EU gas policy transformation in the context of EU-Russia relations

The conclusions of this chapter are:

- The primary source of gas policy integration lies in the interests of the Member States;

- There is a problem of trust between the EU and Russia due to a problem of interdependence that provokes a lack of cooperation in the gas field;

- The Third Energy Package represents how the EU securitize the threat of Russian gas dependence.



2. EU gas policy

2.1 EU gas policy integration

In this part of the work, it will be analysed EU gas policy integration. First, it will be described the EU gas dependence and consumption; second, there will be an overview on EU gas market and its peculiarities; third, it will be taken into account the different steps and regulations shaping EU gas policy integration.

In general, the EU does not have a lot of energy resources and for this reasons mostly all MSs have to import a large quantity of energy resources. Indeed, EU depends on the rest of the world for its energy. The European Union, the world's second largest economy, consumes one fifth of the world's energy, but has very few reserves of its own. Moreover, the energy mix among MSs is very diverse: dams (Austria), coal mines (Poland), nuclear power stations (France), oil rigs (North Sea), gas fields (Denmark and the Netherlands).

As far as natural gas is concerned, its reserves and production are very low among EU MSs and the gap between them and consumption is very evident, as the graphics below show:



Moreover, in the graphic below it is possible to see the comparison of EU gas consumption, imports and production from 2013 to 2016.

It is important to underline that since the previous report, there have been significant revisions in the consumption data concerning Germany which had implications on EU consumption in 2016.

«EU gas demand increased by 2% in the first nine months of 2016 but, according to preliminary data, the growth accelerated in the last quarter when demand grew by 18% year-on-year.» This means that in 2016 the EU gas demand was 7% more than in 2015. As a result of growing consumption and falling production, imports were 12% higher in 2016 than in 2015. The 2016 gas import bill amounted to an estimated 59 billion euros. This is nearly 20% less than in 2015 in spite of the growing volumes. Russia remained the top supplier of natural gas of the EU in 2016 and imports from this country were 22% higher than a year earlier. Russia at the time of the report covered 42% of gas imports, followed by Norway (34%) and Algeria (10%).

In the graphic below we can see EU imports of natural gas by source for the period 2014-2016.



The share of the main supply routes of Russian gas imports was the follows: Ukraine 43%, Nord Stream 28% and Belarus 26%. Volumes arriving through Ukraine were 30% higher in 2016 than in 2015. In the graphic is possible to see the EU import of gas from Russia by supply route.

In order to analyse EU gas integration and EU gas policy transformation, it is essential to understand how EU gas market works, its features and peculiarities.

During the last 30 years, natural gas has become one of the most important sources of energy for the EU and the world. Anyway, it is important to say that the spread of its use is linked with several specificities in terms of governmental choice of energy resources mixes, exploitation development in connection to petroleum products, environmental concerns and of course cost issues. There have been three geopolitical developments that have made the success of natural gas. The first one is the 1970s oil shocks; the second one happened in the 1980s with the spread of policies that limited the use of some energy resources; the third in 1990s with the global environmental direction emerged on the EU political agenda by making natural gas on of the best choice due to its low environmental impact instead of coal and nuclear energy (the Kyoto Protocol in 1997 is the main example). Nowadays natural gas represents the world's fastest growing primary energy resource and its consumption is supposed to double by 2030, overtaking oil.

In general, the natural gas market can be subdivided into an upstream market and a downstream market. The upstream market encompasses activities such gas exploration, development, production, gathering, purification and sales. The downstream market refers to the transmission, distribution, and storage of natural gas. Usually the upstream market is characterized by a high degree of state ownership due to the strategic important of natural gas. The natural gas upstream market is closely linked with the oil market and it is characterized by long-terms contract between the gas producer and the buyer. The basic idea of this model is that both the gas producer and the gas buyer profit from long-term contractual agreements. The producer can trust on guaranteed payments for a period long enough to cover the costs incurred from the investment in exploration, production, long-distance transportation. By the other side, the downstream market does not have a monopolistic structure because natural gas still competes against other energy sources.

The complexity of the gas market consists in its legal nature. Indeed, gas can be understood as a commodity, a service or a network industry. The coexistence of these aspects influences the complexity of the legal framework accompanying the EU gas market. Understanding the complexity of this energy resource is a necessary step in order to comprehend the nature of EU gas policy. Each feature of natural gas is regulated by different EU and national law provisions since there is no unitary EU energy law addressing the gas sector. Single market principles, environmental provisions, international law covering trade relations and competition law and policy interact with specific sector legislation in shaping the EU gas market and policy.

If looking at natural gas as a service or a commodity, natural gas is governed by the single market principle of free circulation of goods and services in the EU, sanctioned by the provisions of the Treaty on the Functioning of the European Union (TFEU). Article 36 TFEU stipulates that the provisions related to the free movement of goods can be submitted to certain exemptions, should such be required for public security reasons. Member States have been able in the past to invoke their security of supply obligations in order to elude the application of general rules on trade and competition to natural gas cases.

