April 28, 2016
Atlantic Council
U.S. LNG Exports and European Energy Security Conference
Energy Infrastructure Integration and Supply Diversification Challenges in Europe

Introduction:
David Koranyi,
Director, Eurasian Energy Futures Initiative,
Atlantic Council

Speakers:
Richard L. Morningstar,
Founding Director and Chairman, Global Energy Center,
Atlantic Council

Dario Mihelin,
Foreign Policy Advisor to President Kolinda Grabar-Kitarović,
Republic of Croatia

Piotr Naimski,
Secretary of State in Chancellery of the Prime Minister, Plenipotentiary of the Government for Strategic Energy Infrastructure,
Republic of Poland

Denis Simonneau,
Member of the Executive Committee in Charge of European and International Relations,
ENGIE

Moderator:
John Roberts,
Nonresident Senior Fellow, Global Energy Center,
Atlantic Council

Location: Atlantic Council, Washington, D.C.
Time: 4:45 p.m. EDT
Date: Thursday, April 28, 2016

Transcript By
Superior Transcriptions LLC
 
DAVID KORANYI: So, welcome back. Let me just commend the audience for remarkable discipline. You kept to the 15 minutes coffee break so far. That’s very, very impressive.
This is the last panel, but nonetheless a very interesting one, too. As I said at the beginning, this is a panel that is going to focus more on the European side, on the missing links in infrastructure, and also on Europe’s diversification strategies. That, of course, includes LNG, but of course it also includes pipeline gas. So I expect a lively conversation around both of those issues: infrastructure integration on the one hand, and supply diversification on the other.

Let me just briefly flag a report that we published already a year and a half ago, that was mainly drafted, at least the energy section of the report, by John Roberts, who is going to be the moderator of today’s panel. It was a major report on what we called Completing Europe: The North-South Corridor, in which we outlined a strategic rationale to complete Europe’s infrastructure integration in Europe’s East, in particular. That’s a historic legacy, and that has not been addressed properly in the last 25, 26 years and ever since the EU accession. So there needs to be more attention on that.

And we were very happy to see the report gaining a lot of traction, including inspiring the Croatian president, Madam Kolinda Grabar-Kitarović, with the help of Dario Mihelin, who is Madam President’s chief foreign policy adviser, to take up the mantle and to play a leadership role in bringing together the Central and Eastern European leaders to address those deficiencies in energy but also in transportation and telecommunications infrastructure. So we are very happy to see that process under way and Madam President leading that Adriatic-Baltic-Black Sea cooperation in the region, which is very important, also in light of what Albert Nahas ended up asking about regional ownership and about some of the regional deficiencies in political leadership.

So again, this is the last panel. John Roberts is going to be your moderator. Unfortunately, we were supposed to have András Bácsi-Nagy from MOL Group, Hungary; he got stuck at the airport, at U.S. Immigration and Customs. I think many of you are familiar how that works. So, unfortunately, he will not be making it. So Ambassador Morningstar graciously agreed to jump in.

RICHARD L. MORNINGSTAR: That’s the bad news. (Laughter.)

MR. KORANYI: I don’t think he is going to represent MOL’s position, but nevertheless he will, of course, be able to talk about his experiences in supply-side diversification.

It’s also a great pleasure to have Piotr Naimski, who is the secretary of state in Chancellery of the Prime Minister in the Republic of Poland, and he’s also the plenipotentiary for strategic energy infrastructure.

PIOTR NAIMSKI: That’s too long. (Laughter.)

MR. KORANYI: And we also have Denis Simonneau, who is the member of the Executive Committee in Charge of European and International Relations of one of the major, biggest international entities, these energy companies, called ENGIE, formally known as GDF. So it’s a great pleasure to have Denis here as well, and I’m pretty sure he will have very forceful arguments in favor of a project that is, of course, very controversial on both sides of the Atlantic. But nevertheless, we are always very happy to see a lively debate on stage. So that was probably also a reason to put Dick Morningstar on stage, to inspire some debate.

So without further ado, let me hand it over to John Roberts to walk you through the last panel.

JOHN ROBERTS: Well, my thanks, obviously, go out to the Atlantic Council for asking me to come along to moderate the panel and taking a look at the subject of energy infrastructure integration and supply diversification.

The key issue with integration is to remember it has two elements. One is the physical infrastructure, the actual construction and development of the pipelines, of the terminals that are required. The other is, of course, the software that’s required for that, the alignment of transmission systems ensuring that the regulatory aspects enable gas, in this case, to flow from one country to another. And getting the physical, getting the hardware and the software aligned is not always easy. It’s not always straightforward. So I’m going to hope that we get a little bit of discussion on that.

I’m not going to bother to make any great opening remarks. I think we should just go straight, if I may, to Piotr Naimski, the secretary of state in the Chancellory of the Prime Minister of Poland, and ask you to make your opening comments, please.

MR. NAIMSKI: Thank you for invitation. Thank you for being here with you.

Let me start with, if we are talking about infrastructure, with the description of what we have in Poland right now. Actually, yesterday we got permit for LNG terminal in Świnoujście. So it’s already done, three years and half late, but anyway, we have it. The capacity of this terminal is 5 bcm. We have plan for a third storage tank, which will expand the capacity to 7.5 bcm, and we have a possibility to expand farther the capacity, improving gasification structure in the installation, probably up to 10 bcm if we need it. This is flexible, which is once again good thing.

We still have Yamal pipeline going through Poland and transporting more than 30 bcm yearly to the West, and we are getting less than 3 bcm from this pipeline. The rest of 10-bcm contract from Gazprom, long-term contract, we are getting through other means.

By the way, we don’t have a penny for transportation of this 30 billion cubic meters through Poland. The contract will expire in 2022, and we are waiting for it. (Laughter.)

