Blog Post

A European gas market for everyone

The European energy landscape has changed markedly in 2014. Now the EU must rethink its relationship over gas with Russia and Ukraine.

By: and Date: January 5, 2015 Topic: Green economy

The European energy landscape has changed markedly in 2014. What was unimaginable in 2013 has become possible: Russia might stop gas supplies to European Union countries, the EU might survive the winter without Russian gas, Ukraine might refrain from importing gas from Russia and reform its gas sector, South Stream might be shelved and Russia might invest massively in gas exports to China and Turkey, and unconventional gas production might translate into a glut of cheap liquefied natural gas. Not all of these will happen, but the possibilities mean that the EU must rethink its relationship over gas with Russia and Ukraine.

The EU must rethink its relationship over gas with Russia and Ukraine

Europe’s primary goal for gas is cheap and reliable supplies. This can be best achieved by competition between all suppliers in a liquid European gas market. Suppliers that still benefit from being able to charge higher prices in markets in which they cannot be contested — such as Gazprom — resist greater competition. And several European companies and countries support for their own purposes Gazprom’s strategy of maintaining market segmentation. Thanks to Gazprom’s segmentation strategy, Germany enjoys lower gas prices, Austria serves as a trading hub and Slovakia generates transit revenues. In addition, many member states still want to keep political control over their gas sectors.

Therefore, if a truly functioning liquid European gas market is to be created, several member states face having to give up their current comfortable situations. Some will even have to accept being worse-off in the short term. For the greater good, Europe needs workable gas sector rules and the European institutions must be empowered to defend them. There should be tangible rules on solidarity, security-of-supply requirements that are binding on market participants, a prohibition of individually beneficial gas deals outside the European framework, network development based on a European (and not only national) perspective and strict enforcement of competition policy. If member states really engage to create a predictable, large and liquid European gas market, Europe will develop into the most attractive destination for gas coming from all hemispheres. This will make all European gas consumers better off.

If a liquid European gas market is to be created, several member states face having to give up their current comfortable situations

And in terms of gas markets, Europe goes beyond the EU. The EU’s gas market rules are already binding in eight non-EU countries of the ‘Energy Community’. Ukraine is one. The EU has a pivotal role in enabling Ukraine to develop a functioning gas market that will allow the country to become part of the European internal gas market. Without EU support, the fragile Ukrainian political system will not succeed in carrying out crucial reforms, such as increasing household tariffs by a factor of four to eight, opening the country’s gas infrastructure to all users, abolishing multiple gas tariffs and restructuring the debt-ridden gas sector monopoly Naftogaz. A strengthened Energy Community to support and monitor the implementation of EU energy sector rules, coupled with technical and financial assistance and credible solidarity promises, should ease the difficult transition. The immediate demonstration of EU solidarity would be commitment to continue gas supplies to Ukraine (‘reverse flows’) and ensuring that the EU-Ukraine border points are not treated differently to border points within the EU.

If, however, the EU fails to support Ukraine in its struggle to develop a functioning gas sector, Ukraine will likely forego the short-term hardship of reform for long-term dependence on Russia. The price of for Ukraine would be high: a politicised and murky gas sector and possible handing of control over its gas pipelines and storage to Gazprom. This in turn would certainly enable Russia to regain significant leverage over Ukraine’s politics. Such a scenario would increase Gazprom’s influence over gas markets in central and eastern Europe and hence preclude the completion of the EU internal gas market.

If the EU fails to support Ukraine in its struggle to develop a functioning gas sector, Ukraine will likely forego the short-term hardship of reform for long-term dependence on Russia

In the short term, Russia might attempt to prevent both the completion and extension of the internal gas market. It might do so by using selective carrots such as projects favourable to individual countries, or selective threats such as supply cuts. The likelihood and impact of such eventualities can be mitigated if EU member states show determination and unity. In particular, tangible rules on solidarity would be a strong signal. In the longer term, even Russia will find it benefits from a predictable, large and liquid European gas market that extends beyond the EU borders.