But gas can be looked also as a network industry. This is because natural gas cannot be considered a properly fungible commodity for some aspects. First, gas market is regionalized because there are scares sources in the EU MSs and limited number of pipelines from third countries that cover a long distance and inter-state borders. Second, there is a situation of stable dependency relationships between EU MSs and a limited number of third countries. Third, these relationships are continually due to political pressure. Fourth, the gas market has no similar equivalent with other energy resources such as electricity, renewables or nuclear energy.

As far as the EU legal framework suggests, competences in the energy field are shared between the EU and its MSs as in paragraphs (2) and (3) of article 194 TFEU. MSs have the right to decide upon their energy mixes, condition for exploiting their energy resources and the general structure of national energy supply. Moreover, these subjects and measures in the field of energy taxation are subject to unanimity. Additionally, Member States are allowed to retain the right to conduct bilateral energy relations with non-EU countries as they want. As a consequence, Member States must act in the spirit of loyal cooperation and in observance of the pre-emption doctrine. All others decision and further integration in the gas field happen only by voluntary compliance. The Commission participates in the monitoring of Member States' gas markets and it is responsible for opening infringement procedures in case of violation.

In order to analyse the different steps of the EU gas policy integration, it is necessary to keep in mind the great gas dependence of the EU by one side, and by another, the big gas consumption, as it has been discussed at the beginning of this chapter. Indeed, this can better explain the objectives of EU energy policy. Moreover, it is useful to distinguish between general energy policy (e.g., EU energy policy), specific policies for the different energy sources (e.g., EU policies on natural gas), and policies addressing traversal or cross-sectoral issues (e.g., research and development policies). This work focuses on EU gas policy but all the three kinds of policies listed up influence the EU gas policy.

In order to analyse the topic of this work, it is essential to go through the process of EU gas policy integration and investigate why, how and when gas issues emerge onto the EU agenda, the adoption of both binding and non-binding rules in this field and which actors and institutions are influential in these processes.

As we said before, gas was not a primary energy resource at the very beginning of the EU integration and this is why it was not included in the energy integration and policies. But at the initial stages of EU energy integration MSs address a great importance to the energy issue.

As it has been already said in the first chapter, EU integration is primarily linked with energy at such a point that some scholars define energy has the motor of the EU integration because it was where the interests of the MSs were more aligned and pressing. The evidence of it is represented by the European Coal and Steel Community (1952-2002) and the Euratom (1958-till nowadays).

The ECSC Treaty was signed in Paris in 1951 by France, Germany, Italy and the Benelux countries. The aim of the Community was to organise free movement of coal and steel and free access to sources of production. In addition to this, a common High Authority supervised the market and checked the respect of the rules. The ECSC was born from a strong economic reason since coal and steel were the basis of the industry and power at that time. The institutions had to ensure equal access to the sources of production and the establishment of the lowest prices.

By the other side, the European Atomic Energy Community (EAEC or Euratom) is an international organisation legally distinct from the EU founded in 1957 in order to create a market for nuclear power in Europe.

In the pictures below it is possible to look at the main steps that have characterized the EU energy integration. Straight after will be analysed and explained only what concerned the gas field.



As far as gas is concerned, traditionally each Member State's gas market has been characterized by the domination of national monopolies. This structure has been supported and encouraged by governments since it satisfied the energy demand and has always been considered a more stable system. Consequentially at the beginning the gas market was characterized by a vertical integration of production and supply within the same under-taking and horizontal integration in a certain region of the market. This evidences the lack of any gas-to-gas competition.

The Single European Act (SEA), entered into force in 1985, represents the first framework of integration of EU gas policy. At the time the European gas market was segmented by three separate regional grids: a Benelux grid that reached France and Germany, an Italian grid traversing the Southern part of the Union's territory and a Central and Eastern European one. By the time SEA was adopted, the European gas market had developed at both national and EU level. SEA brought two important substantive changes. The first regarded the progressive establishment of an internal market, defined as an area without internal frontiers, in which the free movement of goods, persons and services was guaranteed. The second change regarded the enlargement of EU competences to areas that did not previously enjoy an express Treaty basis. In this respect, the extension of Union competences to research and technological development, and to environmental policy, bestowed added legitimacy upon the European Commission's efforts to establish an internal gas market.

It is important to underline that SEA coincided with major transformations in the modes of governance, that is the passage from public to private actors. Indeed, from the 1980s, there were pressures asking to renew the tradition structure of the gas market. The crucial factor was probably the increase in the volume of available gas. As a consequence, the support of producers for the traditional model of government-dominated markets started to collapse.

In 1988, the Commission issued a Green Paper called The Internal Energy Market, which became the first general orientation towards an integrated energy market. The philosophy behind it can be characterised as «free and fair competition». The initiative clearly aimed for the «inclusion of energy in the single market concept». Indeed, the European Commission attempted to open gas and electricity markets to competition.

In 1998 there was the first gas directive (98/30/EC). This directive should be transposed into MSs legal systems by 2000 and it concerns common rules for the internal market in natural gas. Finally, gas was due to the rules of free movement of goods, competition, transparency of the prices. As written in the text of the Directive: «This Directive establishes common rules for the transmission, distribution, supply and storage of natural gas. It lays down the rules relating to the organisation and functioning of the natural gas sector, including liquefied natural gas (LNG), access to the market, the operation of systems, and the criteria and procedures applicable to the granting of authorisations for transmission, distribution, supply and storage of natural gas.»

