Foreign Policy Program
Policy Brief
Summary: The Ukranian-Russian
gas stand-off caused a two-week
interruption of Russian gas sup-
plies to Europe that left countries
like Greece, Bulgaria, and Slovakia
in the cold during a strong winter
and revealed again how vulnerable
the European Union is in its gas
supplies from Russia. Jörg Himmel-
reich suggests four hard decisions
that must be made by the EU.
Europe needs to address the vary-
ing dependencies on Russian gas
within member states, the lack of
interconnectivity within the market,
discuss the need for a European
common external energy policy,
and establish of a European energy
agency.
Soccer wisdom tells us that after
the match is before the match.
This describes the contemporary
European gas policy that needs
improvement. The upcoming EU
Summit provides the continent
the opportunity to discuss this
pressing issue.
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European Gas Policy in Trouble
by Dr. Jörg Himmelreich, Senior Transatlantic Fellow,
The German Marshall Fund of the United States
After the match is before the match. This
soccer wisdom describes exactly the situ-
ation of today’s European gas policy. The
Ukrainian-Russian gas stand-off caused
a two-week interruption of Russian gas
supplies to Europe that left countries like
Greece, Bulgaria, and Slovakia in the cold
during a strong winter. As the EU sources
80 percent of its gas through the Ukrai-
nian transmission company Naftygaz, this
crisis revealed again, and with much fur-
ther-reaching consequences than the one
in January 2006, how vulnerable the EU is
in its gas supplies from Russia—and how
little prepared it still is to respond.
The upcoming EU Summit (March 10-
12), will probably pass the “Third Gas
Package” to foster the European gas market.
The separation of gas transmission infra-
structure from the supply and marketing
business of the “vertically integrated”
European gas giants, like ENI, Gaz de
France, E.ON and RWE, and the creation of
an independent Agency for the Co-
operation of Energy Regulators (ACER)
that coordinates the national pipeline poli-
cies of every single EU member state, shall
both improve the conditions of a competi-
tive gas market within the EU and strength-
en the EU in its gas relations with Russia.
For drawing the adequate “lessons
learned” from that serious menace of
European gas supply security, the EU will
have to make some hard decisions. The
quick response of “improving the supply
security by improving the gas market
integration and competition” along the
lines of the “Third Gas Package” doesn’t
seem to be sufficient alone.
1. Dependence on Russia
The EU imports 29 percent of its gas
from the Russian majority-state-owned
Gazprom, and European demand for gas
should continue to grow. To meet the
ambitious EU climate change policy goals
of a 20 percent reduction in CO² emis-
sion levels by 2020, gas is replacing “dirty”
coal as the electricity-generating fuel of
preference. The share of Russian gas in the
national energy consumption, however,
varies sharply within the 27 EU member
states. It depends on the share of gas in
the national energy mix and on geogra-
phy. Mediterranean Spain, Portugal, and
Cyprus don’t source any gas from Russia.
Finland imports 100 percent of its gas
from Russia but, because of a more diverse
energy mix, depends much less on Russian
gas imports than Slovakia or Latvia, which
import almost 100 percent from Russia
with a gas share of almost 30 percent in
their national energy mix. Germany, which
imports almost 40 percent of its gas from
Russia is, with 78.7 Mtoe (Million tons of
oil equivalent), Europe’s biggest consumer
of Russian gas. These different dependen-
cies lead to very different relationships and
interests with Russia among the 27 EU
member states.
Foreign Policy Program
Policy Brief
2. Post-war gas transmission structures
The private energy companies from Western Europe that source
gas from Russia are played off against each other in bilateral
agreements with Gazprom as customers competing for Russian
gas supplies. Those companies that have the best chances of be-
ing awarded the contract are the ones offering Gazprom shares
in the European pipeline distribution network. This greed for
the acquisition of stakes in European transmission networks,
which in turn leads to direct access to the European end custom-
er, is one reason among others for the ambitious price increases
that Gazprom was claiming from Ukraine. Gazprom knows that
Naftygaz is unable to pay this price, but it attempts to force
Naftygaz to pay with assets, including stakes of its transmission
network in Ukraine. Given all the confidentiality and opaque-
ness of the new Naftygaz–Gazprom agreement, Gazprom is close
to getting some stakes in the Ukranian regional networks. In
addition, Gazprom has been taking steps to undermine Euro-
pean attempts to find other energy sources, binding by contract
alternative gas transport routes and suppliers from Central Asia
and Algeria and those for liquefied natural gas (LNG) in Qatar
and in North Africa. Russia even promotes a gas OPEC as a close
cooperation of gas producers. Norway, as Europe’s second largest
gas supplier, obviously has little interest in reducing gas prices by
accelerating the exploration of its rich energy resources.
