EU Energy Union: High-stakes Supply Security Document Leaked

on February 12, 2015 at 12:01 PM
Europe Fears Cuts In Natural Gas From Russia

A memorial to the first natural gas fields in Ukraine, drilled in the 1920s when the area was part of Poland, stands near the Dashava natural gas facility on September 18, 2014 in Dashava, Ukraine. The Dashava facility, which is both an underground storage site for natural gas and an important transit station along the natural gas pipelines linking Russia, Ukraine and eastern and western Europe, is operated by Ukrtransgaz, a subsidiary of Ukrainian energy company NJSC Naftogaz of Ukraine. Ukraine recently began importing natural gas from Slovakia through Dashava as Ukraine struggles to cope with cuts in gas deliveries by Gazprom of Russia. As Russia has cut supplies many countries in Europe that rely heavily on Russian gas fear that Russia will increasingly use gas delivery cuts as a political weapon to counter European economic sanctions arising from Russian involvement in fighting between pro-Russian separatists and Ukrainian armed forces in eastern Ukraine. (Photo by Sean Gallup/Getty Images)

Last week, the European Commission held its first orientation debate on the Energy Union in the college of the Commission. “It was the first time that all commissioners together had an in-depth discussion on the issue. And I can tell you that there was very broad agreement on the main features of the future Energy Union, an Energy Union that puts citizens at its core,” the Vice-President for Energy Union Maroš Šefčovič said in his opening speech at the Energy Union Conference in Riga (Latvia).

Thanks to Alice Stollmeyer – an excellent source for the latest transpiring news on EU energy and climate policy in Brussels – who granted access on her website to an internal Commission discussion paper on the Energy Union (dated January 30) leaked to her, we are in a position to catch a glimpse of the preliminary outline of the future EU Energy Union. According to Ms. Stollmeyer, the EU Commission is expected to adopt this ‘Framework Strategy’ on February 25.

The discussion paper starts out explaining why the EU needs an Energy Union and lists a slew of ‘ills’ as they relate to energy procurement in the EU:

“We import 53% of our energy, which makes us the largest energy importer in the world, at a cost of 400 billion euro a year. Many Member States – especially those dependent on a single supplier or a single supply route – remain too vulnerable to supply shocks. 90% of our housing stock is energy inefficient. 94% percent of transport relies on oil products, of which 90% is imported. Collectively, we spend almost €110 bn per year – directly or indirectly – on energy subsidies, often not justified. Our energy infrastructure is ageing, and often not adjusted to the increased production from renewables. There is a need to attract investments, but the current market design and national policies offer insufficient predictability to potential investors. Our internal energy market is far from complete. Energy islands continue to exist and many markets, for instance in South-East Europe, are not properly connected to their neighbours. From 2012 to 2013 post-tax electricity prices for households increased on average 4.4%, while at the same time wholesale prices fell considerably. (…) For European companies, electricity prices are 40% above the US, and gas prices are even three to four times higher than in the US, which impacts the competitiveness of our industry, in particular our energy-intensive industries.”

This extensive list leads to only one conclusion; namely, that “Europe has no choice: if it continues on the present path, the unavoidable challenge of shifting to a low-carbon economy will be made harder by the economic, social and environmental costs of having fragmented national energy markets.” As a consequence, the “move away from a fragmented system characterized by uncoordinated policies based on narrow national interests, leading to national barriers and energy-isolated areas,” is inevitable.

So, what is “The Way Forward” in the Commission’s view? These are actually the most interesting paragraphs in the leaked discussion paper. The ‘energy security’ dimensions that need to be worked on read more like a ‘memorandum of understanding’ with respect to well-known, persistent but often latent issues, than a real actionable strategy. It begs the question of why something will get done this time, given these issues have persisted for at least a decade.

First, it should not come as a surprise that “energy security depends on solidarity and trust between the Member States.” The paper states that “[j]oint approaches in the field of energy can make all parts of the European Union stronger, for instance in case of supply shortages or disruptions.” In general as well as in theory, that makes perfect sense. However, it is not conducive to solidarity if Germany pays effectively lower prices for Russian natural gas – admittedly because of long-term supply contracts – than Eastern European countries.

Furthermore, the paper recognizes that European gas supply needs to be diversified – perhaps modeled along the lines of Northern Europe’s ‘multiple suppliers structure’: “Work on the Southern Gas Corridor must be intensified to enable Central Asian countries to export their gas to Europe. We will equally explore the full potential of liquefied gas, including as a back-up insurance.”

