Moscow, 19 October 2012

Conclusions of the 5 th meeting of the EU-Russia Gas Advisory Council Moscow, 19 October 2012 The fifth meeting of the EU-Russia Gas Advisory Council (GAC) took place on 19 October 2012 in Moscow, co-chaired by V. Yanovsky, Deputy Minister of Energy for the Russian Federation and J.-A. Vinois, acting Director from the Directorate General for Energy of the European Commission, and the two co-speakers, J. Stern for the European side, and V. Feygin for the Russian side. A. Yanovsky stressed in his opening speech that the major goal of the meeting was to receive expert advice, which would feed into the EU-Russia Energy Cooperation RoadMap (ECRM). J.-A. Vinois welcomed the ability of both sides to come to a joint paper on gas (the draft Gas Chapter of the ECRM until 2050). Both emphasized the importance of the GAC discussions in the context of EU-Russia energy relations. The meeting continued with discussion of the Draft Gas Chapter 1 and the Draft Report on Results of the First Year of GAC activities (Progress Report) 2. J. Stern acknowledged written comments on the draft Gas Chapter from Eurogas, IGU, and E-Control, and welcomed further comments from other members by 26 October 2012. In the discussion, participants from both sides raised the following points: George Verberg suggested that the draft Gas Chapter should reflect that Russian concerns about insufficient cross-border capacity will be addressed, and transportation will be smoothed progressively with the reduction of the amount of zones Russian gas needs to cross, after the implementation of the Third Package. Several EU participants recommended "softening" some of the in their view more inflammatory statements in the annexes of the Draft First Year Report. Representatives from Gazprom requested that the Draft Gas Chapter should include the need for a transparent legal framework in the EU gas market and the elimination of (or at least restraints on level and time duration of) distortions in EU electricity markets through subsidies for renewables, and the need for different types of ownership of EU gas infrastructure. Both sides also discussed open issues related to the OPAL pipeline and took note that this was currently subject of specific discussions between the relevant EU authorities and Gazprom. 1 Draft of the Gas Chapter circulated for comments dated July 17, 2012. 2 Draft Report on Results of the First Year of GAC Activities, submitted by GAC Co-speakers and circulated October 15, 2012. 1

V. Feygin added that an utmost effort will be made for this GAC version of the Draft Gas Chapter to be an independent assessment, which would contribute to the EU-Russia Energy Roadmap Gas Chapter, acceptable to both Russian and EU coordinators. Following an intervention by Y. Baron, Ministry of Energy of the Russian Federation, it was noted that the draft Gas Chapter prepared by the Gas Advisory Council would provide valuable input to, but be different from, the final version of the gas chapter of the EU-Russia Energy Roadmap which was currently under discussion between the Commission and the Russian Ministry and in the Thematic Group on Markets and Strategies. 1. "Scenarios" Workstream 1: The Speakers, J. Stern and V. Feygin, introduced the next item on the agenda by presenting the results of WS1 meeting, which took place in Moscow on 18 October 2012. The presentation consisted of two parts: one addressing the discussion of the Scenario Chapter of the ECRM and WS1 approach to future work on energy scenarios (presented by V. Feygin); and another addressing specific natural gas scenarios (presented by J. Stern). It was agreed that discussions on scenarios in Workstream 1 should mostly focus on future parameters for EU imports of natural gas from Russia, a clarification and analysis of a specific (and limited) set of drivers for each of the key parameters, and the interaction between these projections and EU-Russian gas cooperation. In line with the Memorandum of February 2011, an important component will be joint work with competent outside experts and informing relevant decision makers on the findings and risks and uncertainties of these outcomes. 2. "Internal market" Workstream 2: Kristóf Kovács (on behalf of Walter Boltz) reported on the results of WS2 work and suggested future directions, including: providing long-term security of supply/security of demand (noting that for these strategic issues a strong link could be established with WS1); acceptable pricing for both sides (noting that although pricing is a sensitive issue it cannot be left totally outside the GAC as the issue of gas competitiveness relates to pricing, which therefore needs to be analysed, although how this should be addressed needs to be clarified); 2

availability of transportation capacity to match demand, (noting that this point is a specific concern for the Russian side, and has been intensively analysed in WS2, and is now under development in internal market documents). It was suggested that it might be useful to re-merge WS2 and WS3 (or at least coordinate their activities more closely); and the effects of implementation of the Third Package noting: o Russian concerns, expressed in WS2, regarding the need to preserve the delivery points in long term contracts under new entry-exit regimes, believing that failure to follow this course of action would have a negative impact on long-term contracts ; o that the EU believes there will be significant benefits for Russian companies stemming from the establishment of an EU internal gas market, including entry-exit regimes with TPA allowing direct access to end-users). K. Kovács also noted the importance of balancing the WS2 agenda by complementing a discussion of EU market issues by developing a discussion on the Russian market issues in so far as they relate to EU issues (domestic market developments, TPA, energy exchanges, pricing, upstream/downstream market opportunities, and the export monopoly). Simon Blakey, Eurogas also highlighted the need to discuss Russian upstream issues as, in his opinion, the current structure and existing export monopoly in the Russian market increasingly created risks for European companies. G. Verberg added that a discussion of Russian topics (including strategic priorities of Russian Government in the gas sector) was necessary for further EU reflections on the relationship with Russia, and, together with other EU participants, underlined the need to have a balanced discussion of EU and Russian market issues. Responding to the presentation, the Russian side (V. Feygin and Alex Barnes, Gazprom) considered that the risks stemming from the Third Package, including the harmonization of market rules and the Gas Target Model were significant for Russia, whereas the risks for the EU stemming from the processes in the Russian market are much smaller. They also expressed reservations about the ownership unbundling clause in relation to companies from non-eu countries as a risk to Russian investments. V. Feygin also noted significant uncertainty about the future EU regulatory framework, given that much of it is still being drafted, and also that its implementation will take a long time. V. Feygin supported the continuing work on the Glossary, the aim of which is to clarify various EU gas market terms. 3

