Year in Review: Eastern Europe showing signs of escaping Russia’s energy clutches

Written by on December 30, 2015 in Perspectives - Comments Off on Year in Review: Eastern Europe showing signs of escaping Russia’s energy clutches

One of the defining trends in the global economy in 2015 was the persistently low prices of oil, which sank to their lowest in more than a decade in December as a host of factors continue to keep the supply high.

For Eastern Europe, the direct impact – lower petrol prices, albeit nowhere near what consumers expected – was less important than the knockdown effect of lower natural gas prices, the consequence of a similar supply glut and Gazprom’s insistence on linking gas prices on long-term contracts to the price of oil.

In the short term, Eastern European countries will end up paying even less for Russian gas in 2016, but this does not mean that the region’s dependence on Russian energy supplies will increase. If anything, the influence wielded by the Kremlin through Gazprom in particular appears on the wane – the first time in more than a decade that such an assertion can be made with some degree of confidence.

Part of the reason is that efforts by the EU and individual member states to reduce such dependence are finally bearing results, such as that the liquefied natural gas (LNG) terminals now in operation in Lithuania and Poland, with Croatia also testing investor interest for one. Additionally, progress has been made on several key interconnector pipelines, such as the one linking Poland to the Baltic States or the one between Bulgaria and Greece.

All this comes at a time when Gazprom, the Russian state-owned energy giant, is facing a number of concurrent challenges and cannot afford to focus squarely on Eastern Europe.

At home, its production is set to hit an all-time low in 2015 as sales abroad have slumped (only the depreciation of the rouble has buoyed its financial results, but figures denominated in euro or dollars paint a grim picture), while domestic rivals nip at its heels, demanding that Gazprom’s monopoly on pipeline exports is revoked, and some even call for the company to be broken up.

In the EU, an anti-trust investigation that went on for years finally came to a head in April, when the European Commission accused the company of hindering competition in eight European Union countries: Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland and Slovakia. Although Gazprom denies the charges and is trying to settle with the Commission, it could still face fines that might range in the billions of euro.

Finally, its much-touted large pipeline projects appear to be heading nowhere. The Turkish Stream, which replaced the South Stream pipeline cancelled in December 2014, is all but dead as tensions continue to simmer between Moscow and Ankara after a Russian war plane was shot down near the Turkish-Syrian border in November.

And the Nord Stream pipeline expansion, despite support from Germany and five Western European oil and gas majors, has run into the strong opposition of EU’s Eastern European member states, joined by Italy at the last European Council summit meeting (Rome protests against what it sees as double standards, given that the EC objected strongly to South Stream, which was due to reach Italy, but less so to Nord Stream) and may yet run into regulatory obstacles.

Worse yet for Gazprom, the current high levels of supply on the global markets will only get higher in the coming years, as several major LNG projects are scheduled to begin production across the globe. At the same time, the end of the US ban on oil exports in December opens the door for liquefied shale gas making its way to Europe, while Iran could provide yet another alternative to Russian supplies when it returns to the global markets in 2016 with the lifting of sanctions in exchange for shutting down its nuclear enrichment programme. (Even in the oil sector, where Russia has long ago cornered the Eastern European market, it now faces competition from Saudi Arabia, which sold its first cargo of crude to Poland earlier this year.)

Russia will hardly relinquish its position without a fight, and the proposal to expand Nord Stream is proof of that – Moscow has not given up on its designs to punish Kyiv for its turn towards the EU by cutting Ukraine out of the transit map (even though it could easily pass the transit “headache” on to European gas buyers by agreeing to sell gas at the border with Ukraine, but then what kind of lever of influence would it be left with?)

It could be yet that 2015 was merely a blip, a rare aberration caused by a perfect storm of unsustainable factors, but 2016 could go a long way towards proving that this year was the start of a lasting trend.

(Photo: gazprom.ru)

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About the Author

Alex Bivol is the news editor of The Sofia Globe.