Following, in 2003 there is the EU Second Energy Package. As written: «Directive 2003/55/EC provides for the complete opening of national gas markets to competition and therefore helps create a true internal gas market within the European Union (EU). Completion of the internal gas market increases competitiveness and improves service quality, guarantees fair prices for consumers, establishes rules on public service obligations, improves interconnection and bolsters security of supply.» With this directive also third-part access is regulated. Consequently, new suppliers can now enter the market and consumers are free to choose their gas supplier. Fair competition needs to regulate the internal gas market. Since 1 July 2004, industrial consumers have been able to choose their supplier.

The Third energy package is the latest framework of legislation that regulates EU gas market. It came into force in 2009. It covers five main areas:

- unbundling energy suppliers from network operators;

- strengthening the independence of regulators;

- establishment of the Agency for the Cooperation of Energy Regulators (ACER) (independent from the Commission, national governments, and energy companies);

- cross-border cooperation between transmission system operators and the creation of European Networks for Transmission System Operators;

- increased transparency in retail markets to benefit consumers.

The most important points of the Third energy package are the principle of reciprocity and the ownership unbundling. The former means that third countries should respect the same rule as EU companies, the latter is the separation of energy supply and generation from the operation of transmission networks.

In the recent years EU energy policy, including gas, has taken a very clear shape that can be summarized in the EU goals in the field of energy:

- securing Europe's energy supply; ?

- ensuring low energy prices; ?

- protecting the environment and combating climate change; ?

- reduce energy consumptions (Energy Efficiency Directive of 2012);

- improving energy grids.

A more recent document is the 2030 framework for climate and energy. This new framework represents the present and future direction of the EU in the field of climate and energy, that are absolutely linked, and will have a great impact on the internal gas market. Indeed, in 2014 it was approved a new EU framework on climate and energy for 2030. The framework includes EU-binding targets to reduce domestic greenhouse gas emissions by at least 40% compared to 1990 levels and to increase the use of renewable energy to at least?27% of total energy consumption by 2030. It also contains renewed ambitions for energy efficiency policies, a new governance system and a set of new indicators to ensure a safe, competitive and sustainable energy supply. The long-term strategy is to build a EU Energy Union.



2.2 Different national standpoints and interests in the final proposal and ongoing of shaping the EU gas policy

As we have seen in the previous paragraph, EU gas policy is shaped by EU institutions, mostly the Commission, and by MSs. Competences in the energy field are shared between the EU and its MSs. MSs can decide their energy mixes and conduct bilateral energy relations with non-EU countries. The Commission and independent regulators such as ACER have the role of monitoring MSs behaviour and make sure they respect the legal framework and act in the spirit of loyal cooperation and in observance of the pre-emption doctrine.

MSs are the subjects of EU gas policy and for this reason they play a great and determinant role in shaping EU gas policy. It follows that it is absolutely important to describe and analyse also this aspect in order to better understand EU gas policy integration and transformation in the context of EU-Russia relations.

As we discussed, EU gas policy integration is moving forward to the idea of an «Energy Union». The Energy Union would ensure gas supply diversification, transparency of intergovernmental agreements and infrastructure expansion. Conversely, not always common standpoints and interests are met between MSs in the field of gas policy. This sometimes leads to two different levels of EU gas policy: policy discourses and policy practices.

In this paragraph, it will be analysed the integrity of EU gas policy in relation to the different interests of MSs. In order to do so, some practical case studies will be taken into account: Germany, Poland and Italy. Each of these MSs has a different orientation in energy policy and different degree of import (in) dependence and different energy, economic, environmental policy goals, which influences its direction on gas policy. This is why also the general direction on energy policy needs to be taken into account.

Germany

The main source of energy in Germany is oil, but its use has declined in the last decade. Germany does not have a lot of domestic energy resources and for this reason it needs to import energy to meet its big demand. The domestic market is liberalised and characterised by different players. The energy strategy of Germany is based on the concept of Energiewende (energy transition) with a focus on nuclear exit, renewable energies and climate policy commitment.

The second most important primary energy source of the country's energy mix is natural gas, which has still a dominant position (20%) in German energy mix. The largest shares of gas imports come from Russia, Norway and the Netherlands. Germany remains the largest importer of natural gas in the EU and its gas storage capacity is the first in Europe and the fourth-largest in the world. Below it is possible to see a map of German natural gas imports by country in 2012.

The main supplier of natural gas to Germany is Russia through two pipelines: Druzhba via Ukraine and Nord Stream, which added 55 bcm of capacity. Moreover, with the new project of Nord Stream 2 the capacity of gas from Russia to Germany will drastically grow and make German gas market became even bigger and giving more possibilities for Germany to provide gas to others EU MSs.

Germany can be considered as one of the biggest gas markets in Europe. The country has an articulated system of pipelines for gas import and distribution. Germany's position strengthened its role as an important gas transit hub inside the EU. Important amounts of gas are transported from Germany to the other EU Member States. Germany is highly dependent on gas imports and experts say that natural gas production in Germany will continue to decline over the next 20 years and this would make Germany even more dependent on gas imports. Germany has made progress on following the EU energy policy and the security of supply situation in Germany is reliable and safe. Of course, its natural gas storage facilities make a significant contribution to energy security.

