Jack D Sharples Russia EU Gas Relations the Russian Perspective

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Jack. D. Sharples: Russia-EU gas relations: the Russian perspective BASEES 2012

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Russia-EU gas relations: the Russian perspective

Jack. D. Sharples, University of Glasgow

Abstract

Much has been written on energy security in Russia-EU gas relations, largely from a

European consumer security of supply perspective. Natural gas has also been securitised in

Russia, but it is framed differently. The economic, political, and social value of Russias gas

exports has led to Russian conceptions of energy security as security of export, particularly to

the strategic market of the EU. Yet Russia faces several challenges to these exports: The

politicisation of Russias gas exports to the EU; Russias lack of short-term delivery route

and export destination diversification options; increased supply-side competition on the EU

gas market; and the development of EU legislation and Russias perceived exclusion from the

EU gas market. In light of these challenges, the next decade should be regarded as a

transitional period during which Gazprom must adapt to changing conditions on the EU gas

market; the development of the Russian domestic gas market and the projected increase in

gas exports to the Asia-Pacific region will reduce Russias dependence on exports to the EU;

the diversification of delivery routes should reduce the impact of, if not the propensity for,

disputes with transit countries. Such developments could pave the way for Russia and the EU

to overcome the difficulties of the past decade and renew their mutually-beneficial energy

relationship.

Introduction

There is a prevalent opinion in academia (Finon and Locatelli, 2007; Gtz, 2008), business

(CERA, 2007) and international politics (European Commission, 2009) that Russia and the

EU are mutually dependent in the sphere of energy, especially with regard to the trade in

natural gas. Unfortunately, such interdependence is often politicised and characterised as a

negative phenomenon, which should be reduced through import and export diversification.

As Belyi (2010) explains, when gas relations are conducted purely between Gazprom and

European energy companies there is no securitisation. But once at the level of the European

politicians there is a willingness to avoid Russia and on the contrary there are statements on

the Russian side to diversify from Europe, that is securitisation Of course its an energy

security dilemma, but not only. Its actually a negative interdependence. And the negative


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interdependence leads to mutual avoidance. As far as Karaganov et al are concerned, such

securitisation is the greatest obstacle to building a positive model of energy interdependence,

alongside the politicisation of attempts by Russian capital to invest in Europe, which is

perceived as having political and geopolitical, rather than commercial, aims (Karaganov et al,

2009, p.104).

European academic literature on the subject of Russia-EU gas relations has extensively

examined the question of how the EU might reduce its gas dependence on Russia through gas

import diversification, the development of the EU internal gas market, and a common EU

external energy policy (Gtz, 2008, p.7; Finon and Locatelli, 2007, p.24-29). These views are

reflected in the EUs Energy 2020 strategy (European Commission Directorate-General for

Energy, 2011, p.5-7). European academic literature which considers the Russian perspectiveon EU-Russia gas relations and Russian approaches to energy security (Umbach, 2011, p.25,

36-38) is somewhat rarer.

Yet despite the rhetoric and proposals for diversification, both EU and Russian policy

documents suggest that Russia will remain a key supplier of natural gas to the EU over the

coming decades ((Cox et al, 2011, p.15-16; MinEnergo, 2009, p.22-23). Therefore, in order

to develop a deeper understanding of the dynamics of what will continue to be a strategically

important Russia-EU gas relationship, the Russian perspective must also be considered. Thispaper not only explores Russian approaches to energy security, but also examines Russian

perceptions of threats to Russias energy security, particularly with regard to Russias gas

exports to the EU, and uses these insights to suggest potential future developments in the

Russia-EU gas relationship.