We do have, inside the country, quite good, I would say these days, transportation system. Our company, Gaz-System, is the operator, and we have possibility first to send gas from LNG terminal to the consumers inside the country. But also already we have possibility to transport through our system some of this gas to other countries. This is through Ukraine interconnector. We have 1.5 interconnector between Poland and Ukraine, and it might be expanded to, let’s say, around 7 bcm yearly if on the Ukrainian side they build hundred kilometers of the pipeline, which is peanuts.

We have interconnection with Germany and with Czech Republic, and we have plans for next series of interconnectors. We have plan for, as I said, expanding Ukrainian interconnector, we have plan for Slovakian interconnector, we have plan for Czech expansion, the Czech capability, and we have plan for connecting Polish and Lithuanian systems.

We also have possibility for physical reverse on the Yamal pipeline from the western side. What does it mean? It means that in the case of crisis – real crisis means that the flow of gas from east to the west is cut – we have theoretically possibility to have 5 billion cubic meters by the reverse flow, physical reverse flow. Combining it with the 5 billion cubic meters through the LNG, we can cover this lost 10 billion cubic meters from long-term contract from Gazprom.

This is theory. In practice, we do have some problems, mentioned before. For example, on the German side, through the regulatory activity, we may lose this possibility for having support from the west in case of crisis. Why? Because German regulatory is preparing specific law saying that first – in the case of crisis, of course – that first they will start to fill the gas storage, which is close to the border, named Katharina, after Tsarist Katharina, and the owner of – part-owner of this gas storage is Gazprom. So it’s not easy, you know, the situation.

What we are going to do in terms of infrastructure, we will try to connect – once again try; for me, for myself, it’s for the third time in 17 years – so we try to connect Norwegian Shelf through Denmark with the Polish coast with the pipeline.

It’s not really competition to the LNG terminal; it’s rather complementary to the LNG terminal, having in mind, for example, that the Danes, they will cease to extract gas from their own platforms on the North Sea, and they will seek for diversification as well, be saturated by gas from Germany, gas which comes from one source.

Because diversification – OK, infrastructure in relation to diversification issues. Diversification, real diversification must mean that we are able to have gas from different sources, different sources, and by different routes. It’s not only on a contractual level. For Poland, it will mean that we’ll have LNG from the terminal, we’ll have pipeline gas from Norwegian Shelf, where already our POGC company is operating very successfully, by the way. And we may have the third opportunity, after ’22, from Russia – why not? – but with completely a different environment.

We have in mind to have as a project in Poland to establish, in Poland, gas hub. Why not? Having three sources of supply, we may have real hub in Poland, hub serving whole Central European region.

What is important for us is the tactic in constructing those interconnectors I mentioned before. Why? Because we take part in a kind of a gas pipeline tax. Second Nord Stream is part of the game. It’s important part of the game. By the way, first Nord Stream is being used on two-thirds of capacity today, so another Nord Stream, which would mean that capacity of this route through Baltic will be above hundred bcm, 110 bcm. What does it mean? It means that Germany, if the whole capacity would be used, will be saturated with Gazprom’s gas, really saturated.

The tricky thing is that the Germans are not preparing themselves for constructing proper infrastructure. Why? It means they don’t need it in Germany. And further, this gas is not aimed for Western Europe. It’s being aimed for Southern Europe. And the only possibility to send this gas, extra gas, is to transfer it along the Polish border on the German side with existing OPAL pipeline and projected Yugel (ph) pipeline to Czech Republic, and through Czech Republic to Baumgarten, and then to Central European states and – I mean eastern Central European states, and Balkans.

It is kind of an alternative, and I would suggest that it is like that, alternative to South Stream and to Southern – Russian Southern Corridor. It means that they want to have a series of goals in the meantime. First, they will saturate with their own gas the region. Once again, they will solidify the presence, dominant position of Gazprom in the region.

Secondly –

MR. ROBERTS: Can I ask you to wind up so we get everybody else?

MR. NAIMSKI: Yes. I’m sorry.

MR. ROBERTS: But I will come back to it.

MR. NAIMSKI: I’m sorry. Yeah, it’s already seven minutes. All right.

So just to complete it, you know, the gas from Gazprom coming from second Nord Stream will go to Czech Republic and possibly to Slovakia. And I return to our interconnectors plan. It might happen that we’ll have same gas from Gazprom, I mean coming theoretically to Poland from southern side. We don’t want it. So we are going to construct North-South Corridor, but safely, safely for other than the Russian gas; for gas from LNG first, and for gas from Norwegian Shelf secondly.

Thank you.

MR. ROBERTS: Thank you.

MR. NAIMSKI: I’m sorry.

MR. ROBERTS: I’m sorry to interrupt.

MR. NAIMSKI: I’m sorry.

MR. ROBERTS: It’s always worrying, in the final session, whether you’re going to get everybody a fair chance to speak.

MR. NAIMSKI: I’m sorry.

MR. ROBERTS: I wonder, if it’s all right, if we could turn to Dario Mihelin at this stage, the foreign policy adviser to President Kolinda Grabar-Kitarović of Croatia.

DARIO MIHELIN: Thank you, John.

Thank you, David, for the introduction. You brought me back to Grand Tarabya, to November 2014. Little did I know at that moment that in a few months that would be one of the main issues that I would be dealing with, taking this position with the newly elected Croatian president.

Thanks for inviting me. It’s really great to be here. Compared to Piotr, I’ll start from the reverse angle. I’ll start from this geopolitical angle to this issue of North-South Corridor.

What we picked up that should be definitely one of the main foreign policy priorities for President Grabar-Kitarović is definitely strengthening of Central European cooperation. All of our countries trying to join the European Union and NATO focused on strengthening links east to west to the detriment of the links between all of the Central European countries from north to south. This is quite apparent in several fields – in energy, in infrastructure, be it rail-based, waterways, being the digital market and digital economy. In addition to that, there is a huge potential for economic cooperation between all of these countries creating global supply chains and then appearing together in some of the third markets.

