Quo Vadis: Crisis or Opportunity? Russia’s concerns ... · Russian StateGubkin OilandGasUniversity Presentation at the 24th meeting of WorkStream 2 "InternalMarkets" of the Russia-EU

Quo Vadis: Crisis or Opportunity?

Russia’s concerns & proposals

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Prof.,Dr.AndreyKonoplyanik,Co-chair WS2GAC;Adviser to Director General,"Gazprom export"LLC;

Professor on International Oil &Gas Business,Russian State Gubkin Oil and Gas University

Presentationatthe24th meetingof Work Stream 2"Internal Markets"of the Russia-EUGas Advisory Council),Representative Office of theEuropeanCommissioninVienna,

Austria,December1st,2017

危й

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Crisis!!!Danger

Challenge,Chance

Prepared by Zhao Yuan Jing (园静), Master-student EMM-1702 group, Russian State Gubkin Oil & Gas University

A.Konoplyanik, 24th WS2 GAC, Vienna, 01.12.2017

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A.Konoplyanik,24thWS2GAC,Vienna,01.12.2017 3

Source: ACER/CEER Annual Report on Results of Monitoring the Internal Natural gas Markets in 2016, p.15

40%=suppliestothefirstentrymarket/countryzoneoftheEU(on-bordersupplies)

34%=supplieswithdeliverypointsdeepinsidetheEU=>RUSgas&RUSgasexportmonopoly(bylaw)

aresubjectstoEUlegislationinsidetheEU

RussiaandtheEU=areintegralmutuallydependentpartsofthe“BroaderEnergyEurope”whichare

inseparablyhistoricallylinkedbycross-bordercapital-intensiveimmobile

infrastructurenetworkdevelopedforlong-termlong-distancelarge-scale

gasdeliveries

LegendEuropeanUnion

EnergyCommunity

ENPEast

ENPSouth

Others

EFTA

Internal EU gas market vs “Broader Energy Europe” (EU “energy acquis” tends to expand through the cross-border gas value chains upstream from

the EU)

MappreparedbyA.Haug,post-graduatestudent,RussianStateGubkin Oil&GasUniversity

Whetheroptimizationispossibleintheenergyimport-dependentEUwithinonlytheportionofsuchcross-bordergasvaluechain(s)basedoncapital-intensiveimmobilenetworkinfrastructuredevelopedforlong-termlong-distancelarge-

scalegasdeliveries?A.Konoplyanik,24thWS2GAC,Vienna,01.12.2017

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Quo Vadis 2017: continued liberalization of EU energy legislation – OR factual deviation from liberalization trends (i.e. same rules for all?) to protectionism and

discrimination of (selective preferences for) some players?(inthenarrowingrelativedemandnicheforfossilfuelwithinchangingparadigmofworldenergydevelopment:

from“peaksupply”to“peakdemand”perceptions)

19571998

20032009

2010

20162017

TreatyofRome (EEC)

1st EUEnergypackage(gas)

2nd EUEnergypackage

3rd EUEnergypackage

NetworkCodesto3rd EUEnergypackagepreparation

VisualfactualdirectivityofQuoVadis – tochange(deviatefrom)existingtrends?

SuggestionofexpecteddirectivityofQuoVadis:(i) thiscomesfromthelogicofprior60Y+historicaldevelopmentofcommonEUeconomicspace,incl.inenergy;

(ii) itisexpectedtobetheprojectforefficiencyevaluationofthegasregulatorysystemofthestillemerginginternalEUenergy market;(iii) thelatterhasbeen teleologically developedthroughthepast60YbasedonprovisionsoftheTreatyofRomeandprogressivelyliberal

instrumentsoftheirimplementation

?

?

