On Monday, the governments of Turkey, Bulgaria, Romania, Hungary and Austria signed a deal in Ankara that is to kick-start the building of the Nabucco natural gas pipeline. The pipe is to bring gas from the Caspian region to the border of Austria (Baumgarten Hub) and from there to Germany. It could even be used to bring in gas from Middle-East countries (Iran, or more presumably, Iraq). As such it would mean an important diversification of gas supplies to Europe, which presently depends primarily on Russian gas for its gas imports. As its own gas production is falling rapidly, Europe will have to import more and more gas from abroad. If the Nabucco pipeline is built, this gas can come from other places than Russia. This diversification can be completed by building LNG terminals on the Eastern and Southern shores of Europe. The signing of this Nabucco deal earmarks an important evolution in German energy policy. By co-signing the deal, the German government seems to depart with its ‘Russian only’ policy of the past.
I have always believed that diversifying gas supplies into Europe makes perfect geopolitical sense. It is clear that after the end of the cold war, Russian hasn’t exactly moved into the European influence sphere. Disputes over accession into Nato or the EU of Eastern-European countries made this clear. And since President Putin came into power in the Kremlin, it was clear that Russia preferred regaining its super power status instead of leaning closer to the EU. Considering that – unfortunately – international politics today still resemble the sort of power games played in Napoleon’s days, reducing dependency on Russia for gas supplies is the more cautious strategy. It is strange that it took so long before many European top politicians understood this.
German politicians and energy companies in particular, seemed to prefer bringing in all the extra gas from Russia instead of diversifying. Ever since Willy Brandt coined the term in the 1970’s, German Social Democrats have been firm adherents to the Ostpolitik, a policy of tightening economic ties with the energy giant in the East, Russia. This became obvious when German chancellor Gerhard Schröder actively supported the construction of the NordStream pipeline, that brings Russian Gas directly to German soil as it lies on the bottom of the Baltic Sea.
German energy policy is remarkable, natural gas in particular. German politicians pay lip-service to European integration in this domain but at the same time they keep on taking decisions that clearly put the national German interest before common European interests. Bypassing Eastern-European countries with the NordStream pipeline is a good example of that. From a historical perspective, it is not surprising that Poland feels uneasy when neighboring Germany and Russia make deals among themselves. The strange thing is that this apparently powerful German gas policy produces such feeble results. Managers of international companies are always shocked to find out how much more their German sites pay for gas than their counterparts in other European countries. Expensive gas clearly is a handicap for German industry. German industries are also increasingly frustrated about the state of the German energy market liberalization process. Strangely enough, they seem to blame the ‘Oligopoly’ of German energy suppliers for this, and they are focused on power markets. I think that the problems in the German market are much more structural than just suppliers’ behavior. I also think that the gas market is a far greater concern than electricity (developments with the EEX power market, for one thing, are positive). The issues that we face in the German gas market are:
– It has only recently become possible for companies to offer competitive bids outside the areas where they owned the grid. It took the German authorities a very long time to determine regulated net tariffs, without which competition for clients on other suppliers’ grids is almost impossible.
– Even today, it remains difficult to get a lot of offers from different suppliers for certain German sites. This is not due to a lack of potential suppliers. Germany is the country with the largest number of holders of a gas supply license. Only, they have difficulties shipping that gas through the country due to the many physical and contractual capacity constraints on the grid, or I should rather say grids, because even the transportation grid hasn’t been unified yet.
– German suppliers have no clue of what service level they are supposed to offer in a modern gas market. I got a good example of that this week. We asked a German gas supplier for conditions similar to those our client was used to in the Netherlands, Belgium and France. The supplier first laughed at us, then made some very small concessions and charged a big extra service fee for those. Take-or-pay conditions in Germany are rigid and unfair. Price fixing services are sub-standard.
If anyone needs to get convinced that liberalization of energy markets isn’t such a bad idea after all, I recommend him to go and negotiate a gas contract in Germany. Some serious measures are necessary to unlock the German gas market. Restructuring the grid operators could be one of those. And this is not about unbundling the larger grids from the giant energy companies that own them. It is all about the excessive costs of transportation (and regulation) that are caused when more than 600 small companies operate a grid. German policymakers however, seem to be too busy entertaining relationships with foreign governments, large energy suppliers and local grid operators to tackle these issues. The fact that Gerhard Schröder became chairman of the shareholders’ committee of the Nord Stream project immediately after retiring from politics, highlights how policy and energy market interact in Germany.
The Nabucco pipeline deal also holds an interesting feature regarding liberalization. As it are gas companies such as OMV, Mol or RWE that will invest, it was to be feared that most of the gas that can flow through the pipeline would be tied up in long term deals. It has been decided however, that 50% of the gas in the Nabucco pipeline will be for the open market. Can this spark the development of Austrian gas Hub Baumgarten as a liquid trading place?
The Russians meanwhile, must worry about the Nabucco development. President Medvedev hurried to Berlin on Thursday to have Angela Merkel confirm her willingness to have the Nord Stream project on line. Russian politicians should realize that their behavior towards their biggest gas client in the past years was the strongest support possible for Nabucco. To my opinion, Russia is right to ask neighboring Ukraine to pay a market price for the natural gas that it gets supplied. The method of enforcing that however, is questionable. By shutting of the gas tap to Ukraine without any consideration for the European customers that sat on the other side of the pipeline through Ukraine, Russia has showed itself as an extremely unreliable supplier. In the past three winters, Russia has punched European gas consumers in the face twice by shutting of gas supplies through Ukraine. Fighting a war with Georgia might have boosted Russian international confidence. Russian governments should however realize that affirming investment in Nabucco was the only logical counter-step in the international power game that Russia and Europe play over gas supplies. Mister Schröder’s story that building gas pipelines into Russia would ensure security of supply of natural gas to Europe makes most policymakers laugh today. Let’s hope that they realize that security of supply can be guaranteed only by creating open and liquid wholesale and retail markets of gas and by ensuring diversification of supplies by supporting the creation of new entry points.