This was quite obvious for quite some time, and Completing Europe report that was prepared by the Atlantic Council provides fantastic analytics that we picked up and continued and presented in initiative that was mentioned, Adriatic-Baltic-Black Sea cooperation.

Here again I come to Poland for mere coincidence of the democratic processes. President Graber-Kitarović took office six months ahead of new Polish President Duda, who shares the same vision of strengthening Central European cooperation, and basically two presidents immediately partnered in pioneering this initiative. We call it Adriatic-Baltic-Black Sea. In Poland it’s known as ABC, being an acronym of the names of these three seas in Polish, or here already mentioned, some call it this three-seas cooperation.

We have another strong pioneer of this cooperation. This is Bulgarian president, President Aliyev. Lithuanian President Grybauskaite, as well. The other presidents are on board. We could have witnessed that in New York last year, where, in partnership with the Atlantic Council, we held the exploratory meeting of the initiative, received the unison support for it, and here I will explain the gist of it.

It’s quite simple. It’s an informal platform: no new organization, no secretariats, no memberships, no presidencies. It’s really focusing on garnering and securing political support for the projects that have been there mentioned for quite some time, being the north-south energy corridor, being the Adriatic-Baltic transportation corridor, or what I mentioned, everything what’s happened in the digital economy that could be definitely fostered.

The idea is, based on all the talks we had, all the meetings that we held, to launch this initiative formally this August in Dubrovnic on August 25th and 26th. This will be the kick-off summit of the initiative – here again we’ll partner with the Atlantic Council – and then to take it further, because what was missing in creating this North-South Corridor was indeed that you have synchronization of political support really to go through this grand-scale project, because all of the countries at certain points could have picked up on the elements of the corridor, but if you garner the political support to have it sort of synchronized to push this grand-scale investment into the infrastructure projects, then maybe you can achieve it faster, though the price tag compared to the advantages that it will bring, that was estimated at 50 billion euros, it’s not that huge, but still, in this time when everyone is thrifty and running budget deficit, it’s not easy to accumulate that amount of spending.

That we are on the right track, both Polish and Croatian president, was witnessed by traction this initiative gained in China. And within the China plus 16 Central and Eastern European countries cooperation, China immediately reacted with a sub-initiative which they called Sea-Land Express Line, targeting one part of that project in the infrastructure and in access to the market – in the transportation infrastructure and access to the market. So, definitely here we are on the track.

In this regard, I would like immediately to answer to the questions that we receive quite often: Is this initiative anti-Germany, is this initiative anti-Russian, or is this a sort of U.S. Trojan horse in Europe? Short answer is: no, no, no. This is the initiative to strengthen Central Europe, to reconnect Central Europe then to the benefit of the Central Europe, European Union and NATO in general. If there is someone who doesn’t see the geopolitical advantages of this, this is another issue that we can discuss. But definitely this is the initiative for and not against.

Coming to the infrastructure part of the initiative, we strongly believe that finally Croatia itself should walk the walk, and not only talk the talk. Here I mean on the LNG terminal on the island of Krk that has been an evergreen topic mentioned by many Croatian dignitaries for more than a decade. But finally, and here again thanks to the U.S. leadership provided in this regard in enabling this huge shift in the LNG world, there will – there is finally on the horizon first moves to have the LNG terminal on the Island of Krk constructed. At the moment, all the decisions are being prepared, and they should be adopted before the EU-U.S. Energy Council next week. This is the timeline that we have in mind.

And the concept behind is that this terminal should kick off as the floating terminal, to have it within next two years, if possible. Business model is still being finalized. And as I said, finally there are positive moves in this regard because we strongly believe that in prep-up for the kick-off summit of the initiative, that Croatia itself should do its part of the work in contributing to the North-South Corridor through linkage with the Świnoujście terminal in the north, and in this regard to contribute to the European energy security.

For the opening, this is what I wanted to share, and I am looking forward to the debate later. Thank you.

MR. ROBERTS: Thank you very much indeed. The thing is that you always want to leave room for questions, and there are plenty of questions concerning how you develop the North-South Corridor in practice.

But can I turn now to Denis Simonneau of ENGIE and ask him to talk. I presume there might be one or two references to Nord Stream.

DENIS SIMONNEAU: Thank you, Ambassador. Thank you, David, for this invitation.

Obviously, I’m going to be today the bad guy speaking about Nord Stream. I know that here it’s not a very easy issue.

But let me start by saying a few words on the gas situation in Europe, because I think that the rationale behind Nord Stream 2 is definitely the current situation of the gas market in Europe. First point is that the role of gas is very important in the energy mix of Europe. As you know, it is today 20 percent of the energy mix of the European Union. But we are facing a situation where the domestic production is decreasing very rapidly. If you look at the situation in the Netherlands, if you look at the situation in the Northern Sea, I mean, there is a decrease of the production, the domestic production. So that’s why we are thinking that we need more gas to come to the EU.

I will observe that if between 2008 and 2014 there was a quite stable situation in terms of consumption in the EU, in 19 – sorry, in 2015 there was an increase of 4 percent of the consumption of gas within European Union.

The second point I wanted to make on gas is the fact that it is part of the EU energy policy today. Why? First, because it is the, I mean, easiest fossil fuel and stable baseload resource for electricity in Europe. If you look at the current situation, coal is facing some difficult time. I mean, there is no investors in Europe that would like to invest in coal today. And if you look at nuclear, they are facing some difficulties as well, you look at the difficulties for Hinkley Point, this big project in the U.K., which is not facing a very positive situation right now.

Third, if you look at the EU Energy Union, I mean the Energy Union is promoting a safe, competitive and flexible system. And we think that gas is exactly a safe, competitive and flexible source of energy.

Last but not least, I think as Robin talked about that this afternoon, you know, gas is fully in line with the Club 21 in the Paris Agreement because it is a quite acceptable source of energy in terms of gas emission.