1951

ParisTreaty(ECSC)

A.Konoplyanik,24thWS2GAC,Vienna,01.12.2017

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QuoVadisproject:itsmajortask&sequenceoftenses• DGENERGYwebsite:“Theaimofthestudyistoprovidesubstantiatedanalysisasto

whetherthecurrentregulatoryframeworkintheEUgassectoristhemosteffectiveinordertomaximise overallEUwelfareorwhetheramendmentsmaybenecessary,andifsoproviderecommendations”:– 26.06.2017 (Brussels,2nd stakeholdersmeeting):PreliminaryEY/REKKreport“QuoVadisEUgasmarket

regulatoryframework– StudyonaGasMarketDesignforEurope(PreliminaryReport,Draftfordiscussionpurposes)”,

• RUSpartWS2provideditscommentstoDGENERGY&REKKon12-14.07.2017• 26.07.2017 (Budapest):debateonmodellingmethodology

• RUSpartWS2provideditsproposals(20.07.2017)&comments(18.08.2017)toDGENERGY&REKK• 19-20.10.2017:debateonQuoVadisatMadridForum

• Rathercriticalcommentsfrommarketparticipants,esp.onscenarios1-4• 13.12.2017 (Brussels,3rd stakeholdersmeeting):nextstageofpublicdebate,hopefully,withdue

considerationofRUSproposals/justifiedinterests• BUT:

• ThirdEUEnergyPackageingasinitsfullintegrity,incl.NCs,onlysinceApril2017;two-year-longcycleofCAMNCINC procedure;=>firstresultsofpracticalimplementationofThirdEnergyPackageingasinitsfullintegrity– mid-2019 =>

• QuoVadismodellingismade&proposalsarebasedonperceptions,withouttesting(passingthrough“learningcurve”)ofintegralThirdEnergyPackagepracticalimplementation?


MajorTaskoftheEU-RussiaGasAdvisoryCouncil

• “…aimedtodiminishmutualrisksanduncertaintiestothetolerablelevel”(PhilipLowe,Director-General,DGENERGY,1st/InauguralGACmeeting,Vienna,17.10.2011)


QuoVadisModelling:generalconcerns&proposals(seePart1)• Imbalancedstudy (pre-determinedbyTermsofreference):

1) “EUwelfare”modellingisbasedonlyontheinterestsofEUfinalconsumers(thoughquestionable– seebelow)andEUgasmarketinternalparticipants,without takingintoconsiderationjustifiedinterests/concernsofnon-EUsupplierstotheenergyimport-dependentEU– BUT: EU&Russiaare interdependentpartiesofthe“BroaderEnergyEurope”=>weareinseparablyhistoricallylinkedbycross-bordercapital-intensiveimmobileinfrastructurenetworkdevelopedforlong-termlong-distancelarge-scaleRussiangasdeliveriestotheEU

2) “MaximizationofEUwelfare”ismodelledbasedonscenarioswithin“zero-sumgame”by:– Shiftingincrementalrisksandcostsonnon-EUgassupplierstotheEU(firstlyonRussianside),&– Transmittinggainedbenefitsto(theirredistributioninfavour of)toEUfinalconsumers(thoughquestionable– seebelow) plustowholesalebuyers-resellers/tradersof(firstlyRussian)gasfromthenon-EUproducers

3) Welfareoffinalconsumersismodelledbasedonwholesale,notretail,prices(ToRDGENERGY)– BUT: ThelevelsandtrendsofwholesaleandretailpricesinEUaredifferent;roleoftaxes

4) Inertia ofmodellingprocess => impossibletocorrect/updatetheprocessfromthemiddleofthewaywithinfixedlimitedprojecttime-frame(June=>July=>October=>December?)


QuoVadisModelling:generalconcerns&proposals(seePart2)• Nevertheless,itseemsreasonable,basedonvalueaddedofQuoVadisexercise,to:– ComplementQuoVadisproject(REKK’smodelling)byanewseparateEU-Russiajointscenario(s)/undertakingwhichwilltakeintoconsiderationjustifiedinterests/concernsoftheRussiansideandwillbebasedonthebalanceofmutualinterestsofthepartiesandontheircooperativeexperienceoftherecentpastwithinGAC,i.e.:

– onPRIMESmodellinginWS1(2011-2013),– onGTMinWS2(2011-2013),– onCAMNCINC/TARNC inWS2(2013-2016)

– RUSsideWS2proposalonthistoDGENERGYforconsideration(asof18.08.2017)


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Quo Vadis !!!Danger

Challenge,Chance


Part 1. Concerns


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FiveselectedQuoVadisscenarios1) Tariffreform