As far as further EU integration in the field of gas is concerned, Germany supported the Third Energy Package as a necessary legal basis but has not been a great supporter of the Energy Union. Indeed, it does not perceive further harmonization and integration to be necessary. This is probably linked with the nature of German energy market, which is characterized by a minimum state intervention in order to guarantee energy security. Moreover, Germany is moving more and more to the direction of renewable energy as demonstrated by the Energy Concept, adopted by the Federal Government of Germany in 2010 and which determinates renewable energy as the main source of future energy supply. By 2022 Germany will terminate to product nuclear energy. In the long-term prospective Germany wants to achieve the following three aims:

- Create an internal market for electricity and gas in order to incentivise investment in these areas and regional cooperation with neighbour countries to ensure energy security;

- Concentrate on climate protection, renewable energy support and energy efficiency measures and make the 2030 governance framework the core of the Energy Union. Germany wants a prolongation of binding national renewable energy targets for MSs;

- Prevent Commission action that supports nuclear or fossil activities or uses state aid rules to influence national decisions on the energy transformation. Germany wants to prevent EU intervention and safeguards its Energiewende.



Poland

Polish energy mix is dominated by coal. In 2013 the share of coal was 54% in the energy sector and 88% in the power sector. It is thanks to coal that Poland belongs to one of the least energy dependent EU MSs. In 2013 Poland imported only 25.8% of energy resources, while the EU average was 53%. Poland even exports its coal resources to other MSs such as Germany. This is why the notion of «technology neutrality», meaning an open window for coal, nuclear or shale gas, is stressed by Poland at a EU level.

It needs to be said that in the coming years the situation is probably going to change because of the environmental regulations, health problematics and high costs of coal extraction combined with the decreasing of coal prices.

In the graphic below it is possible to see Polish energy mix production.

Concerning gas, the great majority of the gas imported by Poland comes from Russia. In 2009 over 80% of the imported gas was coming from Russia. As a consequence, Poland perceives the gas supply has a complex and actual problem of energy security. In order to decrease the gas import dependency from Russia, in Poland was created a LNG terminal for the off-take of liquefied natural gas in Њwinoujњcie. «On 19 August 2008, the Council of Ministers adopted a resolution in which the construction of the LNG terminal was presented as a strategic investment in the interests of Poland, compliant with the plans for diversification of sources and roads of supply of natural gas and guaranteeing the energy security of the country».

Poland believes that its gas dependence required support at a national and EU level. Indeed, Poland has always supported the idea of an Energy Union, an initiative presented by Tusk, former Polish Prime Minister and Chairman of the European Council. Poland often criticized Tusk for not pushing the issue of joint gas purchasing and the rehabilitation of coal strongly enough. Anyway, Tusk was able to put energy security at the top of the EU agenda. Moreover, «De-carbonization», EU climate and energy policy in general are very often described by Polish politicians as a policy problem. Indeed, climate change is not an important political issue in Poland and Polish politicians from different parties criticize the EU climate policy. In particular, renewable energy is viewed with scepticism because it contradicts Polish interest, while the German Energiewende is perceived as a policy failure with negative side-effects for neighbouring states. In this sense, the Polish government is likely to continue pushing for security of supply as the driver of the Energy Union. Polish Premier Kazimierz Marcinkiewicz in 2006 emphasized the need of security of supply through solidarity in gas, oil and power supply and opposed de-carbonization measures.

It is important to underline, that Poland is also a good example that can represent the situation of other MSs that joined the EU with the 2004 and 2007 enlargement, most of them highly dependent on Russian gas and with historically bad political relation with Russia. This pressured the EU in order to take into account their requests and standpoints in the energy and gas field and accelerate the process of integration of the EU gas market.

Italy

Italy is highly dependent on energy imports. Now import dependency is around 82%. Even if the Italian energy picture is quite alarming, this situation has never been accompanied by an adequate energy policy and the Italian position was mostly driven by EU strategy. Indeed, Italy has recently developed a comprehensive long-term energy strategy and made an effort in order to implement EU goals for 2020 about climate change and renewables obligations.

The country's goal is exceeding the EU 2020 environmental and decarbonisation objectives and taking a lead role in implementing the EU Roadmap 2050. More specifically, the country has established a 21% emissions reduction target by 2020.

In the graphic below it is possible to see Italy energy mix in 2016. As we see, oil and gas consumptions are dominant, while renewable is still low but grew in the last years.

It is important to add that from 2000 to 2014 consumption of crude oil decreased 37%.

This reduction is mainly due to the energy policies implemented in Italy that have privileged natural gas as the primary source of energy for the civil sector and for the generation of electricity.

Italy has one of the largest gas storage capacities in Europe, mostly located offshore, and like Germany is not only looking at domestic demand but at regional integration as well. Italy's production has progressively declined over the last 40 years, from 15.4 billion cubic metres (bcm) in 1973 to 8.6 bcm in 2012 (around 11% of Italy's supply needs). Demand for natural gas in Italy has grown over the last decades due also to national programme to reduce oil imports dependence.

