CEE & Russian Gas: A Monogomous Relationship

Love it or leave it, András Deák, Senior Research Fellow at Institute of World Economics, HAS, Hungarian Institute of International Affairs, came up with a novel way of describing the interdependent natural gas relationship between Russia and countries in Central & Eastern Europe at the Gas Dialogues event in Budapest, Hungary, Development and Use of Natural Gas in the Danube Region: Prospects and Opportunities.

“This region has a monogamous relationship with the Russians, understandably,” he said. “We have been supplied by the Russians for many years, and we've always dreamed about having a harem to step in to the gas market, a competitive gas market where you have many different suppliers and Russia is only one of those.”

While those in monogamous relationships sometimes pined for a harem, Mr. Deák noted that the latter could be very expensive.

“In a region where you have social affordability, low GDP as one of the critical elements of your gas policy,” he explained, “you really cannot afford a competitive market which is much more expensive than the existing one - you have your limits.”

This meant, he said, keeping the monogamous Russian relationship intact would be a reasonable path, with some flirting with other suppliers.

In his meditation on the interdependence between the two sides, he said there were two interpretations, explaining, “the one is purely statistical – the two sides are mutually dependent on each other. This is some sort of inertia.”

The other, deeper understanding of interdependence, he said, was a code of behavior: “When the two sides try to cooperate and qualitatively try to improve that relationship in order to deepen the interdependence, or preserve it.”

Mr. Deák said the sides – Europe and Russia - had reached a point when they needed to ask whether their gas relationship should be developed further, or whether interdependence would become uncomfortable and they would stray from each other.

“We have accumulated many questions and are at a critical point – we cannot wait any more in this regard,” he said.

He named what he believed were misperceptions on the European side regarding this interdependence: for one, that it is asymmetric. “It was asymmetric indeed. If you look back to 2004, roughly two-thirds of the gas revenue of Gazprom came from exports to the EU.

“But at the same time, if you look at the situation today we see that this kind of asymmetry has been decreasing – many new developments have been occurring, like the Russian market increased in terms of revenue for Gazprom, new contractual regimes in the old Soviet space, non EU member European markets like Turkey, the Balkans increasing their imports,” explained Mr. Deák.

What this added up to, he said, was that the EU now contributed only slightly over 50% to the total revenue of Gazprom. Looking further out, he noted that Russia and Gazprom were entering China and the Far East markets, which he called a “development of a great magnitude.”

“So, if you look at the new contractual relationships, 50 BCM – 30 to China and more than 10 in terms of LNG, and Vladivostok – this would mean that 20-25% of Russian gas exports in 2030 will not go to the European arena.”

There was a very conscious diversification strategy occurring on the Russian side, he said, meaning that dependence on EU markets would go below 40%, with little chance of reversing the process.

“In this regard,” he said, “we have to keep in mind that the situation is not that asymmetric: there is no perspective, according to the IEA estimate, if there is no political intervention or supply security intervention will happen in the European market, Gazprom will preserve its 25-30% share in the gas markets.”

Regarding unilateral, coordinated actions in the gas market, Mr. Deák explained that there had been much criticism of Gazprom, that the current high gas price environment was a big headache for European competitiveness, especially for electricity generation and the chemical industry.

“This is true and Gazprom, if they want, might have a big input into this story.”

Simultaneously, he said, the three pillars of EU policy – climate policy, internal market, supply security policies – were unilateral. “And, in most cases, have a negative message to the Russian gas producers.”

Theoretically, he explained, climate policy should have a positive effect on gas markets, but Europe had succeeded in replacing nuclear and natural gas with renewables and coal. He commented, “The climate policy had an input into the fact that basically this decade has been the lowest for natural gas markets in Europe – this is primarily bad for the European gas companies, but Gazprom is also affected.”

He said that normally the internal market would be a neutral development for Gazprom, which can accommodate such changes like new European circumstances. “At the same time, if we go a bit further, saying we would like to change the existing status quo through infrastructure regulation, of course pipelines have to be regulated because they are natural monopolies, but there is a big difference if one is also taking into account the regulation, the market and would like to establish, artificially, more competitive markets.”

From the interdependence perspective, he said, it was a negative message for those who had a bigger share of the market. He stated, “You have to keep in mind that you punish those actors on the market who have higher market shares.”

Meanwhile, discourse on supply security was very important, he conceded, but interdependence also needed to be taken into account.

Mr. Deák said that it was questionable whether the West was actually having dialogue on such issues. “We don't – both sides are playing some sort of game of chicken, expecting accommodation to each other's actions, and in a good number of cases we have accommodated each other. If it comes to transit diversification in the north, yes, Europe accommodated Russia in terms of oil and gas; if it comes to the new set-up of the European contractual regimes, market pricing, I think that Gazprom showed much more flexibility than Sonatrach, because of its own revenue-maximizing behavior,” he recalled.

At the same time, he said, there were numerous issues that hadn't even been discussed, like Ukraine or regulation. “They are waiting for each other; 'someone will withdraw from his position.'”

“Some sort of big deal would preserve this interdependence. If not, then it may happen that we have to say goodbye to interdependence. This is not bad by all means – divorce is absolutely an option,” explained András Deák, adding that one had to bear in mind the consequences and implications of such actions – they required a strategy.

Drew Leifheit is Natural Gas Europe's new media specialist.