The European Commission’s proposal for a revised directive on security of gas supply is a direct response to the supply crises that Europe faced in 2006-2007 and 2009. Whatever the outcome of the EU’s decision making process - with the Commission’s proposals certain to be watered down - the EU is likely to gain at least greater coordination powers in gas crises. But any solution adopted by the EU is unlikely to be final. Top Commission officials point out that it has taken 20 years to sort out thorny issues as aviation rights with Russia. Reaching a satisfactory solution and relationship with Europe’s largest supplier of gas will take decades.

“Russia will also learn that we are moving away from a national dimension,” said a DG TREN official. “The reality is the EU market. That is the change that is occurring.” Despite the increasing reality of an EU energy market, the major question still facing European politicians is why do EU countries continue to be affected by the current disputes between Russia and Ukraine. European countries, unlike former Soviet Union republics, such as Ukraine and Belarus, have always paid normal market rates for gas. Contracts include payment for transit through Ukraine. European industry and governments thus want to avoid a situation that could be interpreted as paying “twice” by having to guarantee payment, via the Ukrainians, for transit.

ONE-OFF DIFFICULTIES IN UKRAINE

The Commission admits that Ukraine’s current payment difficulties may be one-off. The year 2009 is the first one in which Naftogaz, and not intermediary companies, is wholly responsible for buying and transiting gas to its European partners. The gas in storage and transit is no longer bought by intermediary companies. However, Ukraine itself is also facing immense budgetary problems due to the financial crisis. With 80% of Russian gas exports to the EU passing through Ukraine, state-owned Naftogaz, being responsible for transit to the EU border, has struggled to fulfil its new role. The vertically integrated company is also in the unenviable position of having to supply natural gas to Ukraine households, budget-funded institutions and utilities at lower prices, set by the Ukrainian state. Non-payment is also rife among Ukrainian customers, whether households or institutions.

The agreement ending the January 2009 gas dispute, valid from 2009 until the end of 2019, foresees a privileged fee for Ukraine of US$1.7 for transiting 1,000 cubic metres of gas per 100 km. As of 1 January 2010, the transit fee will be based on market rates. Gas supplied to Ukraine, for Ukrainian users, is charged at a rate 20% below that of the conventional European price formula. As of 1 January 2010, Gazprom will also charge Ukraine according to a market-based European price with no reductions.

Given its structural restraints, Naftogaz now complains of not having sufficient funds to fill storage facilities and is requesting a loan of some US$4.2 billion (to finance the purchase of an additional 19.5 billion cubic metres of gas for storage). After paying for gas received over the previous month, Naftogaz once again warned, in early July 2009, that timely and full payment is critical from “the point of view of guaranteeing of energy security of Ukraine and stability of gas transit to the countries of the European Union”. If the Ukrainian company fails to pay on time, or in full, Gazprom is entitled, by the contract signed in January 2009, to switch to advance payment for natural gas.

SOLUTION NOT FOR TOMORROW

The Commission’s latest proposal for a regulation governing security of gas supply will not provide immediate relief in the event of a crisis. There are clear benefits in the regulation, especially when compared to the current 2004 directive (see other article). First and foremost, the regulation should set a new standard for calculating preparedness, the so-called ‘N-1 indicator’ that describes the ability of a gas infrastructure to supply gas for maximal demand in a certain area in the event of the disruption of the largest infrastructure. There should also be a faster EU response, with the Commission certain to obtain greater competence than now in declaring a crisis and coordinating, via a strengthened Gas Coordination Group, the response.

The greatest change, though, is the new regulation’s pushing of infrastructure changes. The regulation thus pushes reverse flow capabilities on all intra-EU interconnectors. A good example is Slovakia, together with Bulgaria worst hit by the January 2009 crisis. Only as the January supply disruption was coming to an end was the country able to make use of reverse flows from the Czech Republic. By making reverse flows a permanent capability, Slovakia is now able to tap into supplies via GDF Suez and E.ON Ruhrgas. The new regulation generalises this requirement.

Slovakia is also a good example of the need to be prepared. Slovak gas storage facilities are currently full, with the prime minister setting up a crisis group. Under the new regulation, competent authorities will have to draw up and have evaluated by the Commission emergency plans. Less fortunate are countries like Bulgaria that have to invest more in infrastructure projects, notably in Bulgaria’s case to connect the national gas network to those of Greece, Romania and Turkey. It remains to be seen what ‘incentives’ to connect networks will be accepted by member states when negotiating the new regulation.

Using other countries’ storage capacity should also be another stumbling block. As a French non-paper on the new regulation states: “European solidarity is not possible unless each member state takes its part of the collective responsibility for energy security”. Hungarians, for instance, are worried that their efforts in building up gas storage capacity would not be recognised if free-riders were given undue guarantees via the new regulation.

Slow talks on Ukraine gas loan

The Commission is set to call a second meeting, before the end of July, to discuss the possibility of a loan together with officials from international financial institutions as well as Ukrainian and Russian officials. The first meeting brought together experts from the International Monetary Fund, the European Bank for Reconstruction and Development, the World Bank and the European Investment Bank. Following this meeting, on 29 June, the Commission talked of the need to establish the specificity of the Ukrainian request for US$4.2 billion. EU officials are wary of financing the purchase of an additional 19.5 billion cubic metres of gas for storage. It is unclear when a loan could be put together for Ukraine. Given the lack of transparency, the International Monetary Fund, itself, has only given tentative approval for a USD$3.3 billion instalment of its rescue loan for the country.