10.02.2007
Energy Partnership – A Dialog in Different Languages
№1 2007 January/March
Tatiana A. Romanova

Ph.D. (Political Science)

St. Petersburg University, Russia, Department of European Studies, Associate Professor

Аffiliation

ORCHID: 0000-0002-5199-0003
SPIN-RSCI: 8791-1970
AuthorID: 200093
ResearcherID: J-6397-2013
Scopus ID: 24779959300

Contacts

Address: 1/3 Smolnogo Str., St. Petersburg, Russia 193060
Tеl. + 7 812 363 6435 (x 6175)
E-mail: [email protected], [email protected]



Energy comprises a rather specific
area of interstate cooperation, and this is especially true of
relations between Russia and the European Union.

This reality is rooted, first, in
the fact that stable energy supplies are vital for the development
and prosperity of a state, being an essential component of energy
security.

Second, energy has an immense
potential for integration. In fact, it underlies the formation of
the European communities because at the time of the signing of the
European Coal and Steel Community Treaty in 1951, coal accounted
for 80 percent of the energy balance in the European countries.
Furthermore, the production and transportation of natural resources
requires considerable investment and capital-intensive
infrastructure, which for their part stimulate the signing of
long-term contacts between consumers and producers. Finally,
relations in the energy sphere can lay the groundwork for long-term
contacts in other sectors of the economy, as well as in the realm
of politics.

Third, there is a direct
interdependence between the EU’s demand for hydrocarbons and
Moscow’s need for revenues from the sale of energy resources (the
EU buys over 50 percent of Russian oil exports and more than 60
percent of Russia’s natural gas exports). This factor substantially
alters the traditional lineup of forces and economic relations
between the two parties. In the normal course of things, the EU
tends to take an arrogant, condescending view of economic
relations, as it attempts to impose its own rules of the game both
at the bilateral and multilateral level. Although the EU has made
such attempts in the energy sphere, its approach has been rather
low-key, while Moscow’s reaction has been fairly tough. Over the
past six years, the possibility of signing a separate energy treaty
has been mulled continuously.

The above factors explain the high
priority that is given to Russian-EU energy relations, especially
now that they have fallen on hard times. 

BATTLES ON THE ENERGY
FRONT

One indication of the worsening
relationship between Russia and the EU in the energy sphere was the
April 2006 standoff between the Russian energy giant Gazprom and
the UK (EU).

In early 2006, Gazprom had stated
it was interested to buy the UK gas supplier Centrica, as well as
Scottish Power, an international energy company. Centrica share
prices jumped, but the prospect of a Gazprom acquisition worried
London. Thus, after several rounds of consultations, it was decided
to adopt special legislation to prevent the acquisition of


UK enterprises by the Russian company – for energy security
considerations. (In 2003, a law was adopted in the

UK under which the government may not block a merging of
companies or their takeover on the British market for political
considerations.)

The disclosure of these measures
by The Financial Times predictably provoked a harsh reaction from
Gazprom. At a meeting with the ambassadors of EU member countries
in Moscow, Gazprom CEO Alexei Miller said his company did not want
to face artificial obstacles on the European market that are based
on considerations of political expediency. Otherwise, Miller
warned, the growth of energy deliveries to
Europe would decrease, with Gazprom gradually reorienting itself
toward
China
and the U.S.

A retaliatory response was not
long in coming. The European Commission stressed that the EU would
not tolerate threats and expected contractual obligations to be met
in full. At the same time, it pointed out that Gazprom was free to
diversify its deliveries for commercial purposes, but its behavior
had once again confirmed European concerns about the stability of
supplies from
Russia
and therefore the need to diversify
channels for the delivery of natural gas, as well as natural gas
suppliers. Javier Solana, EU High Representative for the common
foreign and security policy, drafted a paper entitled “An External
Policy To Serve Europe’s Energy Interests.” British Prime Minister
Tony Blair, however, said that no one would place obstacles against
the Russian company on the
UK market, and the
conflict was resolved.