So having said that, I wanted to end up on the fact that, as I said, as the domestic production is decreasing, as we are anticipating an increase of consumption within the European Union, we think that there is a risk of security of supply today in Europe. And if you look at the historical provider, you know, for a long time, Gaz de France and GDS SUEZ and now ENGIE was buying some gas from Algeria, from Egypt, from Yemen. I mean, in all those countries, it is impossible to have one molecule of gas today. And so we are facing a situation where the historical providers of gas are not there anymore. So that’s why we think that we need all sources of gas to bring gas to Europe, and we need LNG from the U.S. We are in Louisiana in the Cameron project with Sempra Energy. We think that we need the Southern Corridor. We are the first buyer of gas from Azerbaijan today. And we need the Nord Stream 2.

And so let me demonstrate why Nord Stream 2 is, first, totally in compliance with the Energy Union, and then I will show you that it is the best project in Europe today. Why is it compliant with the Energy Union? For three reasons.

First of all, we are looking for the security of supply, as I said. Fortunately, in 2014 when we had these difficulties between Russia and Ukraine, we could use Nord Stream 1 as a way to provide gas not only to Germany, but to Poland, to Slovakia, and even to some countries southern of Slovakia, and even to Ukraine because we, as ENGIE, are the first provider of gas to Ukraine today, the first provider of gas to Ukraine. So that’s the first reason.

The second reason is that we think that this project – as you said, Mr. Minister – is a way to increase the internal market, because today a lot of countries in Eastern Europe are dependent from the gas coming from the eastern side, directly from Russia. What we are saying is that with Nord Stream, the second the gas is entering in Germany in gas field, it is European gas, and so you can use this gas as you want and you can bring this gas to a lot of different countries.

It will not be saturated, because as you said, this gas can go everywhere if we provide the correct infrastructure. And it is possible. It is possible why? Because with the Connecting Energy Facility, with the Juncker Plan, we have the ways to develop some infrastructure from north to south, as you said, or from west to east. And so that’s an occasion for countries like Poland, like Slovakia, like the Czech Republic, like even Ukraine to have another source of gas not depending only from the east, but also having some gas coming from the west and coming from the European Union.

Last but not least, I think that it is a very easy way to bring cheap gas and to increase the competitiveness of the European Union. As you know, today we are suffering from the fact that the price of gas in Europe is quite high, and especially compared to the U.S. We believe that as we will bring gas, as I said, from the U.S., the LNG, from the Southern Corridor and from Nord Stream, there will be plenty of gas, and so there will be competition on the internal market and a good way to decrease the price of gas in Europe.

Let me end by saying that – I mean, I listened carefully to some arguments expressed this afternoon, and I want to respond to that. Legality of the project: A lot of people are saying you should respect the third directive. That’s true. I mean, we don’t care about that; that’s all right. But, you know, as it is an offshore project, you cannot make access to the pipe under the sea. There is no way to do so, or no real utility, you know. But that’s true, that the second the gas is in Germany, we will respect the third directive. And that is the case why OPAL today is not used at the current level that we were expecting, because Gazprom doesn’t want to give access to OPAL today. But, I mean, again, I think that we will respect the third directive, and as it is the case for MEDGAZ, for GALSI, I mean, all the pipelines that are coming from other countries to the European Union, we will respect the same rules.

The second point is the economic benefits. I think that, as I said, it is probably the cheapest way to bring gas to the European Union today. But more than that, I think that it is a good way to integrate, as I said previously, a lot of countries to the internal market, to the – including Ukraine.

The third point is the financial benefits. It is a project which doesn’t request one euro of subsidies, because it will be financed by the private sector, including the five Western companies within the project. And there will be a situation where you don’t have to ask the taxpayer to finance Nord Stream 2.

The last point. At least, I mean, a lot of people are saying it’s a purely commercial project; it shouldn’t be a political one. Let me say that it’s – I mean, as usual in a strategic decision like building a pipeline, it is also a political project, that’s true. I mean, it’s a political project why? Because we believe that, you know, ignoring the fact that the most important provider of gas is just close to the EU, Russia; and to say we don’t want your gas, you know, because you are Russia; I think it’s wrong, first.

Second, I think you all observed that in the spring 2014 when there was this problem between Russia and Ukraine, the first decision of the Russians was to go to China and to sign the agreement with China which was under discussion for years and years. I don’t think that it is the end of the route for this project, but at least we should be careful of the fact that if we don’t deal with Russia, there is a risk that Russia will deal with China. You know?

And last but not least, I think that we should, I mean, also take care of the fact that under the current situation of the sanctions, we fully respect the sanctions because Nord Stream 2 is not affected by the decision, neither of the U.S. nor of the EU, under sanction towards Russia. So I want to conclude that and to leave open for the debate.

But again, I think that we should take care of what we are doing with Nord Stream 2. To me, and to us, it’s a way to increase the internal market, to increase the Energy Union policy and of the country.

I thank you for your attention.

MR. ROBERTS: Thank you very much, Denis.

Before I turn to Ambassador Morningstar, I might just make a brief observation that in chatting to one Chinese official, literally, I think, just 48 hours ago, I asked him what was the status of Russia-China energy negotiations; were they stalled? And he came up with the most wonderful reply I’ve heard for ages: No, no, no, he said. We’re making great progress. We really are going everywhere. It’s just we haven’t got agreement on price. (Laughter.)

MR. SIMONNEAU: Exactly. Exactly.

MR. NAIMSKI: I wouldn’t say it like that. (Laughter.)

MR. MORNINGSTAR: We can give the same answer for the last many years.

MR. ROBERTS: Absolutely. You’ve hit the nail.

So, with that comment, I’ll pass it over to Ambassador Morningstar.

MR. MORNINGSTAR: Thank you, John. And I’m happy to be a substitute here at the last minute, but the result of that is that I’m feeling very calm and mellow, late in the day, and feeling very objective, and I will not get excited about any of these issues, which on occasion I have.

