Opinion: Breaking free from Gazprom is of political and economic benefit

The EU market is a power without effect on Russia

We are talking about long-term contracts and joint projects with the Russian gas giant Gazprom. It is a company that pays taxes contributing a third of the Russian federal budget that financed the modernization of the Russian military over the last few years. The results thereof are directly felt in Ukraine. In other words, by allowing Gazprom to consolidate its monopoly position in the European markets, the EU member states and the companies of those countries have contributed to the rise of Russian military power.

The energy sector is important in EU-Russia relations for other reasons, too. While the EU sends only seven percent of its exports to Russia, Moscow’s influence to EU decision-making is disproportionately significant. As Anne Applebaum aptly points out, Russia’s political influence in Europe is huge because of the nature of Moscow’s European business partners. “Usually, these are very large companies related to the oil and gas industry that give support to political parties. Even 100 thousand German traders and manufacturers conducting business with Poland do not have such an impact as the head of E On. Ruhrgas, which invests much in Russia. All Italian wine and cheese exporters put together do not have the same voice in the Italian politics as the executive director of the Italian state-owned gas company Eni, which is Russia’s largest gas wholesale customer,” emphasizes Applebaum.

So without restructuring the EU’s energy dependence on Russia, the latter’s influence on Europe will remain disproportionately high. Furthermore, only by restructuring those connections could we raise pressure on Gazrom positions in the EU market as well as in Russia. After all, in theory, not only the EU depends on Russia’s energy resources, but Gazprom is equally dependent on the EU market. The only problem is that the EU gas market is still fragmented and the European Union does not speak with one voice in the gas sector.

In other words, the market is a potential power but it does not seem to influence Russia. It is true, the liberalization of the EU energy sector, which has provided a breakdown of vertical monopolies, reduced Gazprom’s ability to maintain its autocracy, because in order to operate in the EU market, it has to adapt to European anti-monopoly rules. Gazprom can no longer control gas supply and distribution chains simultaneously. Therefore, in recent years, the main target of the Russian lobby in Europe has been EU energy policies and energy projects that reduce the EU’s dependence on Russian gas supplies.

Lithuania breaking free from the Russian energy clutches

In 2004, the Government of Lithuania, looking for cheaper formula of long-term gas supply, sold Lietuvos dujos to Russian Gazprom and German E.On with all trunk pipelines and thus became one of the EU members most entangled into the net of Russian energy. And this is not just because of the fact that all the gas needed by Lithuania is bought from Gazprom, but because of the fact that, even if we wished to create an alternative, we had to talk with the company managed by Gazprom about energy projects whose very aim was to reduce the influence of Gazprom. It should be noted that even the Ukraine of Viktor Yanukovych, in contrast to Lithuania, managed to keep strategic gas infrastructure in the hands of the state.

The turning point occurred in 2008-2009, when Lithuania became an icebreaker of energy demonopolisation and chose to implement the EU’s Third Energy Package, where, by 2015, pipelines will return to the hands of the state thus reducing the possibilities of the Russian gas giant to block the emergence of an alternative gas supply, like the liquefied natural gas terminal in Klaipėda.

As Lithuania came up with a specific vision for its energy independence, various myths emerged and started circulated in the public discourse; the main message of these myths was that Lithuania’s energy dependence on Russia was inevitable, so instead implementing ambitious energy projects, so draining on taxpayer’s pockets, we should rather avoid irritating Russia, negotiate with Gazprom and expect concessions. This approach fails completely to appreciate the fact that Gazprom’s favours could cost political and economic autonomy. It is worth remembering that Russia’s “pocket” states like Belarus and Armenia pay the lowest price for gas.

All plans of energy independence, without exception, were labeled as “too expensive” of dubitable transparency. Of course, the main target is the Liquid Natural Gas (LNG) Terminal. However, despite various myths, this project began to prove its economic benefit not even at the port of Klaipėda. Gazprom was forced to make 20 percent discount to Lithuania because Lithuania now can plan gas supply contracts with alternative suppliers. In other words, energy independence is not an end in itself because it brings obvious economic benefits.

