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  • Energy Policy in Russia and the EU

    25 June 2010

    Notwithstanding the importance of energy issues in the relations between the EU and Russia, until 2006 they were not the focus of politics. On the side of the EU, the main driving force was the idea to form a single energy market, including the accession of new members and the liberalisation of markets.

    Earlier, the attention was mainly on the volume of Russia’s output of gas and its supply to the EU. Due to the very high gas consumption forecast for the EU for 2020 to 2030, Russians in government, in corporations, and experts, too, were often surprised by the expectation within the EU that Russia would fill the potential gap between consumption and supply. The Russian side never actually committed itself to this, while predictions for the future dependence of the EU on Russian gas were seriously exaggerated.

    Energy security and the gas crisis

    Beginning in 2006, energy security became a major issue. This was caused by a combination of growing energy demand, rising energy prices, and the first conflict between Russia and Ukraine. At the time, Russia decided to put the question of energy supply on the agenda at the G8 Summit in St. Petersburg. Although the G8 formulated a list of critically important points in the area of energy security, this did not result in legislative and/or institutional instruments to support their implementation. Yet, as the 2006 crisis over gas transit through Ukraine had caused quite a stir, it had become obvious to politicians that unambiguous rules for energy transit had to be put in place.

    With so much of the natural energy resources within Russia, and with such a vast market for energy in the EU, it is obvious that energy is an important element in Russia – EU relations. This is even more true, because natural gas is not as ubiquitous a commodity as oil or coal.

    Russian resources - European market

    Today, within the EU – Russian dialogue, energy has become an important issue. It could be asked whether this is appropriate. For some decades, resources have been exported from Russia to countries within the EU. Such exports have been taking place based on commercial arrangements involving private businesses. This has been very successful, and even in the midst of the Cold War trade went on without interruptions. Therefore, what are the new factors that would require discussion at a policy level?

    The first change is that the EU’s internal market has been liberalised. The third energy package recently adopted by the EU is another step in the development of an internal market for gas and electricity. A key feature in this process is the unbundling of production and supply interests on the one hand, and transmission interests on the other. Together with the provisions for the non-discriminatory treatment of third-party access, this results in a strict separation of different segments in the value chain. Thus, vertically integrated energy companies are now being forced to unbundle their activities. The consequence is that the industry is becoming more fragmented and is no longer as able to oversee and control the full gas value chain as it used to be.

    Security for suppliers and consumers

    The second change is the heightened awareness of the connection between energy consumption and global warming. There is near international consensus that measures are necessary to reduce the amount of greenhouse gases emitted into the atmosphere. The EU has set itself ambitious targets with the climate and energy package adopted at the end of 2008. These targets, better known as 20-20-20, may, if achieved, significantly affect the volume of energy consumed within the EU – as well as the mix of energy that is consumed. For suppliers of energy to the EU this raises the question whether long-term investments into energy infrastructure for export to the EU are still viable.

    The third change involves the new political constellation after the break-up of the Soviet Union. This gave rise to a number of states that now sit between the EU and Russia. Some of these states are important transit channels for gas flowing from Russia to the EU. The question is: Are supplies channelled through those countries reliable and secure? In some cases, e.g. the January 2009 gas crisis, the flow of gas has been interrupted.

    Better forecasts of consumption needed

    Finally, the global economic crisis has changed both forecasts of gas consumption in the EU, as well as the capacity to invest in new technologies. In order to be able to invest, there is a serious need for better forecasts; one has to know whether there will be a “supply gap” or not. Russia’s long-term commercial interests are intertwined with the needs of the EU for energy security. “Gazprom actually is prepared to provide highly expensive alternative pipelines to guarantee European gas security at its own (and its partners) expense” (Stern 2009, PDF). This, of course, is setting aside any perception that Russia is a risk – an assumption seen by the Russian side to be a politically motivated attack on its business interests. The Nord Stream pipeline project faces some difficulties, including the demand that there be a second branch, and there are some delays in the development of the Shtokman field. The economic crisis may lead to further delays, and while forecasts for EU demand are still vague, it is difficult to project future developments.

    The factors pointed out above all show the need for increased dialogue between Russia, as the main supplier of energy to the European Union, and the EU, as the main energy market for the Russian Federation. Russia does not believe there is an energy conflict between itself and the EU. For a generation to come, relations between the EU and Russia will be shaped by the question of gas, as this is highly important for the EU’s energy security, climate changes policies, and commerce.

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