On September 7, the EU’s permanent representative to Austria, Martin Selmayr, provoked controversy by saying that Austria’s continued high dependence on Russian gas was tantamount to paying “blood money”. Selmayr, who was the right-hand of former European Commission president Jean-Claude Juncker, was speaking at an event in Vienna where a member of the audience castigated the EU for “warmongering” by supporting Ukraine in resisting the Russian invasion.
Selmayr was promptly summoned by the Ministry of Foreign Affairs, where he was presumably scolded. The Minister for the EU, Karoline Edtstadler, likewise responded sharply, saying that Selmayr’s remarks were “unserious” and “completely one-sided”. Even the European Commission distanced itself from his comments, describing them as “regrettable and unnecessary”.
Historically, Austrian governments do not respond well to criticism, regardless of whether it is justified or not. That Austria continues to be structurally dependent on Russian gas imports is undeniable. Only Hungary has a higher level of dependency among EU countries.
In the months following the Russian invasion of Ukraine, Austria’s dependence on Russian gas plummeted from a high of 81 per cent in March 2022 to a low of 17 per cent in October of the same year. Yet just two months later, the import share had jumped to 71 per cent once again.
Over the course of 2023, nothing changed. Between January-July, the Russian import share averaged at 60 per cent – and there are no indications that this will change in the 12-month outlook. Meanwhile, the share of Russian gas imported by EU member states collectively averaged at 9 per cent.
Gas accounted for 21.3 per cent of the energy mix in 2022, roughly in line with the EU average. It is primarily consumed by the industrial sector (40 per cent) – the heartlands of which are in Upper Austria, Lower Austria and Styria – and power and heating plants (30 per cent).
Austria’s dependence on Russian gas is of a quasi-institutional nature. The flagship energy company, OMV, is the oldest trading partner of Russia in the half of Europe that was not under Communist control. In 1968, it famously signed a long-term gas supply contract with the Soviet Union.
It was a natural partnership for OMV, which was established in its original form in 1946 by the Soviet Union. In 1956, amid the withdrawal of the USSR from Austria, it was reconstituted in its current form, with its name changed from the “Soviet” to “Austrian” Mineral Oil Administration. However, most of its Soviet-appointed management remained in place.
The government at the time, which was formed by a rare absolute majority of the centre-right People’s Party (ÖVP), was the first of a long line that was uninterested in assuming political responsibility for the gas supply. In 1967, the Vice-Chancellor and Trade Minister, Fritz Bock, said that negotiations for the contract by OMV (then entirely state-owned) was “a matter for the private sector”.
Not everyone was comfortable with this laissez-faire approach. In 1971, a senior ÖVP member of parliament, Siegmund Burger, expressed concern: “We have based our energy supply entirely on the presumption of peace. Do we collectively refuse to believe that there could one day come a time of crisis? Our energy supply would probably collapse!”
Amid the energy crises of the 1970s, the Social Democratic Party (SPÖ) attempted to diversify gas suppliers, with Chancellor Bruno Kreisky leveraging the strong relations he had cultivated with non-aligned states such as Algeria to achieve this. This met with limited success, but headway was made elsewhere, with Austria signing a contract with Norway in 1986; an outcome that resulted from a combination of international pressure and the desire of the ÖVP-dominated regional energy suppliers to undermine the dominance of the SPÖ-aligned OMV.
Yet the tendency to outsource energy policy to private sector interests persisted. It was a stark contrast with the electricity sector, which is managed at different levels by the federal, state and municipal governments. Gas remained in its own world, left to private interests despite the revolving door between OMV and the government.
The sanguine approach of successive governments was demonstrated in the 2000s, when OMV joined with four other energy companies to invest in the Nabucco pipeline. This was to supply Turkey, Romania, Bulgaria, Hungary and Austria with natural gas from the Black Sea, covering up to half of market demand. When the project began to struggle in 2009, the Minister of Economy, Reinhold Mitterlehner (ÖVP), responded to a question on the matter by saying, “This [concerns] a project that is not one of the state or states, but rather a project financed by the private sector in which there is admittedly an EU interest.”
This passivity served to strengthen the Russian gas lobby in Austria. The dependence remained firmly entrenched. In 2018, OMV and Gazprom extended the gas supply contract from 2028 until 2040. Chancellor Sebastian Kurz (ÖVP) and Russian President Vladimir Putin attended the signing ceremony in Vienna. The logic of the extension was unclear given that gas was to decline as a share of the energy mix, with OMV shifting its commercial model towards petrochemicals.
Where governments did succeed in strengthening energy security was in the doubling of storage capacity to 95.5 terawatts between 2007-2022. Ironically, their motives were arguably cynical. Over this period, Austria became a European gas hub, receiving Russian gas via the OMV pumping station in Baumgarten before shipping it to other markets in the EU.
Ultimately, the political will to act on the warnings of Cassandras such as Burger never materialised – until it was too late. Russian gas imports to Austria collapsed in the months following the invasion of Ukraine, but this did not reflect active measures taken by the coalition government of the ÖVP and Greens.
