Alan Riley on the EU Energy Prioritization

Natural Gas Europe had the pleasure of interviewing Alan Riley, Professor of Law at City University of London and a Senior Nonresident Fellow at the Atlantic Council’s GlobalEnergyCenter. We discussed his recent publication for the Atlantic Council –“Prioritization in EU energy policy: energy security first, then Energy Union”.

NGE: Prof. Riley, in your recent publication you mentioned that the Energy Union Communication differs from the original Tusk proposal. What are the principal differences?

AR: In April 2014 then-Polish Prime Minister Tusk published his article in the Financial Times calling for a EU Energy Union. The original idea was to protect Europe's supply security by creating a buyers cartel. The Polish foreign ministry published a non-paper for discussion which was circulated around the EU capitals which provided more details than was in the  FT article. The Energy Union became the buzz phrase to describe how we need to reform the EU energy policy to ensure Europe could deal with a supply security risk, in particular, from Russia.

The main difficulty with the buyers cartel proposal is that organizing a such cartel with a common price imposed on a supplier is potentially illegal under the European competition law.  This raises a number of alarming prospects. First, faced with what would amount to a buyers cartel, Gazprom could itself file a complaint with the European Commission alleging it had suffered damage under the EU’s antitrust rules. This would clearly be very embarrassing to the EU. Second, the buyers cartel concept cuts hard against the EU’s well developed policy over the last two decades of creating a single market in gas. This has been created via the three energy packages to legally liberalise the market, the interconnection strategy contained in measures such as the Energy Recovery Plan, and the policy of developing alternative sources of supply. This policy is creating a single European gas market and providing a lot of protection for supply security in Europe. They already exist pretty much completely now in North Western Europe, slowly spreading across the rest of the EU.

So, the answer is not to go and do something different , i.e. the buyers cartel, but continuing down the same path we started on two decades ago of creating a single market in gas.

 NGE: In your opinion, what are the main building blocks for the Energy Union?

AR: On a first reading the Energy Communication paper appears to try to do everything, its going to deal with energy efficiency, build infrastructure have ambitious climate change targets, develop gas resources and diversify supply. There are apparent sharp contradictions in the paper, so we have a massive commitment to renewables and reduce of usage of fossil fuels, with a  commitment to more gas. The argument in my paper is that the Union has to prioritise, starting with the supply security objectives and then building in the other objectives around the supply security objectives. I argue this is a workable approach because an initial gas focus can actually help in deploying renewables because of the need for backup for both solar and wind.

NGE: What natural gas infrastructure projects should be prioritized within the EU?

AR: A lot of projects are already on the way, for example, the Polish LNG terminal is close to completion, the 2019 Polish-Lithuanian pipeline network on its way. The idea of the Energy Union is to boost infrastructure interconnection policy. A particularly major development which may flow from Energy Union is improving access to Western European LNG terminals: the Spanish have 60bcm of LNG capacity and the British have about 50bcm  - together the UK and Spain could provide almost a much gas as Gazprom will provide to Europe this year. The issue is that interconnectors across the Channel can only reverse flow about 25 bcm and the interconnectors across the Pyrenees can interconnect about 7 bcm.  So, one of the simple solutions would be to increase capacity of  the UK and Spain to pour gas into Europe. That would create more liquidity into the European market, more access for LNG.

NGE: What are the major options of new sources of supply for Europe?

AR: The Americans are committed to at least 60 bcm of new capacity, which in today terms is half of gas that Gazprom is being provided to Europe. We expect the States to enter the European market because there is oversupply of LNG in Asia:  there are Japanese switching on the nuclear power stations and at the same time the Australians are increasing LNG production. So, there is increasing liquidity and less demand in Asia which is going to affect European market greatly. I do not think market commentators people entirely recognize the scale of it of the changes that are being unleashed.

NGE: So many things are put in place in the EU to overcome Russian gas supply dependency. Nevertheless, you still estimate it as the key energy security threat.  Is there long way to go, still?

AR:  My essential argument is that the market is changing, there is no point in to fighting for prices linked to oil.  Profitable oil-indexed contracts and no competition – that model does not exist anymore. There is more and more competition in the market and Gazprom says “we must defend indexation of oil prices to gas prices” but the oil prices are so low nowadays that the actual free market spot price can be higher. So there is a great danger that they are losing money by defending this principle.

Russia has huge amounts of gas resources and they can potentially offer it at very low prices – it can help the European economy enormously.  There is a deal to be done between Russia and Europe over the gas issue which makes everybody benefit.  I know that Russia has difficulties with the “win-win” concept but it will be a genuine win-win for Europe and Russia.  The issue is how can we get to stage where we actually deliver "win-win"?

NGE: What part is assigned to Russia in the changing European energy model?

AR: The Russian industry will understand they need to change.  The  danger for Gazprom is that they probably have got about 5 years before the large amounts of  LNG arrive in Europe from the US and the shale gas begin to take off  in Europe.

NGE: How can the Ukraine help the EU to ensure energy security?

AR: Well, the Ukraine was the home of Soviet gas industry. It has huge fields which could be developed, it has intense pipeline network and huge storage facilities in the west of the country. All of that can help the Europeans and provide supply security.  There is a lot of potential.

NGE: Do you personally believe in the project of Energy Union?

AR:  Well, I think the issue is the question “what is the Energy Union project?”.  We do not yet completely see what it is : there is a lot of ideas buzzing around but it has not  taken on the fixed character. So it is difficult to say I believe in it when I am not sure what entirely it is.

Marina Zvonareva is a Natural Gas Europe journalist focused on Russia’s international energy relations. Follow her on Twitter: @ZvonarevaMar1na