But I do want to say – and I mean this very sincerely – I think Denis has given far and away – I guess along with Friedbert Pflueger a few weeks ago – but I think the best argument for Nord Stream 2 that can be given. That’s not to say that I agree with everything, but I think –

MR. SIMONNEAU: Oh, come on – (off mic). (Laughter.)

MR. MORNINGSTAR: But I do – I really do respect – I really do, and I’m serious, I really do respect the argument.

Let me say a few things in putting it a little bit back into John’s original discussion about physical infrastructure and getting the hardware and software aligned and so forth. But put Nord Stream in that context.

I do think it’s true that whatever happens with Nord Stream, even if Nord Stream does, in fact, take place, its negative effects can be mitigated, at least to some extent, by some of the things that have been talked about – the North-South Corridor; even better west-to-east connections; the development of LNG markets; the development of other sources of energy, whether it be renewables, nuclear, whatever. That we still have to look at Europe from a total energy standpoint and never lose that grounding, and we can’t lose the forest for the trees with respect to that. And so that would be a positive thing.

I think strict enforcement of the Third Energy Package can have a mitigating effect, and maybe even more important, or certainly as important if not more important, strict enforcement of the competition laws in Europe.

I’ll also say – and really I’m not just saying this because Denis is here – if I were actually working for a company such as ENGIE or, you know, any of the other partners, I would – I might well be supporting Nord Stream 2. I’m not working for those companies, so I don’t need to support it. But I would say – but the reasons I would be supporting it, not being a total expert on its commercial viability standing alone, given that Nord Stream 1 isn’t even filled, is that from a company standpoint – again, purely a company standpoint – avoiding Ukraine may be something that I would want to do, given past history.

Protecting my other relationships in Russia would be something I would be wanting to think about very seriously, and whether support for Nord Stream 2 could help me as a company in doing that. And I’m not saying – I’m not passing judgment on that or saying that would be bad – good, bad or indifferent. I’m just saying that’s how I would feel if I – you know, if I were in fact working for a company. And I think that at least has to be considered.

Getting beyond that, and getting my independent hat back on, I think there are a lot of issues that do need to be – there are at least three sets of issues that do need to be considered. I mentioned briefly the commercial issues and whether or not is Nord Stream 2 really a commercially reasonable pipeline. And I probably don’t know enough to get into a real debate or argument with Denis over that. I’m sure he has a response to that. But at least on its surface, I don’t see it.

I think there are real legal issues that still have to be worked through. I think a lot of people in the commission, particularly in the DG Energy and in Vice President Šefčovič’s office, were very concerned and troubled by the legal services paper that they came out with some weeks ago and are looking – is there something wrong with the microphone here? – anyway, and I think are looking for more debate.

For the life of me, the argument that the Third Energy Package doesn’t apply when the – even apart from other issues legally – when the pipeline does, in fact, go through territorial waters of various countries, is beyond me. That’s just forgetting the questions relating to exclusive economic zones and forth. And it seems to me once a pipe touches territorial waters, that it really does need to pass muster under the Third Energy Package. Now, that’s a determination that will have to be ultimately made in Brussels.

And I do think the competition laws are absolutely critical. I can’t see how this project could be allowed until and unless the competition case that is going on now with Russia is settled. You know, I look at how Google and Microsoft has been treated by the commission, how they looked at the GE-Honeywell case back when I was ambassador to the European Union. And to allow this project while this competition case is going on, when Russia’s being accused – I mean, they can defend themselves, they might settle it, they might – you know, however it may come out legally, but given what the accusations are that are under consideration, how another pipeline can be built during that time, I would have serious question.

Really, I do appreciate very much and respect that you conceded – “conceded” isn’t the right word – that you can’t separate commercial and political issues. I’ve been arguing that for years, going back to the Baku-Tbilisi-Ceyhan pipeline, when I remember going into the British Foreign Office and their equivalent to our undersecretary of economic affairs, whose name at the time was Colin Budd – some of you may have known him at some point, really a good guy – but he said, you know, why are you getting involved in these political issues relating to the Baku-Tbilisi-Ceyhan pipeline? You should only look at the commercial issues. And you’ve got understand, even though Blair is the prime minister, we’re all Thatcherites. (Laughter.) Anyway, that was 15 years ago. But in any event, you just can’t separate the commercial and political issues.

And I think it’s right – I mean, if I were sitting in your shoes, I would bring up questions relating to Algeria, Yemen, some of these other potential sources of supply. But I ask the question, and to me the question, anyway – no pun intended – that trumps the other questions – that’s a joke – trumps the other questions. (Laughter.) I know it’s almost 6:00.

But anyway, I mean, to me, what kind of a political signal does it send and what kind of weakness does it show to allow a new pipeline to take place that’s going to further rely – create further reliance on Russian gas after what Russia has done in Crimea and in Ukraine?

I realize we have to deal with Russia. This is not a zero-sum game. Europe is going to be buying Russian gas maybe forever, and buying a lot of Russian gas forever. But this particular project right now, I think one at least has to ask what kind of political signal it sends and would it just be an indication – another indication to Mr. Putin how weak the West is.

MR. ROBERTS: And I’ll say the thing that I like about this panel and about civilized panels is that you can get them to wind up. With Mr. Trump, of course, you can only get – you can only wind him up. (Laughter.)

Now, there is one thing about Nord Stream 2 that fascinates me, which is, what is the impact it’s going to have on Russian gas itself? If you’re going to get an extra 55 bcm of capacity coming down, is that all going to be Gazprom gas or are we going to see, particularly in an era of relatively low prices – which, of course, the pressure for them will be intensified by having Nord Stream 2 – are you going to see other Russian gas producers – Novatek, Rosneft – asking, and not many asking, but actually genuinely getting access to the pipeline? How much does this change the Russian gas industry?