Russian energy dependency

Theoretical model of energy dependency and its application to energy-exporting countries

Definitions of security in the political science arena are often based on the notion of an

existential threat to the referent object1 (Buzan et al, 1998, pg. 25). In the post-Cold War

period the Copenhagen School approach has led to a broader definition of security, which

goes beyond the traditional military realm to include political and economic aspects (Buzan

et al, 1998). Coupled with the broader definition of security has been a focus on the question

of securitisation, and its occurrence through speech acts (Waever, 1995, pg. 55). In other

1The referent object being the object which is to be secured, or which is under threat


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words, an issue becomes securitised by being successfully intersubjectively defined as a

security issue. The phrase energy security is now so widespread, having entered the

mainstream vocabulary of Russian political actors (Putin, 2009; Medvedev in Reuters, 2011;

Shmatko, 2009), Russian academia (Belyi, 2003; Simonia, 2004; Romanova 2010a), and the

Russian media (Shishkin, 2006; Antonov, 2009; Mitrova, 2011), that one can hardly deny

that energy has been securitised at a discursive level in Russia.

The theoretical securitisation of energy usually entails classifying energy supplies as the

referent object, with the existential threat being the denial of such supplies, either due to

supply interruptions or price increases which render those energy supplies unaffordable to the

consumer. This approach is reflected in the International Energy Agency (IEA) definition of

energy security as the uninterrupted physical availability at a price which is affordable,while respecting environment concerns (IEA, 2012). The manifestation of such a threat is

most likely to occur when a state exists in a situation of vulnerability, or energy dependency,

which Balmaceda defines as:

a) more than one-third of a countrys total energy supply comes from foreign

sources; b) more than 50% of a countrys annual consumption of a single

major energy source (in most of the Central and Eastern European states, oil or

gas) comes from foreign sources, or c) a country depends on a single externalprovider for more than 60% of its imports of a major energy source for that

country or more than 45% of its consumption of that energy source.

(Balmaceda, 2008, pg. 16)

Many other mainstream approaches to energy security (Kruyt et al, 2009; Lschel,

Moslener, and Rbbelke, 2010b) also examine the issue primarily from a consumer

perspective, often with a focus on security of supply of fossil fuels, as noted by Jansen and

Seebregts (2010). This is especially the case when European approaches to energy security

are discussed (Constantini et al, 2007), and even more so when Russia is included as a factor

in European energy security (Goldthau, 2008; Heinrich, 2008; Andres and Koffman, 2011).

However, for an energy-exporting country, the opposing-directional flows of energy supplies

and monetary revenues are reversed. For energy-exporting countries, the revenues gained

from exporting energy supplies represent the referent object, whilst export supply

interruptions or a collapse in price or demand for that countrys energy exports represent an

existential threat to energy export revenues, and therefore a threat to the energy security of


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that country. If Balmacedas dependency model is reversed it can be said that an energy-

exporting country is energy-dependent if:

a) Energy resources account for more than 50 percent of a countrys exportsb) More than one-third of a countrys GDP or budget revenue comes from the export of

energy resources

c) A country depends on a single external market for more than 45 percent of its exports ofall energy resources, or more than 60 percent of its exports of a single type of energy

resource

The extent to which Russia, as the worlds largest hydrocarbon exporter and the largest

external supplier of hydrocarbons to the EU, may be defined as energy dependent can be

demonstrated through the application of the reformulated Balmaceda model, thus providing

empirical support for Russian conceptions of energy security as security of export.

Russian energy dependency

According to Dr Alexei Gromov, Deputy Director of the Institute for Energy Strategy in

Moscow, the energy sector accounted for 67 percent of Russias export revenues in 2010,

with the export of natural gas accounting for 12 percent. Gromov also states that Russia

earned $255bn from hydrocarbon exports in 2010, of which only $46bn (18 percent) came

from gas sales (Gromov, 2011). The first figure is broadly corroborated by the RosStat (The

Russian State Statistical Service) statistic that mineral products (not including metals and

precious stones) accounted for 68.4 percent of Russias exports in 2010 (RosStat, 2011a),

although the EU Council suggest a slightly lower figure of 63 percent (EU Council, 2011).