The idea of Gazprom moving into
the distribution sector arose from the liberalization of natural
gas and electricity markets. One outcome of the EU energy sector
reform was the abolition of the “destination clause” in Gazprom’s
long-term contracts with European gas companies, i.e., the
territorial proviso, which does not allow for the re-export of gas.
Different gas prices for different European consumers (depending on
the distance of transportation) could have led to a situation in
which Gazprom products would have started competing with
themselves. The only sensible solution in that situation was for
the company to move into the distribution sector. It also provided
access to sales – the most lucrative segment of the natural gas
market. That was the compromise that Gazprom and its partners
reached when the destination clause was lifted.

Gazprom’s operation in the
distribution sector can also be interpreted as
Russia’s
departure from its traditional specialization in raw materials and
a shift into the export of downstream products and associated
services. But that move came up against opposition both in
the
UK and the EC because it was interpreted as a
deviation from the fair competition principle: with no
liberalization in sight on the Russian market, the Russian company
was planning to take advantage of the reformed EU market.
Unsurprisingly in that situation, the EC said it was going to sue
Gazprom over violation of fair competition laws.

Russia’s refusal to open up its own market will be perceived
by the EC as a move aimed at consolidating its position solely as
the EU’s raw materials appendage. Thus, the argument goes,

Russia will bar access to both the distribution segment and the
market of downstream products. At the same time, it could be argued
that the EC is attempting to sell access to the EU’s internal
market twice – first, as payment for modification of long-term
contracts and, second, as an incentive for the liberalization
of
Russia’s natural gas market.

Another indication of the
Russia-EU confrontation in the energy sphere is the decision on the
Shtokman gas condensate field. Discussions around this gas deposit
in the
Barents
Sea
, with probable reserves of
3.7 trillion cubic meters, have been ongoing for over 10 years now.
The latest stage of the debate started in September 2005 when a
short list of candidates for a consortium to develop the field was
announced. It included Norwegian Statoil and Norsk Hydro,
ChevronTexaco and ConocoPhillips of the
U.S., and Total of
France. It had been expected that Gazprom would soon announce its
decision amongst the candidates.

It has long been assumed that
Gazprom needs foreign partners to develop the Shtokman field.
First, the field is difficult to develop and would therefore
require access to advanced technology. Second, it provides for the
transportation of natural gas in liquefied form, mainly to the
U.S., and therefore requires LNG technology and access to the
American market. Finally, it requires significant financial
resources.

Nevertheless, the Russian gas
monopoly dragged its feet on the makeup of the consortium.
Meanwhile, competition between the potential partners, each of whom
had its own perceived advantages, was fueled artificially. The
Norwegians were ready to share their extensive experience in
operations in the arctic seas, offering production and
transportation technology, as well as asset swapping. The French
offered asset swapping and LNG technology, while the Americans
mainly offered access to the consumer market.

Soon, however, the lineup of
forces changed drastically. At a French-German-Russian summit in
Compiègne (France, late September 2006), Russian President
Vladimir Putin said some of the natural gas produced at the
Shtokman field could be delivered to the European market. Observers
linked this comment to Moscow’s difficult negotiations with
Washington over Russia’s admission to the WTO. As a result, the
analysts suggested that preference in the consortium would be given
to European companies. 

Then, in the course of his visit
to Germany, the Russian president said that the North European Gas
Pipeline (Nord Stream), which travels below the Baltic Sea and
links Russia and Germany, would be used to carry gas not only from
the Yuzhno-Russkoye field (in the Tyumen Region), but subsequently
also up to one-half of gas supplies from the Shtokman field. That
was taken to mean Gazprom’s refusal to enter the promising LNG
market. The Russian president’s statement calmed the Europeans’
fears that Gazprom would simply not have enough resources to
fulfill its obligations to European suppliers. 

Finally, on October 9, Gazprom
announced that it did not need any partnership to develop the
Shtokman field. Apparently the company had failed to find a partner
that would offer acceptable terms – that is to say, provide Gazprom
with matching assets, both in volume and quality, in exchange for a
share in the deposits.

