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EC MEDA 2nd Executive Seminar
Liberalization and Restructuring of East European
Natural Gas Industries MEDA REC Restructuring of
Energy companies Marseille, 20 May
2003 Margarita Pirovska, CGEMP University Paris
Dauphine
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Outline

• East European candidate countries a survey
• Key issues of the economic transition
• The energy context in Eastern Europe
• Present situation of Eastern gas markets
• The EU liberalization constraints
• Strategies of foreign gas firms in the region
• National strategies
• The gas rent
• Interconnection issues
• What industrial consolidation of the future
  internal gas market?

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East European candidate countries a survey (1)
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East European candidate countries a survey (2)
Source  Eurostat, 2002
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East European candidate countries a survey (3)
Source  Eurostat, 2000
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Key issues of the economic transition (1)

• Historical context end of the Soviet Bloc, role
  of IMF and the World Bank, EU decision of the
  next enlargement.
• Stakes of the enlargement the biggest ever, and
  a historical event. End of the cold war and of
  the divided Continent.
• Conditions of European Integration acquis
  communautaire.
• Problem of the EU future governance deepening
  vs enlarging.

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Key issues of the economic transition (2)

• Analytical context absence of economic
  agreement. Inference of political and social
  shocks in the transition.
• Two theories the Washington consensus, or
  shock therapy, and gradualism.
• Institutional problem liberalization,
  stabilization and privatization have brought
  serious governance problems in transition
  economies.

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The energy context in Eastern Europe (1)

• The energy context
• The centrally planned economies role of energy
  in the massive industrialization.
• Absence of significant energy resources in
  Eastern Europe.
• Role of the Soviet hydrocarbon reserves.

• The CMEA engagements
• Energy relationships in CMEA the rule gas for
  manufactured goods.
• Europe USA USSR geopolitical stakes in the
  soviet gas pipelines.
• The consequence in Eastern Europe the gas
  dependency.

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The energy context in Eastern Europe (2)

• The limits of soviet dominance.
• Development of indigenous coal reserves.
• Diversification of oil imports.
• Nuclear energy and hydro power.
• Consequences from this historical evolution
• Inefficiency, decay, pollution and insecurity of
  energy infrastructures .
• Difficult harmonization of gas prices to
  international levels.

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The energy context in Eastern Europe (3)
Nota percentages may not add up to 100 due to
surroundings and several data sources. All
figures from Eurostat.
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Present situation of Eastern gas markets (1)

• The three Eastern Europes from a
  geographical, economical and gas networks
  infrastructure points of view, three different
  regions appear. Baltic countries, Central Europe,
  and the Balkan region.

Source Eurostat, data from 1999
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Present situation of Eastern gas markets (2)
Source Ruhrgas, 2003
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Present situation of Eastern gas markets (3)

• The gas dependency is inherited from the
  socialist era. Today, almost 70 of natural gas
  in Eastern Europe comes from Russia, compared to
  41 for EU-15.

Source Eurostat, data from 1999
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The EU liberalization constraints (1)

• Joint reforms in Eastern Europe and in the EU
  enlargement and gas markets liberalization.
• In economic theory a new vision on
  network-based industries.
• Political support for a liberal economic
  strategy in the EU.
• Basic conditions in the industrial organization
  of EU gas markets change. Aim creation of the
  internal gas market.

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The EU liberalization constraints (2)

• Two main elements of this process
• de-integration of State-protected monopolies
  unbundling
• allowing new entrants to the market third party
  access

• The constraint of the liberalization legal
  background of energy industries, considered as an
  acquis communautaire, applies to future member
  countries.

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Strategies of foreign gas firms in the region

• New business opportunities for European gas
  firms.
• Market liberalization often connected with local
  companies restructuring and privatization.
• Value of transit routes and storage facilities.
• Obstacle institutional and financial drawbacks.
• New entries network-oriented acquisitions.
• Motive rent on the value chain, in the gas
  pipelines.

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Structures of national gas industries
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National Strategies

• Why liberalize?
• EU integration constraints.
• Need of cash flow.
• Privatization and liberalization.
• Management difficulties.

• Obstacles and oppositions
• Energy as a strategic sector.
• Social prerogatives.
• Security of supply and external dependence.

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Interconnection issues (1)
Source Inogate, 2003
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Interconnection issues (2)

• Money in the pipes
• Value of big transit routes
• Strategies of foreign investors
• Weaknesses of East European interconnections.
• Financing and relevance of new interconnection
  links.
• The impact of EU energy and infrastructure
  programs.
• The security of supply dilemma.
• The structural problems of Eastern gas markets.

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What industrial consolidation?

• Market imperfections on the East side
• Lack of interconnections
• Dominance of the upstream player, Russia
• Market concentration
• Strategies of dominant players in Eastern Europe
• Natural market power obstacle or sustainable
  configuration?
• Is the present industrial consolidation an
  adapted response to the gas market uncertainties?

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Conclusion

• Is competition possible in the candidate
  countries gas markets and to what extent?
• Is there a trade-off between market opening and
  security of supply in the present industrial
  strategies?
• Cooperation along the gas networks is vital,
  strong regulation is necessary to prevent abuse
  of market power.
• This questions the allocation of power in the
  future enlarged European Union.
• The big unknown what industrial structures in
  the external gas suppliers markets?

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EC MEDA 2nd Executive Seminar
Thank you for your attention! Center of
Geopolitics of Energy and Raw Materials University
Paris Dauphine http//www.dauphine.fr/cgemp