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The Reform of the Gas Export Legislation: Private Interests and Objective Preconditions

Oleg Olegovich Korotkikh, student of the third year of the Institute of energy law of Moscow state law university named after O.E. Kutafi n (MSLA)

In this article the author examines the problem issues of legal regulation of the export of gas, conducts the legal analysis of the energy legislation of the export of gas, and examines the tendencies of change in the energy legislation.

It should be considered unconditional that positive law should not isolate itself from the objective reality. The famous lawyer and the advocate of the sociological theory of law N.M. Korkunov wrote about the need “to turn to the study of law in its life, in its development”[1]. This is especially topical for the legal regulation of the specific aspects of human activity. To the latter, in our opinion, belongs the gas branch of the energy industry, as well as any other branch of industry. This is determined by a number of causes, including the high dynamics of the technological changes in the gas sphere, the conceptual indetermination of the development of the branch, the structural changes in the global economy, the revision of the European energy policy etc. As an example of such dynamics one can refer to the Strategy of the Economic Development until the year 2030[2], as despite the fact that the Strategy was adopted in the year 2009, the actively referred to project “The Shtockman Deposit” has already lost its former topicality and does not anymore play the strategic role, which used to be ascribed to it. That is why the current article will try to connect the issues of the normative and legal regulation with the peculiarities of the gas branch, as it is the latter that serves as the subject of this legal regulation.

It is hard to overestimate the meaning of gas export for the Russian economy. It will suffice to say that it is the export of the hydrocarbons (including oil) that allows to maintain a positive balance of the foreign trade, as well as secure the optimal, and in the last years the minimal growth of the Russian economy. The reverse side is the strong interdependence between Russia, represented by OAO Gazprom, and the main consumer of its gas, which is the European Union. According to the Eurostat data by the European Commission, the share of Russia in the import of the natural gas coming into the European Union amounts to 31,9%[3], which secures Russia the position of the largest exporter of natural gas into the given region. Naturally, these circumstances not only define the special position of the legal regulation of the export of gas on the national level, but also assign importance to the legal regimes set in the gas branch of the energy of the European Union.

Until recently, based on Art. 3 of Federal Law “On the Export of Gas”[4], the exclusive right to export gas was granted to the organization, which was the owner of the Unified system of the supply of gas or to its subsidiary, in whose authorized capital the share of the organization owning the Unified system of the gas supply constituted 100%. Federal Law “On the Supply of Gas”[5] states that the system of gas supply is the property and the production complex consisting of the technologically, organizationally and economically interconnected and centrally managed production and other objects aimed for the extraction, transportation, storage and supplies of gas. The Russian multi-branch network of gas pipelines is owned by OAO Gazprom, whose affiliate oriented at the export is OOO Gazprom Export.

In order to reform the legislation on the export of gas, Federal Law No. 318-ФЗ of 30 November 2013[6] was adopted, which terminates the monopoly of Gazprom with respect to the export of LNG. According to the explanatory note to the law[7], “the demand for LNG in Europe is estimated to double. The high share of spot contracts of LNG in Europe does not allow not only to flexibly re-assign the streams of gas, but also creates competition for the Russian pipeline gas at the comparable level of transportation costs. The overall capacity of Europe to import LNG has already reached about 50% of the joint pipeline capacity. While the most optimistic assessment of the LNG demand growth in China and the countries of the South-East Asia can be fivefold.”

It is true that the technologies of the production of LNG are playing an ever bigger role in the global gas industry. The clause limiting the exporters to the already existing plans on the construction of the LNG plants or to those registering over 50% of the state capital in their capital structure (p. 1_1 Art. 3 of Federal Law “On the Export of Gas”) raises certain objections. However, if this law is considered as one of the elements of the reform of the gas export policy, then it can be assessed largely positively. The legislators have ceased to reduce the technically and economically different types of transportation, have take account of the global trends in the development of the energy industry and the economic forecasts and a step towards the development of the branch and export diversification, which together should positively influence the increasing energy security of Russia.

