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13 September 2022
media coverage

Round Six: The European Union Ban on Russian Energy Imports

The sixth package of European Union sanctions imposed on Russia is a widely discussed topic, yet the overall levels of preparedness to adopt the associated energy import ban varies from one country to another. Indeed, with Russian oil and gas exports being such a dominant source of energy for a number of European countries, it remains to be seen how all of them adapt to the change. To gain insight into how certain EU member states and non-EU countries are (likely) to fare in the immediate wake of the ban, we reached out to legal professionals from Turkey, Poland, Bulgaria, the Czech Republic, and Moldova.

Round 1 – Prepared for the Ban?

“Poland, for one, is well prepared for the ban,” says Penteris Senior Partner Andrzej Tokaj. “The country has strongly endeavored to become independent from Russian-sourced energy supplies for a while now, so the ban is not a sudden surprise that will have a grossly adverse impact,” he says.

“We have an LNG port on the Baltic coast and the Baltic Pipe pipeline connects us with Norwegian gas resources, and, of course, our own national (albeit limited) gas production,” Tokaj continues. He believes that these three components will be enough to enable Poland to even have a small annual surplus in gas. “Furthermore, a floating port is under construction near Gdansk, which will, once completed, be able to receive another ten billion cubic meters of gas each year,” he says. “As far as oil is concerned, we have significantly reduced our dependency on Russian imports – from 70% of consumption to about 17%. Also, Poland will seek to retrofit its entire oil imports towards the Middle East and the US by the end of 2022.”

The Czech Republic, however, finds itself in a potentially more precarious situation. “The Czech Republic largely imports oil through the Druzhba pipeline, which is exempt from the sanctions for the time being,” explains PRK Partners Partner Jakub Lichnovsky. The country generates most of its electricity from nuclear and lignite power plants, and gas sources represented but “10% in the energy mix in the Czech Republic in 2021.”

However, Lichnovsky does note that the country is stockpiling gas and oil “in light of the new developments. The ban might constitute a problem for businesses that are, at the moment, processing mainly oil from Russia, as their facilities are designed for such processing,” he explains.

At the far end of the spectrum, Bulgaria is in an uncertain place. “At the moment, 100% of the processed oil in Bulgaria is Russia-sourced, so it is very difficult to prepare our market for alternative oil supply in such a short period of time,” chimes in Schoenherr Local Partner Stefana Tsekova. “This was the reason for Bulgaria to request a partial derogation for the latest Russian sanctions and to gain additional time to prepare for the new realities,” she explains. “The situation with natural gas is very similar.”

On the other hand, non-EU members find themselves less between a rock and a hard place. Turkey, for example, is lucky that it is not forced to introduce a ban, given its low preparedness for any alternative, because “Russian energy imports are significant for Turkish markets and they are not replaceable in the short and medium run,” explains Nazali Partner Metin Pektas. “As of 2022, approximately 30% of oil imports and 50% of natural gas imports come from Russia,” Pektas says. Any ban similar to the one the EU is imposing would lead to a “big energy shortage.”

Round 2 – Immediate Impact

“We maintain significant energy reserves,” Tokaj says, “so, in terms of guaranteeing supply, we are pretty comfortable.” Of course, with Russian oil being cheaper to obtain compared to that sourced from the Middle East or Norway in particular, Tokaj indicates that energy transportation will be more expensive.

“Oil, for example, would have to be transported via vessels, instead of a pipeline, meaning it will be slower and more intensive.” Tokaj says that Poland is already experiencing price surges of up to 60%, which means that any further price hikes will create an even more difficult situation for citizens. “Given that it is still summer, and less energy is consumed, I don’t think we have yet felt the peak of the price hike.”

As for the Czech Republic, the oil situation is not that problematic. “In 2021, Russian oil imports covered less than 50% of Czech consumption,” Lichnovsky says, indicating that the oil supply is not directly affected by the ban. However, the gas situation is somewhat more complicated.