So, given that we now get persistent statements, including from Denis Simonneau just now and from Gazprom officials, that they will abide by the Third Energy Package, are we seeing further signs that Russia is actually adopting a model of the gas industry that is far more akin to Western models than we’ve seen in the past?

So I wonder if you’d like to take it from there.

MR. SIMONNEAU: Let me respond that, you know, we don’t know what the Russians will do. I mean, what I observe today is the fact that Novatek, Rosneft are coming to the gas market. I mean, Gazprom is not alone today on the gas market. If they will respect the third directive and the EU legislation – I’m betting not on that case – but to respond to Richard Morningstar, I think that – we are talking to Gazprom about the competition issue and about the DG Energy issue as well, the third(-party) access. And we are thinking that it’s better to deal with them in order to discuss with them than to say we don’t want your gas, because in that case we’re going to be sure that they will not respect any EU legislation.

So it’s a bet. I’m not sure that we will succeed on that. But it’s a way to enter into discussion with the Russians, OK?

Let me react also on two points if I may. You said, Richard, that we want to avoid Ukraine. It’s not exactly the case. I mean, we are in favor of keeping some transit through Ukraine. What we are saying is that we won’t be too dependent from Ukraine. We faced a crisis in 2006, 2009, 2014, and it was not because Russia decided to stop the gas by chance. I mean, it was because they were not paid by Ukraine, OK? So it should be clear.

And so if we are, in Europe, too dependent from the gas coming from Belarus and from – because before Poland, there is Belarus –

MR. NAIMSKI: And from Nord Stream.

MR. SIMONNEAU: – from Belarus or from Ukraine, I mean, it is a way to be weak. With Nord Stream, at least it’s a consortium. We have 50 percent of the shares with the five Western companies. And we think that we have a way, you know, to pressure Gazprom because of the 50 percent shares.

Last point is on the difference between Nord Stream and South Stream, because a lot of people, including the president of the Italian Council, Mr. Renzi, last December, raised that case, saying, you know, come on, guys, you’re all very keen with Nord Stream and you were very, very difficult with South Stream. Well, there are two differences, I think, between Nord Stream and South Stream. The first one is that South Stream was typically a project to avoid Ukraine because there were no new sources of gas in South Stream. In Nord Stream, as you know, we are bringing gas from Yamal and we are bringing gas from new fields in the northern part of Russia.

And second point, which is far more important – you know, with South Stream, you were going through different member states, and in that case you should have the third(-party) access because of the third directive, you know – the third-party access because of third directive. And so that was the real problem in terms of legality of the project because Gazprom didn’t want to give access to the other producers on South Stream. And as I said, on Nord Stream that is different because who will ask access for underwater pipeline, you know? That’ s no sense, you know? But we will provide access as soon as the gas will get to Germany. That’s the main difference.

MR. ROBERTS: Piotr.

MR. NAIMSKI: You see, what we are witnessing, there is a difference between understanding the interest in different part of Europe. If we are talking about diversification of supplies in Warsaw and Berlin and Paris, we are talking about completely different situation, completely different situation. In Poland, we are hundred-percent dependent on the import from Gazprom side. In France, you have probably 25 percent of Russian gas.

MR. SIMONNEAU: Fifteen.

MR. NAIMSKI: Fifteen. Fifteen, all right. You had 25, and now you have 15, so you want to raise it to 25. Right. (Laughter.) It’s a good – (laughs) – so it’s a good strategy for diversification. I would agree; being you, I would proceed with this project for sure. But, but the project is against European solidarity, it’s against European common foreign policy, because I do not agree with you that even if from a former platform is not against the sanction; it breaks this sanction in a political sense. For sure. I can tell you this is understood like that in whole Europe. You can go against this feeling, but anyway, this is the reality.

MR. SIMONNEAU: It’s your view.

MR. NAIMSKI: Unfortunately for you, not only mine. And you see, it’s against European energy policy, it’s against diversification, real diversification of sources of supply in Central Europe because it will close the possibility for real diversification, because Russian gas coming through ENGIE to our countries is not the diversification.

MR. ROBERTS: Dario, did you want to comment?

MR. MIHELIN: I just wanted to add a quick point on the solidarity. This is something what was one of the reasoning that Croatia signed by the letter as well, because we believe there are a few questions that should be answered in regard to Nord Stream 2 project.

Croatia itself, it’s fortunate that we produce 72 percent of the gas demands we need. Fifty-five percent of that ends on the Croatian market. So the import of gas that’s being imported is only 0.6 bcm. This is not huge. But we believe that Southern Gas Corridor has to be created for the benefit of Croatia, for the benefit of our neighbors in Southeast Europe and for the solidarity with the Central and Eastern European countries, including Slovakia, Ukraine, all the land-locked countries in this regard.

MR. SIMONNEAU: (Off mic) – I mean, I totally disagree. I think it’s not against the eastern and southern countries of the European Union. I mean, today South Stream is not possible. Turkish Stream is not possible.

MR. NAIMSKI: It’s not against, but it does –

MR. SIMONNEAU: Let me finish, OK? Let me finish. So South Stream is not possible, OK? Turkish Stream is not possible. We are supportive of the Krk terminal, but, I mean, when will this terminal –

MR. MIHELIN: In two years. In two years.

MR. SIMONNEAU: We hope so. We hope so. That’s OK. We don’t have any problem with that. What I’m saying is that we are creating a new source, because the southern, the gas is in Germany. It is European gas. It’s not anymore Russian gas. We bought it. You know, we paid for that. So it is European gas.

And so our proposal is really to make the correct routes to provide gas to Poland, Slovakia, Ukraine, and even the Balkans, because certainly there will be some gas coming from Croatia, but we will need more gas than that.

So, obviously, it’s not against the solidarity. On the contrary, it’s a way to promote the real internal market of gas within the Energy Union.

