The Future of Energy Security in Europe

A discussion with Tomas Maltby (University of Manchester), Andrew Judge (University of Strathclyde), and Jack Sharples (University of Glasgow). This discussion took place on April 1st 2012 during the BASEES Conference at Fitzwilliam College, Cambridge.

Interviewer: Hayden Berry

I would like to start by asking you all what the future of energy security in Europe is?

Tomas Maltby: It is totally uncertain. There is uncertainty in the security of supply as well as in the security of demand. And it is really impossible to know, even if you look at the national strategies of some of the member states, Poland and Bulgaria for example, as well as the other new member states, what their future gas demands will be. What about the ambitious objectives they have to diversify their energy mix? Will the potential shale gas revolution be justified by the huge sums of money that will be invested, although the actual commercial exploitation always another few years down the line. This could be a revolution that really changes things, as could the enhanced use of LNG (liquefied natural gas – editor's note) in Poland the Baltic countires in gas consumption, as well as renewable and nuclear energy. The uncertainty of supply has been demonstrated by Russia in 2006 and 2009, and Russia hasn't guaranteed 100 per cent of the contracted gas for the European Union as recently as February 2012. However, the security of demand from the EU side is also uncertain. How can Russia really know what the EU is going to want and plan investments accordingly?

Jack Sharples: I think the problem for Russia is not so much that EU gas demand is going to decline. There seems to be some kind of consensus that EU gas demand is going to continue rising and then peak around 2030 and then start to decline thereafter, if and when Europe moves to a post-carbon economy. But the problem for Russia is: what is Russia's share in European gas imports going to be? European gas demand is rising steadily around 0.5 per cent per year, but the EU's need for imports is rising more quickly as European gas production declines, unless we get a massive increase in shale gas production. But the fear from the Russian side is what is Russia's share of these imports going to be? We have these moves towards diversification, and so from the Russian perspective, we are currently in the middle of a transition period. Russia's traditional gas production in Western Siberia, these super-giant fields that were discovered and developed during the Soviet era, which have been the mainstay of Russia's gas production for the last several decades, have peaked and are now declining. So in order for Russia to even maintain current levels of gas production, they will to have to move into new areas, for example, north of the Arctic Circle, the Yamal Peninsula, and the offshore Shtokman project. These are very capital-intensive projects which are going to take a long time to make a profit. So from the Russian perspective, what they want to see is security of demand and security of pricing. They want to know that they are going to make back their money back when they invest in this kind of project. And the noises coming out of Europe at the moment are that the key to Europe's energy security is that it must diversify away from Russia. This is a threat to Russia's security of exports and will create uncertainty for them. This is, in fact, their biggest challenge.

Andrew Judge: I completely agree about the security of supply situation in the EU. However, there is a broader problem of political rhetoric. If you agree with the European Commission's approach to energy policy of building an internal market, diversifying sources, and making sure there is a strong, clear and regulatory framework for the trade in gas, then constant references to threats to security of supply ends up being a bit of a problem. This “threat politics”, the idea that Russia is a threat or that our supplies are insecure, does not necessarily make for good policy. This is very divisive in Europe and you get a situation in which many actors use the label “security of supply” for their own purposes: the European Commission wants to have more powers, the member states want to maintain national control over energy sources, and you have the gas industry who switch between different arguments depending on the situation. For example, industry was warning about the dangers of Gazprom buying up unbundled European energy companies in an attempt to stop some of the newer member states supporting the third package. The European Commission pre-emptively introduced a clause into the legislation to try and win the support of those member states. But at the same time, when it comes to the security of supply legislation, the gas industry argued that Russia and Gazprom should not be regarded as threats or risks, calm things down, because they don't want excessive regulation, and they don't want their activities to be monitored too much. If the different actors stop exploiting security of supply concerns for their own purposes then it may be more likely that we will be able to move towards something like a common EU energy policy.

Tomas Maltby: The fundamental friction that we still have in the EU is that the sovereignty for energy remains national. And yet all of the objectives of the European Commission and of the internal market really rely on this sovereignty being delegated to EU institutions. It is all coming to a head and the European Commission's powers are going to be tested. These powers have been growing year on year, and the gas supply disruptions in which Russia has been exposed as being unreliable have been very useful to the European Commission. The European Commission is also gaining supranational power in this policy area and the next two or three years will really start to test the extent to which member states are willing to delegate their sovereignty in this area, for the greater aim of enhanced energy security and an internal energy market. If you introduce greater diversification, you may get more competitors in the market, lower prices, stability in pricing and the stability of supplies. But at the moment, even member states such as Poland, talk the talk about solidarity and diversification from Russia, but have still been willing to sign bilateral deals with Russia as recently as 2010. The real problem is that political rhetoric at national level is somewhat divergent from what actually happens. Thus the EU is going to perhaps need to exploit and add to existing powers.

Andrew Judge: And this is probably going to continue for a good while to come although the European Commission doesn't really realise this at the moment. The EU Energy Commissioner, Günther Oettinger, recently said that he wants full control over the European energy policy because of security supply concerns, including the energy mix which has always been a conventional concern for the member states. They won't give up control on how their domestic sources are used and where they get their gas and other energy sources from. So you can see how this is going to keep going back and forth. Getting real progress is going to take a long time.

Tomas Maltby: Which, of course, all plays into the hands of Gazprom. If member states maintain divergent preferences, Gazprom will have far more leverage in pricing and securing long-temr contracts. Though susceptible to political pressure Gazprom isn't doing anything unusual, it is just a rational economic actor seeking the best conditions for itself.