“Russian gas imports in the last years covered almost all of our domestic consumption,” Lichnovsky says, noting that only 2% of gas was produced locally while 98% came from Russia. “In total, the Czech Republic consumes approximately five billion cubic meters, and 60% of that is gas for industrial technologies,” which Lichnovsky stresses is difficult to replace in the short term. The country has but 2.7 billion cubic meters of storage space, which means that it urgently requires a supply line. With the Czech Republic being a landlocked country without any LNG terminals, it cannot access alternatives as easily as Poland. “Even the gas bought from Germany is mainly Russian gas,” he says.

Again, finding itself at the far end of the spectrum, Bulgaria is in a bind on account of a high dependency on Russian oil and gas. “Currently, there are one large and two very small oil refineries in the country,” Teskova says. “The large one is strategically located on the Black Sea coast, and this eases the access for alternative suppliers to bring in crude barrels. However, the Burgas Neftochim refinery was privatized, back in 1999, by Lukoil, and, as one could imagine, Lukoil are not keen to use other alternative sources of supply,” she explains. “An eventual suspension of the refinery would increase the import of fuels and most probably will lead to a further rise in fuel prices on the domestic market. Without the special derogation, the immediate effect of the ban would have a critical negative impact on the economy,” she stresses.

Moldova finds itself in its own particular position. “Moldova has no significant refining capacity and imports more than 99% of petroleum products consumed in the country,” says ACI Partners Competition Manager Emil Gutu. Indeed, even without applying the import ban, Moldova could be in significant trouble. “A considerable part of petroleum products is imported from refineries in Romania and Bulgaria that use Russian crude oil – if these refineries stop production because of the ban, to switch to another type of crude oil, it could trigger temporary price hikes and fuel shortages in the region.” A situation like that would only exacerbate the “existing diesel fuel shortage caused by the war in Ukraine.”

Additionally, given that Moldova has traditionally been importing all of its natural gas from Russia, via long-term contracts with Gazprom, Gutu reports that any sort of a direct ban is not envisaged. “Our country’s technical and legal preparedness for a possible halt of Russian supply was tested in October 2021, when the reduction of supply by Gazprom forced Moldova’s first-ever, although limited, purchases on the European spot market.”

Round 3 – Evasive Maneuvers

Even with the Czech government supporting the import ban, the country is benefiting greatly from the Druzhba pipeline exemption. Still, preparations are being made to make way for alternatives. “Czech businesses are obviously trying to obtain the necessary gas that is still available,” Lichnovsky says. “We see that the Czech Republic is not prepared for a full phase-out of the Russian gas – in my view, it would take at least three, but most likely up to eight, years to get fully independent,” he explains.

“We would need to negotiate with Poland and the Nordic countries on gas delivery from Norway, organize the connection of our gas pipelines to Austria and the Southern EU countries,” Lichnovsky continues. Even seeking an oil alternative like shale would be problematic. “The question about shale gas from EU countries is a difficult political question and, additionally, we have banned shale gas extraction,” he reports.

As for Bulgaria, it is currently focusing all its efforts on utilizing the special temporary derogation. “The derogation is valid until the end of 2024 and will allow Bulgaria to continue to import crude oils and petroleum products via maritime transport,” Tsekova explains. While this period lasts, however, she reports that “alternative routes of natural gas and LNG supplies are actively being considered.”

Turkey, as a non-EU member, maintains its trade with Russia but is also considering diversifying sources for energy imports. According to Pektas, it is looking towards Iran, Azerbaijan, Northern Iraq, and Israel. At the same time, “Turkey is planning to increase LNG terminal and gas storage capacity,” Pektas reports. Additionally, the country is “incentivizing renewable energy production – especially solar based – and such production capacity is increasing continuously.”

Round 4 – Alternatives

“Both in terms of governmental policies and the attitude of citizens, there is a strong shift from traditional sources of energy to renewable ones,” Tokaj speaks of Poland. As the country invests more in solar power, the Polish government seeks to amend the country’s legislative framework to be more open to renewable resources. “Our regulations were pretty unfavorable, recently, particularly for wind power. However, changes are hastening in light of recent developments,” Tokaj reports.

In contrast to Poland, the Czech Republic is looking outward for alternatives. At the moment, the country is in negotiations “with its European partners on increasing capacity of the TAL pipeline,” Lichnovsky says, speaking of oil. “In addition, oil is imported to the Czech Republic via the IKL pipeline as well.”

