EU-Russia Gas Advisory Council: Assessing the Future of Gas Cooperation

The EU-Russia Gas Advisory Council: Professor Jonathan Stern, EU Co-Speaker Vladimir Feigin, Russian Federation Co-Speaker European Gas Conference Vienna, January 30, 2013

The EU-Russia Energy Dialogue and the GAC Background to the EU-Russia Gas Advisory Council Key steps in the EU-Russia Energy Dialogue • 2000 – Agreement to initiate EU-Russia Energy dialogue • 2003 – Permanent Partnership council set up • 2008 – Negotiations for New EU-Russia Agreement launched • 2010 – Early Warning Mechanism instated • 2011 – Launch of EU-Russia roadmap and Gas Advisory Council • Joint Statement in 2011 by Commissioner Oettinger and Minister Shmatko: GAC should • assess the development of gas market in the EU and Russia • Make long-term recommendations for EU-Russia gas cooperation in sustainable, competitive and secure way • Work of GAC to flow into EU-Russia 2050 Roadmap

GAC to provide input on future role of gas in EU-Russia relations • What are the main drivers of development in the sector? • What is the interrelation between energy policy and corporate decisions on investment? • Does gas have to be regarded in the global or regional context? • How will global developments influence EU-Russia relations? • What kind of infrastructure do we need?

Proceedings are Publicly and Transparently Available on the Websites of the EU and the Russian Energy Ministry OFFICIAL DOCUMENTS • http://ec.europa.eu/energy/international/russia/dialogue/dialogue_en.htm • http://www.minenergo.gov.ru/co-operation/russia_eu/konsultatinyy-sovet-po-gazu DOCUMENTS FROM GAC MEETINGS: • https://circabc.europa.eu/; http://www.minenergo.gov.ru/co-operation/russia_eu/konsultatinyy-sovet-po-gazu

Why an EU-Russian Federation GAC? Why Russia’s position in the European gas market is different to other suppliers: • The volume of gas being delivered • The number of borders across which Russian gas needs to cross Future risks for Russian investment risks in gas supplies and infrastructure are substantial due to: • Decarbonising energy balances (RM2050) • Introduction of network codes and a new transportation regime especially for cross-border supplies Other gas suppliers are facing similar issues but the risks in EU-Russia relations are greater

Structure of the GAC • Coordinators: EU Energy Commissioner – Russian Energy Minister • Co-Chairs: EU Director General Energy – Russian Deputy Energy Minister • Co-Speakers: Jonathan Stern (OIES) – Vladimir Feigin (IEF) • Co-Chairs of Workstreams: • 1. Jonathan Stern/Vladimir Feigin • 2. Walter Boltz (E.Control/ACER) – AndreyKonoplyanik (Gubkin University/Gazprom) • 3. Stefan Kamphues (ENTSOG) – TeodorShtilkind (Russian Energy Ministry/REA)

The Workstreams of the GAC • Workstream 1: supply, demand and decarbonisation issues for EU and Russian gas; energy and gas scenarios (including Roadmap 2050) • Workstream 2: EU internal market (including regulation and network codes); Russian internal market; • Workstream 3: Infrastructure interconnections and new infrastructure, “projects of mutual interest”, technical issues (interoperability)

SOME CONCLUSIONS FROM THE FIRST YEAR’S WORK OF THE GAC* *Report of the EU-Russia Gas Advisory Council from the EU-Russia Co-Speakers on the results of the first year of GAC Activities, including Attachment 3: Gas Chapter of the Gas Advisory Council, Co-Speakers Draft, December 20, 2012

Importance of gas for both sides in the EU-Russian Energy Partnership will continue until 2050 BUT UNCERTAINTIES REMAIN FOR BOTH SIDES: • for the EU: the impact of decarbonisation under RM2050 and the consequences of IEM reforms • for the Russian Federation: the consequences of EU policies, and the impact on investments in domestic resources and export infrastructure The major challenge for both sides will be to limit uncertainty to “tolerable levels”

The EU-Russia Gas Relationship to 2050: identifying three different types of uncertainty • Scenario uncertainty • Policy uncertainty • Investment uncertainty A “tolerable level of uncertainty” can be achieved by defining and clarifying the risks for both sides of the ongoing EU policies to liberalise the natural gas sector and decarbonise the energy sector

Scenario Uncertainty • There is a crucial methodological difference between “back-casting” scenarios such as RM2050 and IEA 450 ppm; and “forecasting” scenarios such as Reference/Current Policies • Scenario uncertainty increases substantially after 2030 • The most important RM2050 decarbonisation scenario questions do not relate to gas, but to assumptions/ projections of efficiency improvements and renewable energy development

RM 2050 Scenarios: net gas imports (mtoe) Decarbonisation is the difference between rising and falling EU gas imports; especially post-2030

Mixed messages from RM2050 on the impact of gas “..the findings of the Energy Roadmap 2050 that gas plays a key role for the transformation of the energy system”. Danish Presidency Conclusions, Council of the European Union, Brussels, 18 June 2012. Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions – the Energy Roadmap 2050; Presidency Conclusions. This is not necessarily the conclusion which would be drawn from the RM2050 scenarios Decarbonisation, not the role of individual fossil fuels, is the focus of the RM 2050 Scenarios

Scenario Uncertainty and Risks for Both Sides • Russian side: the decline in EU gas demand post-2008 may be a permanent phenomenon and that EU demand for Russian gas may not increase from 2008-12 levels • EU side: the EU may need more Russian gas than it currently anticipates and may have erected commercial, regulatory and political carriers to future supplies Detailed examination of the RM2050 scenarios led to the conclusion that these were not useful for analysis of future EU-Russia gas flows

