### REGISTER NOW ### for our vitally important 2-panel event “The Energy Crisis and Russian Aggression Against Ukraine – Key Challenges for the Central European Energy Sector”, on Thursday December 8, 13:00 – 17:00 CET (Address: Rue Belliard 40, 1040 Brussels). High-profile confirmed speakers include Kadri Simson, European Commissioner for Energy, EC; Leszek Jesień, Chairman of the Board, CEEP; Jerzy Buzek, MEP and former president of the European Parliament; Edvard Kozusnik, Deputy Minister for Trade and the Economy, Czech Republic; Cristina Lobillo Borrero, Director of Energy Policy, DG ENER; Pawel Stanczak, CEO, OGTSU (Ukrainian gas TSO); Lukas Trakimavičius, Subject Matter Expert, NATO Energy Security Centre of Excellence. How can we prioritise next steps to protect our common interest? Chief representatives from suppliers, grid-operators, distributors and security experts gather with leaders from the EU’s policy-making institutions (national, EC and EP) to share their concerns and proposals at this critical moment. Click HERE to register [Event promoted by CEEP] ###

For Europe to break away from its reliance on Russian gas supplies it needs to enable the flow of large volumes of gas from west to east. Historically, when relations with Russia were good, the flow was in the other direction. So what’s the hold up? Aura Sabadus at ICIS says it’s not primarily the infrastructure but the out-of-date regulations. The allowable methane content of the gas along the Trans-Balkan pipeline has yet to be agreed. There is a delay in signing new interconnection agreements between EU member states and contracting parties of the Energy Community (such as Ukraine, Moldova or the west Balkan states) and Turkey. And policies incentivise the delivery of imported Caspian gas to Italy rather than to transit countries Greece or Bulgaria. The resulting low gas flows means the price pain is being felt the most by landlocked consumers in eastern Europe who need to transit the gas across several borders. So if the obstacles are regulatory the idea of an emergency cap on gas prices can only be a short term measure that would counter-productively increase demand. Instead, says Sabadus, policy-makers should address the fundamental causes of the gas shortages and high prices, namely the regulatory bottlenecks.

The events that have unfolded in the energy sector in 2022 have triggered nothing short of a revolution in Europe’s efforts to accelerate the green transition by encouraging higher renewable and efficiency targets and break away from its reliance on Russian gas supplies.

However, it has also revealed many latent shortcomings in its natural gas infrastructure.

With Russia nearly halving deliveries to Europe compared to last year, the historical East-to-West direction of gas flows has been for the first time reversed, which means the continent now receives more imports from the West than from the East.

### REGISTER NOW### “The Energy Crisis and Russian Aggression Against Ukraine – Key Challenges for the Central European Energy Sector”. DATE:  Thursday December 8, 13:00 – 17:00 CET. ADDRESS: Rue Belliard 40, 1040 Brussels.

High-profile confirmed speakers include:

• Kadri Simson, European Commissioner for Energy, EC
• Leszek Jesień, Chairman of the Board, CEEP
• Jerzy Buzek, MEP and former president of the European Parliament
• Edvard Kozusnik, Deputy Minister for Trade and the Economy, Czech Republic
• Cristina Lobillo Borrero, Director of Energy Policy, DG ENER
• Pawel Stanczak, CEO, OGTSU (Ukrainian gas TSO)
• Lukas Trakimavičius, Subject Matter Expert, NATO Energy Security Centre of Excellence.

How can we prioritise next steps to protect our common interest? A secure, affordable energy supply for all sectors means open discussion, co-ordination and planning right across the supply chain and into transmission and distribution networks. Chief representatives from suppliers, grid-operators, distributors and security experts gather with leaders from the EU’s policy-making institutions (national, EC and EP) to share their concerns and proposals at this critical moment. Click HERE to register [Promoted by CEEP]

While this has given countries with direct access to terminals of liquefied natural gas (LNG) an advantage in securing more easily volumes from the global market, it has also increased costs for the landlocked consumers further to the East, who need to transit the gas across several borders.

For example, if in 2021, the front month gas price paid for natural gas on the Austrian hub VTP was on average €0.17/MWh higher than equivalent prices on the benchmark Dutch TTF hub, in 2022, that premium increased tenfold to €1.69/MWh, according to ICIS, an international energy news and data provider.

Prices are even higher in countries with assessed markets further to the East. Slovak front month gas prices for example were flat on the Dutch TTF equivalent in 2021 but in 2022 they gained a €2.20/MWh premium.

The problem is mainly regulatory, not infrastructural

The higher costs to source gas in central and eastern Europe are symptomatic of issues that are not necessarily related to lack of infrastructure, as most EU member states have built new interconnectors or expanded existing transport infrastructure.

The obstacles are mainly related to regulatory issues which have been identified in numerous studies, including the SEEGAS infrastructure report, published by the Energy Community this year but have now become more evident as a result of the reversal of gas flows.

