EU energy proposals to focus on gas storage

Good morning and welcome to Europe Express.

Southern nations are still making the case for a more robust intervention in energy markets to calm down the spiralling prices, as the Spanish premier tells the Financial Times. But with stiff resistance coming from Germany, the Netherlands and Scandinavian countries, the consensus emerging is reflected in a paper the European Commission is putting forward tomorrow: more gas storage requirements. I’ll run you through the proposal and why it is less controversial than price caps and markets decoupling.

With three EU councils having taken place in Brussels yesterday (foreign, defence and agriculture), I’ll also bring you the latest on what more forms of support for Ukraine were agreed.

We’ll also look at EU efforts under way to iron out a wrinkle to the last round of Russian sanctions that is causing fuel supply shortages in the Western Balkans, notably Serbia.

Stocking up for winter

The European Commission seeks to change existing legislation and oblige member states and commercial operators to fill up gas storage facilities to 90 per cent this year, according to a draft legal text seen by Europe Express that is due to be published tomorrow.

Possible measures with regard to intervention in energy markets should emerge tomorrow, though it is yet unclear what form they will take and the extent to which leaders will discuss them at the two-day summit starting Thursday.

The draft text setting out an obligation to fill up gas storage facilities amends EU legislation on gas security of supply from 2017.

The reasoning is that by filling up its gas storage facilities, the bloc can avoid major supply disruptions next winter, given that relations with Russia are only likely to worsen in the short term.

The text seeks to strike a balance between interventionist capitals that want the EU to set a price cap and/or decouple gas and electricity markets and free marketeers, who insist on doubling down on renewable energy, better isolating buildings and gradually weaning off Russian imports. No government has thus far taken issue with the need to replenish storage facilities.

“The current geopolitical situation requires additional short-term measures to deal with the market imbalances for energy and for securing supplies in the years ahead,” the draft reads. “As supply disruptions of pipeline gas may occur anytime, measures introducing an insurance policy regarding the filling level of EU storage facilities are introduced.”

According to the commission’s analysis, storage supplies 25-30 per cent of gas consumed in winter. But this past winter, with storage facilities at 10 per cent lower than usual, “an unbalanced gas market has led to a sharp increase in gas prices”.

As gas prices are very likely to rise again ahead of next winter, the commission argues that public intervention will be needed, “including financial support to incentivise the use of storage” — and for the filling process to start as early as April and reach 90 per cent by November.

As a side note, the text was drafted without an impact assessment or any external expertise, “due to the politically sensitive and urgent nature of the proposal”, though the commission did consult with stakeholders, it said.

Chart du jour: Moldova warning

Russia’s invasion of Ukraine from the south, where it has made major gains, has one aim, say western intelligence officials: capturing the crucial Black Sea port of Odesa, cutting off Ukraine’s access to the sea by creating a land corridor from Transnistria in the west to Russia-controlled Donbas in the east. “The closer it gets, the worse it becomes. We all hope Odesa will not end up in active fighting,” Moldovan foreign minister Nicu Popescu told the FT.

Arms and fuel for Ukraine

The presence of Ukrainian officials at EU councils, joining via video link, has become a new normal since the war began. Yesterday, it was the turn of Ukraine defence and agriculture ministers, respectively, to make an appearance at the two councils that were taking place in Brussels and which both pledged more support — the first for arming Ukraine, the latter for providing fuel and other assistance to the country’s farmers.

EU agriculture commissioner Janusz Wojciechowski said ministers were shaken by the fact that their Ukrainian counterpart had to interrupt his presentation and rush to a bomb shelter as the sirens went off.

Agriculture ministers agreed to deliver the fuel Ukrainian farmers needed for spring sowing, mostly via Poland. Export support for Ukrainian foodstuffs that are still produced in the country is also being considered, also mainly transported on land via Poland, since access to commercial shipping in the Black Sea is shrinking amid Russia’s offensive in the south of the country.

Separately, as expected, foreign ministers gave their green light to doubling the use of EU funds to €1bn for arming Ukraine, a decision that will take a few more days to approve formally.

A discussion on further sanctions hitting oil and gas imports from Russia didn’t yield any concrete results yet, as many countries are still opposing this step.

Instead of focusing on sanctions that didn’t work, said German foreign minister Annalena Baerbock, “we have to close the loopholes on the sanctions that really work” — existing economic and financial measures. It was important to discuss ways of reducing dependency on Russian oil and gas, not just for Germany, but also for “other EU member countries who can’t stop the oil import from one day to the other”.

Baerbock added: “If we could, we would do it automatically. But now we are preparing everything so that we can take these steps in the near future, very soon,” Baerbock said.

Balkan exemption

The EU is working on clarifying its sanctions regime against Russia to enable countries in the Western Balkans continue buying Russian fossil fuels. The move comes after Serbia complained that it was facing fuel supply uncertainties stemming from the restrictions, write Marton Dunai in Budapest and Valentina Pop in Brussels.

EU’s latest round of sanctions prohibit engaging in any transaction with companies outside the EU that are more than 50 per cent owned by one of a dozen Russian groups, including Gazpromneft — which holds 51 per cent of Serbia’s only oil refiner and national fuel company, NIS.

The rules de facto ban NIS from buying Russian crude from its usual intermediaries, such as Glencore (Anglo-Swiss) or Vitol (Dutch).

Officials in Brussels are now working on applying the same rules as EU member states (who can still carry out transactions for the supply of Russian fossil fuels), given that geographically, the Western Balkans are an enclave surrounded by EU countries, said a person familiar with the matter.

In Serbia, Gazpromneft bought the NIS stake in 2008 for just under €1bn, which included hefty investments in the outdated infrastructure. Russia also included Serbia in the southern gas corridor and undertook the building of an underground storage facility in the country at Banatski Dvor.

All of that infrastructure now makes landlocked Serbia even more dependent on Russian energy, and the government of president Aleksandar Vucic, who is facing elections in less than two weeks, was shocked at what it saw as a move with a potential impact on the elections exacerbating the effect of already surging fuel prices.

“The essence is that Europeans have left the possibility to import and export from Russia on their territory, but that third countries cannot import oil if companies or refineries are majority owned by Russia,” Vucic told Serbian media. “They did not punish the Russians, they did not punish themselves: they punished us.”

“Currently we are in contact with Serbian authorities to clarify any concerns they may have related to the application and consequences of restrictive measures,” said commission spokesman Peter Stano. “We are working with all our partners in the Western Balkans to alleviate the impact of the war on their economy and society.”

The legal amendments will be subject to approval by all 27 governments and some capitals are already expressing unease at the prospect of helping Serbia after it refused to align with western sanctions. “This would be fair in the case of countries like North Macedonia that fully align with EU sanctions and therefore shoulder some of the cost on their own economy,” said one EU diplomat. “But Serbia hardly aligning with sanctions and wanting an exemption is really beyond the pale.”

What to watch today

1. Ukrainian president Volodymyr Zelensky will address the Italian parliament via video link

2. EU affairs ministers meet in Brussels to prepare the upcoming leaders’ summit

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