EU Obstacles for SOCAR in its Pursuit of DESFA

Azeri state-owned oil and natural gas company SOCAR was successful last summer in its €400 million bid to acquire management and 66% of Greek gas transmission company DESFA and was set to enter the Greek market by the end of 2013. A sudden obstacle however was put forward by the European Commission that may well delay the process for up to a year.

At a recent meeting in Brussels between SOCAR and Greek officials along with the Greek energy regulatory authority and heads of the Directorate-General for Energy (DG Energy), the following procedure was put forward by Brussels to the Greek-Azeri delegation: An EU-Azeri intergovernmental agreement needs to be signed that will need to be ratified by the European Parliament thereafter, as well as by the Parliament of Azerbaijan.

The agreement will specifically stipulate Baku’s adherence to the EU's Third Energy Package that separates in full the gas production corporate structure from transmission and trading.

This is the first time such a request for a privatization is put forth by Brussels, which replied to both interested parties that it is also the first time that a state producer and trading company - such as SOCAR - acquires a controlling stake in an EU gas transmission corporation, such as DESFA.

Despite arguments put forward by Athens and Baku, Brussels is adamant that all legal procedures must be followed, which primarily means that the privatization is still ongoing and SOCAR is not formally the owner of DESFA and may well lose the case in the coming months.

Government and media sources in Athens roughly estimate that it will take around a year to complete all steps and there is growing fear that SOCAR may feel disappointed and abandon its venture into the Greek market, thus derailing the privatization project of the government.

Greek Premier Antonis Samaras will visit Baku mid-December to inaugurate the Southern Corridor and the Trans-Adriatic Pipeline (TAP) as Greece is a basic component of the pipeline.  He will also discuss the issue of DESFA with local stakeholders so as to speed up the privatization process. It should be noted that SOCAR's main interest in the Greek market is due to the selection of TAP as the preferred Southern Gas Corridor route.

One main assumption derived from the above is that the EU bureaucracy places great interest on promoting the Third Energy Package even against the will of the majority of EU states that want, in the case of Greece, to raise its budget revenues by selling off state assets, whilst at the same time diversifying its energy imports from Russia.

In that sense, DG Energy is indirectly eyeing Gazprom by relaying the message that the energy rules will be enforced in any case and in all member states, thus the issues that were brought up recently regarding South Stream's intergovernmental agreements and Brussels' negative stance will certainly be looked upon by the angle of the strict enforcement of the Third Energy Package.

Nevertheless, due to the fact that a set of political and diplomatic initiatives by different by influential state and non-state actors influenced the speedy establishment of the Southern Corridor and the entrance of SOCAR into the Southeastern European market, the pressure exercised by DG Energy may well backlash and legal complications directed against Brussels are not out of the question.

Natural Gas Europe was been privy to information from a credible source that companies such as SOCAR and Gazprom - each one for its own agenda and interest - are accumulating top-tier legal advice against the DG instructions in a matter of issues, including the DESFA privatization, South Stream, intergovernmental agreements and other similar fields.

Concurrently, the Greek government is seriously thinking of protesting at a political level during its EU Presidency in the first half of 2014, should it realize that Azeri interests will wane due to the legal complications originating in Brussels. A recent meeting between Samaras and Oettinger in Athens touched upon the subject but no breakthroughs have been made as of yet.

In a similar nature and as far as the South Stream pipeline project is concerned, the governments of Bulgaria, Serbia, Slovenia and Hungary have defended their intergovernmental agreements with Russia and with the South Stream consortium in a form of defiance against Brussels.

On the other hand, it is a well-known 'secret' that even if the Third Energy Package were to be enforced in full and under the purest legal terms, then companies such as Gazprom could exchange parts of their controlling stake with other state-owned companies or influenced companies in Russia such as Rosneft or Novatek and in reality overcome any EU rules, without changing the "norms of the energy game" at any significant level. The same can be said for Azerbaijan.

Related reading: Azerbaijan's SOCAR Acquires Greek Gas Transmission System Operator