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Insight from Brussels: Russia’s WTO win fails to derail EU’s gas diversification push

Summary:
Russia’s recent win at the World Trade Organization against the EU’s efforts to diversify its gas supplies has come too late to stop Eastern Europe gaining access to non-Russian supplies, even if the EU loses its appeal against it. The EU will likely have time to adopt a fourth “projects of common interest” list, due in late 2019, before any final WTO ruling requiring it to change its selection rules becomes binding. This fourth list would be in force for two years, and the EU expects all the security of gas supply projects on it that help diversify Eastern European gas supplies will be completed by 2021. The EU has appealed against the WTO panel report finding that using “diversifying supplies” as a criteria to select projects in markets where Russia is the dominant supplier impinges

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Russia’s recent win at the World Trade Organization against the EU’s efforts to diversify its gas supplies has come too late to stop Eastern Europe gaining access to non-Russian supplies, even if the EU loses its appeal against it.

The EU will likely have time to adopt a fourth “projects of common interest” list, due in late 2019, before any final WTO ruling requiring it to change its selection rules becomes binding.

This fourth list would be in force for two years, and the EU expects all the security of gas supply projects on it that help diversify Eastern European gas supplies will be completed by 2021.

The EU has appealed against the WTO panel report finding that using “diversifying supplies” as a criteria to select projects in markets where Russia is the dominant supplier impinges Russia’s right to export.

The WTO’s Appellate Body was due to rule on the appeal by December 21, but has said it will be delayed for an unknown period owing to understaffing. This is part of a wider problem in resolving WTO disputes, and the EU recently proposed reforming how the Appellate Body works.

“I’m surprised as a citizen that Gazprom can protect a monopoly supply position under WTO rules,” an EU policy-maker source told S&P Global Platts.

The WTO panel expressed sympathy with the EU’s protestations that Gazprom’s export monopoly for pipeline gas hardly makes it the poster boy for free trade, but said that was not part of the case before it.

The EU’s current PCI list, adopted in late 2017, has 53 gas projects, including the TAP pipeline linking Italy to Caspian region gas, the proposed Krk LNG terminal in Croatia, the planned Baltic Pipe linking Poland to Norwegian gas supplies, the BRUA project to link Austria, Slovakia and Hungary to Romanian gas from the Black Sea, and the planned Balticconnector between Estonia and Finland.

Insight from Brussels: Russia’s WTO win fails to derail EU’s gas diversification push

All these specific projects encourage diversification from Russian gas, the dominant supply source in Central and Eastern Europe.

Projects with PCI status benefit from streamlined permitting and the right to apply for funds from the EU’s Eur5.35 billion ($6 billion) Connecting Europe Facility, to be dispensed from 2014 to the end of 2020.

The WTO panel report on August 10 upheld Russia’s 2014 complaint that this diversification criteria policy broke WTO rules by giving an advantage to non-Russian gas imports, and told the EU to change its legislation to comply.

The total time for complying should not be more than 18 months from the date of the formal ruling, and the losing WTO member can continue with the disputed policy until the deadline. There is no retrospective impact.

The formal ruling will come a month after the WTO’s Appellate Body has ruled on the appeals lodged by both the EU and Russia in September against different aspects of the August 10 panel report, which also covered Russia’s other complaints about the EU’s internal energy market rules.

Focus shifts from supply security to environment

Even if everything is on time – and the Appellate Body has said its ruling will be delayed – the earliest the EU would likely have to change its TEN-E regulation, which includes the rules for selecting PCI projects, would be around mid-2020.

“This doesn’t mean we will stop funding security of supply projects, whatever happens with the WTO,” the European Commission’s internal energy market director, Klaus-Dieter Borchardt, told S&P Global Platts.

“It’s about diversification for the whole EU. We will look for other criteria if needed, such as ending isolation, or internal market integration,” he said.

The EU made gas supply security in Eastern Europe a priority after a severe cut in Russian gas supplies via Ukraine in 2009 revealed major vulnerabilities.

Overall, the EU’s gas market now enjoys high levels of supply security, EU energy regulatory bodies ACER and CEER said in a joint monitoring report in October, although they noted that bottlenecks remain, particularly in south-southeastern Europe.

They recommended focusing future PCI selection criteria more on environmental benefits, including renewable gases, for example, than on supply security.

The number of gas projects on the PCI list has fallen steadily from around 100 projects, some competing, in the first list adopted in 2013.

The EU is now focused on promoting low carbon energies, including renewable gases, as set out in the European Commission’s updated strategy for the EU to be a net-zero carbon economy by 2050.

 

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