Gazprom’s Dwindling Clout

At a meeting in Moscow on Jan. 14, the European Commission’s vice president for energy union, Maros Sefcovic, was surprised to hear the head of Gazprom, Aleksei Miller, declare that if the Europeans want continued access to the Russian natural gas that is currently piped through Ukraine, Europe would have to build its own pipelines to the Turkish border.

Citing “transit risks” presented by transporting natural gas through “unreliable countries,” the Russians plan to bypass Ukraine and build a system known as Turk Stream under the Black Sea through Anatolia to the Balkans. Western Europe, which gets roughly 30 percent of its natural gas from Russia, will just have to live with the decision, Mr. Sefcovic was told. “Turk Stream is now the only pipeline,” Mr. Miller told reporters. “Our European partners have been notified of this, and their task now is to establish the necessary gas-transporting infrastructure from the borders of Turkey and Greece.”

Nevertheless, Mr. Sefcovic and other experts know that European consumers have no real cause for worry. Mr. Miller’s blustering tone reflects little more than the twilight of Gazprom’s heavy-handed pipeline politics; the fact is that the Russian energy giant’s grip on prices and distribution is weakening as gas and oil prices fall and competition rises.

Many Europeans have bad memories of when Gazprom cut off deliveries during the winters of 2006 and 2009 because of pricing disagreements with Ukraine. A sense of vulnerability was compounded by Russian efforts to develop more delivery systems that allow Moscow to directly control the flow of gas to specific countries: the Blue Stream pipeline to Turkey, the Yamal pipeline to Poland and Germany, and Nord Stream to Germany. This expanded network was part of Moscow’s commercial and political strategy, one that undermined Ukraine’s position as the principal transit country to the West, causing Kiev and the smaller countries of Eastern Europe to lose transit fees and enabling Moscow to threaten to cut supplies with impunity.

But the strategy of using pipelines as a lever to control markets no longer works. Since 2009, the European Union has strived to improve its energy security, primarily by acting to develop a single, open market with interconnecting pipeline systems and new sources of supply. If one of the Union’s member states is cut off by Gazprom, gas can simply flow from another member.

Russia’s weakening hold on energy policy was clearly evident in December, when President Vladimir V. Putin canceled the much-touted South Stream project, which called for an undersea pipeline from Russia to Bulgaria. European and American sanctions against Russia, combined with financial and legal problems, had made the $40 billion system to bypass Ukraine untenable. Rather than just fold, however, Mr. Putin has announced plans for Turk Stream.

At first glance, the switch seems like a clever bid to bring Ankara closer to Moscow while keeping Europe dependent upon Russian gas and punishing Kiev for breaking with the Kremlin. But on closer examination, it looks like an act of desperation.

Last year, as the crisis over Crimea and the Donbass region boiled over, Russia cut off gas flows to Kiev for almost six months, citing pricing disputes. Though European officials have received Moscow’s assurances that flows will reliably continue this year, the European market is increasingly open to other sources. Norway now rivals Russia for the title of largest gas exporter to other countries on the Continent. Algeria, too, is able to provide more gas; the first imports of liquefied natural gas from America are only a year away, while the beginnings of shale development can be seen in Poland and Britain. In addition, pipeline networks to Italy and the Balkans are being built by Turkey and Azerbaijan.

For Russia, hit by tumbling oil revenues and other woes, finding investors for new pipeline systems will be difficult at best. South Stream faced many hurdles, including legal obstacles. The European Union’s new market liberalization rules require the separation of gas transmission systems from gas suppliers. In principle, Gazprom, which would have owned the pipeline across Eastern Europe to the major trading hub in Austria, could not legally own both the pipes and provide the gas. Even if Brussels were to grant an exemption, the company would still have been required to allow third parties access to its pipeline. Brussels also would have required transparent pricing for other companies using the system. Such interference was anathema to Moscow.

In some ways the Turk Stream project is even more problematic than South Stream. The Russian proposal envisages avoiding European legal entanglements by having Gazprom customers take delivery at that European border. But that hope could easily backfire. Once Russian gas enters Europe, it could be routed anywhere. A major storage point, particularly in summer, would be the vast facilities in western Ukraine. Turk Stream could further diminish Gazprom’s influence by providing another store of natural gas immune to a Russian cut-off.

It is also uncertain how eager Ankara is to support Turk Stream. The country already receives 60 percent of its natural gas from Russia. Why would Turkey want to make itself more dependent on Gazprom when all of Europe is seeking less dependence? Despite an agreement to conduct a preliminary feasibility study, there is still no actual contract between the two countries’ state-controlled energy companies to build Turk Stream. So far, Ankara seems more focused on obtaining extra discounts for the Russian gas it already imports through the Blue Stream pipeline. Chances of financing from Turkey are just as slim as they are from the West.

There are lessons for both the European Union and Russia in all this. The main one for Brussels is that it should quicken efforts to fully develop its single gas market. The more open the market, the less traction for Russia. Gazprom also has to recognize that it needs to rethink its approach to doing business with the West. Why continue an increasingly fruitless game of pipeline politics when its huge gas reserves could make Gazprom a major profit-maker in a European market that is open and free?

Alan Riley is a professor of law at The City Law School at City University London.

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