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Soviet/Russian & Groningen LTGEC Models: Differences & Similarities

This text explores the differences and similarities between the Soviet/Russian and Groningen LTGEC (Long-Term Gas Export Contracts) models, including destination clauses, transit risks, and gas supply to Europe.

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Soviet/Russian & Groningen LTGEC Models: Differences & Similarities

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  1. Figure 1. Soviet/Russian & Groningen (Dutch) LTGEC Models: Differences & Similarities A.Konoplyanik, Chapter on Transit, EE Commentary on ECT

  2. From Russia B A • LTGEC (modified Groningen concept)- On-(EU-15)-border sale • Netted-back replacement value • Destination clauses E D EU-15 external border C PB≈ PC ≈ PD ≈ PE AB < AC < AD < AE PA►B < PA►C< PA►D < PA►E Figure 2. Destination Clauses: Economically Motivated Integral Part of Soviet / Russian Export Schemes to Europe “Destination clauses” allowed gas supplier to sell gas to different buyers at different prices and other contractual terms at one and the same delivery point to protect its competitiveness at different end-use markets / contractual final destinations (to prevent price arbitrage by buyers) and to obtain maximum marketable resource rent collection in favour of resource-owning sovereign state protected by international law A.Konoplyanik, Chapter on Transit, EE Commentary on ECT

  3. Figure 3. Role of Gas Transit for its Main Existing Exporters to Europe when ECT came in force (1999) A.Konoplyanik, Chapter on Transit, EE Commentary on ECT

  4. Figure 4. Russian Gas Export to/through the EU: On-border Sales and Transit Legs (from 1991 to post-2007) Pipelines within RussiaPipelines outside Russia EU – 15 ► EU – 25 ► EU - 27 A B C D Russian LTGEC to the EU: A, B, C, D – points of change of ownership for gas and/or pipeline;C – delivery points to the EU;D – delivery points through the EU as REIO After dissolution of USSR / COMECON new risks have appeared in Russian LTGEC to Europe - outside Russia but within geographical area of Russian side responsibility, upstream & inclusive to LTGEC delivery points Map source: CGES A.Konoplyanik, Chapter on Transit, EE Commentary on ECT

  5. Figure 5. This Author’s Vision of the Nature and Three Major Components of Transit Risk in the Cross-Border Gas Value Chain Direction of logical chain in development of transit risks - bottom-up approach: the name of the transit country is the element of last importance in the logical chain Change in political relations between transit states and its neighbors that can create interruptions of supplies through transit state Technical component (adequate maintenance of transit system to provide technical stability and reliability of transit) Legal (third country sovereign law) and regulatorycomponent (adequacy of legal transit regime to fulfillment of supply obligations between parties to LTGEC from third countries), to exclude appearance of “contractual mismatch” problem A.Konoplyanik, Chapter on Transit, EE Commentary on ECT

  6. Figure 6. Contractual Mismatch Problem Time Supply contract: D + V Transit contract: D + V Contractual mismatch == ΔD + ΔV or Transportation contract: D + V Mismatch: between duration/ volumes (D/V) of long term supply (delivery) contract and transit/transportation contract as integral part to fulfill the delivery contract => risk of non-renewal of transit / transportation contract => risk for supply contract.Core issue: guarantee of access to / creation of adequate transportation capacity for the duration of long term contracts. A.Konoplyanik, Chapter on Transit, EE Commentary on ECT

  7. Figure 7. Russian Gas Supplies to Europe: Zones of New Risks for Existing Supplies Within Russia’s Area of Responsibility Under Its LTGEC Direction of Russian gas flow to Europe Zones of new transit risks New Transit Risks 1 zone New Transit Risks 2 zone А RF EC – 25/27/28 В USSR EC – 15 С COMECON Italic – non-EU countries; New EU accession states: underlined – since 01.05.2004, underlined + italic – since 1.01.2007; Bold – FSU states members of ECOMT; A, B, C – points of change of ownership for Russian gas and/or pipeline on its way to Europe A.Konoplyanik, Chapter on Transit, EE Commentary on ECT

  8. Figure 8. Organization of internal domestic EU gas market according to Third Energy Package 2017 vision 2010 vision Pipelines-interconnectors between regional (market) zones within the EU Supplies to the EU from outside the EU Source:17th Madrid Forum (January 2010); ACER Gas Target Model, 30th Madrid Forum (October 2017) A.Konoplyanik, Inaugural lecture, Aberdeen, 16.02.2018

