The Impact of New EU Energy Policies on the Gas Trade with Russia: Is the EU Headed Towards Protectionist Policies?

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The Impact of New EU Energy Policies on the Gas
Trade with RussiaIs the EU Headed Towards
Protectionist Policies?

• by Sergei KomlevHead of Contract Structuring
  and Price Formation, Gazprom Export

Groningen May 6, 2009
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What Protectionism Is

• Protectionism is the economic policy of
  restraining trade between nations, through
  methods such as tariffs on imported goods,
  restrictive quotas, and a variety of other
  restrictive government regulations designed to
  discourage imports, and prevent foreign take-over
  of local markets and companies. This policy is
  closely aligned with anti-globalization, and
  contrasts with free trade, where government
  barriers to trade are kept to a minimum.
• (Source Wikipedia)

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Overview

• New Energy Policy as presented in the Second
  Energy Review of November 2008
• Energy Security Regulations and plans to decrease
  the so-called energy dependence on Russia and
• Third Energy Package

Issue 1
Issue 2
Issue 3
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Overview

• New Energy Policy as presented in the Second
  Energy Review of November 2008
• Energy Security Regulations and plans to decrease
  the so-called energy dependence on Russia and
• Third Energy Package

Issue 1
Issue 2
Issue 3
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Projected Market Displacement of Natural Gas in
the New Energy Policy
2020 Natural Gas Primary Energy Demand, EU
Production and Net Imports, bcm
2005 Baseline scenario Baseline scenario New Energy Policy scenario New Energy Policy scenario
Oil price 61/bbl Oil price 100/bbl Oil price 61/bbl Oil price 100/bbl
Primary Demand Primary Demand Primary Demand Primary Demand Primary Demand
516 586 514 463 400
EU Primary Production EU Primary Production EU Primary Production EU Primary Production EU Primary Production
218 134 131 125 116
Net Imports Net Imports Net Imports Net Imports Net Imports
298 452 383 338 284
Import Dependence Import Dependence Import Dependence Import Dependence Import Dependence
57.7 77.2 74.6 73.1 71.1
Source Adapted from the Europes Energy
Position - Present and Future, European
Commission, November 13, 2008
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Comparative Capital Costs per kW, Euro
Source CERA
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Will Subsidies for Renewable Energy Be Needed in
the Future?
The Economist magazine notes in a recent
editorial, "Wasting Money on Climate Change,"
that each tonne of emissions avoided due to
subsidies to renewable energy such as wind power
would cost somewhere between 69 and 137.
The German Renewable Energy Federation (BEE) has
outlined a future where Germany could be
generating nearly half of its entire electricity
supply from renewable sources. A target of 47
could be reached by 2020, according to the
industry association, assuming that the current
level of subsidies for renewable energy
development continues to grow in the years ahead.

Big things are expected of offshore wind but
this fledgling sector could be at risk given
ongoing increases in capital costs, especially if
government subsidies do not keep pace, said Matt
Brown, CERA senior director and head of
the European power service . Further increases
of 20 percent in offshore wind capital costs over
the next few years should be expected. That means
capital costs will increase from 2300 per
kilowatt to 2800 per kilowatt.
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Types of Government Intervention in Inter-Fuel
Competition
Direct Financial Transfers

• Grants to producers.
• Grants to consumers.
• Low-interest or preferential loans to producers.

Preferential tax treatments

• Rebates or exemption on royalties, duties,
  producer levies and tariffs.
• Tax credit.
• Accelerated depreciation allowances on energy
  supply equipment.

Trade restrictions

• Quota, technical restrictions and trade embargoes.

Energy-related services provided by government at
less than full cost

• Direct investment in energy infrastructure.
• Public research and development.

Regulation of the energy sector

• Demand guarantees and mandated deployment rates.
• Price controls.
• Market-access restrictions.
• Preferential planning consent and controls over
  access to resources.

Failure to impose external costs

• Environmental externality costs.
• Energy security risks and price volatility costs.

Source European Environment Agency, 2004
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Support Policies for Renewable Technologies in
the EU 15
Source European Environment Agency, 2004.
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Overview

• New Energy Policy as presented in the Second
  Energy Review of November 2008
• Energy Security Regulations and plans to decrease
  the so-called energy dependence on Russia and
• Third Energy Package

Issue 1
Issue 2
Issue 3
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EU and Gazprom Inter-Dependence
Gazprom for EU
Basic Information

• Gazprom is a reliable supplier for 40 years
• Gazprom has already supplied more than 3
  trillion cm of gas to European customers
• Gazprom guarantees suppliers of additionalalmost
  3 trillion cm up to 2035 under long-term
  contracts
• Gazprom is world biggest source of gas (proved
  reserves are 29.8 trillion cm).