As for the gas supply, the Czech Republic is seeking to construct a new pipeline with Poland and, “potentially, also the purchase of a stake in a Polish LNG terminal,” Lichnovsky continues. “Furthermore, the interconnection of the gas network with Austria, the purchase of a stake in a German LNG terminal, and gas supplies from Norway through the German NETRA pipeline are being considered,” he explains.

For very-exposed Bulgaria, alternatives are being sought in all directions. If the Burgas refinery gets shut down, the country would have to turn to ready-made fuels import. “For example, in the Black Sea region, it is possible to import oil from Kazakhstan and Azerbaijan,” Teskova reports. “Oil from Algeria, Libya, and Egypt is available in Mediterranean ports, and other alternatives are also possible – the Gulf countries or the West coast of Africa,” she explains. Still, these alternatives are quite costly, because of more difficult transportation and an oil price surge.

When it comes to gas, things are developing a bit faster. “The construction of the ICGB natural gas interconnection between Bulgaria and Greece – intended to bring gas from Azerbaijan and LNG from the Alexandropoulos terminal – is developing with high priority,” Teskova stresses. “On Bulgarian territory, the ICGB pipeline is already successfully connected to the national gas transmission network of Bulgartransgaz, and the ICGB moves forward with its certification as an independent transmission operator, after the national energy regulators of both Greece and Bulgaria adopted a draft joint decision for certification of the project company managing the gas interconnector.” Similarly to Bulgaria, Moldova, too, is looking toward Azerbaijan for a potential natural gas supply. However, Gutu stresses that this is not linked to the ban itself, but more to mounting general insecurity regarding the affordable natural gas supply. “The energy crisis of the past winter sparked a new wave of interest in energy-saving projects by businesses, public institutions, and the population,” he adds.

Round 5 – Aftermath

Regardless of preparedness levels, current capacities, and plans for alternatives, the energy imports ban will definitely have substantial ramifications.

“The immediate effect will be a popular awareness of the need to conserve energy,” Tokaj admits. “For businesses and citizens alike, the need to save will be palpable.” He indicates that with the price hikes Poland will face, “consuming a lot of energy will not be sustainable.” For the Czech Republic, things could be even worse. “From my point of view, we would certainly experience a further increase of energy prices and a further increase of inflation, which is already one of the highest in the EU,” Lichnovsky says. He believes that Czech industry could find itself on the “verge of collapse” and could “become dependent on the reaction of Germany and Hungary. However, even in such a case, Czech businesses would most likely receive Russian gas in the medium-term horizon.”

“The ultimate aftermath of the ban, with respect to Bulgaria, depends entirely on the timely and adequate measures that the Bulgarian government undertakes,” Tsekova says, while indicating that she believes the two-year derogation will give the country enough time to prepare. “Unfortunately, the political situation is very unstable at the moment, and we could only hope that this will not hinder the implementation of the necessary steps to secure alternative energy supplies,” Tsekova concludes.

As for non-EU countries, the ban will also have strong ramifications. “Most probably, the ban on Russian oil will put a temporary additional upward pressure on refined petroleum products’ prices, before the market comes to a new equilibrium,” Gutu chimes in. Still, he does indicate that “the supply disruptions and demand shocks created by the war itself will remain the main factors” affecting the price and security of petroleum products supply to Moldova. “A possible EU ban on Russian gas, on the other side, will likely have a massive adverse impact on the Moldovan economy and population, as it will probably cause explosive growth of the spot market price for natural gas,” Gutu says. Regardless of Moldova’s long-term supply contracts with Gazprom, the “price formula is partially linked to the spot market,” he explains.

On a lighter note, if there is one, Pektas says that Turkey might actually be better off. While it is difficult to foresee the future because of many “variables that may have an impact on the situation, import prices from Russia may decrease” for Turkey. Without a ban in place, and in case Russia may have an excess supply because of the EU ban – it might become cheaper for Turkey to access Russian oil and gas, Pektas says.

Considering all of the above, one question clearly presents itself: What will Round 7 look like?

The article was first published in Issue 9.6 of the CEE Legal Matters Magazine, 02.09.2022
author: Andrija Djonovic
interview: Stefana Tsekova