Jack Sharples: I am sure that the Russian interpretation is not so much that this is all playing into Gazprom's hands, but that it just represents uncertainty. The transition and development of the EU gas market is an ongoing process and we don't know where it is going to end. From the Russian perspective, the security of exports which is based on stability and knowing what the situation is going to be in 10 or 15 years time, is somewhat absent. And that is very worrying for the Russians. The disruption in the supply of Russian gas to Europe in 2006 and 2009, and more recently in early 2012 has already been mentioned. In 2006 and 2009 these were disputes with Ukraine. It was not Russia just turning off the taps to Europe. Gazprom lost a lot of money and the dispute damaged Russia's reputation significantly. This was not a positive development from the Russian perspective which is why they have built the first pipeline of Nord Stream, and the second line is due for completion this year. And this is why they also want to build South Stream. They want to get away from being reliant on transit states. Why? Because the EU is a strategic market for them. They don't want to stop selling gas to Europe. Gazprom is a rationally economic actor: they want to sell as much gas they can for the best price they can get. And Europe is where they are going to make their money.

What does this uncertainty represent for countries like Ukraine and Belarus?

Jack Sharples: From the Russian perspective, Ukraine and Belarus are the two big transit countries. There was pretty much an 80/20 split between Ukraine and Belarus in the transit of Russia's gas exports to the EU until mid-2011, although both were characterised by uncertainty. They seem to have solved the situation in Belarus because Gazprom has now finally gained complete control and 100 per cent ownership over Beltransgaz which operates the main transit pipeline, the Yamal-Europe pipeline. Gazprom actually owns the Belarusian section of the Yamal-Europe pipeline which Beltransgaz operates through Belarus, whilst Beltransgaz owns the soviet-era gas infrastructure which includes the transit of smaller volumes. There is still uncertainty in Ukraine because Gazprom has been seeking some kind of merger, or at least asset swaps, with the Ukrainian company, Naftogaz. However, there has been no progress because Ukraine regards Naftogaz as a strategic national asset, and they don't want to give up control over it. There has been noises about whether Ukraine would cooperate with the EU, or whether the EU is going to come in and pay for the renovation of Ukraine's gas transit pipelines. But it is a situation of great uncertainty, especially with the ongoing developments in Ukraine as regards Yulia Tymoshenko who signed the gas deal with Russia in January 2009 which ended the dispute. On the Ukrainian side, she was subsequently accused of exceeding her authority as Prime Minister of Ukraine, and was ultimately jailed for signing a contract with Russia that was said to be against Ukraine's national interests. This is horrifying from the Russian perspective. But as to what the future will be with Ukraine, we don't really know. There needs to be some kind of trilateral solution between the EU, Russia and Ukraine to stabilise the situation. And this is everybody's interest: Russia wants secure transit for its security of export, the EU wants secure transit for the security of supply, and Ukraine wants to retain its share of gas transit because they get transit revenue for this. Thus it is in everybody's interest, but yet it is still characterised by tension and uncertainty.

How would you sum up EU/Russia energy relations in 2012?

Tomas Maltby: I think 2012 is going to be a huge year for EU/Russia energy relations as there are so many projects on the table just about to be sorted out: the situation with supplying and financing the Nabucco pipeline of the Southern Gas Corridor might be resolved, Russia is probably going to make progress on the South Stream pipeline this year, the Nord Stream pipeline will also be coming online pretty soon, shale gas exploration will continue, and discussions regarding nuclear energy and renewables as a future will also continue. Some uncertainty could potentially be resolved this year, and it should perhaps become clear who is going to supply the EU's energy needs and what Russia's role in it will be. But people have been saying this every year. In late 2011, the European Commission proposed nine billion euros infrastructure projects that are not necessarily commercially viable,  such as the Southern Gas Corridor, as well as other infrastructure, so in theory, there should at least be some concrete progress that will point to the future of EU energy by the end of this year.

Andrew Judge: I totally agree with that. The EU has been pushing for these things for a long time, but now they actually have some money to put this into practice, just as they did in 2009 with the first economic recovery package. Infrastructure is much more developed now inside Europe, and the latest money should improve the situation further. The Russians are also trying to reassure Europe in all kinds of other ways. This winter, Gazprom was unable to meet the extra gas demand in Europe that was caused by the extremely cold weather. It has sought to reassure European customers by stating it would build additional storage facilities in Europe. So there is a lot of effort being done to try to make sure the situation doesn’t get too politicised again. And it is only really if this happens that we will see any progress towards energy security both for the EU and Russia. Threat politics won't get us anywhere because it just leads to political tensions and fragmentation.

Jack Sharples: I would agree that 2012 is going to be an interesting year because of the projects that are in development. The second line of Nord Stream, the potential start of the construction of South Stream, as the Russia wants to start construction just before the third energy package comes into force. But, above all, what we can really say is that we are at the beginning of a transition period. The EU energy market is changing and developing, and it is something that Russia is going to have to adapt to, although it has the potential to be extremely valuable to both sides.

Tomas Maltby is a Ph.D candidate at the University of Manchester, 2009 – 2012. His focus is: Have new member states (Bulgarian, Poland and Latvia) succeeded in influencing EU foreign policy towards Russia on the issue of energy security since enlargement in 2004 /2007?

Andrew Judge is a Ph.D candidate at the University of Strathclyde and focuses on the emergence of energy security as a core concern and legitimising factor in EU energy policymaking over the past decade. He is also the co-ordinator for the Strathclyde International Relations Reading Group.

Jack Sharples is currently a PhD candidate at the University of Glasgow. His current research focuses on drivers of Russian external gas policy towards Europe, including Russian conceptions of natural gas as a strategic resource; Russian conceptions of natural gas as an economic, political and social good; and the influence of foreign policy orientations on external gas policy.