Balkans: Gas Supply Only One Part of the Equation

Turkey and Azerbaijan have signed a historic agreement for the shipment of gas from the huge Shah Deniz 2 field in the Caspian Sea to Turkey, the Balkans and central Europe.

This deal is a win-win for everyone, and it is especially important for the Balkans, which are energy-deficient in every way imaginable. Balkan energy infrastructure is old and inefficient and the whole region is over-dependent on gas from Russia. But the new gas deal won’t solve these problems – unless governments also accelerate long-overdue reforms.

Last week’s agreement defines the terms under which 16 bn cubic meters (bcm) of natural gas from Azerbaijan’s Shah Deniz 2 will be shipped to Turkey and beyond: Turkey will keep 6 bcm for domestic use, and 10 bcm will be sent to the Turkish western border with Bulgaria.

While this gas will help the European Union as a whole reduce its dependence on out-dated polluting coal technology and diversify its gas supply sources away from Russia, the benefits to the Balkans will be particularly significant.

South east Europe’s energy infrastructure is old and in need of upgrades. The region’s electricity generation capacity is still largely run on coal, interspersed with old hydro and nuclear power plants. This is an environmental concern and a security risk.

For example, in Albania, where 100 percent of electricity is produced through out-dated hydro technology, severe droughts a few years ago resulted in a loss of more than one third of its power production.

The Balkan states need new energy sources to wean themselves off coal, hydro and nuclear power as they prepare for further economic growth and modernisation and bring their economies up to west European standards.

But they can’t afford to increase their dependence on gas if this means increasing their reliance on Russia. Russia’s Gazprom supplies up to 100 percent of individual countries’ gas imports. This gives Russia enormous political leverage in the Balkans. The EU is rightly concerned, not least, because these countries are already EU members, or are on their way to accession.

Natural gas from Azerbaijan will help meet the rise in future demand in the Balkans.

However, along with new supplies and new investments, the region needs reforms. The Balkan states are vulnerable to shortages and shocks due to old grids, lack of interconnections between countries and policies that limit competition.

How else can the gas price in the region be 25 percent higher than the spot price in Austria? This is only possible because non-market forces are interfering in the free flow of energy throughout the region. When the region buys its gas from only one supplier, and lacks a sufficient number of connections to alternative energy sources, it gives that supplier the power to set the price through long-term contracts.

In the Balkans, Gazprom sets the gas price, and Russia also owns a lot of downstream assets in the region outright or through joint ventures, which ensure it has the ability to intervene and block access to pipelines for third parties.

Meanwhile, Balkan governments regularly use national utility companies to interfere n the electricity market and dictating the price.  By keeping the price of electricity low – Balkan prices are much lower than prices in neighbouring Austria and Italy for example – the governments please the voters.

However, the long-term damage inflicted on the electricity market, and ultimately on consumers is huge. The losses generated on this trade are hidden in state budgets and eventually get stack-up on the pills of government debt.

High input prices and cheap selling prices are the primary reason why the Balkan energy markets remain unattractive to transparent and profit-motivated foreign investors. So uncompetitive government companies, headed by well-paid government-appointed CEOs – together with Gazprom – dominate the markets.

Defending this miserable status quo is a sure way to never having competitive energy markets in the Balkans. Balkan consumers won’t have access to the best technology or to green energy, because the companies that are leaders in green innovation, and apply new technologies to production of power will stay away from this market.

If access to energy is not secure or too expensive, the private sector – including local and foreign companies – has no room to grow and create much-needed jobs.

The Balkan region needs political leaders that will guide it through the transformation of its archaic energy market and create a regional platform for region-wide energy policy debates.

The Brdo Process, which was launched a few years ago by Slovenia to facilitate political dialogue between countries in south-eastern Europe, should be transformed into a business-oriented forum focused on energy modernisation.

Caspian natural gas is vital for the region. But deep reforms in the region’s energy markets are also essential, and cannot be delayed any longer. Otherwise, the owners of the Azeri gas may be better served by-passing the Balkans and sending all of the 10bcm of gas to Italy.

Borut Grgic is a nonresident senior fellow at Atlantic Council's Dinu Patriciu Eurasia Center and founder and director of the transCaspian initiative.