• nullificationofintra-zoneE-Etariffs,compensatoryincreaseofentry(toEUwholesalemarket)and/orexit(toEUretailmarket)tariffs,centralizedredistributionofcompensatoryrevenues(vianewlyestablishedTCF)

2) Realmergerofmarketzones3) Virtualmergerofmarketzones

• pavingthewayforvirtualreverseflowstoUA4) ShiftofdeliverypointstotheexternalborderofEU(areaofEUacquis=>EU+Energy

Communityarea)• RussiangastobedeliveredtoRF-UAborder

5) Expansionofpipelineinfrastructuretodeliverregasified LNGfromcoastalimportterminalsto insideEU(themain/Rus deliverypoints)

• TosubstitutetheirRus gasshiftedtoRF-UAborder?whowillfinance?ViaTCF?Myfinalconclusion(devil’sadvocate/worst-caseinterpretation): QuoVadis initscurrentstructurepresentsanintegralprogramme ofpushingoutthe(morecheap)RussianpipelinegassuppliestotheperipheryoftheEU/EnergyCommunityarea(RF-UAborder)anditssubstitutioninthe(EasternEU)areaofitshistoricalpresenceby(morecostly)USLNG


A.Konoplyanik: publications & presentation on Quo Vadis with further/more detailed argumentation

• Publications:– Расчисткарынка:каквЕСхотятизменитьправилапокупкироссийскогогаза.//«РБК-daily», 31.07.2017– Водниворота.//«НефтегазоваяВертикаль», 2017,№15-16,с.52-57– «Санитарныйкордон»ЕСнапутиуглеводородов.(Попыткирегулированияевропейскогорынкаголубоготопливаведуткограничениюприсутствия

отечественныхкомпанийвСтаромСвете)//«НГ-Энергия»№8(121),Приложениек«Независимойгазете»,10.10.2017,с.9,12-13– СоблазнениеЕвропы.(МеждуРоссиейиСША:чейгазбудетпокупатьЕвросоюзвближайшиегоды)//Профиль(деловойеженедельник),№7,16.10.2017,с.47-51.– EUQuoVadis:atheoreticalexercisewithananti-RussianFlavour?//“NaturalGasWorld- GlobalGasPerspectives”, 19October2017– QuoVadis:оценкаэффективностиТретьегоэнергопакета ЕСилитестнаформированиеновой«линииКерзона»новойЕврокомиссией?//«Нефть,газиправо»,

2017,№4-6(впечати)

• Presentations:– «ПроектQuo Vadis ЕС:путьк(мифическому)Четвертомуэнергопакету ЕСилипопытка(корректной?)оценкиэффективностивыстроеннойза6летсистемы

регулирования/функционированияформирующегосяединоговнутреннегорынкагазаЕСнабазеТретьегоэнергопакета EC?»//Presentation at the Expert Meeting“Russian response to the upcoming 4thenergy package - EUgas market regulatory framework”,19April 2017,Moscow School of Management SKOLKOVO

– “Inthesearchofan efficientEUgasmarketmodel:QuoVadis?(introductoryremarksofthemoderator)”.//PresentationattheWorkshop“Inthesearchofan efficientEUgasmarketmodel”(underthesupervisionoftheCo-chairsofWorkStream2- "InternalMarkets"oftheRussia-EUGasAdvisoryCouncil),RepresentativeOfficeofPJSC“Gazprom”inBelgium,30thMay2017

– «ПроектЕврокомиссииQuo Vadis пооценкеэффективностиивозможныхкорректировоксистемырегулированиярынкагазаЕС»//Выступлениенасеминаре«ОбзорЕвропейскогорынкаприродногогазаиСПГ»,организованномкомпаниейThomson Reuters,Москва,12июля2017г.