The reform in question touches upon the gas exported in the liquefied form. The transportation of the export gas through the pipelines retained its existing model, namely OAO Gazprom conducted the transfer of gas extracted by other organizations at the fixed state-regulated tariffs. This situation is determined by the technical impossibility and the economic unprofitability of creating a competitive market and is described in Federal Law “On the Natural Monopolies”[8]. According to the law, the natural monopoly is the state of the commodity market, when the satisfaction of the market demand is rendered more effective by the absence of competition because of the peculiarities of the production … and the goods produced by the subjects of the natural monopoly cannot be substituted by other goods. As the continuation of the given model, the owner of the network of the Russian gas pipelines conducts control over the transfer of gas to the external markets.

However, for the effective reform of the legislation on the export of gas, more assertive measures are required, which would in turn require both the political will and a detailed plan of action. The need for a fundamental reform is explained by, firstly, the structural changes in the gas industry of Russia, and secondly, by the reform of the energy legislation of the European Union.

In contrast to the oil industry, which saw the chaotic appearance of the individual oil extracting organizations in the 1990s, Gazprom was created by the re-organization of a ministry first into a concern, and later into a joint stock, which was immediately oriented at the ongoing political and economic transformations. The status of the legal successor of a branch ministry secured Gazprom’s monopoly in the area of gas export, and the management of the concern successfully retained its technological and organizational unity[9].

However, the last years saw major changes reflecting the strong trend of the decrease of Gazprom’s share in the Russian gas industry. Gazprom, which before 2009 controlled up to 97% of the domestic sales of gas, now controls less than 70% of the market. Up to 40% of the energy companies already work using the gas of the main competitors of Gazprom, namely Rosneft, NGK Itera, Novatek and a number of small producers of the region scale[10]. As stated in the forecast of Sberbank SIV, Gazprom will annually lose about 3% of the domestic market of the natural gas, and in 2020 its share of the domestic market will stand at 53%. At the same time, Rosneft and Novatek will grow their shares to 18% and 20% respectively[11].

Thus, a situation is created when one organization, although dominating the market, continues to control the national gas arteries under the conditions of the toughening competition. One should recognize the big difference between controlling the gas transportation system and controlling 97% of the domestic market, and the situation when the same organization’s share drops by one third (with the trend towards further market share contraction), but it continues to control the national network of gas mains. This signifies that Gazprom’s control of the unified system of the gas supply does not anymore seem logical and peremptory, which is supported by both the structural changes and the trends in the Russian gas industry, and the existing model of the oil market, where pipelines are controlled by Transneft company, which is independent from the mining organizations.

As mentioned above, by supplying the market of the European Union, one cannot avoid the accompanying legal regulation. The EU is actively conducting reform of the gas industry and the power sector as part of the Third Energy Package. The key documents of the EU currently influencing the gas industry are the Gas Directive 73/2009[12] and the Regulation on the Access to the gas networks 715/2009[13].

This reform bears a whole range of visible and hidden threats for Russia. For this topic, one should first of all mention the decoupling of the vertically integrated corporations foreseen by the Directive 73/2009, secondly, the arising need to maintain reserve capacities in the gas pipelines to provide the non-discriminatory access to other market participants, which is foreseen by the Regulation 715/2009.

Gazprom falls under the definition of a vertically integrated corporation given in Art. 2(20) of the Gas Doctrine, which is defined as a gas enterprise or a group of gas enterprises, where one and the same person or the same persons have the right to directly or indirectly control and when the enterprise or the group of enterprises conducts at least one of the functions of transportation, distribution, liquefaction or storage of the natural gas and at least one function of the production or supplies of the natural gas. The options foreseen by the Directive in one or the other way significantly limit the powers of the owners of the vertically integrated corporation.

As for the problem of the provision of non-discriminatory access, while there is certain progress in this direction, and the utilization of 100% of the branch of the North Stream OPAL should undoubtedly be considered a success, standalone agreements do not solve the problem in a systemic way, because of the existence of other branches of the North Stream, of the South Stream (Gazprom owns over 50% in both of them) as well as a number of previously purchased gas pipelines, which pass through the territory of the countries-members of the Third Energy Package.