The EU interpreted the decision as
yet another attempt by Russia to restrict the liberalization of its
energy market. In particular, members of the Norwegian Storting
expressed their regret, pointing out that cooperation would benefit
all sides.
U.S.
politicians were more outspoken,
saying that
Russia’s refusal was well
in line with
Russia’s policy toward
self-isolation, including the isolation of its energy sector, while
the International Energy Agency described the decision as an
unmistakable sign of nationalism. At an informal meeting between
Putin and EU chiefs of state in October 2006, considerable time was
devoted to the discussion of this issue, with the Russian side
explaining its position in detail.

Finally, the third event that
illustrates the state of “energy relations” between Russia and the
EU were their negotiations on the Energy Charter Treaty, which
Russia and a number of other states signed back in 1994 and that
went into force – albeit without Russia’s participation – in
1997.

The Treaty is concerned with four
sets of issues.

First, trade in
energy resources based on WTO principles.

Second,
protection of capital investment at the post-investment stage
against all sorts of non-economic risks, as well as profit
repatriation guarantees.

Third, transit.
Here, the Energy Charter Treaty and Protocol make provisions for
free transit across the territory of all signatory states, as well
as for international mediation to settle disputes on a temporary
basis. Outstanding issues include auctions for available
capacities, securing long-term contracts with long-term agreements
on the use of capacities, and regional integration provisos. It
should also be noted that Gazprom is concerned about the loss of a
substantial part of its revenues and control over the Unified Gas
Supply System.

Fourth, energy
effectiveness.

The Energy Charter Treaty was long
viewed as a dead mechanism, but in 2006 the EC and EU member states
threw their support behind it. Moreover, the document’s
ratification by Russia has become an idée fixe with Brussels’
bureaucracy. This turn of events was largely precipitated by the
Ukrainian-Russian crisis in early 2006. In addition, ahead of the
G8 summit, where Russia offered its own vision of energy security,
it was suggested that the basic principles were already enshrined
in the Energy Charter Treaty and that all that was left to be done
was to ratify the Charter.

In a letter on behalf of the EU
leadership in the run-up to the Sochi Summit in May 2006, EU Energy
Commissioner Andris Piebalgs and Austrian Economy Minister Martin
Bartenstein (Austria held the EU presidency in the first half of
2006) stressed that the EU was ready to preserve long-term
contracts provided that Russia ratified the Energy Charter Treaty.
That was yet another example of how the EU, which had already
pledged to maintain long-term contracts in working out guidelines
for the liberalization of the natural gas market in 1998 and 2003,
as well as at a time when the contractual terms had changed,
attempted to “sell” that advantageous gas delivery condition to
Moscow once again. 

After the May Summit, Vladimir
Putin stated in no uncertain terms that Russia wanted to know
exactly what it would receive in exchange for the ratification of
the treaty, and what benefits it would get in addition to a
possible inflow of investment. That was an obvious hint that
Russian companies should be given access to the EU consumer market
and that the Energy Charter Treaty provisions therefore should be
reviewed.

It may be recalled that the EU
partially excludes its territory from the effects of the Treaty,
sticking to the regional integration clause, which gives precedence
to EU internal legislation over the Energy Charter
Treaty.

An informal meeting between the
Russian leader and the EU heads of state in Lahti (Finland) on
October 20, 2006 marked a new trend in the EU approach toward the
Energy Charter Treaty. It was proposed that the relevant provisions
of the Energy Charter Treaty and Protocol be incorporated into a
new legal framework for their relations – i.e., the Strategic
Partnership Agreement, negotiations on which are to start in 2007.
In other words, the idea is to make the approval of the new legal
framework for Russia-EU relations dependent on Russia’s acceptance
of corresponding requirements in the energy sphere. This will come
into conflict with the stipulation that the Strategic Partnership
Agreement proclaims only the basic principles and aims of
cooperation, whereas all sector-specific accords are taken outside
the framework of the Treaty. Furthermore, this will drastically
change the field of negotiations.

