May 20, 2016
by Sonja van Renssen
A first Energy Union victory
Member states agree to let Brussels scrutinise gas deals
Europe is one step closer to a more united, coherent energy policy. This week national ambassadors took the unprecedented step of agreeing that yes, Brussels should have the right to scrutinise intergovernmental agreements (IGAs) on gas before they are signed. It’s historic because such an “ex ante” assessment was rejected by EU member states just a few years back. At the same time, Brussels is running into problems with other parts of its Energy Union. Some member states still want national not regional plans to ultimately underpin gas strategy, they’re bickering over how to implement a new “solidarity principle” and they don’t see why the Commission should be allowed a closer look at important commercial gas contracts. If the decision on IGAs is unexpected, the rest is business as usual.
Even just over a year ago, when heads of state and government met to discuss the Energy Union for the first time, greater European Commission involvement in energy deals seemed a distant dream. In 2011 member states had already rejected the idea of the Commission getting involved in negotiating energy IGAs with third parties such as Russia. Their conclusions in March 2015 seemed to bode no better. They simply called for all agreements on gas purchases from foreign suppliers to comply with EU law and “reinforced transparency”. There was no mention of a stronger role for the Commission. The single reference to commercial contracts warned that confidentiality is key. Instead, European leaders liberally inserted references to member states’ sovereign rights on energy issues.
But the Commission believed that the situation had changed since 2011. Energy security had risen to the top of the agenda after the crisis in Ukraine, plus instability in North Africa and the Middle East. South Stream was dead. The Energy Union very much alive. And it had become clear just how many IGAs break the law: fully one-third of those notified to Brussels relating to energy infrastructure or supply are not in line with EU competition or free market rules. Armed with these facts, in February 2016, the Commission proposed a controversial “ex ante” (pre-signing) assessment of energy IGAs as part of its winter package on gas and security of supply. It also proposed an overhaul of a 2010 gas security of supply regulation that would give it access to more information about commercial gas deals.
What exactly are IGAs? These are legally binding agreements between countries (usually bilateral) that have typically served to provide certainty for building new oil and gas pipelines or for fuel purchases. They usually underpin commercial contracts. Gas IGAs are the most common – and problematic – kind. Six IGAs underpinned South Stream alone. For this reason, it is significant that national ambassadors this Wednesday agreed to submit these for ex ante assessment.
Note that they have nonetheless narrowed the scope of the Commission’s original proposal, which was for all energy IGAs. That could have helped avoid problems like the nuclear fuel supply deal between Russia and Hungary for the Paks II reactor, which the Commission reportedly blocked last year because it was incompatible with EU competition law. Incidentally, nowhere does it say that member states cannot sign an IGA if the Commission disagrees with it, though naturally they may find themselves in hot water later when it turns out the deal breaks EU law.
Until last week, there was a blocking minority of member states that opposed any kind of ex ante assessment. These included Germany, France, Belgium, Italy, Greece and Hungary among others. The two main concessions to this group, proposed and successfully shepherded through by the Dutch EU presidency, were: one, to drop the mandatory ex ante assessment for non-gas IGAs and two, to exempt all non-binding agreements (e.g. Memoranda of Understanding) from any kind of notification to Brussels.
How significant are these changes? Certainly they put member states on a collision track with the European Parliament, which will co-decide the new legislation. The rapporteur, or MEP in charge, Polish right of centre MEP Zdzislaw Krasnodebski, will unveil his position at the start of June. But one of his advisors already told Energy Post: “We want both [all] IGAs and non-binding agreements to be checked ex ante.”
Poland, along with many of Europe’s other newer member states, has been a vocal supporter of more power to Brussels on this front. Older member states such as Germany rely less on IGAs – and indeed are happy to negotiate their own deals with Gazprom (and get good prices) – while newer member states tend to rely on IGAs much more and appreciate EU support in their negotiations with Russia in particular.
“We have had a bit of a problem of understanding from the old EU,” says Mariusz Kawnik, Director of Regulatory and International Affairs at PGNiG (Polish Oil and Gas Company) in Warsaw and the former chief negotiator for Poland in the IGA debate. “There was even one member state in 2011 which couldn’t believe an IGA exists on gas imports.”
Mr Krasnodebski’s advisor explains why he believes that non-binding agreements also need an ex ante check – more than the simple notification the Commission proposed (and the Council scrapped): “They could form an alternative to an IGA. The newest non-binding agreements look exactly like IGAs.” Like IGAs, these Memoranda of Understanding and Letters of Intent could lead to political pressure or illegal commercial contracts, so why let them slip under the radar? It would be interesting to know what kinds of documents underpin Nord Stream 2 so far.
MEPs will debate the file on 27 June. In the meantime, EU energy ministers are expected to rubberstamp the position agreed by their ambassadors this Wednesday at the next Energy Council on 6 June. Negotiations between Parliament and Council should start in October with many expecting a deal before the end of the year.
In parallel, there is a closely related but much more difficult debate getting underway on the second legislative proposal of the winter package: a revised gas security of supply regulation. The Dutch EU presidency proposes a debate on this by ministers at the 6 June Council. This will focus on what the presidency identifies as the three most contentious elements: regional cooperation, solidarity and transparency.
These are all essential building blocks of the Energy Union. And they are all running into problems. Take the regional approach. The Commission wants member states to prepare regional risk assessments and preventive action and emergency plans. But some countries favour “a more flexible approach”, says the Dutch presidency, with joint analysis of specific risks (e.g. a major gas supplier turning off the tap) yet national plans. Other member states simply don’t like the region the Commission has put them in, a Council source said.
A new “solidarity principle” has found widespread favour, but under exactly what conditions should it be deployed? The essence of this principle is a suggestion that member states should be forced to prioritise gas deliveries to vulnerable consumers in neighbouring countries over non-vulnerable consumers in their own, when the former face an emergency. It leaves open the “technical, legal and financial arrangements” for this however. Some, such as Kawnik, see problems getting these agreed and want the Commission to spell out more exactly what’s needed. Others simply don’t seem to trust one another to deliver when the time comes.
Finally, demanding more transparency of commercial gas contracts was always going to be contentious. Some member states don’t see the need to submit further information to Brussels in non-emergency situations – the Commission argues that it needs this to better assess security of supply risks. It wants all gas contracts that last more than one year and put more than 40% of the gas consumption in a member state in the hands of a single supplier to be notified. Kawnik is one of very few who argues that all contracts should be submitted to the Commission, to ensure that the transparency requirement hits every country. At the moment, with the 40% threshold, only seven countries – Finland, Latvia, Estonia, Lithuania, Poland, Hungary and Bulgaria – would have to reveal all, he says.
In the European Parliament, it is another Polish MEP, Jerzy Buzek, chair of the energy and industry committee, who is leading debate on this file. He plans to present his report close to a debate on the topic scheduled for 13 June.
The question is: how relevant is the debate on security of gas supply to the completion of the internal energy market? For some of those in the gas business, such as Anders Marvik from Statoil, Head of its EU Office, much of this political debate is a distraction from what really matters: completing the internal market for gas, or “getting sufficient electricity and gas interconnections in place”. In effect, they argue that it does not matter much where gas comes from, as long as the market is competitive.
But for Poland, who with two rapporteurs in place will play a big role in the gas package in the Parliament in particular, priorities are different. “Energy security is a top priority for the new government [in Warsaw],” says Kwanik. “Until we’re free of Russian dependence, we will not be fine with a fluid market. That’s not the deciding factor.”