Petroleum Review

Speaking at a recent London conference on 'The New Politics of Energy: Europe in a Global Context', organised by Chatham House, energy experts, officials and politicians from around the world explained how, with rapidly changing global energy markets, the European Union is becoming more disadvantaged in coping with the coming new realities. The possession of oil and gas reserves is increasingly becoming an instrument of foreign policy for many regimes, most notably Russia - not all of them with the EU's best interests at heart - writes Alan Osborn.

Today's world energy supplies are closely linked to security, a point amplified by Dr Jamie Shea, Director of Policy Planning in the private office of the NATO Secretary General. He drew attention to the political instability of many such nations, saying there was 'a danger of an oil and gas cartel controlling political outcomes'. Traditional market factors had been replaced by state-to-state agreements that locked up the supply of oil and gas, making the market less transparent and providing less security of supply, he said. Dr Shea noted a BP finding that 75% of the world's known oil reserves were now in areas closed to traditional international commercial investment. The EU had made little progress in reducing its energy dependence and this, in turn, 'will constrain our ability to pursue other foreign policy objectives such as the fight against terrorism,' he said.

Derek Taylor, Advisor to the Energy Directorate General at the European Commission (EC), said that on current projections the EU's energy dependence on oil and gas fossil fuels would remain at around 60% even by 2030 and this was 'not sustainable'. It is this concern that has been fuelling the Commission's pressing desire to develop an internal energy policy in the EU, especially given that its pan-European energy legislation was 'incomplete', there was a lack of cross-border capacity and often 'chronic congestion' at interconnectors. With an eye to the hottest topic on the EU energy agenda at the moment, Taylor stressed that Brussels 'very strongly believes' that the first step had to be the ownership unbundling of electricity generation and transmission assets. Furthermore, this had to be accompanied by a much stronger role for the national regulators, which had to be coordinated at the EU level.

Without such an overarching policy there are real risks, suggested Dieter Helm, Professor of Energy Policy at Oxford University and energy advisor to a number of governments, who said the traditional objective of cheap energy had now given way to the new paradigms of climate change and security of supply. He warned there was a possibility that Europe would now go the national route, perhaps through bilateral deals between the Russian company Gazprom and individual EU members like Germany, Italy and France. This would be 'full of harm', he noted. An energy policy for Europe needed European planning, regulation and institutions, Professor Helm insisted. The external challenges for the EU now were low investment, the rise of China and India, the adverse development of the supply/demand balance and Europe's growing gas dependency.

So, what should the EU do? Professor Helm told delegates that the first priority was completion of the EU's physical internal energy market infrastructure, which had to be developed on European rather than national lines. There had to be a bringing together of national grid operators and this meant there had to be unbundling among other things. The creation of European strategic storage capabilities was necessary, although he agreed this would be resisted by companies because it would mean lower prices (restricted interconnection capacity effectively constrains supply and this drives prices up in the face of strong demand - Ed).

Professor Helm called for the setting up of institutional architecture in Europe and the presentation of a common front (including Germany) to Gazprom. However, there are pressures against such a policy - he noted there was a special 'long, deep and historic' relationship between Germany and Russia, and that Germany had much to gain from becoming the 'core component' of Gazprom's attempt to penetrate European markets. The EU would have to work hard to see that a European approach prevailed in this sector, he said.

Threat to EU supplies
The threat to EU supplies posed by the Russians - a recurring theme at the conference - was presented in forceful and dramatic terms by Konstantin Simonov, General Director of the National Energy Security Fund, an independent Moscow research group focusing on the problems of political and investment risks in the energy industries. Energy was Russia's 'trump card' and an energy breakthrough was 'the main task of Russian foreign policy', he told the conference.

Simonov, a frequent international speaker on oil and gas issues, said Russia's current aggressive policy reflected the country's appreciation that its negotiating position may be stronger now than it will be in three to four years' time. Indeed, it was Gazprom's ambition in the short term to build relationships with Germany and Italy in order to create two new gas gates to Europe - the North Stream to Germany and the Blue Stream to Italy. 'After 2008, the necessity (for Russia) of cooperation with western partners will increase sharply,' he said.

Between 2010 and 2011 the Russian oil production situation would worsen because of the expense of geological prospecting and the development of green-field sites, weakening its position. At the same time, all resources in the gas industry would be needed to meet Gazprom's export contracts and the gas supply situation on the Russia domestic market 'will be very serious', causing significant political problems. It was Simonov's view that Gazprom would put its export commitments to Europe above the demands of its domestic market, but clearly this would be an uncomfortable position.

As a result, Simonov said Russian foreign policy in the short term would be devoted to ensuring political support for the new pipeline projects, to help Gazprom prepare for future difficulties, but also convincing the EU of the safety and reliability of Russian companies in upstream European roles. There would also be 'stick' as well as 'carrot', with Russia 'blackmailing Europe with China' export plans to shore up its short-term negotiating position and keeping central Asia in the Russian zone of political influence.

In remarks that Chatham House officials regarded as 'ironical', Simonov said President Putin's ambition was to become CEO of a multinational oil and gas corporation when he retired from the Russian leadership next year. He suggested that present Russian government policy was dedicated to creating an 'energy super state', with Gazprom, led in due course by Putin, as the leading world player in energy markets.

Keynote address
The conference keynote address was given by Alistair Darling, UK Trade and Industry Secretary, who echoed the view of others in identifying climate change and security of energy supply as the main challenges of today. Without predicting the content of the UK government's Energy White Paper (subsequently published in May), Darling said Britain, like others, faced growing competition for energy. However, there was also a particular problem for the UK in the form of declining reserves and the fact that a third of power stations were coming offline in the next 15 to 20 years. 'We believe we must ensure that we continue a diverse mix of energy supplies, get international markets working right, improve UK infrastructure as well as getting the most out of our North Sea reserves,' he said.

Darling stated that the government gave its full backing to the EU's new Energy Action Plan and was dedicated to finding a European solution to looming problems of supply. This was widely welcomed, although to the disappointment of some delegates, he mentioned nothing about nuclear power.

More candid views
Other speakers were more candid. John Mitchell, Associate Fellow at Chatham House, felt that nuclear power had now 'come out of the closet'. It was clear during proceedings that, for both strategic supply considerations and environmental reasons, nuclear power was now experiencing what Dr Thomas E Shea, Chief Non-Proliferation Specialist at the Pacific Northwest Center for Global Security, termed a 'renaissance'.

Dr Shea said that reactor construction was now being actively considered again in the US for the first time since the Three Mile Island accident in 1979 and there were now plans for 34 new reactors being considered. Similarly in Europe, there was now a lot of new positive thinking about nuclear power and 'at least the beginnings of a (pro-nuclear) European position', according to Annalisa Giannella, Special Representative of the General Secretariat of the EU Council of Ministers.

Published: European energy policy, July 2, 2007