market by winning one EU friend after another.

Last week, Gazprom gave France’s flagship energy firm Total a blocking stake in the Shtokman gas field, which it had earlier planned to hoard. The deal followed a phone call between President Vladimir Putin and newly elected French President Nicolas Sarkozy, and marked a warming of the energy relationship between the two countries.

Some of Gazprom’s biggest inroads into the EU market have been made through personal ties between Putin and European leaders, who have given their blessings to long-term supply contracts. Gazprom’s deal with Gaz de France runs until 2015. Its deal with Germany’s E.On Ruhrgas runs until 2020, and one with Italy’s Eni and Enel runs until 2035.

These are Gazprom’s main EU partners. But with the EU as a whole there is no formalized energy bond, and EU vice president Gunter Verheugen lashed out Monday at such divide-and-conquer tactics.

“The principle of solidarity is a basic principle of the European Union, and we will never, never, never violate this,” Verheugen, who is also the EU industry commissioner, said on the sidelines of a news conference in Moscow. “That means that our partner countries cannot pick and choose. You have to deal with the whole, with all the European Union. You cannot separate or single out member states.”

But dealing formally with the whole of the EU, and gaining access to its market, would require Russia to pass laws that contradict the core of its energy policy, top officials and experts say. Russia would have to adopt the Energy Charter Treaty, a sweeping commitment to liberalization, as Europe has been insisting for years. And Gazprom, as a monopoly, would have to be broken up.

These demands have taken on a special urgency as the EU carries out a plan to create a unified internal market for energy. Adopted in 2003, the plan aims to give all European firms open access to consumers throughout the bloc, and to end the unfair advantages of vertically integrated companies — those that handle both the production and distribution of energy.

The EU fears Gazprom’s European partners could come to dominate the new market, undercutting the competition by getting bargains on Russian gas.

Mark Franco, head of the European Commission’s delegation in Russia, said abuse of dominant position would not be taken lightly. “It will be [one company or another] on the European market not at this stage involved in deals with Russia that would ring the alarm and would ask the Commission to examine deals that they would consider unfair competition,” Franco said.

Through subsidiaries, joint ventures or company stakes, Gazprom is now active in 18 out of the 27 EU countries. And if a European company would “ring the alarm,” the Commission could force ventures to break apart, change ownership structures, or “in some cases” it could levy a fine, Franco said.

Building the Barricade

Europe’s new internal market crossed a milestone July 1, when most European consumers were given the right to buy their energy, including electricity and natural gas, from any EU supplier they choose.

Almost as soon as it learned of this intention in 2003, Gazprom, which provides one-quarter of Europe’s gas, began to lick its chops. It quickly pledged in a statement to use “all new opportunities” that arose from the European reforms. And these opportunities will be huge, as the transition could open a lucrative path to consumers all over Europe.

Currently, Gazprom sells gas at the border to European partners, who take it the rest of the way, cutting off Gazprom from the end-users’ cash. One of its ultimate goals, therefore, is to control the entire supply chain, without intermediaries, from the gas fields of Siberia to the stoves in European homes.

In fits and starts, the EU has been working to avoid this.

Last week, the European Parliament reinforced the legal barricade against suppliers such as Gazprom.

The resolution adopted Tuesday insists that no company from outside the EU should be allowed to buy energy infrastructure in Europe — unless there is “reciprocity with that country.”

The document is vague on what reciprocity means, but Eluned Morgan, one of the European Parliament lawmakers behind it, said “one-off” deals with EU companies will not earn Russia any points — not even Gazprom’s new partnership with France’s Total.

“These deals would not be enough of a signal,” Morgan said by telephone from her office in Wales. “We want reciprocity enshrined in law.”

Until Russia passes a law that mirrors EU policies, opening its pipelines and its markets to EU firms, Morgan said it could forget about accessing the downstream market.

“All companies outside the EU have to abide by the same rules as us,” she said.

Political Distrust

Russian officials took these measures as a “provocation” that Europe would come to regret.

Konstantin Kosachyov, chairman of the State Duma’s Foreign Affairs Committee, said in an interview in his office Friday that Europe was following the old Russian proverb: “To hurt my own grandma, I’ll freeze off my ears.”

Kosachyov pointed out that state-set gas prices in Russia are now kept up to five times lower than what European customers pay, giving suppliers little incentive to sell at home, and causing shortages in the world’s most gas-rich country. But by 2012, the price of gas on the domestic market will be brought in line with prices abroad. So Gazprom may shift away from exporting to Europe, bringing its gas back home.

“This will happen sooner or later,” Kosachyov said. “It is part of our energy policy, and if Europe does not wake up to these realities, and does not establish long-term relationships with Russia on the downstream side… [Gazprom] will say, ‘Fine, we’ll handle the downstream all on our own soil,’ and then Europe will be left sitting there with its fancy anti-monopoly legislation. I highly doubt this is in Europe’s interest.”