– ОценкаэффективностиТретьегоэнергопакета ЕС- ипроектЕврокомиссии«Quo Vadis».//Выступлениенаконференции«Энергетическаябезопасностьиперспективыразвития»IXМеждународногоГазовогоФорума,03-06октября2017г.,Санкт-Петербург

– ПроектЕврокомиссии«Quo Vadis»:оценкаэффективностиТретьегоэнергопакета ЕСвгазеили техзадание дляновойЕврокомиссиинаЧетвертыйэнергопакет ЕСдлягазасантироссийскимуклоном?(рольполитикивсовременнойэкономике)//Выступлениенасеминаре«Европейскийвызовмеждународнымрынкамгаза»врамкахФорума«НефтегазовыйдиалогИМЭМОРАН,Москва,ИМЭМО,24.10.2017

– QuoVadis:оценкаэффективностиТретьегоэнергопакета ЕСилиподготовкановой«линииКерзона»?//Выступлениенаконференции«ПроблемыиперспективывзаимоотношенийРоссиииЕвропывгазовойсфере»,Москва,ИНПРАН,07.11.017


QuoVadis:possibleconsequences(summarizingworstreading) forRussiangas• Scenario1:Creationfornon-EUgassupplierstoEU(firstlyRussiangas)entrytarifflimitations,

worseningitscompetitiveadvantagesinEU(i.e.againstUSLNG)=>administrativeentrybarriersforRussiangas

• Scenarios 2-3:“Import”tonon-liquidmarketzones(withinEU&EnergyCommunity)ofgaspricesfromliquidEUmarketplaces=>substitutionofdirectsuppliesofRussiangastoUAfromtheEastbysuppliestoUAfromtheWest(fromEU)ofgasoriginatedfromRussia =>theformofbusiness-supportofEUmidstreamcompanies

• Scenario 4:RemovalofdeliverypointsofRussiangastotheperipheryofEUacquisimplementationarea=>transfer oftransportation(transit)servicesto“old”RussiandeliverypointstoEUcompanies– traditionalwholesalebuyers-resellersofRussiangas=>formofbusinesssupportofEUmidstreamcompanies

• Scenario 5:CreationofnewgaspipelineinfrastructurewithinEUtodeliverregasified LNGfromEUcoastalimportterminalstotraditionaldeliverypointsof(Russianpipeline)gasinsideEU => creationoftechnicalcapabilitiestosubstituteRussiangasbyLNGwithinEU

• Inresult: formationof“vertical”gastransportationcorridorintheEasternperipheryofEUconnectingnewLNGterminalsaimed(ontopofitstechnicalreasoning) to cut-offRussianpipelinegasfromtheareaofitshistoricalpresence/dominance (programmes CESEC,PCI,TYNDP)???


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Possible application consequences (schematic) of five Quo Vadis scenarios, selected for quantitative modelling, under their most negative interpretation for

Russian side

Source:A.Konoplyanik.EUQuoVadis:atheoreticalexercisewithananti-RussianFlavour?//“NaturalGasWorld- GlobalGasPerspectives”,19October2017;https://www.naturalgasworld.com/gpp-eu-quo-vadis-a-theoretical-exercise-with-an-anti-russian-flavour-56079

ExistingLNGterminalsNewLNGterminals

ExistingkeydeliverypointsofRussiangastotheEUNewdeliverypointsofRussiangastotheEUasproposedinQuoVadisreport

DevelopmentofnewpipelineinfrastructurefromexistingLNGterminalstoexistingdeliverypointsofRussiangaswithintheEUasproposedinQuoVadisreportShiftofexistingdeliverypointsofRussiangasinsidetheEUtotheirnewlocationsattheexternalborderofthezoneofEUacquisapplicationasproposedinQuoVadisreport

1 NewmergedregionalgasmarketzonesasproposedinQuoVadisreport

NewNorth-SouthEUgaspipelinecorridorintheEasternpartoftheEUtoconnectnewLNGterminals

TransferofexistingtransitbusinessofRussiangastoexistingdeliverypointwithintheEUtothemid-streamcompaniesoftheEUasproposedinQuoVadisreport

New (incremental) European gas infrastructure

(PCI) (see legend)

Источник:http://ec.europa.eu/energy/infrastructure/transparency_platform/map-viewer/main.html


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Legend to figure with new (incremental) European gas infrastructure (PCI)

Источник:http://ec.europa.eu/energy/infrastructure/transparency_platform/map-viewer/main.htmlA.Konoplyanik,24thWS2GAC,Vienna,01.12.2017

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QuoVadis,Russianpipelinegas&USLNGinEU:attemptofunfaircompetition?AtthecostofEU?WhatthePresidentsaresaying…

