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    South Stream and TAP: Working to Double Standards?



Gazprom and South Stream have been discriminated against by the European Commission in certain regulatory decisions, while SOCAR and TAP have not faced the same obstacles, despite comparable characteristics.

by: G Plus Limited (Demostenes Floros)

Posted in:

Natural Gas & LNG News, News By Country, Azerbaijan, Russia, Pipelines, South Stream Pipeline, Trans-Adriatic Pipeline (TAP) , Top Stories, Caspian Focus

South Stream and TAP: Working to Double Standards?

The Trans-Adriatic Pipeline (TAP), an 870 km-long pipeline designed to carry Azeri gas to Europe, has received the red carpet treatment from the European Union. It has obtained exemptions from the rules governing gas transmission networks in the EU, been ushered through the regulatory steps involved, and SOCAR was welcomed with open arms in the tender for DESFA, despite the risks to competition it presented. By contrast, the South Stream gas pipeline project, running from Russia to the EU via the Black Sea to circumvent the transit risk of Ukraine, has lately encountered a series of hurdles, and Gazprom was blocked from the tender for DEPA. How can such discrimination be justified?

Published in 2009, the European Union’s so-called Third Energy Package (TEP) aims to increase the integration of the European energy market and thereby improve its functioning. A cornerstone of these ‘market liberalisation’ efforts in the field of natural gas is the ‘Ownership Unbundling’ principle, whereby a company cannot simultaneously own and operate a gas transmission network. Acknowledging the large up-front investments needed from private companies, the package also allows for exemptions from such requirements, which could discourage companies from investing. After all, who will invest in constructing a new pipeline if the returns cannot be reaped afterwards?

The TAP obtained a series of such exemptions in May 2013. The European Commission decided to exempt it from the principle of ‘ownership unbundling’, further requirements were also waived: for access by third parties to book its initial capacity, and restrictions on regulation of tariffs. However, since then, SOCAR acquired both a share in the TAP and bought Greek transmission system operator DESFA.

The resulting situation would raise eyebrows: SOCAR will now be on both sides of the negotiating table, as a shareholder in the TAP consortium supplying gas to Greece, and as operator of Greece’s gas grid. However, as of yet, the European Commission has given no indication that it will reconsider the exemptions. Thus the regulatory pathway has been cleared for a pipeline that will supply only 10bcm per year, on the grounds that it ‘diversifies supply’ by adding an additional source of gas for Europe, notwithstanding the fact that Greece already receives 14% of its gas from Azerbaijan. It is hard not to see an element of favouritism clouding the process. 

South Stream’s story is rather a different one. Where the TAP has eased past potential obstacles, South Stream has been met with resistance. This is odd: South Stream is considered by the EU as an ’umbilical cord’ connecting Europe to Russia, and the governments of the countries crossed by the pipeline granted priority status to the project. However, the European Commission recently announced that the agreements reached by these countries with Russia are not compliant with EU law on three counts: the pipeline will be owned by a gas producer; it does not offer third party access, and tariff criteria are yet to be defined.

Undeniably, Gazprom is a gas producer – though national consortia control the respective onshore sections of South Stream. The exemption for third party access is currently under negotiation, and tariffs will be defined by local operators. However, it rather appears that the Commission is deliberately blocking the regulatory progress of the pipeline. The IGAs were in place – and in the public domain – for two years before the Commission decided it ought to intervene. It strains credibility to suggest that the announcement was anything but linked to what has euphemistically been dubbed the ‘current political context’.

Moreover, Gazprom could well have been discouraged from participating in the tender for DEPA, the Greek gas supplier. The Greek Energy Ministry came under considerable pressure from Brussels to apply the standards of ‘effective separation’. Yet when vertically-integrated SOCAR won the DESFA tender, no one in Brussels objected. It should be little surprise that Vladimir Putin spoke out against the Third Energy Package. The ‘effective separation’ clause seems to be a protectionist measure aimed squarely at traditional global gas producing businesses – with room for the Commission to pick winners at will, as with SOCAR. Combined with article 11 (“granting certification will not put at risk the security of energy supply to the Community”), it is – without mincing words – an anti-Gazprom law.

If the European Commission was serious about improving the functioning of the European gas market, it would not seek to punish Gazprom via arbitrary political decisions in matters where regulatory certainty should be the rule. Instead, it would heed the calls made by Claudio De Vincenti and engage in direct talks with Gazprom, taking into account the needs of all the parties touched by the South Stream project – producer, operators, and transit countries. The aim would be to allow South Stream to follow in the footsteps of TAP to regulatory acceptance in the EU. Doing so would vastly improve Europe’s energy supply security – and boost competition on the energy market to boot.

Demostenes Floros is a geopolitical and economic analyst. He teaches at the University of Bologna.