Russ Oil-Gas

// Gazprom Told to Split
Sep. 20, 2007 - Kommersant by Dmitry Butrin - The European Commission’s proposed energy reforms seemed shockingly strict toward investors outside of the EU. The energy reform suggested by Europe and the reform United Energy Systems of Russia (UES), would close the door on Gazprom buying energy networks in the EU until Russia and the EU sign a cooperation agreement and Gazprom is divided into production and transportation components. The project was presented yesterday by the European Commissioner for Competition Neelie Kroes and must still be ratified by the countries of Europe. The reforms’ primary concern is Europe, not Russia. Three European Commissioners, Commission President Jose Manuel Barroso, EU Competition Commissar Neelie Kroes and EU Energy Commissar Andris Piebalgs, presented the project to reform the energy market of Europe, initiated in accordance with a European Commission ruling in June. Vladimir Putin, during a visit to Australia, expressed suspicion that the project would include protectionist measures against investment by Russian companies. His suspicions were overwhelmingly justified. The document, if ratified by the Council of the European Union’s 27 energy ministers and the European Parliament, would block Gazprom from investing in European energy. Kroes began work on the current reform package in June 2007 after the Council of the European Union rejected a previous version. Yesterday Kroes presented the reform package, which is made up of five documents. Two suggest amendments to directives 2003/54/ec and 2003/55/ec concerning EC-wide antimonopoly rules on the electric power and gas market. Another two amend the rules of transborder networks and gaslines (1228/2003 and 1775/2005), while the last would create an Agency for Cooperation among Energy Regulators (ACER). The idea behind Kroes’ package is to create ACER, a supranational organ with powers to set a single tariff, as well as regulatory and competition policies for the national regulators of EC members, thus managing the flow of energy in Europe. The same principle served as the basis for reforms in UES. The amendments to 2003/54/ec and 2003/55/ec forbid one company to simultaneously manage the production and transport of electric power or gas. The amendment would split regional energy companies (Gaz de France, Electricite de France, E.ON, RWE, Endesa) into generation and distribution companies. The European Commission does not intend to unite the distribution companies into an analogue of the Federal Grid Company, as did UES. Investment in electric power generation and gas production is not limited. The package does, however, put forth limitations on buying controlling stakes in the grid and pipeline companies; these limitations are extended to third-party nations as well. Barroso explained that division leads to a decrease in size. The energy reform will make them the “pinky” for mergers by companies from third-party countries. “We’re open, but we must not be naïve,” the head of the European Commission said. In order to receive the sanction of ACER and the European Commission to buy shares, companies from third-party countries must operate by the same principles in their home country. Gazprom many lay claim to Britain’s Centrica, in which case United Supply System will be removed and handed over to be managed by an independent company or sold. Discussion of the amendments will begin in early October 2007. If the amendments make it through the bureaucracy they could begin to affect investors beginning in May 2008. The European Commission’s initiative shocked Gazporm. The company declined to criticize the proposals, although earlier it commented on them negatively. Sergei Kupriyanov, press-secretary for Gazprom, announced yesterday that “We share the main goal of the EU – to provide longer-term, reliable gas supplies to the EU. Gazprom plans to bring constructive input into the discussion about energy regulation in Europe and is confident that its voice will be heard.” The company said it has begun a “detailed analysis” of the proposal’s text (about 200 pages) and is consulting with the EU. The government has also begun a careful study of the document. Spokesman for the Ministry of Industry and Energy of Russia Vasily Osmakov said that “we welcome any initiative aimed at increasing transparency in the energy sector,” but demurred that adding new administrative barriers on the EU market would serve this purpose. The head of RSPP, Alexander Shaahin, said the regulations were non-constructive. Formally, the structures created in the division of UES meet the EU rules. “We are not planning to buy anything in the EU, and therefore are not commenting on the document,” Intera announced. Inter UES is taking a wait-and-see position. “The project of reforming the European energy sector is too serious to comment on it extemporaneously. We should wait to see how things pan out, wait for the final iteration,” Boris Zverev, council to the head of the company said. The documents don’t directly explain how companies will be certified by the European Commission. Barroso explained that in the European Commission’s plan only entities whose home countries have the appropriate agreement with the EC will have access to European consumers. The “Kroes-Piebalgs amendments” are more serious for Russia than the passage of the Energy Charter, which doesn’t envision dividing Gazprom. However, the question was discussed within the Russian government from 1995-2003, when the management of Gazprom and the Ministry of Industry and Energy declare the topic closed. Gazprom can only hope for disagreement within the EU. Piebalgs admitted yesterday that within the EU there was not yet “full agreement” about how and for how long energy companies will be separated, but said that all 27 countries agree that it is something that needs to be done. The protectionist measures defending the European energy market will not likely be overturned, but the “Kroes-Piebalgs package” may not pass discussion in the EU Council as happened in June.
History: What has Europe demanded from Gazprom
October 8, 2003: during negotiations about accession to the WTO EU Commissar for Trade Pascal Lamy made a “gas ultimatum” to the Minister of Economic Development and Trade containing six components: raise domestic gas prices, equalize domestic and foreign gas tariffs on gas transport, cancel or radically reduce export taxes on gas, provide oil and gas transportation freedom through Russian pipelines, allow for private pipeline construction and breakup Gazprom’s monopoly on gas exports.
May 21, 2004: Russia had undertaken only two of the six components: raising domestic gas prices and opening Russia’s pipe system to all producers.
March, 2006: The European Commission presented Europe’s new energy strategy (The Green Book), which rejected long-term bilateral agreements on gas shipments. Instead, the EU suggested a single framework contract by which Gazprom would sell gas across the EU border and its further delivery would be taken over by European companies.
Summer 2006: The European Commission worked out a plan for obligatory split of energy entities into production and transportation companies.
February 22, 2007: European Commission Spokesman (….) emphasized that if these rules are adopted then “Gazprom will not be an exception.”
June 16, 2007: EU Competition Commissar Neelie Kroes announced that according to the new plan Gazprom will have to sell its stake in the Northern European gas pipeline that is under construction.