Interview with Dr. Vladimir Feygin; President of the Institute of Energy and Finance (Moscow)
- What is your opinion on the regulatory changes that took place over the last decade in Europe? (Ex: Liberalisation of internal gas market, Information Exchange Mechanism about intergovernmental agreement between Member States and Third Country, etc…)
Liberalisation was a main term at the early stage of this process, now it is more about rather radical change of regulation and an integration of a market; the latter itself is a complicated task. Generally speaking it goes in the direction taken globally since the mid-80. Historically, in the European Union there was a combination of national grids and national markets and legislation was made at the national level. That legislation and corresponding practice were not deeply coordinated between Member States: they were developed before the current approach to gas market structure and before new regulation was taken, so adaptation is needed. A transformation toward an integrated market raises a lot of issues both on national and supranational levels that must be solved (the regulation of transportation operations, the requirement of more strict unbundling from other services, the disposition on third party access and many others). Real integration is an ambitious task but the process is going and if it is done thoughtfully and smoothly, it can succeed.
Extreme should be avoided and the market should not be over-regulated. The creation of the internal market with the separation of competing activities is not a problem per se. However, in such areas as trading parties involved should be left with a margin of manoeuver. This is up to them to decide how to adapt. The regulation should only provide market players with a favourable environment for this type of activities. We see now more and more tendency to regulate trading. This is different from infrastructure (dealt with the Third Energy Package). It may lead to misunderstanding and dangerous consequences for established system of supplies. In case of strong requirements such as those stated in some draft documents saying that trading should be done in a specific way and not in another, I see a contradiction with the transformation process of the EU internal market. If we are told like in draft doc that it will be only trading at hubs, then it forbids some form of contractual relation that parties may prefer keeping, develop, transform, adapt, then there will be a shock. Parties in gas trade should remain free to decide. The market is developing and the combination of different ways of selling/buying gas should develop if it is in demand of the parties involved in the contract, and mostly of demand from consumers. Regulators should create the conditions for evolution according the market players’ needs. It is a question of parties involved in the contract to decide.
On the information exchange mechanism, we recognise that EU is a developing entity, very important and becoming very active in the energy sphere. As I mentioned, historically everything was developed at the national level and there were bilateral agreements between Member States and external parties, like Russia. There is the principle in the EU that any country entering Union should align its internal legislation, including international agreements, with the acquis communautaire. The legislation in the EU is evolving, and new principles are introduced and it may happen that they contradict something in the existing agreement(s). New agreements must be looked at to ensure that they are in line with the existing state of the acquis communautaire. So there is a need of a watchdog. Who should watch? My understanding is that it was somehow missing. The fact is that the Third Energy Package contains a strong pack of requirements, dealing with unbundling but also indirectly with investments that have already been done. There are international agreements on protection of investments. The question of relations between these two subjects was raised by various sides, including Russian side. It is now under discussion, and even under consideration in trials. My understanding is that this new decision on information exchange mechanism should be good to prevent in the future such potential contradictions. In that regard it is a positive thing for the European Union. On the other side it will change the power allocation between Member States and the EU. This may be painful for some Member States who do not intend to lose their powers. It may be also painful for external parties traditionally used to act mostly on national level. More monitoring at the supra-national level may make life more difficult.
2. Do you see more flexibility coming in the near future in contractual relations (ex.: what future for long-term contract with oil indexation on the European market)?
Flexibility, in terms of volume, is included in existing long-term contracts and is intended to reflect buyers’ needs. In due course of transition to the new system there could be another form(s) of flexibility. Could that be that long-term contracts will be of more diversified set of forms and conditions? Yes, I do believe that there could be trend in this direction and based on the needs of gas users preferably.
Concerning pricing in long-term contracts, it is based on a traditional principle of formula(s) that has historical roots starting from Groningen. It was created by European players in the 60s. It had a lot of reasons to exist and advantage to assist in infrastructure development. On the national level the situation was combined with the existence of national monopolies. It is clear that the situation is now evolving and long-term contracts will change as well.
The European market has now more suppliers, mostly due to the development of liquefied natural gas. Suppliers have different approach such as Qatar that mostly do not rely on long-term contracts so they are more flexible and eager to provide gas everywhere as the market is becoming global. The sale of gas at trading hubs is developing and their pricing system based on a seller and a buyer acting to come to a commonly agreed price has nothing in common with long-term contract prices. Hub prices are often lower than long-term contracts prices and there is a lot of opinions on consumer side that traditional pricing should be over. The pricing of gas is now a subject of intensive discussion in the expert circles including the Gas Advisory Council. But let assume that tomorrow everybody comes to spot prices… Well, existing hubs cannot welcome these volumes which are entering the European market each day because they deal with much lower volume. Existing hubs are very short terms and they are not liquid enough. Hubs prices are developing but it is really risky to say “let’s everybody come to spot prices”. People come now to better understand that and people are more thinking of a balanced approach. If you look at it, the European market is supplied by a certain number of small suppliers but the number of major suppliers is limited. If everything was to depend on the balance between supply and demand, the market may be easily in the hands of this small number of major suppliers… So more hub based pricing could be good for consumers who think that spot prices will always give them lower prices, but not in the situation were you have a limited number of suppliers (unlike in many other goods and commodities). In the end consequences may not be in the favour of consumers. So my understanding is that there should be much more balance as some consumers need guaranteed supply and predictable prices. This is part of security of supply. For that purpose long-term contract play their role. So to summarise it will not be an abrupt transformation to spot prices, it will be some sort of more diversified picture. I do not think it will be hybrid formula; it is a more complicated question of who will be the parties, what types of contracts they will prefer. Market participants have to move forward and regulators, if they say that gas is needed for the reduction in greenhouse gas emissions and see gas as an important factor for climate change policy, clean energy use and larger efficiency, they have to think of how to make it workable.