MR. ROBERTS: I’m going to make one basic point, which is very simply that I would accept Ambassador Morningstar’s argument that in practice, in sharp, hard, political terms, it’s quite harsh to imagine Nord Stream 2 being built and approved by the EU in the absence of a settlement to the competition issue. But one thing that strikes me very much is there’s absolutely nothing wrong with increased volumes of Russian gas so long as you have the basic energy security requirement of, is there an alternative if your leading gas supply for some reason should get cut off?

So this goes back to the heart of the other element that we were discussing earlier, and I wonder whether Piotr and Dario will comment further on what size of infrastructure do you need if you’re going to have an effective north-south corridor? It’s not enough to talk about 1.5 bcm connections to go to Ukraine. How do you – if you’re going to get 10 bcm, theoretically, 7.5 or 10, into Świnoujście, how do you manage to get that into the heart of Europe and the same coming up from Krk? What is the size of infrastructure you need in your north-south corridor? I wonder if you’d like to comment. And then I’ll come back.

MR. MIHELIN: No, sure. This is something what’s being analyzed at the moment, particularly the business model based on size and based on the market that you would have for the gas, because it’s huge difference in investment whether you target 4 bcm, 8 bcm, 16 bcm or further. Differences are huge. I’m quite certain one of the first elements of this new business model will be new open season to see what is the demand, what is the potential in this regard.

But you mentioned, John, the right thing, and this is – in Croatia itself, we’ve been focusing on the stationary LNG terminal on the island of Krk for quite a long time and focusing that you can build the terminal, but if you don’t have interconnectors and pipes, what is the terminal there for? So that’s right now this new phased approach to start with a floating facility, and then at the same time enable to use the funds from the Connecting Europe Facility and some other funds to create interconnectors and the reverse flows at the same time to bring that gas to Hungary and then further up – on one point. And then on the other point, mentioning Southeast Europe, there should be further moves in regard to the Ionian Adriatic Pipelines coming through the Trans-Anatolian Pipeline in this regard.

MR. ROBERTS: Richard.

MR. MORNINGSTAR: Yeah, just a related question. I’m more in a question-asking mood today. If Nord Stream 2 is built – this relates to the diversification question – and even if at the end of the day it’s no greater amount of gas than presently is coming from Russia, although I don’t think that would be the case, what kind of effect would it have on incentives for investment in other sources? So in other words, you know, would it restrict diversification because companies or investors who are interested in selling LNG to Europe – I don’t think our friends from Cheniere are still here – what effect does it have on – you know, what effect would it have on their calculations? What effect would it have on other infrastructure investors if they thought, well, you know, they’re just going to buy all this Russian gas, and are we going to be able to compete with them?

MR. ROBERTS: Piotr, did you have a comment? And I will come back.

MR. NAIMSKI: What ambassador is asking, that is the very crucial point, the competition between – I mean price competition between gas from the pipeline and LNG in Europe for the future. Because it may happen that the rule saying that the price from the pipeline is always $5 less than LNG price may be the reality. What would it mean? It would mean that probably Polish terminal is the last one in Europe. And it wouldn’t be a good idea to do it like that.

MR. ROBERTS: I’m going to ask Denis to talk very quickly, because I know we’ve got questions in the audience and we’ve only got 10 minutes.

MR. SIMONNEAU: Just two reactions on this, the first one to answer the question of Ambassador Morningstar. We as ENGIE, I mean we are one of the first buyers of gas from Cheniere today. You know, we have signed an agreement with Cheniere. So we believe that LNG will be useful because it is flexibility, and flexibility is very useful. At the same time, we should be aware of the fact that this flexibility could be also a drawback to Europe because, you know, depending on the price you can get, you will bring your cargoes – we have some cargoes, and we know that – you can bring your cargoes wherever it is the best price to get your deal, you know. And so it will be the case for the U.S. as it will be the case for all LNG providers in the world. So we should keep that in mind.

On infrastructure, I fully agree on the fact that we have the benefit of two programs today, Connecting Europe Facility and the Juncker Plan. But let me react to what Ambassador Morningstar said –

MR. NAIMSKI: Not yet.

MR. SIMONNEAU: – said on Midcat, you know. Midcat, it is –

MR. NAIMSKI: Not yet.

MR. SIMONNEAU: – fantastic project on the paper, which is bringing gas, LNG gas, to Spain, because it’s true you have seven terminals functioning at 15 percent, as you said. But we look at the economics of this project, you know, and it doesn’t work at all. Why? Because you have first to bring the gas from the U.S. to Spain, so you pay a good price, and then you have to build the infrastructure from Spain to Central Europe, and it’s going to cost a lot of money. We look at that because France is definitely part of this deal.

But you know, today the commission is looking at Midcat as a first priority, but it doesn’t fly economically. You should bring gas to Croatia or to Poland and build the connection to Central Europe. For sure, that is far more cheaper than bringing gas through the Pyrenee(s) and the Alp(s) and to Central Europe. You see what I’m –

MR. ROBERTS: Now we’ve got three people, I know, who want to ask questions, so I’m going to ask them all to ask their questions now so that we make sure we do get them.

Can you introduce yourself, please?

Q: (Off mic) – The Strategy Group.

The question for Mr. Mihelin. Congratulations on moving forward on the floating solution. I know that was an extremely difficult debate in your country. It looks like you’ve moved to that decision. I wonder if you could elaborate a little bit about something you said before, about what is it that you want to announce – did I hear that right – in advance of the Council? Thank you.

MR. ROBERTS: I’ll gather all the questions at the same time. Can we have a microphone here, please.

Q: Yeah, thank you. Jean-François Boittin, with TSG as well.

Two quick questions. First one: I understand from the minister that Poland wants to become a hub for gas in Europe. So what’s wrong with Germany being the hub after Nord Stream is being finished? And the second question is, does the panel have an idea – I mean, this country, champion of free trade, has had embargo on oil exports for 40 years. Can we – can the Europeans be hundred-percent sure that there won’t be any restriction ever on exports of gas or oil from the U.S.?