Further to a presentation by S. Komlev from Gazprom Export on the gas pricing principles for European markets, a discussion took place on pricing issues in EU-Russia gas relations. Company representatives noted that this was a commercially sensitive issue and that detailed discussions were not possible also for competition reasons. That said, several EU members emphasized their conviction that the process of delinking gas prices from the oil price was irreversible and was an important step in the further development of EU gas markets. There was a general agreement that an exchange on general pricing principles within the GAC may be useful as such principles were key for future gas demand, the development of markets and EU-Russia gas relations and therefore relevant for the work of Workstream 1. In that context, the Russian side referred to the importance of long-term contracts for (infrastructure) investments which are consistent with EU legislation and regulation. J. Vinois emphasized that the work on the EU internal energy market is crucial to the sector and upon completion will lead to similar benefits as consumers and market players are experiencing in other sectors. He emphasized his conviction that Russian companies could also benefit from the new structure. While further work remains to be done, the European Commission is committed to reaching this target through a transparent and inclusive process. J. Vinois concluded that at this stage of the process it was understandable that there is still some insecurity on the Russian side about the effects of this process, and that Commission and national regulators are keen to smooth the transition and its outcomes. Member States have gone through a similar evolution both with regards to the gas sector and also other sectors where this process is more advanced. 3. "Infrastructure" Workstream 3: Theodore Shtilkind, Russian co-chair of this workstream, informed the Council about the last WS3 meeting, which took place in September 2012 in Moscow. T.Shtilkind reminded the audience that the highest priority issue for the WS3 (as agreed during the 4 th GAC meeting in July 2012 in Brussels) is the issue of promotion of new gas infrastructure projects including elaboration of criteria to define Projects of Mutual Interest (PMIs) between Russia and the EU. WS3 proposed some approaches to definition and promoting (EU-Russian) PMIs and practical problems that could arise because of cross-border nature of pipelines linking different jurisdictions. V. Feygin furthermore set out his view of Gazprom's (unpalatable) choices in its quest to build new large infrastructure to the EU. In the absence of a specific regime, new capacity crossing multiple borders would either have to be built under the Third 4

Package rules (which in current circumstances would be extremely difficult or impossible as the regulatory procedures are not yet developed), or via an exemption. In relation to the latter, V.Feygin emphasized that it is much more complicated for a project to get an exemption under the Third Package, compared to the Second Package. J.A. Vinois replied that the Russian side was welcome to participate (and is in fact already participating) in the specific discussions relating to the further harmonization of market rules. In addition he emphasized that the discussions in the GAC also serve the purpose of making decision-makers aware of the key issues. J. Stern welcomed the progress reached by WS3. It was also agreed to make available all WS3 documents to the GAC. Nigel Sisman (ENTSO-G) and S. Blakey expressed their reservations concerning the idea of centralised dispatch raised by T. Shtilkind in the EU, with N. Sisman arguing that the current vision of the EU gas sector is conceptually different from the one suggested by the Russian side. The Russian side replied that there is no contradiction as the centralised dispatch should be consultative and provide advice to network users and T. Shtilkind agreed to contribute an explanatory paper on this subject. Further work J.A. Vinois made a presentation outlining the state of play of current EU-Russia gas relations and highlighting a number of issues which should be discussed in future GAC meetings. These included, in addition to EU market issues, a more detailed study of the Russian gas sector, for example on investment in production and pipelines, and the development of the Russian domestic gas market. He noted three key questions for discussion of future EU-Russia gas relations: will EU players on the Russian gas market enjoy equal treatment? Will Russian gas be price-competitive in Europe? What infrastructure is necessary and how will it be used? 4. J Stern concluded the meeting by outlining the major procedural and substantive steps forward. He also announced that it had been agreed that the next GAC meeting will take place on 29 January 2013 in Vienna, and that the work of the GAC will also be presented at the European Gas Conference in Vienna on 30 January 2013 (in line with the 4 th GAC Meeting Conclusions). 5

Technical conclusions: - The co-speakers will finalise the First Year Progress Report including the GAC Draft Gas Chapter and prepare a paper for the next meeting on GAC priorities for 2013, including joint recommendations on the future focus and goals of the GAC containing proposals on the work of the GAC up to the summer 2013. It was suggested that at the GAC meeting in summer 2013, there should be an assessment of the GAC work and its usefulness which should decide whether the Council should continue its work and, if so, its future focus and goals, and there was general agreement for this course of action. - Price/pricing principles as a driver of gas consumption should be further discussed in Workstream 1 in a format acceptable for GAC members which represent companies - A joint meeting of the Internal Market and Infrastructure Workstreams (WS2 and 3) will be held on 28 November in Vienna. - The next meeting of the Gas Advisory Council will be held on 29 January in Vienna back-to-back with the European Gas Conference (29/1-1/2 2013). EU and Russian side will present the work of the GAC in this conference on 30 January. Russian Co-speaker EU Co-speaker V. Feygin J. Stern 6