According to Russias Ministry of Finance oil and gas revenues accounted for 8.5 percent

of GDP in 2010 (Ministry of Finance of RF, 2011). However, the share of energy in Russias

GDP may be much higher. President Medvedev has stated that the energy sectors share of

Russias gross domestic product is above 30 percent (President of Russian Federation

(henceforth Pres. RF), 2010c). President Medvedevs claim is echoed by Gromov, who

suggests that the energy sector accounts for 31 percent of Russias GDP, with the gas

industry accounting for 12 percent (Gromov, 2011).

The Ministry of Finance also claims that federal budget revenues were equal to 18.5 percent

of GDP in 2010 (Ministry of Finance of RF, 2011), meaning that oil and gas revenues

accounted for 46 percent of federal budget revenues in 2010. Again, Gromov suggests a


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slightly higher figure, with the energy sector accounting for 49 percent of budget revenues in

2010, and the gas sector accounting for just 6 percent (Gromov, 2011). The small share of gas

in Russias federal budget revenue is confirmed by Igor Prokopenko of the Russian Ministry

of Finance, who claims that taxes paid on oil production and export accounted for 92.5

percent of federal budget oil and gas revenues in 2010, with taxes on natural gas production

and export accounting for just 7.5 percent (Prokopenko, 2011).

Given the discrepancy between varying sets of figures, such statistics should be viewed

with a degree of caution. Kuboniwa et al have discussed the potential for the oil and gas

sector to be underrepresented in RosStat figures (Kuboniwa et al, 2005). The identification of

oil and gas revenues in Russias economy became more challenging following the 1st of

October 2010 amendments to the Federal Budget Code

2

which stated that separate accountingof oil and gas revenues for the federal budget, reserve fund, and national wealth fund will be

suspended until 2014 (Rossiyskaya Gazeta, 2010, Ministry of Finance of RF, 2010).

Gazprom has held a legal monopoly on Russian gas exports since July 2006 (Rossiyskaya

Gazeta, 2006). In 2010 the company exported a total of 218 billion cubic metres (bcm) of

gas, of which 130bcm (59 percent) was delivered to the EU-27. However, due to the higher

prices at which Gazprom sells gas in the EU, sales to EU countries accounted for 62.4 percent

of Gazproms export revenues (net of excise tax and customs duties) in 2010 (Gazprom,2011b). The EU Council suggest that the EU accounts for 88 percent of Russias oil exports,

70 percent of its gas exports, and 50 percent of its coal exports (EU Council, 2011).

The figures above suggest that, according to the reformulated Balmaceda model of energy

dependency, Russia is energy dependent given the share of energy in exports and budget

revenues, and is close to dependency regarding the share of energy revenues in GDP,

depending on which statistics are used. Furthermore, Russia meets the criteria of depending

on a single market (the EU) for more than 60 percent of its exports of a single energy

resource (natural gas).

The under-representation of the gas sector in Russian exports, GDP and Government

budget revenues is partially explained by the argument that Gazprom benefits from low taxes

in exchange for supplying the domestic market with gas at low, regulated prices. Quite

simply, the economic benefits of the Russian gas industry are not fully monetarised, with the

Russian Government foregoing tax revenues in order to maintain low domestic gas prices.

2Federal Law of 30 September 2010 N 245-FZ "On Amendments to the Budget Code and other legislative acts

of the Russian Federation"


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(Dusseault, 2010). Therefore, Gazproms gas sales to the EU are crucial not only for Russias

external energy security, but also for Russias internal energy security.

The role of energy in Russias broader economic and political relations with the EU

The EU does not only represent a key market for Russian gas exports. The EU is also

Russias most important economic and political partner on the international stage. According

to the European Commission, the EU-27 accounted for 43 percent of Russian imports and 49

percent of Russian exports in 2010 (European Commission Directorate-General for Trade,

2011a, pg. 4), and it is estimated that 75 percent of Foreign Direct Investment (FDI) into

Russia comes from EU Member States (European Commission, 2011). For comparison,

China is Russias second-largest import and export partner, accounting for 18.1 percent of

Russias imports and 5.3 percent of Russias exports (European Commission Directorate-

General for Trade, 2011a, pg.6).