3. As a member of the Gas Advisory Council, what comment do you have on the evolution of the EU-Russia energy relation (as far as natural gas is concerned)?
How do you see it evolving?
The Gas Advisory Council (GAC) was established because both sides of the Energy Dialogue reckoned that natural gas is a very important and sensitive area that creates contradictions. The GAC has thus been established to pay a special attention to this area. It pools together experts from both sides in order to consider it in details and provide independent views and recommendations. It was not clear at the beginning whether it would work or not, and it is difficult to be fully independent but we tried and I am encouraged with the GAC development. We dealt with complicated areas such as the EU energy roadmap 2050 with aspects of decarbonisation, its scenarios, and its consequences for our relationship, our trade, our cooperation. We worked on the gas chapter of the EU-Russia Cooperation Roadmap until 2050. It is not yet finalised but it is in progress. We worked on the transformation of the EU gas market. We now start to deal with the real aspects of intergovernmental agreement between the EU and Russia in the gas sphere. Members of the GAC have of course different opinion on various issues but we are coming to close understanding and common recommendation on important issues.
Regarding Roadmap-2050, I would comment that it is challenging to look almost forty years ahead and it is not possible to come to definite conclusion for such a time ahead. As a matter of fact, we can see how things changed already in the few last years with shale gas and renewables. Energy is really under change so it would be very pretentious to say what we foresee for forty years from now. The EU has strong targets for 2020 and it is yet not clear whether they all will be met. The EU needs for some vision for 2050. Climate change targets for that horizon are high: it is the main reason why there is a need to look so long ahead. The conclusion reached within EU, after discussion, and fixed officially on paper, was that in principle the EU can reach its decarbonisation targets. There are various ways to reach it and there is a need to choose a track on the political level. What is important for GAC are risks and ways to mitigate them or, as we formulate it, to move to tolerable level of risks and uncertainties, mainly those having strong impact on EU-RF relations in the gas sphere.
One of our tasks in the Gas Advisory Council is to assist in development of the EU-Russia Cooperation Roadmap (ECRM) till 2050. This document is not agreed yet and both parties, EU and Russia, have to decide the way forward in the energy relation. We sometimes declare that EU and Russia are strategic partners. We had a basic agreement and now negotiation for a new one. Being strategic partners in the energy sphere means a lot. This draft ECRM is based on the assumption that parties are moving toward integration of energy supply infrastructure and that we are developing our markets in some coordinated way as open, competitive, transparent markets. This reflects the first option where parties go further on integration. If the move on this way of more cooperation and integration is chosen, through milestones as it takes time of course, these considerations of security of supply and concerns of extra-dependence which are in the EU will play a small role.
Another, second option is that parties do not decide to go for more integration as it has advantages but also more obligations. In this latter case, EU and Russia are simply trading partners in the energy sphere and particularly in gas and at least for the couple of coming decades they will be important trading partners. But this second option has its own consequences. It can be good for those people on the EU side who do not like long-term contracts and wish to get maybe cheaper gas at the gas exchanges and trading hubs. But the choice to less (or no) long-term contracts is risky, and these risks should be analysed in advance. When this picture was presented at the GAC, we were immediately told from the EU side: “we do not like the second option” (namely being simply trading partners); “we want the first option of strategic partners”. Currently both sides are somehow moving to cooperation in energy, we are working on the ECRM. But we still remain free trading partners until both sides consider it is more important to deepen the relation. A choice still has to be done and this could be a part of the finalising ECRM process.
4. How can Russia get the best out of its position between the East and the West?
Russia is historically and geographically in this position. How it will be developed in reality depends on various aspects. The Asia Pacific region is growing and the Eastern part of Russia is underdeveloped but is also part of this eastern world. Russia will definitely pay more attention to this opportunity: it is a growing market and growing actual and potential partners. Russian resources in the East can be directed to this part of the world, such as the gas resources from Sakhalin to Japan. Definitely, the potential for cooperation is good and the interest to it is growing.
China considers Russia as a source of diversification for its energy supplies. There are very important opportunities for such developments in energy but as well in other directions as energy transformation, chemistry etc. How it will be in the longer terms depend on parties. Russia has enough natural resources to be active both in the west and east of its territory and offshore.
Regarding the discussion between Russia and China on natural gas, I do not agree with those who tell that it is too late. China is interested in gas supplies and Russia will be among its preferable options. They did not increase their gas consumption for a long time because they told they need cheaper energy. This was partly due their energy is based on domestic and (to less extent) imported coal. But there are areas where they cannot use more coal. For the energy delivery in eastern cities, Shanghai for instance, owing to efficiency reason and of environmental reason, it is not possible to base only on coal any longer. They decided that gas will play larger role, and it will not be cheap gas. Gas is definitely more expensive than coal. They are already buying it from abroad as LNG and are paying reasonable price. I am sure commercial negotiations on gas supply from Russia to China will be soon finalised. About pricing, it would not be on coal indexation because it will mainly not be for substitution of coal on power stations.
5. What future do you see for gas in Europe (cf. shale gas, climate targets, etc..) ?
There are people interested in less gas in Europe (those making money out of coal, renewables, those having subsidies). Europe can say if it needs more gas or not. The real question is whether the EU wants to be more competitive or not. Gas should have a room in Europe for it to remain competitive. I do hope that in the end decisions will mostly be based on reasons of economics/ecology/sustainability and not suspicions and mistrust. So I believe in good prospects for gas in Europe as well as they are promising for the world as a whole.
Yasmina Sahraoui