  9. BELARUS UKRAINE CZECH & SLOVAK REPUBLICS Net-back replacement value In line with EU market price Russian Netted back EU gas Netted back EU market price Russian price market price gas price HR Average Gas Russian importprice gas price HR HR Notional price for Russian gas Notional price for Russian gas Notional price for Russian gas 1990 2000 2007 2010 1990 1998 2000 2006 2007 2010 1990 2000 2007 2011 1996 Remarks: 1- The figures are entirely for illustration purposes and, therefore, may not fully reflect the actual price levels and movements 2- The illustration for "Netted back EU market prices" are based on the IEA's World Energy Outook, 2006 3- Estimates for future gas price movements beyond 2007 are entirely illustrative. 4- Recent actual price figures for Ukraine and Belarus, based on information from public sources, are as follows: For Ukraine - Russian gas price: 230 $/mcm (2006) ; Average gas price (for a mixture of Russian / Central Asian gas): 95 and 135 $/mcm (2006 and 2007, respectively) For Belarus - Russian gas price: 100 $/mcm (2007) It will reach market price level by 2011 in agreed upon steps (67, 80, 90 and 100% from 2008 to 2011) 5- Notinal prices for Russian gas were used to determine volumes of gas as compensation for transit services. For Ukraine: 80 $/mcm until 1998; 50 $/mcm from 1998 to 2006 For Belarus: 47 $/mcm most recently until 2007 Hotelling Rent Cost-plus? (Net forward) Figure 9. Russian Gas Prices to the EU and the Countries along the Pipe Source: Based on “Putting a Price on Energy: International Pricing Mechanisms in Oil and Gas”, Energy Charter Secretariat, 2007. A.Konoplyanik, Chapter on Transit, EE Commentary on ECT

  10. G Sea B CP2 Area H E D F A CP3 Area C CP1 Area Figure 10. Transit is not the only option … 3 possibilities of gas supplies from A to B:No transit (e.g. for exporters - on-boarder sales at C): Turkmenistan/Uzbekistan/Kazakhstan-RF-UA, Algeria-Italy, Algeria-Spain;Transit (throughput through C & D) : • through the pipe in CP1 owned/leased by shipper: France in Germany, Norway in France, Italy in Austria; RF (partly) in EE;• through the pipe in CP1 not owned by shipper: Ukraine, Belarus (until 2007), EU A.Konoplyanik, Chapter on Transit, EE Commentary on ECT

  11. Figure 11. “Lami Package” (October’2003 EU Commission’s six demands on Russia under energy agenda in EU-Russia WTO accession negotiations) • Raise internal prices for natural gas • End Gazprom’s monopoly on gas exports • Lift restrictions on gas transit (“free transit”) • Allow foreign investors to build pipelines in Russia • Introduce equal prices for transit of gas for domestic users and for exports • Cancel gas export tariffs Source: www.russiajournal.com, 02.03.04 A.Konoplyanik, Chapter on Transit, EE Commentary on ECT

  12. Figure 12. A.Konoplyanik, Chapter on Transit, EE Commentary on ECT

  13. Export (“originated in … Area”) ECT Art. 7(3) ECT Art. 7(3) ECT Art. 7(3) AREA Import(“destined for … Area”) TRANSIT Domestic Transportation Figure 13. Russia-EU Debate on Tariffs (ECT Art. 7.3) ECT Article 7(3):“Each Contracting Party … shall treat EMP in Transit in no less favourable manner than its provisions treat such materials and products originating in or destined for its own Area …” In non-EU countries:ECT Art. 7(3) shall apply to transit vs. export / import,ECT Art. 7(3) shall NOT apply to transit vs. domestic transportation In EU countries (with or without REIO):ECT Art. 7(3) shall apply to all means of transportation (free movement of goods -Treaty of Rome 1958) A.Konoplyanik, Chapter on Transit, EE Commentary on ECT

  14. Dispute settlement procedure (b) not in the contract (a) in the contract “…dispute over any matter arising from Transit…” If no “previously agreed” dispute resolution remedies, then straight to Conciliator “…all dispute resolution remedies previously agreed…” END OF DISPUTE SETTLEMENT PROCEDURE CONCILIATOR 100% Interim decision applicable until dispute is resolved or 12 months (whichever is the earlier) Number of transit contracts not containing DSP 0% ~100% oftransit contracts ~ 0% oftransit contracts 1991 2001 Figure 14. Conciliation (ECT Art. 7.7) A.Konoplyanik, Chapter on Transit, EE Commentary on ECT

  15. Figure 15. A.Konoplyanik, Chapter on Transit, EE Commentary on ECT

  16. Figure 16. Possible Scenarios of Hydrocarbon Supplies Destined For and/or Transported Through REIO Territory (1) 1 2 3 5 6 4 “Chinese wall” within the pipeline (in contractual terms) Downstream contracts (e.g. 20%)(“free circulation”) Import/upstream contracts (e.g.80%)(no “free circulation”) EU = REIO DP DP Art.20.3 ? AC to apply Art.20.1 TP to apply (TP to apply?) Swiss DP TP to apply DP DP(Turkey, Kaliningrad oblast RF) TP to apply DP DP – Delivery point A.Konoplyanik, Chapter on Transit, EE Commentary on ECT

  17. 6 5 3 2 4 1 Figure 17. Possible Scenarios of Hydrocarbon Supplies Destined For and/or Transported Through REIO Territory (2) (*) The point of change of ownership rights for gas in the pipe (LTGEC) A.Konoplyanik, Chapter on Transit, EE Commentary on ECT

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