• InitscurrentstructureQuoVadisseemstobefactuallyaimedatjustificationofsubstitutioninEUbymoreexpensiveUSLNGofmorecheapRussianpipelinegas;ontheroutesofthelattertoEU(bothonexistingandonprospectiveones)itismodelledtocreateincrementalbarriers.=>QuoVadisscenarioswellcorrelatewithnewanti-RussianUSsanctionsagainstexistingandnewRussianexportpipelinesandmightleadnottoincreasebuttodecreaseofEUwelfare.ItseemsthatQuoVadisscenariosareconstructednotinfavour ofEU,butinfavour ofUS:– USPresident D.Trump (Warsaw,04.07.2017):“Maybe,thepricewillcomeslightlyhigher– but

that’sOK…” (“USEnergyDominance” &”AmericaFirst”strategies)– RussianPrime-MinisterD.Medvedev (St.Petersburg,21.09.2017):“…AmericanAdministration-

andCongress…- trytopromoteitsownsuppliersandtosubstituteRussianFederationatthismarket”

– RussianPresidentV.Putin (Sochi,19.10.2017):“…recentsanctions’packageadoptedbyUSCongress openlyaimedatpushingRussiaawayfromEuropeanenergymarkets,toforceEuropetoturntomoreexpensiveUSLNG …”


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Dividing line from Baltic to Black sea (Project “Intermarium”) – major aim of USA in Europe (acc. to G.Friedman, “Stratfor”)


“…final aim of the US consists in creation of “Intermarium” – territory between Baltic and Black Seas, which concept was developed as far back as by Pilsudski. First aim for US is not to allow that German capital and German technologies were united with Russian natural resources and labour resources in the invincible combination. … Trump card of US which defeat such combination -dividing line between Baltic states and Black Sea.” (https://www.thechicagocouncil.org/event/europe-destined-conflict)

Source:PresentationofGeorgeFriedman,FounderandPresidentofprivateintelligenceagency“Stratfor”attheconferenceof“TheChicagoCouncilonGlobalAffairs”,4февраля2015г.,https://www.youtube.com/watch?v=iOY1dDqa7F0;https://www.youtube.com/watch?v=xewzbMYmC_I

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Quo Vadis!!!Danger

Challenge,Chance


Part 2. Proposals


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A.Yanovsky (Russian Co-Chair, GAC) on non-EU suppliers’ role in Quo Vadis

• “…WewelcomeinitiativeoftheEuropeanCommissiontoundertakecertain“revision”oftheresultsofdevelopmentandimplementationofthedocumentsongasmarketregulation inelaborationofThirdEUEnergyPackage. …Wewillattentivelyfollowthecourseandresultsofthisstudyinthehopetopreventnewimperfectionsandinaccuracies,whichcannotbeexcludedwithoutengagedjointdiscussionoftheproblemsinsubstance.Inourview,itwillbeadvisableto foreseeinvolvementinsuchstudyofthegasexporterstotheEUsincesuccessofEUgasmarketfunctioningdependsontheirsatisfactionwiththeregulatoryrulesatthethismarket. …Moreover,inourview,anymarketcanunlikelybesustainableinprincipleifitsregulationisorientedexclusively(orevenprimary)totheinterestsofthebuyers”

• (frompresentationofRussianEnergyDeputyMinsterA.Yanovsky atthePlenarysessionoftheInternationalConference“ProspectsofRussia-EUenergycooperation:gasaspect”,June15,2017,Berlin(«Газовыйбизнес»,2017,№3,с.12))


Results of 30.05.2017 Workshop (*) registration poll (non-Gazprom Group attendants’ answers only)


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Other model

Is there a need for further improvement of the EU gas market regulatory environment?

Should the future architecture of the EUgas market:

What is the most effective future pricing mechanism for the EU internal gas market?

Shall stakeholders be fully involved in any further market developments initiated by the EU regulatory bodies?