…Methane content

For example, one of the most problematic issues in south-east Europe has been the level of methane content specified in import contracts held by various European buyers with Russia’s Gazprom.

Historically, Russia has insisted on a 90% methane content in the gas supplied regionally. Nevertheless, with Russian imports now dwindling and new sources of gas reaching Europe either as LNG or as piped gas from other countries, there are likely to be major differences that could lead to bottlenecks.

This is best seen along the Trans-Balkan corridor, which was historically used to transit Russian gas to the Balkans and Turkey via Ukraine, Moldova and Romania. With Russian flows diverted to the new Russian-operated TurkStream corridor, the Trans-Balkan corridor is now largely empty.

It could be used to import gas in reverse from Greek terminals all the way up to Moldova and Ukraine but one of the reasons it remains largely unused is because of the difference in methane content.

LNG arriving in Greece has a methane content of approximately 70%. Meanwhile, the Bulgarian system has been accepting a 75% level, Romania 85% and Moldova and Ukraine above 90%.

There are ongoing talks at the European Commission level together with regional transmission system operators to harmonise the molecular content of gas and ensure all countries along the route apply similar rules. There are signs that the matter could be solved.

…Interconnection agreements

Another ongoing problem is the delay in signing new interconnection agreements between EU member states and contracting parties of the Energy Community, such as Ukraine, Moldova or the west Balkan states.

These countries have been working with the Energy Community, an international institution extending the wider EU internal energy market principles to the immediate neighbourhood, to implement key regulations including the EU’s third energy package or its network codes.

The goal has been to bring parties together to sign interconnection agreements, free up more transmission capacity and ensure the unhindered flow of gas throughout central and eastern Europe.

Although there have been some success stories including the recent signing of an interconnection agreement between the Republic of North Macedonia and Bulgaria, which will allow the former to break its full reliance on Russia and import alternative sources of gas, there have also been obstacles and delays elsewhere.

For example, although the Trans-Balkan pipeline has a transmission capacity of around 25billion cubic meters annually on the Romanian-Ukrainian border for north-west flows, Romania has freed up only 5bcm/year of capacity for south to north flows.

This means that in case of higher demand further North, deliveries into Romania and further into Moldova or Ukraine would be limited even if there were sufficient supplies in the South.

The lack of interconnection agreements signed by Turkey, an Energy Community observer country and neighbouring Bulgaria and Greece is also limiting the ability of the region to tap LNG imports via this country.

According to the SEEGAS report, Turkey’s total regasification capacity could exceed 50billion cubic meters if a fifth importing terminal is added to the existing onshore and offshore facilities. However, although the Trans-Balkan pipeline could transport some of those volumes, they cannot be tapped regionally because no interconnection agreement has been signed yet.

…Incentives

Another issue which had been flagged by traders active regionally has been the fact that under existing capacity allocation arrangements, companies importing Caspian gas via the Trans-Adriatic Pipeline (TAP) are incentivised to deliver it in Italy and discouraged to sell it to transit countries Greece or Bulgaria.

A new mechanism could be established to give shippers who have booked capacity at one exit point in TAP the opportunity to move the use of that capacity to an alternative point by participating in auctions for shorter term capacity products than the duration of the capacity product initially procured.

As highlighted in the SEEGAS report, in case of a successful outcome of the auction, the shipper moving capacity from West to East would do this at no additional cost, unless the auction clears with a premium.

These are just some of the regional issues which highlight the fact that although there is ample regional transport capacity, access to it is limited by regulatory bottlenecks.

This translates into higher import costs and ultimately into putting the region at a disadvantage over other parts of Europe.

The most obvious example appeared this autumn when many fertiliser producers in western Europe which had shut down or reduced output over the summer because of high gas prices started to ramp up once costs began to fall.

This, however, was not the case for central and eastern European producers which remained shut for longer because of higher costs.

Capping gas prices?

Right now, the European Commission is working to reform the pricing of gas, expecting to introduce new benchmarks or cap existing prices, noting the discrepancy between comparatively cheaper LNG prices and higher hub prices in Europe.

Although it is true that hub prices have been six times higher than the five-year average according to ICIS data, largely on account of the Russian-related supply crunch, the central and eastern European premium is caused by regulatory bottlenecks.

Capping gas prices may provide some short-term relief but its long-term benefits are questionable not only because by suppressing them there is a strong chance that gas demand would increase, precisely at a time when it should be reined in.

They are also questionable because, at least as far as central and eastern Europe is concerned, they will not address one of the fundamental causes of the elevated costs, namely regulatory bottlenecks.

It is here that policymakers need to focus their attention rather than on measures that could ultimately create further problems for Europe’s already battered energy sector.

***

Aura Sabadus is a senior energy journalist at ICIS