EU pipeline ruling helps Ukraine thwart Russia

Author : Leonid Bershidsky

Source : Bloomberg

Putin wants to use the natural gas transmission system to squeeze the Ukrainian government. A European court just made that harder
15:22, 13 September 2019

The politics of gas. Photographer: Krisztian Bocsi

A European Union court has undermined Russia’s strategic plan to eliminate its dependence on Ukraine for the transit of its natural gas exports to Europe. That’s another stroke of luck for Ukraine’s new president, Volodymyr Zelenskiy: Now he has a much stronger position in trilateral gas talks with Russia and the EU, due to take place later this month. And no long-threatened U.S. sanctions against the Nord Stream 2 project expanding the capacity of pipelines beneath the Baltic Sea were required to achieve this important result.

The EU General Court in Luxembourg on Tuesday overruled a 2016 European Commission decision allowing the Russian natural gas exporter Gazprom PJSC to use more than 50% of the capacity of the OPAL pipeline, which runs from Lubmin in North Germany to Olbernhau near the German-Czech border. OPAL is an onshore extension of Nord Stream 1, the Russian pipeline laid across the bottom of the Baltic Sea, finished in 2012. Last year, Nord Stream 1 delivered 58.8 billion cubic meters of gas to Germany, more than its nominal capacity of 55 billion cubic meters and about 29% of Russia’s gas exports to Europe.

Without the 2016 EU decision, these record deliveries wouldn’t have been possible. The gas needs to travel further from the north German landing point to reach consumers. But initially, in 2009, the EU only allowed OPAL to be built on the condition that Gazprom would be able to use just 50% of its 35-billion-cubic-meter capacity: The bloc’s energy rules require competitive access to pipelines. (Also because of these rules, which limit suppliers’ right to own the delivery infrastructure, Gazprom owns less than 50% of OPAL shares; the rest belong to Germany’s Wintershall Holding GmbH.)

In this particular case, the rules make little practical sense. No one else delivers gas to the same point near the German city of Greifswald; supplies only become competitive along the way, more and more so by the pipeline’s endpoint. But because of the capacity cap, Gazprom had to maintain higher prices for Nord Stream 1 gas, giving competing traders no incentive to lower their prices. Instead of benefiting from the EU competition regulations, customers ended up paying more for gas.

The European Commission realized that and allowed Gazprom to bid for more OPAL capacity. According to the Polish state oil and gas company, PGNiG, it allowed Gazprom to pump an additional 12.4 billion cubic meters of gas through Nord Stream 1. This, along with increasing competition from liquefied natural gas imported from the Middle East, the U.S. and, more recently, Russia, helped drive down European gas prices to a 10-year low this fall.

The available onshore capacity has allowed Russia to go ahead with building a new pipeline, Nord Stream 2, parallel to Nord Stream 1. That project is opposed by the U.S. It argues that Nord Stream 2 would make Germany too dependent on Russia for energy supplies and would allow Gazprom’s exports to Europe to bypass Ukraine’s Soviet-era pipeline system, depriving that country of about $3 billion in transit fees just as Ukraine receives major Western financial assistance. Germany has ignored the criticism: It needs all the gas it can get to enable its simultaneous transitions from coal and nuclear power generation.

But if the onshore pipeline network cannot carry more Russian gas, the costly offshore expansion makes little sense. And that’s the weak point at which PGNiG decided to strike.

The Polish state company’s goals are twofold. Politically, the strongly anti-Russia Polish government is aligned with the U.S. It’s trying to drive Poland’s imports of Russian gas down to zero. But PGNiG is also vying for higher transit fees from Gazprom than the paltry $5.3 million a year it currently is receiving. It is, therefore, strategically interested in preserving the Ukrainian transit option. That’s why PGNiG challenged the 2016 commission decision in the General Court.

“As Gazprom can no longer enjoy its monopolistic position on the OPAL pipeline, it will not be able to terminate transit of gas to Europe via Ukraine, at least in the coming months,” the Polish company’s vice president, Maciej Wozniak, said after the court ruling.

Ukraine moved 86.8 billion cubic meters of Russian gas to Europe last year, and there’s no guarantee that volume won’t drop once Nord Stream 2 is finished. But any hurdles on the alternative route do force Gazprom — and its controlling owner, the Russian government — to maintain the Ukrainian transit option. That’s something Russia wanted to avoid starting next year, once Nord Stream 2 is operational and the current 10-year transit contract with Ukraine has run out.

The European Commission has two months to appeal the court ruling, but even if it decides to do it (its first reaction was noncommittal), it probably won’t file an appeal before it engages with Russia and Ukraine on the future of Ukrainian transit after the transit deal expires at the end of this year. The talks will take place in Brussels on Sept. 19, and before the OPAL decision, Russia wanted a short placeholder contract with low guaranteed deliveries, while Ukraine insists on a new 10-year deal with supplies of 60 billion cubic meters guaranteed.

The court ruling makes a sizable dent in Russia’s armor. Even if the reimposed OPAL cap doesn’t hold, Gazprom can’t be sure it won’t be hit with further restrictions: The EU’s competition rules are extremely unfavorable to it. These obstacles make it harder for the Russian supplier to compete with exporters of liquefied natural gas. Gazprom needs Ukraine to keep deliveries stable and retain market share. It may well have to opt for a sensible business strategy, even if it doesn’t quite fit President Vladimir Putin’s preference for using Russia’s power in the energy sector to put economic pressure on Ukraine’s pro-Western government.

If Russia compromises and reaches a more generous deal with Kyiv and the EU than it has planned, Zelenskiy will be able to log a major success for his fledgling administration pretty much without lifting a finger: By winning in court, Poland, backed by Lithuania and Latvia, has done all the work.

Read the original article here.

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