Natural gas pipeline politics in and around the European Union Modelling – based assessment of Russian and European strategies

Abstract

In the last 20 years, the growing reliance of the EU on gas imports increased the vulnerability of the energy system to supply shocks. Natural gas is difficult to substitute in the short term due to the high share of gas in space heating and electricity generation in most of the EU Member States. Russia has been supplying gas to the EU since the 1970s and reached a 35% market share by 2020. There has always been some cautiousness with ’red gas’ during the Sovjet era, but trust in Russian gas supplies was first time seriously questioned by Western European policymakers in January 2009. At that time transit via Ukraine was halted for two weeks because of a dispute over gas transit between Russia and Ukraine. Since that time the EU and Russia developed parallel strategies to mitigate this transit risk. This dissertation focuses on the power politics surrounding the natural gas pipeline projects planned and implemented between 2009-2020 with a special focus on the Nord Stream 2 pipeline, which became a symbolic project of power politics. The dissertation applies an interdisciplinary approach and uses geopolitical, legal and economic arguments to explain the pipeline strategies and their implementation. In the analytical chapters, the main analytical tool is gas market modelling to compare different pipeline and policy options from the European welfare and the Russian profit point of view. The dissertation aims to answer the following questions: Question 1.: How would Russian Gazprom use the Ukrainian infrastructure under different combinations of availability of the new routes, if it were a profit-maximizing actor? Question 2.: How successful was the EU’s pipeline strategy in infrastructure planning, in selecting and implementing the right projects of common interests between 2013-2020 to improve the resilience of the EU gas markets to supply shocks and growing market power of upstream supplies? Question 3.: How did the European and the Russian pipeline strategies influence each other under a worsening geopolitical EURussia relationship between 2009-2020? The timeframe of the dissertation is 2009-2020, which is the era when the security of supply-related legislation forming was dominating the EU legislative agenda in the natural gas sector. The geographical coverage of the analysis is the territory of the European Union plus the Energy Community Contracting Parties, Russia, and Turkey The novelty of the dissertation is the advanced use of gas market modelling on geopolitical scenarios to inform policymakers of the cost and the socio-economic benefits of certain policy decisions. The dissertation was based on three modelling chapters connected by the analytical framework of Russian and European natural gas pipeline investment developments between 2009-2020. The scenarios applied reflected the latest state of play at the time of the respective analysis. The analytical framework and the methodology applied proved to be useful tools to address high-level questions on pipeline politics. The changing environment was reflected in changing input data and scenario definition and the analytical approach can be applied to new questions in the future, like the full substitution of Russian gas supplies to Europe. - The dissertation contributes to previous academic research done in the field of regulation of natural monopolies especially in the field of energy networks by assessing with market modelling tools the use of different pipeline routes and marketing strategies of Russia. (Chapter Error! Reference source not found.) - Modelling applied in the dissertation contributes to the understanding of how changing parameters of the long-term contracts (annual contract quantity, flexibility, and especially change in delivery point and capacity bookings along the route) impact wholesale gas prices of the European countries and the welfare of the citizens. The dissertation adds to the modelling literature the Russian perspective, by applying profit maximization to the Russian sales strategy when selling spot volumes to the European market complementary to long-term contract deliveries. (Chapter 5) - The dissertation also contributes to the development of a methodological sound modelling-based cost-benefit analysis of infrastructure investment applied to the European gas PCI projects. (Chapters Error! Reference source not found. and Error! Reference source not found.) Thereby the competitive nature of the European and the Russian pipeline strategy is captured which is new in the literature.