LNG Terminal will benefit everyone

The alternative provided by the LNG terminal will bring benefits for each resident of the country. It is estimated that the reduction of gas price (both supplied through the terminal, as well as through traditional pipeline from Russia) will save, on average, 340 litas per household per year. Cheaper gas will also reduce the cost of some services (a 20-percent drop in the cost of gas will cut heating bills in Lithuania’s major cities by 16-17 percent) products (of companies that use gas for manufacture). These are indirect benefits that are difficult to measure, but they are no less tangible for every household.

However, sceptics say that the obligation to buy a fixed ratio of natural gas from the LNG terminal may result in much smaller price decline than Gazprom could offer. In fact, the discount negotiated by Lithuania for gas supplied by the Russian company have pushed the price to a similar level as the expected purchase price through the LNG terminal. Moreover, the EU Third Energy Package, aimed at decreasing dependence on Russian energy resources, could push down the price even more. However, it is often forgotten that the gas supply from the LNG terminal, as opposed to that coming from Russian pipelines, operates under conditions of the global market. In other words, there are more factors that may lead to changes in the price of natural gas.

The Shale gas revolution in the United States, new natural gas deposits in the Arctic could lead to more supply in the global gas market and lower cost for consumers. In recent years, the boom in liquefied natural gas volumes led to lower prices than those specified in long-term Gazprom contracts. Moreover, in the global gas market, the LNG price is calculated differently than in Russia – the latter links it directly to the price of oil.

Therefore, while oil prices are potentially rising, Lithuania, bound with long-term contract with Gazprom, will pay an excess for the gas that could cost up to six times less in the world market, excluding transportation fees. This means that, by playing in the global gas market, Lithuania will be able to buy gas for at least 20 percent less and, with the possibility of importing gas from the United States – even up to 40 percent less. Therefore, when we calculate benefits for households and include both direct and indirect effects of cheaper gas, it is obvious that the diversification in the gas market will bring benefits not only at the state level, but also to every citizen.

US gas is closer than it seems

It is important to emphasize that the positive effects of US gas on Lithuanian energy security is not a utopia. The United States has long been dependent on natural gas imports, but this relationship began to change due to the so-called “shale gas revolution” which started in 2006: during the first five years, the share of shale gas in total US natural gas production increased from about 1 to 34 percent. The sharp increase in production has led to a large decrease in gas prices.

From about 2018, the United States will become a net exporter of natural gas, but it can start exporting even earlier – after 2015, once the first LNG export terminal begins to work. Comparing the prices of natural gas on both sides of the Atlantic, the price in the United States is up to three times lower than the EU average. However, only a very small part of the LNG is exported – most of the extracted natural gas in the United States is exported via pipelines to Mexico and Canada. This is because, under the current law, the license is automatically issued for LNG exports to countries that have free trade agreements with the United States. In countries that have no free trade agreement with the United States, gas can only be exported if the United States Department of Energy issues a separate license. Therefore, the interest of Lithuania is the Transatlantic Trade and Investment Partnership agreement between the EU and the US, which would create a transatlantic gas market. Of course, another way for American gas to reach Lithuania would be for the United States to amend its legal framework, allowing to supply gas not only to the countries that have free trade agreements, but also to NATO countries and allies of the United States.

Lithuania currently buys gas from a single supplier, the Russian gas giant Gazprom, but consumes only 0.6 percent its production. This means that Lithuania does not have a sufficient bargaining leverage to negotiate better prices. For example, although a uniform gas pricing formula is applied to all three Baltic countries, Latvia, which has Inchukalns gas storage facility, and Estonia, which can use local shale resources, pay less for the gas supplied from Russia. Therefore, Lithuania’s interest is twofold: in the short term, the LNG terminal will provide a leverage that can help negotiate lower gas price. In the long term, we must seek to set up a regional (Baltic Sea, the Baltic and Visegrad countries) or, better yet, all-European agency for LNG procurement. This would strengthen Lithuania’s bargaining power with Gazprom; and, in return for cheaper gas, there would be no need for concessions at the expense of political independence.

Translated by Lotus Translation

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