“To meet the ambitious EU climate
change goals of a 20 percent reduction in
CO2 emission levels by 2020, gas is
replacing ‘dirty’ coal as the electricity-
generating fuel of preference.”
There is no reason why Russia should give up this strategy
anytime in the near future. It has benefited hugely from it, both
in economic and foreign policy terms. Given the firm politi-
cal leverage that the ownership of large stakes of the European
pipeline network offers to Gazprom and the Kremlin, calls for a
“de-politicization” of European-Russian energy relations appear
to be rather utopian. Russia’s energy business, like in many other
countries in the world, always had been politicized. Russia will
not ratify the Energy Charter Treaty or the Transit Protocol, both
of which it signed in 1994. It will not accept the demands made
in those agreements: to make the structure and dealings of its
state-owned companies transparent, and to allow Western com-
panies to take majority stakes in the Russian transport networks.
The European-Russian gas pipeline structure deepens the seg-
mentation of the European gas market and individual coun-
tries’ relationship with Russia. The present pipeline structure
in the EU is the result of bilateral agreements concluded by the
national, state-owned energy groups following World War II.
The majority of the pipeline infrastructures in Germany, Italy,
Austria, and the East-European EU member states are still ori-
ented toward Moscow. The main East-West corridors have few
branches southward.
A real pan-European pipeline network does not exist. The main
impediment for an integrated European market is this lack of
interconnectivity. Therefore, the EU needs to establish additional
pipelines to complete the existing mainly East-West pipeline
structure. In addition, the national gas storage infrastructures
have to be improved, and a common set of rules has to be imple-
mented regarding how many days of gas consumption the gas
storage shall cover every EU state and under which emergency
conditions one country has to supply additional gas to another.
The improvement of the interconnectivity with the EU’s Eastern
neighborhood and of the gas storage infrastructure and poli-
cies could work as a perfect tool of integration, too. Under an
EU umbrella, European and U.S. companies should be engaged
in buying into existing Ukrainian pipelines or future pipeline
systems in the EU and its Eastern neighborhood.
3. Supply security as a public good
Since the early 1990s, European energy policy consisted of
privatizing national, state-owned energy groups and liberating
the markets so as to achieve a greater security of energy supply
through increased competition. But gas transport is technically
viable only through pipelines. That might change to some little
extent in the future, when the technology to liquefy gas makes
LNG more economically competitive to gas. But LNG will sub-
stitute only for a small part of the gas transport by pipes. Thus,
in the near future, a real competitive gas market remains rather
incomplete given the high costs of additional infrastructure and,
thus, creates only limited alternatives. That is why competition is
2
Foreign Policy Program
Policy Brief
making slow progress, and privatized oligopolies do not pursue
any greater competition if there is no discrimination-free access
to the distribution networks. Besides this, private European
energy companies themselves have, in an oligopolistic energy
market, little interest in increasing the competition by building
additional transmission infrastructure or LNG terminals. On the
other hand, supply security is a public good with public interest,
and the European gas companies are in various degrees depen-
dent from the Russian state-owned Gazprom. Therefore, the
EU Commission should take up the initiative to encourage the
European private gas companies to build additional transmis-
sion systems, regulate access, and permit the sale of European
pipeline stakes to a politicized Gazprom. Thus far, the European
Union has focused solely on its internal energy supply issues and
has ignored those that concerned foreign affairs.
In the new Millennium, the European Union intends to focus
on climate protection. However, the ambitious environmental
objectives set by the EU Summit in March of 2007 can only be
realized if they are supported by a long-term, secure, uninter-
rupted supply of oil and gas, on which the European economy
depends, and if this supply is protected by a corresponding
foreign policy. This means that the EU urgently needs a com-
mon external energy policy. Even the EU reform treaty signed in
Lisbon leaves it to the individual EU member states to determine
their national energy mix.
