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    Euro-Russian Relations: Proposing Ways to De Politicize Gas



Because of the economic crisis and an oversupply of natural gas, according to Danila Bochkarev, Senior Fellow, East West Institute, it looks like a “buyers' market,” in which buyers of natural gas have the upper hand. “The question is, for how long it will last.”

by: Drew Leifheit

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Euro-Russian Relations: Proposing Ways to De Politicize Gas

At the beginning of his speech at South Stream: The Evolution of Pipeline in Ljubljana, Slovenia, Danila Bochkarev, Senior Fellow, East West Institute, described the different attitudes concerning energy between consumers and suppliers of energy. “Basically, right now the relations between Europe and Russia are seen as very peculiar,” he commented.

Competitiveness, climate change and security of supply were all important for Europe, he explained, but were treated differently by Russia in its role as a natural gas supplier. Europe, he said, wanted energy to be governed by supply and demand and access to pipelines was seen as a “rent sharing” agreement.

“It's also a discussion on pricing and, of course, on the type of contracts,” he said.

Showing demand and supply between the EU and Russia, he said that exporters emphasized their resources as a part of national sovereignty, energy as a “common good” and energy infrastructure as a national development imperative.

He commented: “In a way we can see it's sort of like protectionism; on the other hand, there's a liberal approach regarding security of supply: trying to get energy as cheap as possible regardless of preconditions.”

Because of the economic crisis and oversupply, according to Mr. Bochkarev, it looked like a “buyers' market,” in which buyers had the upper hand. “The question is, for how long it will last.”

Now, he explained, there was little talk of oil or gas peaks, with today's conventional, unconventional and offshore operations; it was now just a question of how much it cost to produce it.

In terms of the pricing formula regarding EU – Russian relations, he said, Gazprom was still pushing long-term contracts and oil indexation, but the pricing formula had changed.

“Prices on the German border are getting very close to the hub prices in BTF in Poland, for instance, or Henry Hub in the UK,” he reported, saying it opened up a debate regarding future security of energy supplies.

“Europe's becoming more active on the energy friend, while Russia is becoming more defensive. The idea is how to find a compromise.”

Mr.  Bochkarev pointed to Norway and how Europe was able to get the country to play by European rules. “Norway now, for instance, is supplying spot prices for most of its supplies to Europe.”

Russia's stance, he recalled, was formed during an era of high energy prices. “Energy was based on energy being a part of national sovereignty or part of foreign economic policy,” he explained.

Now, he said, it was starting to change, becoming more flexible along with the supply/demand curve. “The emphasis on state players is starting to fade away; we see the arrival of new players, in particular in the gas sector - market liberalization for energy, as governments themselves realize that Gazprom itself won't be able to cope under a number of strategic directives.”

He noted that Russia was still trying to persuade the EU to move South Stream away from the impacts of the 3rd Energy Package.

While renewables were important, Mr. Bochkarev contended that Russia was aware that hydrocarbons would still make up the bulk of the country's energy sector.

“What should be done to make gas an interesting type of fuel?” he queried. “What does the picture look like in the current policy environment, taking into account the carbon price and relatively high prices?”

He noted Gazprom's promotion of new uses for natural gas. 

Of the Nord Stream and South Stream projects, the latter's purpose was to serve new markets, which could possibly use more gas. Transport, he said, represented a new market for gas. Despite such new frontiers, a number of new projects would be focused on Asian markets.

“Russian gas is definitely under heavy criticism in Europe,” he said.

If consumption were to increase fairly substantially, he opined that the price of gas at hubs would be much higher for a longer period than oil-indexed contracts.

“It will be interesting to see what the reaction of the main suppliers like Gazprom; would they increase payment under long-term contracts or would they switch to spot to monetize the profits from the high hub prices?” asked  Mr. Bochkarev, who said that LNG shipments going to Asia following the accident at Fukushima showed that Europe would not be taking the lead in this regard.

South Stream, he concluded, should not only be presented as additional supplies to traditional markets, “But it should also go into forces with local industry and promote non traditional usage of gas – not only in the chemical industry, heating or power generation, but going for instance into transport: emissions for gas-powered vehicles are like 30% than gasoline. This is where new suppliers can play a specific role.”