(*)Workshop “In the search of an efficient EUgas market model”(under the supervision of the Co-chairs of WS2GAC,RepresentativeOffice of PJSC“Gazprom”in Belgium,30thMay 2017

Collected&summarizedbyD.Udalov A.Konoplyanik,24thWS2GAC,Vienna,01.12.2017

Improvementnotnecessarilymeansradical

changes

AK:stakeholdersthroughthewholecross-bordergasvaluechainwithin

“BroaderEnergyEurope”

Russian side of WS2 proposal to the DG ENERGY coordinator of Quo Vadis project (as of 18.12.017)

• “…InthisregardtheRussian/GazpromGroupsideoftheWS2GACproposeDGENERGYanditsConsultant(EY&REKK)on“QuoVadis”projecttoconsiderpossibilitytojointly(undertheumbrellaoftheRussia-EUGACWS2)“assessthecurrentregulatoryframeworkandconcludewhether–consideringtheoverallcostsandbenefits– achangeinthatframeworkisnecessary…”(asitmentionedinthe“TenderSpecification”forQuoVadis…)(*),but“consideringtheoverallcostsandbenefits”insuchassessmentwith:

- dueconsiderationofthejustifiedconcernsofthenon-EUproducers/externalgassuppliers/exporterstotheenergy-import-dependentEU,and

- adjustmentoftheabove-mentionedimperfectionsoftheREKK’sEGMMmodelforthegiventask.”

(*)CallforTendersNoENER/B2/2016-413“QuoVadisEUgasmarketregulatoryframework–StudyonaGasMarketDesignforEurope”,TenderSpecifications,p.9“Tasks”


A bigger Pie for both Parties?• QuoVadisstudy includes investigation of methods entailing a

welfare shift from gas producers to European gas users(i.e.welfareshift:fromRussia→toEU).

• Suggestedadditionalanalysis(additionalstudytoQuoVadis,notwithincurrentQuoVadisproject):“Win-Win”extensiontoQuoVadisstudy:

Howcanwe• increasethepieforbothpartiesintheRussia-EUgasbusiness(EUandRussiatogether)

• andequitablydistributetheadditionalwelfare?


Win-Win Extension: suggested steps• Step1: Discoveryexercise

• WhichareasofcollaborationexistthatcouldleadtoatotalwelfaregainforEUand Russiainthegasbusiness?

• Howcouldsuchcollaborationlooklikeinpractice?• Step2: Evaluationofwelfaregain

• Analysisofsizeofwelfaregainpercollaborationopportunity• Step3: Welfaredistribution

• Developing options for principles and operational methods of distributing the additional welfare identified(dulyconsideringthetoolboxdevelopedinQuoVadisstudy)

• Step4: Implementation• Planningandfacilitatingimplementation


Win-Win-Extension: suggested Project organisation

Prerequisitesforprojectsuccessasregardsconsultants:• Bothpartiesneedtohavetrustinbothconsultants.

Suggestedprocedureforselectingconsultants:• Option1: Eachsideproposesconsultantfromotherparty’sarea(i.e.EUproposesRussianconsultantandRussiaproposesEUconsultant)withrightofrefusalbyotherparty

• Option2:Eachpartyproducesshort-listwithconsultantsfromitsownregion(3-5consultants)forotherpartytochosefrom

EU– RussiaGasAdvisoryCouncilorWS2GAC

(Steeringcommittee)

JointConsultingTeam• ConsultantsfromEU

collaboratingcloselywith

• ConsultantsfromRussia

Stepwiseapproach:1) Selectconsultants2) Useconsultants’experiencetodevelop

studydesignformaximisingjointsuccess3) PotentiallylimitinitialtasktoStep1

(Discoveryexercise)A.Konoplyanik,24thWS2GAC,Vienna,01.12.2017 25

Thank you for your attention!

[email protected]

[email protected]

Disclaimer:Viewsexpressedinthispresentationdonotnecessarilyreflect(may/shouldreflect)and/orcoincide(may/shouldbeconsistent)withofficialpositionofGazpromGroup(incl.GazpromJSCand/orGazpromexportLLC),itsstockholdersand/orits/theiraffiliatedpersons,oranyRussianofficialauthority,andarewithinfullpersonalresponsibilityoftheauthorofthispresentation.


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Quo Vadis: Crisis or Opportunity? Russia’s concerns ... · Russian StateGubkin OilandGasUniversity Presentation at the 24th meeting of WorkStream 2 "InternalMarkets" of the Russia-EU