Interview with Prof. Alan Riley: Russia Could Trigger Fully Integrated EU Energy Market

The current east-west standoff is complex and evolving rapidly. It comes as no surprise that analysts have a different understanding of the situation. We try to shed light on the matter in speaking with Alan Riley, Professor of Law, City Law School, City University, London. Herein, Professor Riley explains that Putin's bold decisions could have repercussions on Russia. According to the Professor, a supply disruption could lead to a fully integrated European gas market. In that case, the EU would try to pull in as many Eastern neighbourhood states as possible into a common European gas market.

There is much confusion around future relations between Moscow and Brussels. Bank of America Merrill Lynch sounded quite pessimistic, while Goldman Sachs and Citigroup released optimistic notes. So what is your understanding of the Ukrainian crisis?

The difference in the notes between Bank of America and Goldman Sachs/Citigroup reflects the uncertainty as to what may happen next. No analyst would have expected Russia to annex Crimea. President Putin’s recent speeches and the new Duma annexation law indicate Russian interests not only in Ukraine, but also the Baltic States and perhaps northern Kazakhstan. Perhaps it is all political posturing but that is currently unclear. What is clear is that even if there is no further attempts to control parts of Ukraine or other states there will be no ‘business as usual’ for a long time. President Putin has upset the entire European post-war settlement agreed at Yalta in 1945, he has struck at the UN Charter and the Helsinki Final Act, and created a new basis for state control around ethnicity. One cannot really underplay this. These actions fundamentally destabilise European security and undermine the ability to maintain normal relations with Russia.

Russian President Vladimir Putin gave Ukraine a month to pay its debt, calling on Europe to provide aid to Kiev. Putin said that if there were no payments, Russia would move to prepayment terms, which could lead to disruption in Russian shipments to Europe. Do you think it is going to be the case?

Gazprom and the Kremlin will have to think very long and hard about triggering European supply disruption. It could very seriously backfire. The 2009 cut off resulted in a significant European programme to provide supply diversity and security. A second major supply disruption would be likely to result in a fully integrated European gas market with the EU pulling in as many Eastern neighbourhood states as possible into a common European gas market. Does Gazprom really want the EU to turn Kyiv’s massive 50bcm of gas storage capacity into the centre of a major European trading hub which would marginalise Russian influence on eastern European gas markets?

Do you foresee any backlash if Europe moves forward with its Energy Community? Do you think that Moscow could perceive this project as a threat to its dominance in the Balkans and Eastern Europe?

Clearly Moscow will seek to undermine any European energy co-operation. It is not in its commercial or political interests for European’s to develop effective co-operation and run a fully liquid single gas market.

According to Bloomberg, Ukraine is boosting gas imports from Russia to the highest levels in 10 weeks after Putin’s ultimatum. Is it a signal? What does that mean? (Ukraine imported almost 115 million cubic meters of gas from Russia on April 19th, the most since February 5th. According to the Russian Energy Ministry’s CDU-TEK unit, the country imported 40 million cubic meters on April 16th, before Putin’s statement)

I am not entirely sure what is going on here. Probably the gas was being imported under the old contract and Ukraine was making the most of those contract terms before the new pricing regime took effect.

Polish Prime Minister Donald Tusk called for a European Energy Union. His point of view is that the European Union must create an energy union to secure its gas supply because the current dependence on Russian energy makes Europe weak. Do you agree with Tusk’s position? Do you think it would be possible for Europe to create a body that would buy gas for the whole 28-nation bloc?

I think it may be tricky to make this work. I can see where Mr Tusk is coming from and I fully support his idea of greater European co-operation in energy security. The major difficulty is that differing interests of states in central and eastern Europe compared with western Europe. The western markets are very liquid, with significant supply diversity, the opposite is the case in central and eastern Europe, with a monopolistic supplier, low liquidity and low levels of interconnection. One clear route forward for Europe is to promote full interconnection of the whole European market.