A CONCEPTUAL DIVIDE

So what is the reason for the
growing confrontation in the energy dialog between Russia and the
EU? It is fueled primarily by the widening gap in the sides’
conceptual approaches toward energy cooperation. Importantly, these
differences have a serious impact not only within the energy sphere
per se, but also on the central problem of Russia-EU relations,
that is, laying the legal groundwork for cooperation between Moscow
and Brussels after 2007.

The EU’s approach toward energy
cooperation was formulated in the early 1990s, about the time when
the Energy Charter and the related treaty were signed. At that
time, energy legislation within the EU was only emerging so the
Partnership and Cooperation Agreement (PCA) between Russia and the
EU simply contained a reference to the Energy Charter Treaty as a
basis for relations between the partners in the energy sphere.
Thus, according to Article 65 (1) of the PCA, “cooperation shall
take place within the principles of the market economy and the
European Energy Charter, against a background of the progressive
integration of the energy markets in Europe,” while Article 105
reaffirms this principle, making a reference to the Charter: “In so
far as matters covered by this Agreement are covered by the Energy
Charter Treaty and Protocols thereto, such Treaty and Protocols
shall upon entry into force apply to such matters but only to the
extent that such application is provided for therein.”

The Energy Charter and the Energy
Charter Treaty were drawn up with the direct participation of the
European Commission. The European community had jurisdiction on
matters of trade and transit, and it was therefore essential to get
the European Commission involved in the process. Furthermore, the
Commission was to ensure that relations in trade, investment, and
transit were not in conflict with the emerging liberalization of
the energy markets of the EU member states. Finally, these
documents were supposed to provide a basis for a fourth community
in Europe going beyond the three communities that had been formed
in the 1950s, gradually integrating Russia and other post-Soviet
countries into a common European space.

Step by step, EU energy
legislation began to be codified. On the one hand, it was based on
general internal market principles (free movement of goods,
services, capital and people, as well as the promotion of
competition between all European market players). Furthermore,
there were environmental protection requirements that involved
substantial costs (today, they account for up to one-third of the
final costs of electricity), and therefore companies violating
those requirements acquired a significant competitive
advantage.

On the other hand, the changes
that had occurred in the natural gas and electricity sector, which
were the focus of the EC’s reform program for the EU energy system,
were similar to those in any other network business sector
(telecoms, transport, etc.). The plan involved large-scale
liberalization – i.e., separation of producer of goods (services),
carrier, and supplier of goods and services from each
other.

Because the development of the EU
market moved beyond the framework designated in the Energy Charter
Treaty, and because Russia was in no hurry to ratify it, the EU
started making new conditions for energy cooperation with Russia.
The general meaning was that Moscow gradually bring its energy
legislation in line with European legislation. As an additional
incentive, the idea of regional integration, which exempted the EU
from the effects of some of the provisions of the Transit Protocol,
was brought into the negotiations on the Protocol to the Energy
Charter Treaty.

So the focus in building a unified
regulatory mechanism shifted into the sphere of bilateral
relations. The EC’s main mechanism was to encourage legislative
harmonization as a basis for action by energy companies, which
enabled them to operate effectively and provide the EU with the
required volume of resources.

A fundamental transformation
occurred within a few years: the idealistic vision of the Energy
Charter Treaty gave way to the realistic perception of the Charter
and the Energy Charter Treaty, as well as energy dialog as a means
of ensuring energy security. At the same time, the idealistic
belief that liberalization based on EU principles was good for all
states, including Russia, remained.

Throughout the 1990s and at the
beginning of this century, the European Commission was consistently
urging the EU at all intergovernmental conferences to grant the
Community the powers to formulate external energy policy, but its
pleas were invariably rejected. So all it could do in that
situation was to develop its energy legislation and rely on
European energy companies. Meanwhile, the ban on access to the EU’s
lucrative internal market in the absence of liberalization was, on
the one hand, an important economic regulator protecting the
European producers against unfair competition and, on the other, an
instrument of strengthening their positions on the global energy
market.