The extent to which energy forms the basis of this relationship is seen in the fact that,

according to EU statistics, mineral fuels accounted for around 75 percent of Russias

exports to the EU in 2010. Of these mineral fuel exports, petroleum and petroleum products

accounted for 85 percent and gas 11 percent (Ottens, 2011, pg. 3). In 2010 Russia had a

positive trade balance of 68.1bn Euro, based on exports worth 138.6bn Euro, with the EU. Of

these exports, oil and petroleum products accounted for 100.5bn Euro, while gas, electricity

and coal combined accounted for 19.4bn Euro (European Commission Directorate-General

for Trade, 2011a, pg. 10). However, these figures seem to slightly underestimate Russias

revenues from gas sales in 2010 Using an exchange rate of 37 to 43 Roubles per Euro (XE,

2012), the figure of 966bn Roubles used above should have given Gazprom revenues of 22.5-

26.1bn Euro for EU gas sales in 2010. Whilst gas sales are significant in that they represent

around a third of Russias positive trade balance with the EU, it would clearly be impossible

for Russia to maintain a positive trade balance with the EU without oil exports.

However, while oil may be more important economically, gas is arguably more important

politically. In the context of a more regional market still largely based upon a fixed pipeline

network, Russian state control over Gazprom, which has both a monopoly on Russian gas

exports and a significant role in EU gas imports, means that gas exports to the EU bring far

greater influence and political value to Russia than oil exports.

As well as being Russias most important economic partner, the EU also represents

Russias most important political partner. When interviewed, various Russian experts, and


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European experts on Russia, agreed that a desire not to be excluded from Europe was a

crucial aspect of Russian foreign policy (Morozov, 2010; Dobronravin, 2010; Potmkina,

2010; Moshes, 2010; Smith, 2010). Yet this desire not to be excluded does not equate to

desire for integration or inclusion. Morozov describes this as a struggle for recognition versus

a struggle for independence, where recognition as member of the family comes from

accepting the rules of the family. Russia doesnt want EU membership, but does want to be a

normal European country. Therefore, Russias energy policy in relation to Europe can be

interpreted as a desire for leverage, to be heard, and to be important (Morozov). In essence,

Russias political leadership appears to be seeking a strong relationship with the EU, rather

than inclusion into the EU. In order for this to be possible, the Russian logic runs, it is

necessary for Russia to have sufficient status on the international, or regional, stage to be

deemed important enough to be a partner of the EU. Thus, an equal partnership with the EU

represents confirmation of Russias status on the international stage.

Whilst the phrase energy superpower has fallen out of use due to the perceived negative

connotations (Smith, 2010), experts agree that what Russia seeks is great power status

(Cameron, 2010; Saari, 2010). Trenin describes such great power status as a combination of

strategic independence and equal treatment in Russias relationship with major international

players such as the US, the EU, China, India and Japan. In particular, financial independence

is a necessary (although insufficient by itself) condition for strategic independence, and

Russias ability to come through the financial crisis of 2008-10 without applying for external

financial assistance was proof of Russias independence (Trenin, 2010). During the crisis the

Russian Government relied heavily on the Stabilisation Fund of the Russian Federation,

which had been established in 2004 as a means of absorbing excessive liquidity, reducing

inflationary pressure and insulating the economy from volatility of raw material export

earnings (Ministry of Finance of RF, 2007). Therefore, oil and gas export revenues can be

said to underpin Russias strategic independence. Furthermore, from a Russian perspective,

Russias role as the European Unions largest external energy supplier means that the EU

must take Russias interests into account, and prevents Russias exclusion from Europe,

without committing Russia to too much integration. As Zagashvilli suggests, for Russia

energy exports to the EU represent not only monetary profit, but also influence and status

(Zagashvilli, 2010).

Thus it can be seen that a strong and equal partnership with EU is vital for Russias regional

economic and political status, and that energy exports not only underpin such a partnership,


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but also form the basis of Russias strategic independence. However, despite the importance

of the EU as a strategic market for Russian gas exports, it represents an increasingly

challenging environment for Gazprom.