In the environment, when the efforts to avoid the application of the norms of the Third Energy Package to Russia, for example by granting the Russian transportation holding the status of a “trans-European infrastructure”, are not bearing fruits, progress in the negotiations is extremely slow and there are no improvements at all regarding the vertically integrated corporation issue, a working solution can be a split from Gazprom of an independent gas transportation company, which would control all the pipeline holdings of Gazprom. In such a case one can firstly, achieve non-affiliation between Gazprom and this gas transportation organization and secondly, include other Russian mining organizations in the export operations and thus use the reserve capacities.

In conclusion, one should note the positive trend of prompt legal reaction to perturbations in the dynamically developing gas industry. Nevertheless, it should be understood that the legal regulation of gas export in Russia is still hardly in sync with the modern trends and changes, which are meanwhile shaping the form of the gas industry of the future. It is hard to imagine a situation when Gazprom agrees to construct gas pipelines to China on the Rosneft projects, while such cooperation is possible with an independent gas transportation company. The South and North Streams are the strategic projects, which are meant to strengthen the Russian positions in the European gas market as well as create ground for further expansion of the Russian share in the region, which is why retaining control over it from the side of the Russian organizations, as well as the full utilization of their capacities undoubtedly justifies even a complicated and expensive reform. If the worthiness of a fundamental legislative reform of the gas export based on the domestic factors alone remains arguable, with consideration of the external factors there appear enough grounds to speak of the objective need for their prompt implementation.



[1] Korkunov N.M. Lections on the General Theory of Law. 7th Ed. SpB, 1907, p. 623 (in Russian).

[2] The Regulation of the Government of the RF No. 1715-р “On Adopting the Energy Strategy of Russia in the Period until 2030” of 12 November 2009. Code of Laws of the Russian Federation, 2009, No. 48, Art. 5836 (in Russian).

 [3] Natural gas consumption statistics.

Available at: http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Natural_gas_consumption_statistics

[4] RF Federal Law No. 117-ФЗ “On the Export of Gas” of 18 July 2006. Code of Laws of the Russian Federation, 2006, No. 30, Art. 3293 (in Russian).

[5] RF Federal Law No. 117-ФЗ “On the Gas Supply in the RF” of 31 March 1999. Code of Laws of the Russian Federation, 1999, No. 14, Art. 1667 (in Russian).

[6] RF Federal Law No. 318-ФЗ “On the Basis of the State Regulation of Export Activity” of 30 November 2013 and Arts 1 and 3 of the RF Federal Law “On the Export of Gas”. Code of Laws of the Russian Federation, 2013, No. 48, Art. 6166.

[7] Explanatory note to the Federal Law draft “On the Amendments to Art. 3 of the Federal Law “On the Export of Gas” and Arts. 13 and 24 of the Federal Law “On the Foundations of the State Regulation in the Export Activity””. Available at: http://asozd2.duma.gov.ru/main.nsf/%28SpravkaNew%29?OpenAgent&RN=378656-6&02.

[8] RF Federal Law No. 147-ФЗ “On the Natural Monopolies” of 17 August 1995. Code of Laws of the Russian Federation, 1995, No. 34, Art. 3426.

[9] Neft i kapial [Oil and capital], 2013, No. 1-2 (197), p. 10.

[10] Gazprom will receive the right for dumping. Ekspert. (In Russian).

Available at: http://expert.ru/2013/09/23/gazprom-poluchit-pravo-nademping/

[11] Gazprom is losing Russia Vedomosti. (In Russian).

Available at: http:// www.vedomosti.ru/companies/news/21447021/gazpromteryaet-rossiyu

[12] Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009. Available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:211:0094:0136:en:PDF

[13] Regulation (EC) No 715/2009 of the European Parliament and of the Council of 13 July 20 Available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:211:0036:0054:en:PDF

Bibliography:

  1. Korkunov N.M. Lections on the general theory of law. 7th Ed. SpB, 1907. p. 623.