Import dependency for natural gas is very high, 88.5% in 2012. Italy's import dependency is expected to increase to around 90% by 2018. The main gas suppliers are Algeria (21.8 bcm) and Russia (19.0 bcm), which represent 60% of Italy's imports, followed by Libya (9%), and Qatar (9%). The Netherlands and Norway are also significant sources of natural gas imports for Italy.

As it has been said at the beginning of this paragraph, not always common standpoints and interests are met between MSs in the field of gas policy. This is clear by the three case studies described previously:

- Germany wants to ensure its energy transition and would like to avoid EU further integration, namely the Energy Union;

- Poland wishes for a more EU control in the gas field in order to ensure security of supply and keep under control Russia influence. For this reason, it supports the Energy Union;

- Italy does not have an adequate internal energy policy but a very big energy dependence and it is likely to support EU gas integration.

This incongruence sometimes leads to two different levels of EU gas policy: policy discourses and policy practices. The concreate manifestation of this phenomenon are pipelines projects that is were different national interests of MSs clash with each other's and are not always aligned with the EU gas policy direction.

The case of Nord Stream 2 is a clear example of EU missed coincidence of policy discourses and policy practices in the field of gas. The pipeline project consists on an offshore pipeline in the Baltic Sea that is going to link Russia and Germany for the second time bypassing any transit countries. The project has received a lot of critics by other MSs, which were interested in the realisation of other pipeline projects such as South Stream and Turkish Stream. Indeed, the project ignore three main factors:

1. The opportunities of a regional cooperation and the principle of solidarity among MSs;

2. The principle of diversification of supplier, manly concerning Russia, as ratified by the Third Energy Package;

3. The facts concerning the geopolitical crisis between EU and Russia, that have seen the EU supporting Ukraine, while Nord Stream 2 is clearly against the economic interest of this country.

In November 2014, the energy ministers of some EU MSs (Poland, Romania, Hungary, Slovakia, Lithuania, Latvia and Estonia) wrote a letter to the European Commission in which they expressed their indecisiveness about the legality of this project as it eliminates the need to cross the transit countries of the Central - Eastern and South-Eastern Europe (including Ukraine). They stated that the project could bring geopolitical instability to the EU. Also, the project could pose risks to the energy security of the countries of Central-Eastern and South-Eastern Europe and strengthen the energy dependence of the EU on Russia, which can take advantage of this for political threats. Most importantly, the project violates EU legislation on supplier diversification.

The opposition by Former Italian Prime Minister Matteo Renzi at the European Council had an apparently important consequence, which caused a comeback of projects such as South Stream and Turkish Stream in 2016. Also, the chairman of the European Council Donald Tunsk spoke out against Nord Stream 2. He said that energy dependence is a common EU problem and therefore a common energy policy is needed, and not a bilateral agreement, since energy also has geopolitical consequences. All new infrastructures must coincide with the new principles of the energy policy of the EU and TEP, that is, the diversification of suppliers and flows and the reduction of energy dependence. For these reasons, the Nord Stream 2 project is not a good decision: dependence on Russian gas will increase to 80% and a bilateral agreement between Gazprom and Germany will make the relation too strong. In this regard, the Prime Minister of Poland, Jerzy Buzek, stated that Nord Stream 2 and the EU Energy Union cannot co-exist at the same time.

This was not enough since on 28^th March 2017, in a letter published by the Wall Street Journal, The European Commission said it had no grounds to stop the pipeline.

«We don't like Nord Stream-2 politically,» said Anna-Kaisa Itkonen, an energy spokeswoman at the Commission. «This being said, there are no legal grounds for the Commission to oppose Nord Stream-2…because [EU] rules do not apply to the offshore part of the pipeline,» she added.

The project will penalize Poland and other EU Eastern European countries since they will not serve as transit countries and lose their transit fees

Germany opposed political interference in the pipeline but it evident the project will strength its economic situation, gas supply security and will make grow its player position in the EU gas market and gas price regulation.

The question of strengthening Germany in the EU energy sector is very actual. In Germany, all gas pipelines from Russia have already been completed: Nord Stream and Yamal - Europe and the two projects of Nord Stream 2 and Yamal - Europe 2 have been confirmed. Due to this, gas prices in Germany are lower than in other EU member states, especially in Eastern and South Europe. Germany has no energy security problems, as it has diversification, unlike others. In addition, Germany sells gas to other EU member states and this creates an imbalance within the EU, as many EU member states have no alternative. Also, the strengthening of Germany's position in the new conditions with Russia will lead to even greater discontent among the EU member states, especially with Poland and the Baltic countries for geopolitical reasons. Therefore, it is true that Nord Stream 2 will also strengthen these factors, that already exist. The strategy of the EU Energy Commission in recent years is to liberalize the EU's internal energy market and diversify imports. Nord Stream 2 does not coincide with the current gas policy of the EU.

The conclusions of this chapter are:

- EU gas policy integration is slow compared to other energy sources due to the complexity and particularity of the gas market and MSs want to keep their control over it;

- At the moment MSs have too different standpoints in shaping the EU gas policy so there is no basis for an efficient Energy Union;

- Not always common interests in the gas field are met within Member States, especially in the case of pipelines projects.