Challenges for Russian gas exports to the EU

There are several reasons why gas exports to the EU are currently an area of specific concern

for Russia. These may be termed structural, since they provide the context, or conditions, in

which Russian discourses on energy security are constructed.

Politicisation of Russian gas exports to the EU

Until the beginning of the 21st

century the Soviet Union, and then Russia, was regarded as areliable supplier of gas to Western Europe. Even during the early 1990s, when the Russian

economy was going through a difficult transition, the gas flows from East to West continued

uninterrupted. However, during the first decade of the 21st century, Russian gas exports to

Europe became increasingly politicised. Terterov argues that such politicisation would not

have happened but for two events: a) The expansion of the EU in 2004; and b) The gas transit

dispute with Ukraine in January 2006, which received a significant amount of media attention

and captured public imagination at a time of high oil prices and Western political discoursesof resurgent Russia (Terterov, 2010). Meanwhile Belyi suggests that Russian opposition to

the Energy Charter and Gazproms monopoly on gas exports also contributed to the

politicisation of Russian gas supplies (Belyi, 2010). To these points, this author would add

that Western perceptions of Russia following the arrest of Khodorkovsky and

dismemberment of Yukos in 2003, and the reassertion of Russian state control over Gazprom

in 2005, contributed to the broader Western discourses on resurgent Russia and fears of an

increasingly authoritarian and assertive Russia wielding the energy weapon (BBC, 2006;

Economist 16 December 2006). Such politicisation of Russias energy exports also occurred

in Russian literature on the subject, with references to Gazprom as a new Russian weapon

(Panyushkin and Zygar, 2007), and to Putin as a gas emperor (Grib, 2009).

The expansion of the EU in 2004 brought into the Union three former Soviet states (Latvia,

Lithuania and Estonia), and four former members of the so-called Eastern Bloc (Poland,

Hungary, Czech Republic and Slovakia), all of which, to a greater or lesser degree, were

united in their occasionally difficult political relations with Russia, and their high levels of

dependency on Russian gas imports (see table below).


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Table. 1. Russian gas dependency in 20103

Country

Gas

imports

(Bcm)

Gas

consumption

(Bcm)

Russian

gas

imports

(Bcm)

Import

Dependency

(percent)

Russia in

imports

(percent)

Russia in

consumption

(percent)

Czech Rep 8.51 9.28 7.46 91.70 87.66 80.39

Hungary 9.64 12.05 6.77 79.96 70.26 56.18

Poland 10.90 17.20 9.76 63.35 89.55 56.73

Slovakia 5.97 6.26 5.97 95.27 100.00 95.27

Estonia 0.70 0.70 0.70 100.00 100.00 100.00

Latvia 1.12 1.82 1.12 61.69 100.00 61.69

Lithuania 3.11 3.12 3.11 99.78 100.00 99.78

Data source: International Energy Agency (IEA), 2011.

Russias gas transit dispute with Ukraine in the winter of 2005/06 was the result of the

failure of the two sides to agree new contracts for both the sale of Russian gas to Ukraine and

the transit of Russian gas across Ukrainian territory. With no new contracts in place by the

time the previous contracts expired, Russia halted gas deliveries to Ukraine and Ukraine

halted the transit of Russian gas to the EU. Whilst the details of the dispute have been

considered in detail elsewhere (Stern, 2006), what is significant here is the effect the dispute

had on (specifically Western) European perceptions of Russia as a reliable energy supplier.

The dispute gave a substantial boost to the development of EU energy policy, as seen in the

Green Paper (European Commission, 2006) which was published in March 2006, just months

after the dispute. In Europe the dispute was interpreted as Russia bullying its smaller

neighbour, and seeking to punish the Ukrainian Government for its Orange Revolution

(Andres et al, 2011). In Russia the interpretation was quite the opposite. Ukraine firstly failed

to pay its gas bill and then, when Russia halted the supply of gas to Ukraine, Ukraine began

stealing gas intended for Europe, forcing Russia to halt deliveries via Ukraine entirely (RIA

Novosti, 2006). The Western reaction struck Russian commentators as double-standards,

given that compliance with Russia's WTO accession obligations was among the reasons

that a decision was taken in 2000 (with active EU participation) to gradually eliminate

discount prices charged to former Soviet republics. This decision was publicized by Russia,

but initially largely ignored by its neighbours with Ukraine wanting to maintain the best of

both worlds regarding integration with the West and discounted energy from Russia

(Liakhov, 2009).