Tusk’s intervention on the Financial Times implicitly refers to European gas storage capacity. Do you foresee significant investments in this area? Do you expect Europe to step up efforts to increase its storage capacity? In which geographical areas?

I do not think it's possible to look at gas storage in isolation. The question is what do you store in the storage? Presumably not Russian gas. So really if you are talking new storage you must also be talking more LNG facilities, more non-Russian pipelines and more LNG and pipeline supply contracts. I think we can expect more storage facilities, new receiving facilities and new contracts. Most of these storage facilities will be located in CEE and the Baltic States. One major option for Europe as indicated above is to develop the huge gas storage facilities in western Ukraine, and fill it with LNG, Norwegian and Russian reverse flow.

What about the Caspian? My understanding is that the current standoff over Ukraine is also destabilizing the Caspian area. Is it the case?

I suspect the states surrounding the Caspian Sea will in fact gain more support from the EU and the US so they will be more not less stable. Of particular interest to Europe is the TANAP/TAP pipeline carrying gas from the Azeri section of the Caspian Sea to Europe. This is a lot more important that it first appears. In the first place, it is the largest single source of new gas available to the European Union which will arrive in the next five years - 10bcm of new gas will be flowing into Europe by 2018. Secondly, although 10bcm does not seem a lot of gas in overall terms (European consumption was 462bcm in 2013) that gas goes into South-Eastern Europe and Italy where Gazprom is a dominant and monopoly supplier. It will have a significant impact on supply security and reduce Gazprom’s role as a price-maker. Thirdly, there is scope to expand the TANAP/TAP pipelines to take more gas quickly by adding additional compressor stations. In addition, there is also the prospect of more gas, from additional Azeri resources, Turkmenistan, and potentially from Northern Iraq. Because of the potential of relative ease of expanding capacity and potential available of additional resources, the EU and US are likely to focus on the region to increase gas supplies to Europe.

It looks like Turkey is moving closer to Moscow. It seems the two countries have converging interests. Some commentators even hypothesized that Ankara could prefer Moscow to Brussels. Do you think Turkey could lean towards Russia?

I doubt that any co-operation will go very far. The Turks were as shocked as other Europeans  by the annexation of Crimea. They also have interests in Crimea, particularly in respect of the Crimea Tatars. In addition, Turkey is also very dependent on Russian gas, over 50% of its supply comes from Russia. Like the rest of Europe, Turkey would like to increase its supply diversity.

Do you know of any alternative ways to cope with the situation? We have been speaking about other suppliers and a stronger cooperation between the East and the West. Are there any other measures that could ease European difficulties in terms of energy security?

We have to look at what can be delivered relatively quickly and at scale. That is why I gave the example of the TANAP/TAP project. It's already on its way and may be able to be expanded. That is the sort of project that can assist European energy security with shortish time scales. Equally, onshore winding projects which are ready to go but being hampered by planning restrictions may be an area for Member States to streamlining planning consents to allow them to get up and running faster. There is also a case for looking at whether some of the dirtier older coal fired power stations can be brought back online as a temporary measure to provide an alternative source of power.

In conclusion, what are the main winners of this standoff over Ukraine?

My view would be (a) coal, we will use more coal as a temporary measure to reduce Russian gas dependence (b) energy efficiency and cost effective wind projects and in the longer term shale gas, both US shale as LNG and domestic shale gas production. Though I doubt, unless there was a strong push for streamlining current procedures we would get any substantial production before 2020.

It looks like Moscow is moving closer to Beijing. Do you think that this is the case?

Beijing may be able to get a lower price for gas out of Gazprom but again it is unlikely the Crimean annexation would have made Moscow many friends in Beijing. The Chinese state has stood by the territoriality principle in public international law, the sacrosanct nature of national boundaries and the principle of non-interference. Moscow has breached all these principles and indicates it may go further still.

Sergio Matalucci