3. EU gas policy transformation

3.1 Russia as a context factor that has triggered specific changes in the EU gas policy

In this chapter, the author will analyse EU gas policy transformation after the two Ukrainian gas crises till nowadays by taking into account Russia as a context factor that has triggered some particular changes to the actual direction of EU gas policy. The author will define which are these changes and why did they happen. Moreover, in the second paragraph of this chapter, the author will analyse EU-Russia gas relations and try to define some possible scenarios and give some suggestions for a possible and more efficient cooperation between the EU and Russia in the gas field.

In order to contextualise the two Ukrainian gas crises, it is important to say that Ukraine highly depends on Russian gas and nowadays about 40% of Russia's gas imports by Europe come through the Urengoy-Pomary-Uzhgorod pipeline located in Ukraine, a huge export pipeline built by the Soviet Union in 1983, which is linked with other two pipelines: Druzhba and Union. Ukraine receive a transit fee from Russia for the gas that transits to the EU.

Since 1993, there have been energy conflicts between Russia and Ukraine, but the crises of 2006 and 2009 were the most significant because influenced EU gas policy drastically. The 2006 gas conflict between Russia and Ukraine had negative consequences for Russia-EU gas relations. In particular, this conflict led to the processes of politicization and securitization of the EU gas policy. The EU realized that such situations should not be repeated in the future and for this was necessary to create alternative routes that do not go through unstable transit countries such as Ukraine. This is evident in the official document of European Energy Security Strategy of 2014. In fact, on point 7 it is written that the EU should «diversify external supplies and related infrastructures».

The trigger factor of the 2006 crisis, was the establishment by Gazprom of normal gas prices for Ukraine following the victory in Ukrainian Presidential election of Viktor Yushchenko in 2004, the Orange Revolution and the consequent economic contract between Ukraine and the EU. Ukraine refused the new conditions imposed by Gazprom and since no agreement was found between Naftogaz and Gazprom, the former in January 1, 2006 announced the block of gas supply for Ukraine but specified that it would be no restriction for gas addressed to the EU. Following this announcement, the Ukrainian side started to take without authorization Russian gas destined to the EU. Gas supplies to the European Union drastically decreased and an energy crisis occurred in the EU since many EU countries were forced to use their oil reserve. By January 2^nd Hungary had lost 40% of its Russian gas supplies, Austria, Romania, Slovakia and France about 30%, Poland's gas inflow fell by 14% and Italy lost about 25% of its supplies between January 1^stand 3^rd. The energy crisis of 2006 lasted 3 days and on January 4, 2006, Naftogaz and Gazprom found an agreement. Even if the 2006 gas crisis did not last for so long compared to the second one, it has a very important symbolic significance for the EU, because for the first time in the history of Russia-EU gas relations there was an interruption of gas supply without warning. The EU after the first gas crisis concluded that:

- Russia and Ukraine are responsible for have violated the interests of EU consumers;

- political problems between Russia and Ukraine affect the efficiency of gas supply to the EU;

- Russia and Ukraine are irresponsible and unreliable partners.

It should be clarified that the EU sympathy remained with Ukraine because the EU thought that Russia wanted to use this situation as an «energy weapon» against Ukraine to influence Ukrainian policy and that Russia could do the same with the EU in the future.

Experts believe that the 2006 energy crisis was resolved «on paper», that means not strategically, since the issue of the stability of gas supplies from Russia to Ukraine was not completely resolved. Therefore, there was a general feeling that only a temporary solution has been found. Russia, Ukraine and the EU lived under the pressure of a new gas crisis that, as it was predictable, arose in 2009.

The conflict of 2009 began because Gazprom and Naftogaz could not find an agreement by January 1, 2009, the expiring date of the contract between them. Following this fact, Gazprom stopped gas supplies to Ukraine, but continued to supply gas to the EU. Since January 5, gas supply to EU consumers drastically decreased as Ukraine took the gas addressed to the EU. Therefore, starting from January 7, the transit of Russian gas through the territory of Ukraine was stopped completely by the decision of Gazprom. The EU came to the conclusion that Russia is an absolutely unreliable partner. On January 20, gas supplies for Ukraine and transit to Europe were re-established. After that, a new contract between Gazprom and Naftogaz was agreed for a period of 10 years.

The energy conflict of 2009 was the most serious and dangerous for the EU energy security since there were no gas supplies for two weeks. Several EU countries are fully dependent on Russian gas through Ukraine and suffered greatly from this situation. Moreover, another problem was the lack of adequate infrastructures and pipelines interconnections between MSs in order to help each other and give gas resources to that MSs which were in a critical situation. The EU realized that it was necessary to protect its energy security and that such episodes should not repeat in the future. Energy security has become a new priority for the EU in the energy sector. The EU made these conclusions after the 2009 energy conflict:

- Ukraine is an unreliable partner, for this reason it is necessary to build new alternative gas pipelines that will not pass through Ukraine;

- it is necessary to reduce imports from gas pipelines that pass through unstable transit countries;

- the EU began to view Russia as a threat and an unreliable partner;

- the EU cannot so strongly depend on Russian gas and therefore it is necessary to reduce gas dependence on Russia;

- Gazprom has a monopoly on the supply of gas to the EU and is therefore a threat;

- cooperation and transparency between EU Member States in the field of energy is necessary;

- it is necessary to harmonize security in the EU, have standards between the EU Member States and build new infrastructures between them in order to develop regional cooperation between MSs and have the possibility to help each other's.