3Import dependency is the share of imports in consumption, express as a percentage


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demand more than European Union depends on Russian supplies (Kaveshnikov, 2010),

because in a crisis situation the EU would be able to find some, if not all, of its short-term gas

needs from other sources (Babynina, 2010) such as an increase in LNG imports.

Russias Energy Strategy to 2030 acknowledges Russian dependence on Europe, and

proposes reducing this dependence by increasing the share of the Asia-Pacific region in

Russian gas exports from currently less than 1 percent to 20 percent by 2030 (Ministry of

Energy of RF (MinEnergo), 2009, pg. 141). However, five-year long negotiations with the

regions largest market, China, show few signs of being concluded any time soon, with China

refusing to pay European prices for Russian gas imports (Akin, 2011). In order to break into

the Chinese and South Korean gas markets Gazprom would need to expand its LNG capacity

or build new pipelines, such as the proposed Altai and Khabarovsk pipeline to China(Topalov, 2011) and the proposed trans-Korean pipeline (European Geopolitical Forum,

EGF, 2011a). However, given the significant capital investment and long time scales

necessary for the building of new pipelines and LNG terminals, Russias short-term options

for diversification of gas supplies away from Europe remain extremely limited.

Increase in supply-side competition on the EU gas market

The EU gas market represents an increasingly challenging environment for Russia as a gas

supplier. What was traditionally a fixed-pipeline based market with a small number of

external suppliers (Russia, Norway, and Algeria) is becoming increasingly competitive with

LNG supplies being imported from Qatar, Libya, Nigeria, Egypt, Trinidad and Tobago, and

Oman (Kavalov et al, 2009). This increased competition has contributed to Russias share of

EU gas imports declining from 47.7 percent in 2001 to 34.2 percent in 2009 (Eurostat, 2011).

By the end of the decade, shale gas production in Europe could be a reality (Gloystein and

Kahn, 2011). Even though a moratorium has been placed on drilling for shale gas in France

and Bulgaria (BBC, 2012), commercial shale gas production is set to start in Poland in 2014,

thus easing that countrys dependence on Russia (Dejevsky, 2011). Whilst it is unlikely that

shale gas could prove to be a game changer in Europe as it was in the United States, and

concerns remain about the cost effectiveness and environmental impact, shale gas certainly

has the potential to make a major impact on European gas supply (Gas strategies, 2010, pg.

2-6). Any such increase in European gas supply represents a potential reduction in European

gas imports, which therefore poses a challenge to Russias European gas exports. Such

uncertainty over future European demand for Russian gas presents a difficult challenge forRussia as a gas supplier, as Yastrzhembsky explains:


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We would need a common understanding of how much gas the EU will

require in say, ten, 20 or 30 years, and how much of that it would expect to

buy from Russia. Then we could align our plans accordingly. Instead, we hear

panicky statements about the need to reduce Europes over-dependence on

Russia. How can we develop and co-ordinate our energy strategy under these

circumstances? (Yastrzhembsky, 2008, p.36)

Romanova adds that Russian politicians have expressed the opinion that it is unfair for the

EU to encourage Russia to build pipelines and become hostage to the European market, while

at the same time pursuing diversification (Romanova, 2010b). However, it is not only the

potential future demand for Russian gas imports which worries Gazprom and Russian

analysts, but also the level and stability of prices at which that gas will be sold.

Spot trading as a challenge to prices and long-term contracts

Coupled with increased supply-side competition and the effects of the global financial crisis

since 2008, the development of the European gas market and short-term spot market gas

trading has exerted downward pressure on European gas prices (Melling, 2010, pg.120-124).

