Energy Security and Current Developments in the Russia-EU

Energy Relationship

Jack SharplesUniversity of Glasgow

Introduction

Aim: To discuss European and Russian approaches to the concept of energy security, and the role of energy security in current developments, including:

1) Transit corridors (Nord Stream, South Stream, Nabucco)

2) Gazprom in Europe following the launch of the EC antitrust enquiry

3) EU-Russian energy security in light of the political changes in Russia

Overview of Russia-EU Energy Relationship

• Soviet Union and then Russia a reliable supplier of gas to Europe for several decades

• Expansion of European Union in 2004 changed the level of overall EU dependency on Russian gas

• Energy Dialogue since 2000• In 2010 Russia exported 152bcm to Europe (EU-27,

Turkey, Switzerland, Balkans) and 66bcm to FSU (not inc. Baltic States)

European Conceptions of Energy Security (1)

• EU is a net importer of energy, relying on external supplies for c. 53% of gas consumption

• Russia supplies 40 percent of EU gas imports• Russia therefore supplies just over 20 percent of EU

gas consumption• But the actual dependency of different EU member

states varies greatly• For Europe energy security means security of supplySource: www.energy.eu

European Conceptions of Energy Security (2)

• Delivery – Are the supplies reliable?• Volume – Can we purchase as much as we need?• Price – Can we afford these supplies?

European Policies to Preserve Its Energy Security

• Diversification of supply routes (Nord Stream, Nabucco)

• Diversification of suppliers (increase LNG imports)• Development of internal energy market• Challenge to long-term contracts and aim for more

flexible pricing formulae• Limit overall gas consumption through energy

efficiency and increase in renewable energy

Russian Conceptions of Energy Security (1)

• Russia is a net exporter of energy• EU accounts for 69 percent of Russian gas exports,

with almost 30 to CIS and small amount to Asia-Pacific region

• Energy accounts for 40% of Federal Budget revenue and 20% of GDP

• Russian energy security is based on security of exportSource: www.gazprom.com

Russian Conceptions of Energy Security (2)

• Delivery – Are our export channels reliable?• Volume – Is the demand for Russian gas stable

and sufficient?• Price – Is the price for Russian gas stable and

is it high enough to make capital-intensive projects profitable in the long term?

Russian Policies to Preserve Its Energy Security (1)

• Diversification of supply routes in order to avoid unstable transit countries (Nord Stream and South Stream)

• Diversification of export markets (LNG from Sakhalin, pipeline gas to China, new markets in Europe)

• Long-term contracts to guarantee long-term returns on initial investments, with take-or-pay clauses to ensure sales volumes

Russian Policies to Preserve Its Energy Security (2)

• In such long-term contracts the gas price is linked to the oil price with a time lag of 6-9 months and is not based on supply and demand, or the cost of production

• Investment in, and control over, transit capacity and downstream direct sales to consumers in other countries, in order to guarantee reliability of delivery and stability of demand

European Perceptions of Russian Energy Policy

• Soviet Union/Russia longstanding reputation as reliable supplier to Europe

• Combination of price increases, EU expansion, increase in disputes and politicisation of energy

• Influenced by perceptions of Russian foreign policy and assertiveness on world stage

• Financial crisis shifted the balance of power and over the last two years relations have been much improved

Russian Perceptions of Russian Energy Policy

• EU energy policy non-existent prior to mid-2000s• Financial and reputational losses in January 2006

were a big shock to Russia• EU diversification of suppliers and uncertainties over

future gas demand are a threat to Russia’s energy export security

• Russian companies, specifically Gazprom, excluded from European market

• European attempts to reduce gas prices also concerning for Russia

The Third Energy Package and the ‘Gazprom Clause’

• Third Energy Package: EU attempt to separate production, transportation, and sales of gas

• Must be separate companies, or separate management, at each level

• EU hopes that Competition at each level will reduce prices and protect consumers

• ‘Gazprom clause’: Non-EU companies operating in EU must also act according to EU laws and regulation

Transit corridors and their prospects

• Nord Stream already reality• South Stream: Real project, or just pressure on

Ukraine? Answer in 2012• Nabucco: European project but delayed and lacking

gas to fill the pipeline• Nord Stream and South Stream will reduce Russian &

European dependency on Ukraine/Belarus• Nabucco European attempt to reduce dependency

on Russia

Gazprom and the EC Antitrust Enquiry (1)

• On 27-28 September European Commission antitrust inspectors raided approximately 20 companies in ten EU Member states over suspected anti-competitive behaviour relating to gas supply contracts

• Target: Gas contracts between European energy companies and Gazprom

Gazprom and the EC Antitrust Enquiry (2)

• Similar investigations were conducted in Western Europe between 2007 and 2010

• Raids coincide with EC legal action against 18 EU Member States for failure to implement Third Energy Package

• Concerted action against Gazprom, or effort to make EU internal energy market a reality?

Gazprom and the EC Antitrust Enquiry (3)

The future for Gazprom in Europe – A choice:

1) Gazprom will have only minority stakes in European gas transit infrastructure and energy companies which sell gas directly to consumers

Or

2) Gazprom to lose its monopoly on gas exports, and other Russian energy companies to play a role in gas transport and gas sales in Europe

EU-Russia Energy Security and Political Changes in Russia

• Not a great change in energy policy – Putin remained influential as PM and no dramatic change in policy 2008-2011

• Importance of language, rhetoric, and trust in energy security

• Medvedev presented ‘friendly face’ to Europe• Will PM Putin continue to use friendly language, or

will he take a more strident tone in protecting Russia’s interests?

A Problem of Perception?

The Russian View?

“Transcontinental Export Gas Pipeline: Urengoy-Uzhgorod”

The Russian View?

“The gas for export will be right on time!”

http://www.youtube.com/watch?v=A7RD5ONjv8M

(REN TV 2nd January 2009)

Thank you for your attention

Interactive session on energy security

• You are an EU-Russia Commission on Energy Security• Two groups: EU and Russia• 3 press releases (new pipelines; EC antitrust inquiry;

political changes in Russia)• 5 proposals for improving energy security in Europe• Read, debate, and vote on proposals• Demonstration of how EU and Russia may view same

issue differently, and of areas in which EU and Russia can cooperate