4. ACER as a European Energy Agency
Combining these diverging European interests into one joint ener-
gy policy vis-à-vis Russia is of the utmost importance. Moreover,
the EU will need to adapt its energy policy to meet new global
challenges. These no longer consist of improving the competition
within the internal EU energy market only; the issue now is to
protect the internal market from third parties outside of the EU,
who neither follow the rules of fair competition nor adhere to the
principles of a free market. This is not a protectionist violation of
the rule of free competition but a necessary security framework to
ensure the free market competition against those who abuse it for
purely foreign political strategic objectives. Such a governmental
security framework in and for the European gas market follows
entirely the line of Washington arguments that in 2005 politically
forced the management of the Californian Unocal to refuse the
higher takeover bid of the Chinese state-owned oil giant CNOOC
and to accept the smaller $1.5 billion Chevron bid.
“The European Union must succeed in
establishing a European Energy Agency, an
institution with the authority to negotiate a
European Energy Agreement with Russia
on behalf of all European private energy
groups and to permit the sale of European
pipeline networks to Gazprom.”
This strategic security implication for the European gas mar-
ket makes it so decisive that the European Union must succeed
in establishing a European Energy Agency, an institution with
the authority to negotiate a European Energy Agreement with
Russia on behalf of all European private energy groups and to
permit the sale of European pipeline networks to Gazprom.
In March, the EU Summit will decide on the creation of the
European Agency for the Coordination of Energy Regulators
(ACER), which is politically the smallest common denominator
among the 27 member states but falls sharply short of what is re-
ally needed. The EU Commission’s original proposal would have
separated the large pipeline networks from the big European
energy giants and subjected their management to a national
transmission system operator (TSO), and to introduce and obli-
gate EU permission for sales of pipeline stakes to third non-EU
countries – called the “Gazprom Clause.” The German govern-
ment, together with France, watered down this proposal. The
pipeline network can still remain in the legal ownership of the
energy company, but it has to be managed by an independent
TSO that follows national rules. The energy company may sell its
pipeline infrastructure to everyone, but it has to seek the approv-
al of the national government in cases of conflict with European
interest. The ACER is only created to coordinate the rules of the
national TSOs to the best possible extent and has only an advi-
sory authority to the EU Commission. Instead of such a political
dwarf, the EU needs a European organization that has the virtual
authority to design and implement a real pan-European pipeline
policy. Such an agency should also be empowered to regulate
national access to the pipeline network, to implement common
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Foreign Policy Program
Policy Brief
rules for the creation and management of national gas storage
infrastructures and their use in emergency cases, and to design a
central pan-European pipeline infrastructure.
The main prerequisite for all of this, however, is that the EU
member states must learn to give up their national legisla-
tive and administrative competencies in energy policy. Only
by transferring their national energy policy competencies to
a virtual European energy agency will they secure an uninter-
rupted supply of gas to the European Union—from Russia and
elsewhere.
Jörg Himmelreich, Senior Transatlantic Fellow, GMF
Dr. Jörg Himmelreich is a non-resident senior transatlantic fellow of
the German Marshall Fund of the United States (GMF). His special
focus is on Russia, CIS, global energy security, South Caucasus,
Central Asia, and transatlantic relations. Dr. Himmelreich comes to
GMF from the German Foreign Office, where he served as a policy
planner in 2004. In the year prior, Dr. Himmelreich worked with the
DaimlerChrysler Board of Management, where he focused on political
and economic relations in Russia, Central Asia, and Eastern Europe.
He previously served as director of investment banking for media and
communications for the London office of European commercial bank
WestLB, having established and directed the bank’s Moscow subsid-
iary from 1996 to 2000. Dr. Himmelreich has also held appointments
as head of privatization of the construction industry at the Federal
German Trust Agency, as a junior professor at the Institute for Public
Law at the Free University of Berlin.a Studies, and has been a visiting
professor at the University of California.
About GMF
The German Marshall Fund of the United States (GMF) is a
nonpartisan American public policy and grantmaking institution
dedicated to promoting greater cooperation and understanding
between the United States and Europe. GMF does this by supporting
individuals and institutions working on transatlantic issues, by
convening leaders to discuss the most pressing transatlantic themes,
and by examining ways in which transatlantic cooperation can
address a variety of global policy challenges. In addition, GMF
supports a number of initiatives to strengthen democracies. Founded
in 1972 through a gift from Germany as a permanent memorial to
Marshall Plan assistance, GMF maintains a strong presence on both
sides of the Atlantic. In addition to its headquarters in Washington,
DC, GMF has seven offices in Europe: Berlin, Bratislava, Paris, Brussels,