On February 6, 2009, during the visit to Moscow of Barroso, former President of the European Commission, he stated that the EU had received considerable damage due to the conflict between Ukraine and Russia and that the EU no longer considers Russia reliable. Barroso spoke about the need to ratify the Energy Charter and on Russia's accession to the WTO. The energy conflict between Russia and Ukraine in 2009 strengthened the negative positions of the EU towards Russia, which emerged after the energy conflict of 2006. The crisis of 2009 and 2006 brought to particular and actual changes to the main principles of EU gas policy:

- security of gas supply has become one of the most important priorities of the EU;

- the Third Energy Package is based on the experience of these conflicts;

- the point of the TEP on «unbundling», concerning the prohibition for gas supply or production companies to control or own also the transportation of the system operators, was made specifically to reduce the strength of Gazprom and to avoid other energy emergencies like these;

- the point of the TEP on «reciprocity» (also called by the Russian side th «Gazprom clause») is the way the EU would reform the energy sector of Ukraine and Russia in accordance with EU legislation because it is made in order to make third countries respect EU legislation if they want to participate in the EU gas market;

- diversification has become another priority for the EU energy policy (after these conflicts, actively started new pipeline projects, that do not pass through unstable transit countries);

- the EU decided that it is necessary to reduce energy dependence on Russia and so to not only diversify the gas transit infrastructures but also the gas supplier;

- these crises worsened some geopolitical contradictions between Russia, Ukraine and the EU;

- by one side energy conflicts strengthened the common positions of EU Member States, and accelerate EU gas policy integration to the direction of securitization and diversification creating a more complete legal framework, further ground for cooperation and the awareness of a need for a unified EU energy policy.

After the 2009 gas conflict, Russia and the EU agreed on a new mechanism: «The Early Warning Mechanism.» This means that Russia and the EU are obliged to inform each other if there are any problems or threats concerning the gas supplier. This is a mechanism that can better protect the interests of EU consumers, that is the security of supply.

As can be deduced, the main transformation of EU gas policy after the two gas crises was the introduction of the term «energy security» in the EU political discourse. The EU's energy security needs to be understood as the «availability of energy[…], in sufficient quantity and at affordable prices, delivered in an environmentally friendly, sustainable manner which is also free from serious risk of major disruptions of service» (Kirchner & Berk 2010: 864). Benita Ferrero-Waldner, the EU's external relations commissioner, said that the 2006 Russia-Ukraine gas dispute was a «wake-up call, reminding that energy security needs to be even higher on the political agenda». Josй Manuel Barroso stated that energy had been «until recently a forgotten subject in the European Agenda. Now it is back at the heart of European integration, where it began with the creation of the Coal and Steel Community».

On 8 March 2006, the Commission issued a Green Paper called A European Strategy for Sustainable, Competitive and Secure Energy^. The European Commission states that the EU has «entered into a new Energy era». These are the most important points:

- there is an urgent need for investment (around one trillion euros in the next 20 years in order to meet energy demand and replace ageing infrastructures;

- there is a need for security of supply thought a competitive and liberalized market;

- there is a need to make domestic energy more competitive;

- there is a need for the diversification of the energy mix;

- solidarity as the guidance principle of EU energy policy;

- the development in the energy field should be sustainable and aware of climate change;

- there is a need to develop innovation and technology in the energy field;

- there should be a common external policy on energy

- the existing Directives on gas and electricity security of supply should be re - examined to ensure they can deal with potential supply interruption.

As it transpires from the Green Paper, the Commission wants to concentrate on the internal energy market in order to ensure energy supply in the EU, so really little space is left for external policies in the paper. In the official website of the European Commission is reported that «many countries are heavily reliant on a single supplier, including some that rely entirely on Russia for their natural gas. This dependence leaves them vulnerable to supply disruptions, whether caused by political or commercial disputes, or infrastructure failure. For instance, 2009 gas dispute between Russia and transit country Ukraine left many EU countries with severe shortages. In response to these concerns, the European Commission released its Energy Security Strategy in May 2014. The Strategy aims to ensure a stable and abundant supply of energy for European citizens and the economy.» (Commission, n.d.) It can be concluded that the Energy Security Strategy of 2014 is the straight answer to the EU to the gas crises of 2006 and 2009. The Strategy is based on eight key pillars that want to promote cooperation between MSs in the energy field for the principle of solidarity:

1. need to increase EU's capacity in order to overcome winter 2014/2015;

2. strengthening emergency/solidarity mechanisms;

3. moderating energy demand;

4. building an integrated internal market;

5. increasing energy production in the European Union;

6. further developing energy technologies;

7. diversifying external supplies and related infrastructure;

8. improving coordination of national energy policies and speaking with one voice in external energy policy.