Leaving the project funding part aside, the fact that the Southeastern flank of Europe is very much in geopolitical flux is often underappreciated. Greece is attempting to – at the very least – emancipate itself from Brussels and the EU’s tentacles with regard to Greek post-financial crisis economic policy, which includes stringent labor-market reforms and austerity. Additionally, Turkey’s EU membership has hung in the balance, with Ankara left to ponder its “candidate country” status for over a decade.

The Southern Gas Corridor

roman Eu gas1Source: Jamestown Foundation; Map used does not intend to make a declaration as for the ‘status’ of Crimea.

Turkey, in particular, becomes a pivotal country for Europe’s future energy supply security if the decision is made in European capitals and Brussels that a good pragmatic business relationship with Russia after the Ukraine crisis is incompatible with Western values. However, the EU-membership leverage that Brussels used to have may have silently crept over to the Turkish side. To make matters even more complicated, Russia seems to have finally started to openly court Turkey as an energy partner. Russia as a crucial global energy producer and supplier carries substantial weight in a country projected to be next in line among countries which could realistically catch up with the so-called BRIC countries. Turkey has every intention to “take advantage of [the] hunger for energy in Europe and at home.”

Note, if the EU has to pick a side between energy producing and transit countries, choosing the former may prima facie be the better play. In the paper, the EU Commission states, however, that it intends to pay particular attention “to upgrade the Strategic Partnership on energy with Ukraine, an important transit country with considerable energy efficiency potential.”

Remember, compressor stations on Ukrainian territory are crucial components of the natural gas transport system in order for Russian natural gas to reach the EU. It is more likely than not that one day with alternative pipeline infrastructure in place – maybe from Russia via Turkey to the EU – Ukraine’s current status as important transit country will significantly diminish.

Ironically, while Russia seems to already actively “reframe” and pursue this medium-term shift in its gas export strategy to Europe, the EU will probably still have to figure out when the appropriate time is to reframe its energy relationship with Russia: “At the appropriate time, we will consider reframing the energy relationship with Russia based on a level playing field in terms of market opening, fair competition, environmental protection and safety, for the mutual benefit of both sides,” the paper states. To put it into perspective, it would not be too far-fetched to compare Europe’s critical energy relationship with Russia to America’s pragmatic energy relationship with Saudi Arabia – especially before the advent of the US shale boom and even today.

As for Greece, if for no other reason than its geostrategic location linking supplies from the Caspian Sea basin – and potentially at a later stage supplies from the Eastern Mediterranean and Middle East – to the EU, Greece is critically important for the EU’s energy supply security as a pivotal transit country. In the cases of both Greece and Turkey, strategic foresight seems to dictate that these future pivotal transit countries enjoy upgraded strategic partnerships on energy with Brussels.

Instead, the discussion paper mentions the Ukraine in this regard, and – to be clear – this makes sense at least in the medium term until alternative pipeline infrastructure is available to bypass the Ukrainian territory. Ideally, Greece should stay within the EU and in the case of Turkey the process to join the EU should be fast-tracked if the latter still wishes to do so.

However, both Greece – in desperate need of further budgetary funding – and Turkey – with likely growing future energy needs due to demographic trends and economic growth – may find themselves entangled in Russia’s ‘Greater Black Sea region, effectively able to play gatekeeper to Central Asia and the Caspian energy resources.

Oil and Gas Deposits in the Caspian Sea Basin & the Persian Gulf

roman Eu gas2 Source: PFC Energy via Stanford University Libraries

Lastly, European Commissioner for Climate Action and Energy Miguel Arias Cañete recently made the following comment at the Atlantic Council’s Global Energy Center in Washington DC: “when it comes to energy, do not put your faith in autocratic regimes.” Interestingly, the following EU statement of intention appears to be at odds with Cañete’s view: “As part of a revitalized European energy and climate diplomacy, the EU will use all its foreign policy instruments to establish strategic energy partnerships with producing and transit countries such as Algeria and Turkey; Azerbaijan, Turkmenistan and Iran; the Middle East and Africa.” Some of those countries feature political systems that could be described as autocratic.

Overall, some of the “mutually-reinforcing and closely interrelated dimensions” in the Energy Union strategy require reassessment. While every effort should be made to finally ensure the realization of the ‘Southern Gas Corridor’ in order to diversify away from a potential Russian energy threat, it could turn out to be myopic to not properly understand the ‘energy security value’ of Greece and Turkey as future transit countries potentially replacing the Ukraine. It could be even worse to allow those countries to drift into the Russian sphere of influence, which would further complicate the EU’s future energy supply security situation.