Indeed, the drop was a result of Gazprom curtailing its supplies to Austria by two-thirds. That prompted a rush by the government to secure alternative supplies, which it procured mainly from Norway. Once the reserves were full, imports from non-Russian sources dropped off. Meanwhile, supplies from Gazprom continued, increasing again as a relative share of total imports.
Come January 2023, Gazprom normalised gas flows to Austria. That calmed the nerves of Austrian stakeholders. While there is an understanding that the Gazprom quandary must be resolved in the medium- to long-term, the immediate sense of urgency was lost.
From that perspective, the government has done no small amount. It is envisaging attaining energy independence by 2027. As a stopgap, strategic gas reserves have been built up to the point that price spikes arising from supply shortages may be blunted considerably. OMV has reserved transport capacity through Germany and Italy that will cover 45 per cent of market demand with non-Russian gas until September 2026. A proposed amendment to the Gaswirtschaftsgesetz (Gas Economy Law) requires that energy suppliers prove that they have sufficient gas reserves to cover protected customer categories for 30 winter days; in the case of Russian-supplied gas, this rises to 45 days.
The government is also encouraging reduced gas consumption as a means of lowering its share of the energy mix. Over the winter of 2022/2023, it oversaw a reduction in the monthly gas consumption of 15-27 per cent year-on-year, helped in part by milder temperatures.
For the longer term, the government has other irons in the fire. In July, OMV signed a 10-year contract with bp, which will see 1 million tons, or 14.5 terawatts, of liquified natural gas (LNG) supplied to Austria per annum from 2026. In the previous month, OMV announced that it would proceed with €4 billion in investments to finally develop the Neptun Deep deep-water offshore project in the Black Sea, which is a joint venture between OMV’s Romanian subsidiary, OMV Petrom, and the Romanian state-owned Romgaz. Neptun Deep is expected to begin production in 2027, with volumes reaching 10-11 billion cubic metres of gas per year by 2030. The gas will be transported via pipeline to Hungary and Austria.
Furthermore, in November 2022, Austrian Chancellor Karl Nehammer was hosted by Croatian Prime Minister Andrej Plenkovic at the LNG terminal on the island of Krk. There, a thinly veiled game of realpolitik played out. Plenkovic agreed that pipeline capacity from the terminal may be expanded to supply the Austrian market. Days later, Nehammer announced that Austria would drop its opposition to Croatia’s application for membership of the Schengen area of free movement, suddenly deciding that his government was satisfied with the quality of its external border controls. Romania and Bulgaria enjoyed no such favours.
The government also wishes to build domestic production up to a 8 per cent market share. This will be possible through the discovery of new reserves. In July, OMV announced that it had found the largest reserve of gas in Austria in 40 years; namely, some 48 terawatts in the Lower Austrian town of Wittau, which should be tapped within five years. Furthermore, the government is hoping to use the green transition as a means through which to reduce the share of gas in the energy mix more generally. The Greens, in particular, are strongly pushing for massive investments into renewable energies.
Such projects will be the foundation of Austria’s energy security in the long-term. However, these sources will not be tapped until at least 2027. That assumes that the accompanying infrastructure will have been built, which is not a given. Political risks may frustrate implementation, having long plagued the realisation of Neptun Deep, for example.
Neither are supply partners necessarily reliable. For example, in October 2022, Chancellor Nehammer led a delegation to the United Arab Emirates (UAE). Nehammer claimed to have secured a full ship of LNG, which would provide supply to 65,000 households through the winter of 2023/2024. OMV, one-quarter of which is owned by the Abu Dhabi National Oil Company (ADNOC), later clarified that the agreement was a declaration of intent rather than a fait accompli. And as of this summer, the shipment has not yet arrived.
Unwilling to stay, unable to leave?
The elephant in the room is that Austria is continuing to pay Gazprom billions of euros annually. The CEO of OMV, Alfred Stern, told the Financial Times that it will continue to do so for as long as Gazprom is prepared to meet its contractual obligations. From a legal perspective that may be entirely valid, but for Ukraine, which is attempting to defeat a devastating foreign invasion, it is remarkably tactless.
The unfortunate reality is that the Austrian government is paying the price of a one-sided contract with Gazprom. Although the content of the contract is classified, it is widely known that it does not include an exit clause. It also contains a “take-or-pay” clause, which obliges OMV to pay 90 per cent of the agreed price of the contracted volumes if it refuses them. This entails that OMV must pay Gazprom close to the full amount of the contracted gas volumes regardless of whether it accepts them or not. So, OMV may as well accept them rather than gift Moscow billions of euros.
Theoretically, OMV may seek to annul the contract through international arbitration proceedings. It has even been suggested that it do so together with other European energy companies. Nonetheless, this process would last many years. And if OMV simply refused to pay, if it then lost the legal case, the government would be liable to compensate Gazprom up to €30 billion.