Analysing this Energy Security Strategy and the Commission statements of that period, one can deduce that the EU, following the two gas disputes, suddenly became aware that its gas dependency from Russia is extremely high and can cause security problems for many MSs, especially the six of them which depend from Russia as a single external gas supplier (Bulgaria, Romania, Slovakia, Estonia, Latvia, Lithuania) and so for the EU as a whole even if some MSs do not depend on Russian gas at all (Denmark, Ireland, Portugal, Spain, Sweden and the UK). Nevertheless, it is interesting to specify that during the Cold War, EU countries were importing more gas than today but the term «Energy Security» was absent from the EU political discourse. The key point in order to understand the transformation of EU gas policy and Russia as a trigger factor, is to understand why the EU is so concerned about dependence on Russian gas today, especially after the two Ukrainian-Russian energy crises, and not in the last days of the cold war. What have changed since then? Indeed, the EU dependence on Russian gas exists from very long time and nowadays the EU gas dependence from Russia even diminished compared to the Soviet time. Indeed, in 1990s the share of Russian gas imported by the EU was 55%, while nowadays is around 40%.

So, it is clear that the EU dependence from Russian gas itself or even the sudden awareness of it after the Ukrainian gas crises cannot be consider as the determinant factor that has influenced the transformation of the EU gas policy as the EU states in its Energy Security Strategy. We need to consider other three factors that have contributed to the EU gas policy transformation. First, the evolution of the position of energy in international relations. Indeed, nowadays gas issues are understood mainly in terms of security, dependence, political influence, threats, and geopolitical gains and losses. This probably needs to be linked with the evolution of the energy issue in general from a predominant economic logic in the 1990s to the perception of a predominant political logic. In this context, for the Realist approach, energy and so gas is an issue of power and security. «Energy relations are understood as a crucial element in the struggle of power between states. The possession of energy resources is seen as an essential latent source of power, increasing the relative capabilities of states vis-а-vis others.» (Casier, 2011) This means that the control of energy resources and transmission networks can be described as a geopolitical competition over power. By trying to get control over energy production and pipelines, states seek to strengthen their position in the international system. Owning energy production of transmission increases the chances of strong energy powers and this is essential in order to project national interests and increase its influence in decisions in the international arena or internal politics of other countries. Keith Smith analyses energy relations in terms of `national security risks'. He considers EU dependency on Russian energy not only `a threat to the sovereignty', but also holds it directly responsible for the `corrosive effect' on transatlantic relations. Indeed, many analysts understand «energy relations as a zero - sum game: what one party gains is the loss of the contending party». As Baran writes: «Russian power and influence is no longer measured in ballistic missile accuracy or bomber production but in miles of pipeline constructed and barrels of oil per day exported, and for Europe, this energy invasion has already begun» (Baran, 2007). And further: «The unjust manipulation or interruption of energy supplies is as much a security threat as military action is…» (Baran, 2007). So, for Baran the interruption of energy supplies as it happened with the two gas crises, it can be compared to a military action. Indeed, shutting down gas pipelines can always be used as a potential threat with such dependent countries such as the majority of EU MSs. This is a peculiarity of natural gas and its regional market based on long-term contracts. Indeed, a similar reasoning cannot be done in the case of oil or other energy resources. So, theoretically, gas can be used as a political weapon by one state against another. Second, in the recent years there was a changing of the global energy markets in general. Energy consumption has increased and oil prices has grown. This has made gas as one of the most preferable choice in the energy mix also because of its low environmental impact. This process brought to a growth in worldwide energy demand and increasing dependence of the industrialised countries on energy producing states. World primary demand for natural gas expands even further than the demand for oil: over half between 2006 and 2030 to 4.4 tcm, a rate of increase of 1.8% per year. The share of gas in total world primary energy demand increases marginally, from 21% in 2006 to 22% in 2030. A redistribution of power in the international energy markets took place in the period between the years 2003 and 2008 that led to the concentration of major energy resources in a small group of developing countries. Moreover, there was a boom of new economics like China and also Russia economic position strengthen after 2000. As a consequence, Russia started to use a stronger position vis-а-vis the EU in order to negotiate higher prices and better conditions. The Energy Charter represents the example of that. Russia and the EU signed the Charter in 1994, introducing neoliberal principles in the energy market as the EU preferred. The Charter, indeed, was very EU centric and based on EU ideas. Nevertheless, Russia did not ratify the Charter because its economic position has grown and it wanted to be recognized as an equal partner of the EU. Moreover, Putin from the very beginning considered energy a strategic sector that needed to be controlled by the State. Third, EU enlargements of 2004 and 2007 brought into the EU new countries highly dependent on Russia gas and this increased EU gas dependence from Russia. This fact, hurried the urgency to define a EU common security strategy since these MSs made pressures to EU institutions in this direction. Also, these MSs have complicated and not easy relations with Russia for historical and geopolitical reasons and usually criticize Russia to use energy as a weapon in order to influence their internal policy. As it has been said, these factors contributed to the transformation of the EU gas policy. Indeed, it is not sufficient to take into account only the two Russian-Ukrainian energy crises but it is essential also to take into accounts the factors described in order to have a clear and full analysis of the context.

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