Pavol Szalai is External Expert of the Bratislava-based Central European Policy Institute (CEPI).
"While the Tour de France was being launched last summer in the Mediterranean, a decision with far-reaching implications on Central Europe’s energy security was taken at the Caspian Sea. Yet, unlike the cycling race, the gas news did not make the headlines.
At the end of June, Shah Deniz Consortium chose the Trans Adriatic Pipeline (TAP) over Nabucco to transport Caspian Gas to Europe. Nabucco, the pipeline that was to reach Baumgarten, Austria and to become a symbol of the EU’s efforts to decrease its energy dependence on Russia, lost the stage. The winner is a junior project, TAP, passing through Greece and underneath the Adriatic Sea all the way to Italy.
Since both Nabucco and TAP were conceived to bring Caspian Gas to Europe, they are like members of the same team racing in the Tour de France. Nabucco – the older and more-experienced rider – symbolised EU’s diversification efforts. TAP – the younger but economically more solid rider – will finally realize them: as of 2019, the EU will import 10 bcm of gas per year from Azerbaijan, diversifying the supplies now dominated by Gazprom.
The problem for Central Europe is that their favourite was Nabucco. The Visegrad countries (Czech Republic, Hungary, Poland, and Slovakia) are heavily dependent on Russian gas, which represents more than two thirds of their imports. The danger of such dependence was fully revealed in the 2009 gas crisis, when a thirteen-day long import disruption caused economic losses worth half a billion euro in Slovakia.
Nabucco, which was to bring Caspian gas to their doorstep, would have avoided such losses. Nabucco is not dead yet, although it is out of the race for now. As for TAP it may bring some gas to Central Europe, but that perspective is too distant and too uncertain. The Visegrad countries should bet on two other teams in the race for energy security: liquefied natural gas (LNG) and the liquidity of the European market.
LNG is a connection to the global gas markets. Reducing the gas temperature to -162 ºC and volume by 600 times allows for it to be transported in sea vessels. These have many more destination options than a pipeline buried in the ground. By 2017, Central Europe should have access to two LNG import terminals : Świnoujście in Poland and Adria in Croatia. If the U.S. Congress approves the LNG for NATO bill that facilitates trading with Europe, they may also import cheap American shale gas.
Apart from opportunities, there are risks. The first is the cost of LNG ports. The EU is expected to help, but the cost of such gigantic projects is not certain until they are finished. The second risk is inherent to the nature of the LNG trade. Like the pipeline trade, the LNG trade is dominated by long-term contracts linked to oil prices with take-or-pay clauses. The Polish gas company PGNiG has concluded such a contract with Qatar Gas. The third risk is related to the short-term LNG contracts based on demand and supply. The gas demand and gas prices in Europe, including Eastern Europe, are lower than in Asia. For LNG producers, it is more profitable to export to Asia. As a result, we’ve seen LNG imports to Europe falling in 2012.
The other champion that Visegrad can support in order to decrease its dependence on a single dominant supplier, is market liquidity. The more gas is available on spot (or short-term) trading points, and the more national gas markets are interconnected, the more leverage the gas buyer has. The liquidity of the European gas market is currently rising thanks to the spot-traded LNG and the price concessions of major suppliers like Statoil and Gazprom.
Nevertheless, the eastern EU member states cannot benefit from this “buyers’ market”. The lack of interconnections keeps their transport infrastructure east-west oriented and allows for little physical diversification. They remain dependent on Gazprom, which charges them more than Western Europe eventhough they are closer, and which continues to link gas prices to oil prices.
In September 2012, the European Commission decided to facilitate access to a liquid market and new supplies by a regulatory action: it launched antitrust proceedings against Gazprom. DG Competition suspects Gazprom of abusing their dominant position and thereby hindering competition and supply security in Eastern Europe. The DG that sanctioned Microsoft has every chance to succeed.
As the era of more short-term pricing approaches, it brings with it two perils. First, it makes investments to the costly infrastructure projects like country interconnectors more uncertain, all the more if demand rises moderately. Second, it makes the small Central European gas markets more volatile due to seasonal demand shocks (exceptionally cold winters), potentially open to speculation.
Six recommendations for the Visegrad
Just like the riders in the Tour de France, Gazprom will eventually have to learn fair play. But Central Europe, too, has to learn how to manoeuvre in tomorrow’s gas market, where demand and prices are key and Asian teams are strong and rich.
It is essential that the Visegrad countries cooperate more within the European Union. In addition, they should turn to Ukraine, a key gas transit country currently aiming to diversify gas supplies away from Russia and move closer to Europe.
In particular, the Visegrad governments should: coordinate national energy policies and name energy targets for the next decade; create a gas buyers consortium, as suggested by the former Slovak Ambassador to Ukraine, Urban Rusnák, and consider including Ukraine. They should incite national gas companies to coordinate infrastructural projects and cooperate in applying for EU funding; and as suggested in a previous CEPI Policy Brief, support market coupling and construction of interconnectors in Central, South-Eastern, and Eastern Europe to create a regional market along the European Gas Target model.
Lastly, they should assist the European Commission fully investigating Gazprom‘s antitrust probe and invite it to negotiate gas prices with Gazprom; and export EU market rules to Ukraine via the Energy Community and the Energy Charter."