[GGP] EU-Russia: Energy, Policy & Competition
From record Gazprom exports into the EU in 2016 thanks to lower prices, demand growth and lower domestic supply…
By having implemented three energy packages and a 2020 strategy with a focus on markets, efficiency and renewable, the EU Commission has set a new world where fossil fuels need to be competitive if they want to stay in the EU mix. By having commoditised gas and allowed trading on hubs, the Commission managed to set a new competitive level-playing field. Hence the arrival in 2016 of a new competitor (US LNG) pushed TTF price to their lowest levels since 2010, even with a second year of EU gas demand growth (after a decade of demand destruction) and lower domestic supply as the Dutch Groningen production was further cap from 30 to 27 bcm/y.
Gazprom, that has gained flexibility in the last few years, can benefit much faster from market changes. Hence, 2016 saw record imports from Russia into the EU as the price attractiveness of Russian gas outcompetes US LNG. In 2016, the EU was 33% dependent on Russian gas. More importantly, the EU-27 (excluding the UK to account for Brexit) was 35% dependant on Gazprom in 2016.
… to renewed record in 2017 with higher prices and more gas flowing via Nord Stream 1 thanks to a change in EU policy…
2017 turned out to be an interesting year for both EU markets and regulations. In October 2016 the European Commission allowed Gazprom to bid for the remaining OPAL capacity alongside third parties while guaranteeing that the latter would still have access to 20% of the capacity. Increased capacity access in OPAL from January 2017 – enabling increased utilisation of Nord Stream1 – was an important achievement for Gazprom, as it reduces its dependence on transit countries and reduces costs while boosting export flexibility. But the EU decision to lift the cap on Gazprom’s use of the pipeline angered Poland that referred the decision to the Court of Justice of the European Union. In January 2017 the Court of Justice suspended the Commission’s decision. So, after a record use of Nord Stream 1 in January, Gazprom had to wait for the rejection of this suspension, in July, to again use fully OPAL and Nord Stream 1.
For 2017, Gazprom’s flows to the EU have already reached a new record high2 . So high indeed, that Gazprom Export that tested a new mechanism of sales with gas auctions in 2015 and 2016 (for a total of 3.6 bcm) decided, on 7 November, not to hold any auctions in 20173 as it had already sold enough gas. The change of EU policy regarding Nord Stream 1 and the further cut in Groningen cap (24 bcm/y) allowed those record Russian imports, leading to a further increase in Gazprom’s market share in 2017, while TTF prices are on the rise as US LNG as a competitor didn’t materialised yet. This highlights Gazprom’s mastering of markets by efficiently using its competitive advantage as the lowest cost producer.
… to too high future Gazprom’s market share allowing the EU to push its new policy agenda?
In November 2017, the Commission proposed to amend the Gas Directive to ensure that all major pipelines in the EU and entering the EU territory are operated under the same degree of transparency and are accessible to other operators. This is in part because “the Commission sees no need for new infrastructure of the magnitude of Nord Stream 2”4 .
The further reduced cap in Groningen production (21.6 bcm/y) was rejected by the highest Dutch administrative court in November, saying it might be possible to cut output further without endangering supplies and ordered the government to review its decision within the next 12 months. The LNG glut that so many where expecting might not materialise at all with booming demand in China and lower than expected supply from Australia, leaving again additional room for Russian gas…
On a policy side, Russia is not an EU friend, but on the energy side Gazprom is the cheapest gas supplier that can, on top, provide, if it so wishes, additional gas the EU may need5 . With Gazprom’s increasing further its market share, how is Europe’s schizophrenia going to evolve? Perhaps with a too high Gazprom’s market share, hence a market power risk, the Commission could turn away from politics and focus on further enhancing gas market competitiveness for the benefit of its customers....
Dr Thierry Bros is Senior Research Fellow. Oxford Institute for Energy Studies and a member of the Natural Gas World Advisory Board. First published in Gazprom Blue Fuel.
1 Nord Stream 1 load factor was already 80% in 2016 at
https://www.nord-stream.com/press-info/press-releases/nord-stream-utilisation-averages-80-in-2016-438-bcmtransported-to-the-european-union-490/
2 “Russian Gas Export in January-October 2017 Tops the Figures of Previous Years” at http://www.gazpromexport.ru/en/presscenter/news/2065/
3 “Gazprom’s European Exports Growth in 2017 is Well Above the Market Once Again” at http://www.gazpromexport.ru/files/EVB_interfax_08_11_2017253.pdf
4 http://europa.eu/rapid/press-release_MEMO-17-4422_en.htm
5 Gazprom spare production capacity is estimated at 140 bcm for 2016.