Although other European energy majors are engaged in international arbitration with Gazprom, these lawsuits concern the suspension of supplies that resulted from Moscow’s decision to demand payment in roubles from some countries, as well as the destruction of the Nord Stream 1 pipeline.
These may pave the way for the termination of long-term supply contracts with Gazprom. In November 2022, the Stockholm arbitration court ruled that the Russian government’s demand that Gazprom be paid in roubles by Finnish state-owned energy group Gasum constitutes force majeure, which prevents Gazprom from meeting its contractual obligations. Therefore, Gasum may legally terminate its contract with Gazprom, which it duly did in May 2023.
This creates a legal precedent for energy companies in similar situations, but not for OMV, as the Russian government ultimately agreed that OMV may continue to pay Gazprom in euros. That concession secured the gas supply at the time, but it has become an albatross around the neck of OMV and the Austrian government.
Yet the status quo will almost definitely change from 2025. The natural gas that Austria receives from Gazprom now flows entirely through the pipeline that passes through Ukraine. The transit agreement that Ukraine has with Russia is set to expire on 31 December 2024 and, despite the fees it brings Kyiv, Ukrainian Energy Minister Herman Haluschenko said that it was very difficult to imagine that negotiations for its renewal would be successful.
There is anxiety in Vienna about the consequences of this. The head of the Austrian energy regulator, E-Control, stated that non-renewal of the agreement would result in price increases, but spikes were not likely due to Austria’s strategic gas reserves.In the end, expiry of the transit agreement may do the Austrian government a favour, as it could be interpreted as force majeure. Nonetheless, the risks are high: even Gasum, with its entitlement to terminate its contract with Gazprom, must still resolve questions raised by the take-or-pay clause to which it is subject.
It is possible to argue that the Austrian political and business establishment were wilfully blind to the risks posed to energy security by Gazprom. But it is probably more accurate to see this as a case of collective delusion.
Professor Herman Lechner, the deputy head of the Energy Agency, described four assumptions that formed the basis of this delusion. First, that there was no alternative to Russian gas. Second, that Russia is a reliable supplier. Third, that Russia and Austria were mutually dependent. And fourth, that Russian gas was cheap.
Events proved time and again that none of this was true. It is the case that Austria, as a landlocked country with limited natural resources, must rely on partners to diversify its supply routes. Indeed, a former board member of OMV, Robert Musilek, emphasised in a recent interview that this was attempted, citing the Nabucco pipeline and attempts to participate in the development of the Krk terminal. “But for supply contracts you not only need partners who are able to deliver but also want to,” he said.
There is also no small amount of hypocrisy in some criticisms of Austria. In having positioned itself as a European gas hub, most of the gas it imports is resold to other national markets. Once it enters the European storage system, it is no longer designated as Russian gas. This means that countries such as Germany and Italy, whose direct imports of Russian gas have collapsed, are receiving it indirectly via Austria.
Regardless of whether that justifies Austria’s failure to diversify its gas suppliers, the ultimate price was high. Since the onset of Russia’s invasion of Ukraine, Austrians have paid per head an average of €590.20 for Russian gas, according to calculations by the weekly magazine profil. That is the highest per capita level in the EU, matched only by Hungary and Slovakia. Other member states, including recovering addicts Germany and Italy, have paid a fraction of that.
Awaiting the roosting chickens
The costs of the Gazprom delusion are fuelling the populist fervour that is already potent due to widespread disaffection of the government’s management of the Covid-19 pandemic. The far-right Freedom Party (FPÖ) is profiting from this, having topped the polls for nearly a year with up to 30 per cent of the vote. The FPÖ, which is an ally of President Putin’s United Russia party, is regurgitating the gas myths that should have been discredited – but still have currency with large swathes of the electorate. It is pinning the blame for high prices on EU sanctions, which it hopes to oppose as part of a Central European alliance of Hungary’s Viktor Orban and, if elected, Slovakia’s Robert Fico.
Parliamentary elections in Austria are scheduled for autumn 2024 at the latest. If the FPÖ maintains its lead, its only viable route into government would be through partnering with the ÖVP. Fearful of entering opposition for the first time in 37 years, the ÖVP may very well decide to bite the bullet, calculating that it can control the FPÖ, as it did in 2000-2005 and 2018-2019.
In an optimistic scenario, this will prevent the FPÖ from protecting Gazprom’s interests in Austria. However, the regional clientele of the ÖVP are increasingly impatient with sanctions and hope to rely on Russian gas pending the availability of new supplies. That may create scope for policy overlap between the ÖVP and FPÖ.
On the other hand, if Ukraine and Russia do not renew their transit agreement, even the FPÖ may have no choice but to accept the new status quo. Whatever the case, the days of gas being a matter for the “private sector” are over.
Marcus How, Head of Analysis at VE Insight
This article is cross-posted with bne IntelliNews
For future questions, please contact email@example.com
*Photo credit: On June 1, 1968, Austria became the first country in Western Europe to sign a gas contract with the Soviet Union. / OMV