MR. ROBERTS: And lastly, Matt Bryza.

Q: Hi. Matt Bryza from the Atlantic Council.

Great. What a fascinating exchange here. I mean, no matter what the companies say, no matter what ENGIE says, obviously the Polish government and governments to the east are going to be worried, right? But diversification, strategic diversification has a price. That’s what we’re talking about now. It costs something. It’s a complex venture to figure out the optimal mix of pipe gas versus LNG when we don’t know what prices are going to be. It requires sophisticated economic metric analysis, I would guess.

So what are the countries in Central and Eastern Europe doing to try to figure out how maybe to group together, potentially under some sort of voluntary buyers grouping or analytical grouping, to figure out how to determine what the optimal mix would be? Thank you.

MR. ROBERTS: Thank you.

I think the first question was about Croatia?

MR. MIHELIN: It’s pretty short.

MR. ROBERTS: Right. OK.

MR. MIHELIN: The answer is pretty short. What I was mentioning on the decision, on going with this phased approach, of having the floating LNG, of having the main contact point within the administration, of having all the elements to warrant the political support throughout the project, this is the decision that is being prepared and will be adopted by the government, supposedly prior to the EU-U.S. Energy Council next week.

Q: Will that be published?

MR. MIHELIN: Yeah, yeah, it will be published, of course, in the Croatian official journal, sure.

MR. ROBERTS: Germany as a hub. Quick responses from Denis and from Piotr. Piotr, you start us off.

MR. NAIMSKI: All right. You see, probably it’s the question about, you know, I mean, a strategy for security. We want to have physical access to more than one source of gas. Now we have an access to two sources. We try to have an access to third source, which won’t be German source, because this is the same source as we have from the east. This is what we think. This is what is the reality. And having such a physical diversification of supply, possibility for physical diversification, probably, probably we could start – we’ll start behave like French government and ENGIE. (Laughs.)

MR. SIMONNEAU: I don’t disagree with you. I think that you have the occasion to have a fourth source, is the European gas being proposed by Nord Stream 2. And obviously – let me say that I was in Poland recently and I talked to somebody – I will not denounce this person, but I talked to somebody at the economic department in Poland. And frankly, this person told me, we would love to receive gas from Nord Stream because it will be a source of diversification to us, you know. So I know that in Poland there are divergent voices also, as it is everywhere.

MR. ROBERTS: We’ve got two more questions. I’m going to ask first of all –

MR. NAIMSKI: Give me the name. (Laughs.) (Laughter.)

MR. ROBERTS: I’m going to ask Dick Morningstar if you’d talk a little bit about Europe and free trade, whether you really think that we can have – there’s any prospect that Europe might actually take against American as well as Russian gas. (Laughs.)

MR. MORNINGSTAR: Well, first of all, as far as there always being the availability of American gas, I’ve learned to never say never. You know, in 1999 I said there would never been Blue Stream.

MR. NAIMSKI: I still remember.

MR. MORNINGSTAR: You know, last summer –

MR. NAIMSKI: I still remember.

MR. MORNINGSTAR: – I said, you know, Trump would never win the Republican nomination. (Laughter.)

MR. NAIMSKI: I still remember.

MR. MORNINGSTAR: I’m still saying Trump will never be elected, but I hope I – I hope I don’t – I hope I don’t live to regret that. (Laughter.)

MR. MIHELIN: (Off mic.) (Laughter.)

MR. MORNINGSTAR: So, you know, on gas availability I’ll never say never, but I don’t see any reason why – there may be a question whether the gas is competitive at any point in time, and whether from a price standpoint, Europe will continue to prefer – assuming there are no other issues – to buy piped gas at a cheaper price, but I don’t see any reason why the gas won’t be at least available for the foreseeable future and that – as I think was said in one of the earlier panels – that at the least, it will keep prices down.

MR. SIMONNEAU: Absolutely.

MR. ROBERTS: We’ve got one last question on whether or not it would be price coordination, cooperation, trying to get some kind of collective market power to buy. Would anybody wish to take that issue on?

MR. SIMONNEAU: Maybe on that point. You know, there was, at the beginning of the discussions on energy union within Europe, this proposal by Jerzy Buzek, in particular, and the Jacques Delors Institute to create such a common purchase agency. Again, on the paper it’s a very good idea, on the paper. But if you enter into the reality, you know, the practicability of the project, who is going to negotiate with Gazprom, Sonatrach and the providers? For what price? To what direction? You know, do you want to create a Gosplan in Europe to deal with the provider of gas? Plus the fact that, you know, it’s better to have different companies – Shell, E.ON, ENGIE – dealing with the providers to make the price getting down, because if you are only one buyer, you have a situation which is economically very bad.

MR. ROBERTS: I do remember that –

MR. NAIMSKI: (Inaudible) – I would agree with you.

MR. SIMONNEAU: Great. Thank you. (Laughter, laughs.)

MR. ROBERTS: – when the European Union, way back in the 2000s, wanted to create a Caspian Development Corporation to think of being a single buyer of gas from Turkmenistan, it had two recommendations. The one that fell south, completely collapsed, paid no attention to, came from me, which says it’s fine, it works, if you could put it on one sheet of paper. The one that they considered cost them, I think, a quarter of a million dollars from one major American consultancy, at which point it said, we’ve only written two-thirds of the report; can we please have some more money? (Laughter.) Something tells me that I might have been right on that occasion.

With that, I’d like to thank everybody very much for a very good conversation. The final point is a very simple one: If we get Nord Stream 2 and we have LNG, then so long as we have the intervening infrastructure that connects the LNG terminals in Poland and Croatia and manages to distribute gas throughout Europe, my God, what on earth is the price of gas in Europe going to be?

Thank you very much. (Applause.)

(END)

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