In this light, the events around
Gazprom’s attempt to acquire assets in the UK, and especially the
rhetoric coming from the EC, are taking on an altogether different
meaning. The EC’s discontent over the Shtokman decision is also
understandable: it excludes those European players that are
purportedly translating the EU energy security concept into
reality.

It should be noted that by
striving to impose its legislation, the EU does not limit itself to
Russia. It is pursuing the same strategy not only with respect to
EU candidate member states (which is only natural) but also in
relation to potential recipients of EU energy laws.

Russia’s approach toward energy
cooperation evolved over a substantially longer period. Initially,
a coherent long-term policy was lacking, with an aggregate of
short-term, narrow interests of individual companies or sectors
prevailing. Also lacking was an understanding of Russia’s long-term
interests in its energy dialog with the EU. That was why the
European Commission succeeded in setting the agenda for
negotiations by incorporating individual problems that aroused
Moscow’s concern. 

The situation only began to turn
around in the past few years, as shown by Russia’s negotiations
with Germany on the North-European Gas Pipeline project and the
development of the related Yuzhno-Russkoye field. The focus started
shifting toward the idea of asset swapping – offering a share in
Russian natural gas deposits in exchange for access to distribution
networks – that is to say, the most lucrative segment of the EU’s
natural gas market.

Moscow’s views on energy
cooperation were finalized during the preparations for Russia’s G8
presidency (energy being one of the priority subjects there) and
during the discussion of the energy security concept. It was stated
in no uncertain terms that reliable security guarantees should be
provided not only to consumers but also to suppliers. Supplier
security guarantees mean that the natural resources that are
produced will find their consumer, while investment will be
recouped. In other words, this is about long-term obligations for
suppliers to produce and deliver energy resources and for consumers
to buy them at reasonable prices. At the same time, obligations
should not necessarily be formalized in long-term
contracts.

In addition to mutual guarantees,
development of relations between companies should be ongoing, with
reciprocal access for producing enterprises to distribution assets
and for importing countries to production assets. Such
interpenetration will not only facilitate business diversification
but also help involve the commercial segment (private actors) in
ensuring energy security on the global level. Therefore, in working
to translate their concept into reality, both Russia and the EU
rely on close interaction with the energy business.

Russia’s relatively new but
long-term energy cooperation concept was reflected in the final
energy-related document that was adopted at the G8 Summit in St.
Petersburg in July 2006. Furthermore, for the past year it has been
the focus of discussion at various meetings between Russian and EU
officials.

Unsurprisingly, Gazprom sees the
UK situation differently than the EU does. What is important here
for the Russian energy company is, first, compensation for
alterations in long-term contracts with access to the end-consumer
market and, second, access to the distribution segment in exchange
for access for foreign companies to Russia’s production sector. In
this context, Russia’s refusal to form a consortium to develop the
Shtokman field should be read as a declaration that it had not
received commensurate assets, while its Western partners
underestimate the capacity of its shelf deposits. At the same time,
it is also a demonstration of Russia’s new concept of energy
cooperation on the practical level.

Finally, Moscow’s position on the
Energy Charter Treaty becomes as clear as can be: if it is to
abandon its long-established monopoly position, Russia must know
exactly what it will get in exchange for that and just how open the
European market will become for Russian companies. Moscow is, in
effect, saying that it will not seek unilateral action and that
compromise on its part calls for reciprocal moves by the EU. This
also puts into perspective the statement that the Energy Charter
Treaty should first be modified and only then can its ratification
be discussed.

A comparative analysis of the two
concepts shows, first, that the EU vision is more mature and better
thought through: it is better articulated and legally
substantiated. But it seems that the obligations of the EU partners
are given greater priority than those of the EU itself.
Furthermore, the EC is evidently determined to extend the effects
of EU legislation to Russia and strengthen its regulatory impact on
Russian companies.