This article was first published on European Voice and Rzeczpospolita

Read more:

Rebalancing the EU-Russia-Ukraine gas relationship


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More on this topic
 

Opinion

For Europe, an oil embargo is not the way to go

Even at this late hour, the European Union should consider taking a different path.

By: Simone Tagliapietra, Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 9, 2022
Read article More on this topic
 

Opinion

A tariff on imports of fossil fuel from Russia

A tariff on imports of Russian fossil fuels would allow Europe to hit Russia's energy sector without great suffering.

By: Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 2, 2022
Read article More on this topic
 

External Publication

How to weaken Russian oil and gas strength

Letter published in Science.

By: Ricardo Hausmann, Agata Łoskot-Strachota, Axel Ockenfels, Ulrich Schetter, Simone Tagliapietra, Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 2, 2022
Read article More on this topic
 

Opinion

A phase out of Russian oil may be less effective than a tariff at reducing Putin’s rents

A punitive tariff on all energy imports from Russia would be a better choice than a gradually phased-in embargo on selected fuels.

By: Simone Tagliapietra, Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 2, 2022
Read article
 

Blog Post

How a European Union tariff on Russian oil can be designed

The European Union should apply a tariff on imports of Russian oil; it can be accompanied by a quota for a gradual, conditional phase-out of all Russian oil imports.

By: David Kleimann, Ben McWilliams and Georg Zachmann Topic: Global economy and trade, Green economy Date: April 29, 2022
Read article
 

Opinion

EU risks letting Putin’s gas divide-and-rule strategy win

The 2 May meeting of EU energy ministers should deliver strong and common EU action. Failing to do so would undermine Europe’s unity, energy security and foreign policy.

By: Agata Łoskot-Strachota, Simone Tagliapietra and Georg Zachmann Topic: Global economy and trade, Green economy Date: April 29, 2022
Read article More by this author
 

Opinion

Europe must get serious about cutting oil and gas use

As energy security risks increase, European governments must stop subsidising oil and gas, and ask people to consume less.

By: Simone Tagliapietra Topic: Global economy and trade, Green economy Date: April 29, 2022
Read article Download PDF
 

Working Paper

Cutting Putin’s energy rent: ‘smart sanctioning’ Russian oil and gas

The most efficient way for Europe to sanction Russian energy would not be an embargo, but the introduction of an import tariff that can be used flexibly to control the degree of economic pressure on Russia.

By: Ricardo Hausmann, Agata Łoskot-Strachota, Axel Ockenfels, Simone Tagliapietra, Ulrich Schetter, Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade, Green economy Date: April 28, 2022
Read article More on this topic
 

Blog Post

A sanctions counter measure: gas payments to Russia in rubles

A requirement for gas to be paid for in rubles is a way for Russia to side-step central bank sanctions.

By: Maria Demertzis and Francesco Papadia Topic: Global economy and trade Date: April 19, 2022
Read article
 

Opinion

Cutting Putin’s energy rent: ‘smart sanctioning’ Russian oil and gas

Three ways Europe could limit Russian oil and gas revenues.

By: Axel Ockenfels, Simone Tagliapietra and Guntram B. Wolff Topic: Global economy and trade, Green economy Date: April 11, 2022
Read article More on this topic
 

Blog Post

The European Union demand response to high natural gas prices

Even before Russia’s invasion of Ukraine, high natural gas prices triggered an estimated European Union demand cut of about 7%.

By: Ben McWilliams and Georg Zachmann Topic: Green economy Date: April 8, 2022
Read article More on this topic More by this author
 

Podcast

Podcast

War in Ukraine: The EU’s ban on Russian coal

A live podcast on energy sanctions on Russia following the EU ban on Russian coal.

By: The Sound of Economics Topic: Green economy Date: April 6, 2022
Load more posts