In a report issued in May, the International Energy Agency underscored the threat of waning supplies, and pointed to the “very real concerns” that new fields are not being developed fast enough to meet growing demand, especially in Europe.

Yet even in the midst of a supply crunch, the EU’s priority seems to be breaking its dependence on Russian gas. Although the main aim is to protect competition on its internal market, experts said the reasons are also political and boil down to distrust.

“Europe assumes that if Gazprom takes over, it will be acting in the interests of the Russian government, whatever that might be,” said Britain’s Lord Skidelsky, chairman of the Centre for Global Studies and founder of the U.K.-Russia Round Table. “It would be easier for cooperation if Gazprom were broken up.”

The collapse in Europe’s trust of Russian gas supplies dates back to January 2006, when Gazprom shut off exports to Ukraine, a key transport country to Europe, during a pricing dispute.

Nevertheless, the incident was a “wake-up call” for Europe, said Franco of the European Commission.

“The rules should be stable. The [Russian] government should not be continually changing the goal posts, which is something that is happening now. They upset deals, they upset contracts, and they have a clearly strange way sometimes of negotiating,” Franco said in an interview in his office across the river from the Kremlin. “The government should implement its policy in a more civilized manner, with more respect for rule of law and normal business practices.”

Playing Favorites

But Gazprom’s business practices seem to suit its big European partners just fine, as they have allowed the monopoly to build vital bridges to the EU market.

Perhaps most notable is Wingas, its joint venture with Germany’s largest producer of crude oil and natural gas, Wintershall. Fifty percent-owned by Gazprom, Wingas controls 2,000 kilometers of pipelines in Germany as well as Europe’s largest underground gas depot, with a capacity of more than 4 billion cubic meters, enough to supply Portugal or Norway for a year.

“With an interest in Wingas, Gazprom effectively owns a stake in Germany’s gas mains,” Gazprom says on its web site.

Indeed, Germany has been Russia’s largest energy customer and its closest European ally. Former Chancellor Gerhard SchrЪder is now on Gazprom’s payroll, heading up the Nord Stream pipeline project that aims to supply Russian gas directly to Germany from 2010, bypassing existing routes through Poland and Ukraine.

For SchrЪder’s role in the project, U.S. Congressman Tom Lantos last month called him a “political prostitute,” a comment that the German government dismissed as “unseemly.”

Gazprom’s Italian partners have been called similar names, while also enjoying similar energy favors from Russia, such as a deal to have gas transported directly until 2035.

But of course such a friendship must have reciprocity, and one hand seemed to wash the other in April. That was when a consortium of Italy’s Eni and Enel bought a chunk of bankrupt oil firm Yukos, including a 20 percent stake in Gazprom Neft, at an auction for $5.8 billion. The same day Eni offered to sell Gazprom the Gazprom Neft stake for $3.7 billion within two years.

Some analysts said the auction had been rigged, and Yukos’ former managers threatened to sue the Italians, claiming they were “making a profit from stolen property.”

It is not yet clear whether energy ties with France will be so chummy, but the Shtokman deal with Total has been seen as a signal that it will.

Thomas Gomart, director of the Russia center at the French Institute of International Relations, said the key word was interdependence. “The point with Gazprom is: You are here, you are the biggest player, we have to deal with you,” said Gomart, whose institute is linked to the French Finance Ministry. “All of us have a strong need of Russian gas for the next decade.”

And the need is mutual.

Gazprom exports more than 25 percent of its gas to Europe, and its tax payments account for about one-quarter of federal tax revenues. With three major pipelines to Europe now under construction, turning away from the European market hardly seems like an option. But as the rhetoric heats up from the EU side, the future of Gazprom’s role in Europe’s internal market becomes less and less clear.

Franco said that in the fall, the European Commission will lay out its formal energy policy, and Morgan, the European Parliament lawmaker, said it would take between 1 1/2 and two years for the European Parliament, the European Commission and the EU Council of Ministers to all agree upon an energy framework.

In this time, Gazprom may be able to cement bilateral ties with many more partners, weaving a net of contracts across the EU. But as Europe creates a free internal market, Morgan said such deals could come under fire.

“Establishing reciprocity,” she said, could require “forcing divestment in some cases along the way.”

Kosachyov, gesturing to a map of the world in his office, said the tone of the EU’s demands was bound to fail, because Russia, for better or for worse, now sees itself as a “great power.”

“They tell us: Hurry up and sign the Energy Charter, because you must,” he said. “This talk that we must do something does not work. It only leads to new conflicts, new tensions.”

The Moscow Times 17.7.2007

By Simon Shuster
Staff Writer

Staff Writers Nikolaus von Twickel, Miriam Elder and Alissa de Carbonnel contributed to this report..

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