By contrast, the Russian approach
is largely based on political declarations. It is noteworthy that
this is probably the first time that Brussels is coming up against
difficulties in setting an agenda.

Second, the EU calls for
instituting a common legal environment that will give companies
greater freedom of action. At the same time, Russia believes in
concluding concrete agreements between concrete companies on
concrete, clearly specified assets. This approach was realized on
the one hand in Gazprom’s negotiations with Germany’s E.ON Ruhrgas
and BASF on the North European Gas Pipeline Project and the
Yuzhno-Russkoye gas field, and, on the other hand, in the debate
around the Shtokman project. It is a political principle that
should be used as a basis for specific projects. A considerable
amount of dirigisme is inevitable here.

Third, Russia has raised the issue
of compensation for the loss of its exclusive right to control its
unique system of natural gas pipelines, as well as its deposits.
Meanwhile, the EU keeps talking about the benefits of market
relations in general and about the advantages of building a
pan-European market. At the same time, Brussels is not ready yet to
address the issue of compensation.

Finally, the situation is
complicated by the fact that Russia appears to be a rather
“consolidated” actor: its policy course is enunciated by the head
of state and relevant government ministers, while companies
actively implement it. By contrast, the EU is relatively
heterogeneous. The aforementioned concept is pursued by the EC but
is not always endorsed by EU member states.

Indicative in this respect is
Germany’s policy, as well as statements by French President Jacques
Chirac at the informal EU meeting in Lahti, to the effect that EU
values should not serve as the sole foundation for formulating EU
energy policy toward Russia. Such disagreements not so much
facilitate the advancement of the Russian position as irritate EU
member countries and representatives of EU institutions.

BEYOND ENERGY
COOPERATION

Clearly, because of the different
views on energy cooperation, Russia and the EU are doomed to the
ongoing confrontation in this realm until both sides reach a
compromise.

Negotiations on a new agreement
will be extremely difficult, and the following factors need to be
taken into account:

  • Unlike the early 1990s, Russia
    today is not only opposed to a simple copying of EU laws (as
    provided for, e.g., in Article 55 of the PCA) but has also put
    forward an alternative concept. But the European Commission is not
    ready to abandon its traditional orientation toward the “unilateral
    transfer” of its legislation. Furthermore, should norms different
    from those accepted in the EU be codified, the European Court may
    refuse to approve the treaty. Otherwise, painstaking, prolonged,
    and capital-intensive efforts will be required to alter certain
    provisions of European legislation.

  • Moscow is not translating its
    political vision into concrete legal norms. Rather, it is putting
    forward political projects without fleshing out their technical
    details. So it is not always clear to technocratic Brussels what it
    should do with them. A recent EC paper on external energy policy,
    prepared at the informal meeting in Lahti, on the one hand,
    acknowledges the differences in approaches between Russia and the
    EU. On the other hand, it only proposes practical measures that
    conform to the EU vision of energy dialog. Therefore, Russia and
    the EU are speaking in different languages not only conceptually
    but also technically.

  • The views of individual EU member
    countries and institutions seriously differ from each other. This
    can complicate both the advancement of Russia’s “divide and rule”
    policy and the negotiating process. A special committee, comprised
    of national representatives, will watch every step the EC takes,
    preventing any deviation from a consensus.

Finally, the difference in
approaches and the need to search for a compromise between
diametric views de facto predetermines the structure of any future
agreement. It should not be a big, comprehensive document,
encompassing all sectors. This can only be a general agreement
(strategic partnership agreement) and a number of sector-specific
agreements, which will be used as a platform for a complex
compromise between the Russian and the EU vision. In the interest
of preserving the balance of forces, different sector-specific
agreements can be consolidated into blocks, as is the case with
agreements between Switzerland and the EU. In other words, several
such agreements can constitute one group conditional on the
“guillotine principle.” Under this principle, the tearing up of one
agreement will mean the termination of all other agreements in this
group. This will provide an additional guarantee that both Moscow
and Brussels will fulfill their obligations.