• Gazprom Gas Sales

Gazprom Gas Sales Structure
EU for Gazprom

• EU is the main export market for Gazprom
• Supplies to EU ensured steady Gazproms revenues
  for 40 years
• Contract arrangements with EU customers till 2035
  valued at around 1 trillion dollars
• Good business relations with major counterparties
  in EU.

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Gazprom Represents No Threat to Energy Security
in Europe- Only reason to decrease
European energy dependence on Russia is political
and not based on sound economic arguments- We
will never agree with a verdict that Gazprom is
unreliable supplier. We consider it unfair, and
are insisting on an objective investigation of
the January transit crisis that will show
Gazproms complete innocence. Before it is done,
EU has no right to accuse Gazprom of
unreliability.
Time and time again, the clear feeling from
Russia is that they are irreplaceable and can do
what they want," 'We can get away from you We
can live without gas from Russia It will be
costly, difficult it will take 10 years. But we
can do it. Bartuska, Ambassador at large at
the Czech foreign ministry
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There is no Economic Reason to Discriminate
Against Russian Gas

• Prices of Russian gas are fully competitive.
• Quality of Russias gas is high, it has the
  highest methane content.
• European customers are perfectly protected by
  long-term oil-indexed contracts against any form
  on monopoly abuse of power.
• With long-term contracts in place any form of
  OPEC-style cartel in gas is impossible. It is a
  European buyer not a supplier who defines daily
  volumes within the range provided by the
  contracts (DCQ).
• Presence of Gazproms affiliated companies in
  Europe only increases competition.
• Gazprom is investing enough money to provide EU
  with a reliable supply for years ahead.

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Gas Prices under Long-Term Oil-Indexed Contracts
and Spot Prices
NBP price is Monthly Average for Day-Ahead
Prices. All prices converted for Russian gas
quality.
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Russian Gas Price Compared to Average Gas Price
at German Border (PIRA assessment)
According to PIRA, Russian gas price at German
border is below the Average.
PIRA forecasts that gap between oil-indexed and
spot prices will narrow down by the end of 2009.
We expect that in the fourth quarter of 2009
Gazproms prices will reach parity with the spot
market prices or even be lower.
All prices converted for Russian gas quality.
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Overview

• New Energy Policy as presented in the Second
  Energy Review of November 2008
• Energy Security Regulations and plans to decrease
  the so-called energy dependence on Russia and
• Third Energy Package

Issue 1
Issue 2
Issue 3
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Open Questions in the Context of the New EU
Legislation

• Basic question for Gazprom is the future of our
  investments in the European gas infrastructure.
  Third energy package is a strategic document that
  leaves many details unclear.
• Another major concern is our ability to meet
  long-term commitments for the European clients in
  cases when our transportation contracts expire
  earlier that those commitments. Right of first
  refusal has to be introduced.
• Open season procedures for transit capacity
  rights and tender provisions for spare transit
  capacity have to be drafted in a way not creating
  paradise for speculators at the expense of
  shippers and their European clients.

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Third Country Clause has Potential of Becoming a
Widely Used Instrument of Protectionism

• The fact that Russia and EU employ different
  market models in the gas industry does not give
  legal, or any other ground to create barriers for
  Russian investments in the European gas under
  pretext that Russia does not share liberal
  values.
• All Gazprom subsidiaries active in Europe are
  subject to EU rules and regulations, including
  TPA and anti-trust regulation. Gazprom has only a
  small percentage of Western European domestic
  market share Germany, less than 7 Italy,
  France, UK and Turkey, less than 2.
• Third Country Clause has a potential of blocking
  any European projects involving Gazprom
  participation by a single EU member. It is
  especially true as the solidarity principle in
  the EU is treated one-way, as defense of the New
  Europe from the perceived Russian threat.
• Russia and Gazprom will defend their legitimate
  interest using the existing intergovernmental
  agreements, international law provisions, and
  commercial law.

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Way Forward

• Our major concern is that the EU energy policy is
  becoming protectionist and that is against the
  European interests in the long run.
• The EUs energy policy has not yet been finalized
  and this means there is still time for finding
  vital compromises.
• Let us continue our dialogue to minimize risks of
  Europe and Russia moving apart.
• Our disagreements can be overcome if both sides
  show enough political will

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THANK YOU FOR YOUR ATTENTION