This poses a challenge to Gazproms preferred system of long-term contracts, which index-

link gas prices to those of oil with a 6-9 month time delay and include take-or-pay clauses

to ensure that consumers purchase at least a minimum amount for the duration of the contract,

which can run for 10, 20 or even 25 years (Gazprom, 2012). This system is designed to share

the risk between the supplier and consumer. However, the last decade has seen an increase in

spot-trading, whereby gas is traded within the EU with prices based on supply and demand

rather than oil prices. This has been made possible by the elimination of destination clauses

which prevented countries from re-exporting imported gas (Melling, 2010, p.46). The

combined effects of increased LNG supplies to Europe, economic downturn and the related

slump in European gas demand relative to supply led to spot prices in the EU falling far

below the prices in Gazproms long-term contracts. Following these developments European

energy companies began to pressure Gazprom for a greater share of spot pricing in the LTC

gas price formula, while several European companies also appealed to the Stockholm

Chamber of Commerce (SCC) Arbitration Institute (a well-known centre for the resolution of

international trade disputes) for arbitration on disputes over gas prices (SCC, 2012). In

response Gazprom offered discounts on LTC gas prices in January 2012 (RIA Novosti,

2012). The question for Gazprom in the coming decade is whether it will be willing to


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Energy Package, and that Gazprom should be prepared for the consequences. On a positive

note for Gazprom, the first line of Nord Stream was launched in November (Nord Stream

AG, 2011). Then in December EU Energy Commissioner Gunther Oettinger announced the

possibility of exemptions for Russias South Stream project from Third Energy Package

regulations (RIA Novosti, 2011), whilst Socor suggests that Gazproms decision to bring the

start of South Streams construction forward to late 2012 is an attempt to pre-empt the entry

into force of the Third Energy Package in March 2013 (Socor, 2012). However, until an

agreement is signed, the legal future of South Stream on EU territory will remain uncertain.

Conclusion

From the Russian perspective the period 2001-2008 represented a golden era for Russian

gas exports to the EU, with prices and demand rising, and Russias international status and

economic growth following suit. However, despite the quicker than expected recovery of

international energy markets, the period of 2008-2012 may be interpreted as the beginning of

a transition period in the Russia-EU energy relationship.

The development of the EU into a more liquid, competitive gas market will continue.

Gazprom must adapt to these changing conditions through a combination of competitive

pricing, more flexible contracts (regarding contract duration and offtake volumes) and asset-

swaps of minority shareholdings in partnership with downstream European energy

companies, in order to retain market share and export volumes.

Russias domestic gas market is expected to become more profitable and competitive, due

to the gradual increase in state regulated prices and the liberalisation of gas sales. As

independent Russian gas producers and Russian oil companies supply an increasing share of

the Russian market, the need for Gazprom to use export revenues to subsidise domestic sales

will be reduced.

In the long term, post-2020 period, it is possible that increased Russian gas exports to the

Asia-Pacific region in line with projections in Russias Energy Strategy to 2030 (MinEnergo,

2009, pg. ) could further reduce Russias dependence on the EU as an export market.

Finally, 2012 should see both the completion of the second line of Nord Stream and the

launch of the construction of the South Stream gas pipeline. If both projects are completed as

planned, Ukraines share of the transit of Russian gas to the EU will be reduced from around

80 percent in mid-2011 to below 50 percent. Even if these projects do not reduce the


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propensity for Russo-Ukrainian disputes, they will reduce the impact of such disputes on

deliveries of Russian gas to the EU.

Therefore, there is the distinct possibility that Russias gas exports to the EU will undergo a

de-securitisation over the next decade as Russia and the EU reduce their negative

interdependence. If this is the case, there remains the hope that Russia and the EU will be

able to overcome the difficulties of the past decade and renew their mutually-beneficial

energy relationship.


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Jack D Sharples Russia EU Gas Relations the Russian Perspective