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Dec 21, 2012 | 11:21 GMT

Energy Negotiations Between Moscow and Brussels

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Summary

The European Union's efforts to diminish Russian dominance in its energy markets face growing constraints as the two parties begin negotiations Dec. 21 over the legal status of Russian pipelines in Europe. Moscow has positioned itself well to remain Europe's lone large-scale supplier for piped natural gas in the coming decades. Meanwhile, the European Union is struggling to move forward its plans to construct a pipeline for Azerbaijani natural gas. 

Still, Brussels retains significant leverage against Moscow thanks to the development of liquefied natural gas import capacity on the Continent and the integration of Europe's natural gas markets. An immediate policy shift is not expected during the upcoming summit.

Bulgarian President Rosen Plevneliev on Dec. 19 announced another six-month delay in the Nabucco West pipeline project, saying that supplies of natural gas from Azerbaijan were still uncertain. The announcement came on the eve of a summit in Brussels during which diplomats were to discuss exempting Russia's Nord Stream and South Stream natural gas pipelines from EU anti-monopoly legislation.

Moscow will ask that Brussels grant the pipelines "Trans-European Network" status, which would free Nord Stream and South Stream from key limitations imposed by the European Union's Third Energy Package, which will take effect in March 2013. The EU legislative framework could require Russia to allow other producing nations, such as Azerbaijan, access to its pipeline network to export natural gas to European customers. It could also legally require Gazprom to divest itself of the majority share of the pipelines.

Competing Pipeline Networks

The European Union has refrained from altering the legal status of the South Stream and Nord Stream pipelines, instead trying to spur the development of alternative pipeline infrastructure that would allow the Continent to diversify away from Russian natural gas. The European Union has backed the Nabucco West and Trans-Adriatic Pipeline projects that would channel natural gas from the Shah Deniz II field being developed in Azerbaijan.

Russia's South Stream project will service virtually the same markets by transiting natural gas from its southern Astrakhan and Nadym-Pur-Taz fields under the Black Sea. Moscow's primary objective is to diversify its supply routes for natural gas away from Ukraine, where political tensions continue to threaten transit routes.

The outlook for Nabucco West is increasingly dire. Two of the project's initial five shareholders (Germany's RWE and Hungary's MOL) are looking to drop their share of the project, while a third (Bulgaria's BHE) has hinted it may sell a significant part of its stake to Azerbaijan. 

Russia's Argument

Russia's strategy during the discussions will be to present itself as Europe's only reliable supplier of piped natural gas, especially since the output of gas from the North Sea is set to decline sharply by the end of this decade. Moscow will offer three major arguments for why the European Union should cement its energy ties to Russia.

First, after developing the project on an accelerated schedule, Moscow can credibly say that it will build the South Stream pipeline. The Kremlin has heavily supported South Stream, which is much further along than the EU-backed pipeline projects.

On Dec. 7, Gazprom announced it had broken ground on the pipeline. That step followed an intense campaign to secure agreements with potential transit countries in the Balkans, and Moscow offered significant natural gas discounts and development aid in its effort to edge out the Nabucco West project. Bulgaria, the prospective South Stream transit country that received the most significant incentives from Russia, is still a majority shareholder of the competing pipeline. At Moscow's behest, Sofia could delay Nabucco West's development, especially as it begins a lengthy environmental-impact review of the project.

Second, Russia has reacted to concerns that it was using its natural gas leverage over Europe to further its political ambitions in the region — especially in Central Europe. Gazprom knew that diversification efforts in its main consumer markets could damage it, so it offered major discounts to consumer countries including Germany, Italy and Poland. In its effort to retain market share in Europe, Gazprom also began to move away from its practice of indexing natural gas prices to the price of oil. 

Finally, Moscow will seek to underscore the difficulties of resolving its protracted negotiations with Ukraine. Russian-Ukrainian tensions were at the core of several natural gas supply crises between 2006 and 2009. These episodes are what prompted the European Union's efforts to diversify its natural gas supplies away from Moscow. This in turn prompted the Kremlin to kick-start the Nord Stream and South Stream projects to bypass the traditional Ukrainian transit route.

Russia will try to reassure the European delegation that an energy crisis is not an immediate prospect. At the same time, Moscow will emphasize that the Nord Stream and South Stream pipelines are the only conduits able to ensure a stable, continuous and affordable supply of piped natural gas to Europe.

The summit will probably not result in the announcement of major shifts in pipeline policy. But Moscow will try to use the meeting as a starting point for negotiations before EU anti-monopoly policies take effect in March. Even without an agreement, it is hard to say how the European Union would enforce these policies. Still, the constraints both parties face suggest a compromise will eventually be reached.

The European Union, despite concerns over Russia's dominance of its energy sector, has not implemented a meaningful diversification scheme to supply piped natural gas from the Caspian Sea to Southern and Central Europe. The Trans-Adriatic Pipeline and the development of multiple projects for the importation of liquefied natural gas mean the European Union can still draw out negotiations with Moscow. But it remains in Brussels' fundamental interest to avoid a break with Moscow on energy issues.

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