Policy Uncertainty • Scenarios and models should not be confused with policy instruments and implementation • the major uncertainty about the speed and degree of decarbonisation to 2050 is political will • other uncertainties are economic, technological and environmental: • energy efficiency, fuel switching potential, carbon pricing and the future of EU ETS • carbon capture and storage • acceptability of nuclear power Both sides need mechanisms allowing them to follow the status of the other’s decision-making

Internal Energy Market Issues (institutional uncertainty) • CAM/CM and other network codes – detailed content is still evolving • Clarification of delivery points (VP, entry, exit) • Long distance transportation involving crossing several IPs • Entry and exit zones and tariffs • Conversion of existing transportation contracts Transition to a competitive and integrated EU gas market: many uncertainties remain to be resolved

Investment Uncertainty • Investment uncertainty may be greater for Russia than for the EU because of the need for major investment in resource development and export infrastructure • Due to possible reduction in EU gas demand and import needs there is a risk that investments not amortised prior to 2030 may not be remunerated • New infrastructure (Nord Stream and South Stream) is aimed at eliminating transit uncertainty; but can Russia be assured of capacity in onshore extensions of these pipelines? Investment uncertainty involves investment risk for Russia, and gas supply risk for EU

Regulatory Risks Related to Existing and New infrastructure • That Gazprom may not be able to deliver specified volumes under current long term contracts (and will be required to move the delivery points in those contracts to VTPs/hubs) • That transportation under existing contracts will cost more under an entry/exit regime than under the current point to point regime • That the Third Package transportation regime may prevent Russian gas from reaching existing and new EU customers • That during the establishment of the new EU regulatory regime, the investment environment may be too uncertain for large scale gas investments to be undertaken

Summary of GAC Work 2011-12 The GAC process has been, and will continue to be, important in deepening the gas relationship, and avoiding misunderstandings and conflicts between the EU and Russia arising from the IEM/GTM implementation process. On longer term RM2050 issues, the GAC has been useful for defining the risks for both sides stemming from EU decarbonisation policy of making, or failing to make, investments related to gas production and transportation.

Future of the GAC • Up to Summer 2013, the GAC will work on providing clarification and resolution of the risk and uncertainty issues identified above • Depending on the success of that process (and the resolution of some other issues), a decision will be taken as to: • whether the work of the Council should continue and should it be decided to continue… • which issues which should form its future Agenda

Additional items linked to EU-RF gas relations status and future(in the context ofEnergy Cooperation Roadmap and its Gas Chapter)

Gas chapter and basic energy security topics • We have to materialize in our collaboration such basic principles as “security of supply” and “security of demand”. • We have to provide these signals to our societies in order to get them knowledge of practical benefits of our collaboration • I.e. with current (and potential future) changes of market structure and regulation – who is in charge of both “securities”? • At a moment in gas supplies – it is completely unclear who is in charge of security of gas supply for final consumers on the EU side or on behalf of member-state side?! • It is not a theoretical question as on each stage of transformation (at least until our markets form a “single” market from Lisbon to Urengoy or to Vladivostok(?) – if this is a goal and a process) – such determination is a must! Why – because: • - consumers have to be aware of it • - contracts have to reflect it • - mechanisms of EWM and Joint Infrastructure have to be linked with them. 8 Further joint elaboration of basic energy security issues is needed

What are the alternatives to this approach? (1) Main alternative: EU and RF are simply trading partners in energy sector Each side takes its own strategic decisions and tactical measures In view of the scale of uncertainty, lack of predictability and wide spread suspicions regarding intentions of each side - most likely decisions will be directed to reducing size of interdependence, taking lower and lower projections and “pragmatic” (close toselfish) decisions Mutual actions are becoming more and more short-term oriented (as a prevention of transit crisis – now less and less actual; i.e. to be concentrated on the “fighting the last war”) Only in case of crisis or unexpected events the demand for “solidarity” is becoming a priority But in this case – a behavior of a partner may be selfish and/or he may not be able to respond in a cooperative manner 9

What are the alternatives to this approach? (2) In case of gas sector items and for Russia a “logical way” – to reduce long term contracts coverage and to “modulate deliveries” to EU market based on maximizing short-term financial returns For EU a ‘logical way” – to further increase subsidies and investments in alternative energy sources – while the rest of the world will definitely increase a role of gas (based on competition and efficiency principles) 10 In very negative case of events it may seriously damage both Parties’ opportunities. Who will win out of this as in XXI century globalised world there are always political and economic alternatives?

If the positive decision is taken to move forward following this approach then what has to be explored? Structure of Cooperation: Joint monitoring of technological developments, joint R&D Programs, Regular consultations on the harmonisation of legal and regulatory systems (incl. understanding on subsidies) Industry and investment panels Institutions (as GAC, later – horizontal links between relevant institutions of Parties)… Dynamic determination of targets at milestones - for instance, till 2015: To fix a structure and fundamental principles of cooperation in mutually binding documents – as documents in the scope of a new Basic Agreement on EU-Russia Partnership and specific agreement(s) in gas sphere – on gas infrastructure and its development To form main components of the Structure of Cooperation To agree on the “tolerable level” on uncertainty in gas sphere for the period till 2030 11

Thank You

EU-Russia Gas Advisory Council: Assessing the Future of Gas Cooperation