Examination of Witnesses (Questions 100-114)
PROFESSOR JONATHAN
STERN AND
MR JOHN
ROBERTS
17 MARCH 2009
Q100 Mr Borrow: Following on from
that, because it raises the question as to whether the EU needs
to develop an EU energy policy, given what you have said in terms
of the difference between one part of the EU and the rest. If
the EU does need to develop an energy policy should that be one
that diversifies away from dependence on Russian energy? If the
EU wants to do that, how can the EU develop a more diverse energy
policy which is not dependent upon Russia? What are the main planks
for that policy?
Mr Roberts: I do not think you
can end dependence on Russia. I think you can reduce the level
of dependence on Russia. To put it bluntly, Russia is the world's
biggest gas exporter and the European Union is the world's biggest
gas importer and they live next-door to each other. The logic
is a partnership. This is where I think I move to disagree with
Jonathan. It makes sense to insist on good and smooth transit
across Ukraine because repairing the pipelines, restoring the
pipelines, improving the pipeline infrastructure in Ukraine comes
a lot cheaper than either €15 billion or so investment in
Nord Stream or a similar investment in Russia's proposed South
Stream project. For the record, I have to say that I think the
Nord Stream anyway will go ahead—it is too late for the
Russians and the Germans to pull back. That will be built. There
is pipe on order. But South Stream I think is very much a classic
example of a pipeline that brings little or no new supplies of
gas onto the market, so therefore does not improve Europe's energy
supply system per se. It does, I would grant, diversify Russia's
delivery options. But Europe certainly does need a coherent energy
policy. It has one, to the extent that it is promoting energy
efficiency. The 20-20-20 plan will help reduce what would have
been the rate of acceleration of gas demand. Indeed, if you look
at one extreme, there are even beginning to be suggestions that
the need for European gas imports under certain circumstances
could decline. The point is simply that we live in a different
era in terms of gas demand assumptions today than we did a year
ago, and that is because of recession. Also, the European Union
needs to do two things that it is doing. The first is greater
integration of existing European networks, improving gas connections
that would enable the states that are 100% dependent, or close
to that, on Russian gas supplies to have diversified options.
Second, to diversify import supply routes for Europe as a whole
by accessing new sources of supply. That is why there is such
focus in the EU at the moment on the Nabucco pipeline. That would,
as it were, create a route between Turkey and the heart of Europe,
and allow any country capable of accessing the Turkish market
the ability to transit through Turkey to the heart of the EU.
It also is a reason why the EU is very strongly in favour of the
Italy-Greece-Turkey interconnector, which is primarily designed
to allow gas to flow from the Middle East or probably Caspian
suppliers to Italy but which in a crisis could be used in the
other direction to allow gas from North Africa to transit Italy
and then head into the Balkans to alleviate the pressure in the
event of a crisis. So there is a coherent EU policy. What is required,
of course, is the implementation of that policy. I think there
is a greater effort at that than I have ever seen before.
Professor Stern: I have to say
I am a veteran of over 30 years of looking at EU energy policy
statements. The EU could never agree and implement an energy policy
when it had far fewer members than it currently does. Very briefly,
because this is not really our subject today, I feel that the
EU is split down the middle, between the old Member States who
are largely prioritising carbon reduction and the new Member States
who are largely prioritising security of supply, by which they
mean reducing dependence on Russia. I have to say that while I
think 20-20-20 is admirable, I do not see it as being very realistic.
I think the key thing to say about diversifying away from Russia
is that this is not a new story. The reason why the dependence
on Russia is so great today is not something that anyone intended.
It happened because other sources of supply failed for one reason
or another. John's description of the Caspian situation I think
is fine, but 30 years ago I wrote a paper on pipelines from the
Middle East and Caspian region to Europe. Nothing very much happened
until about the last five years. These are very, very complicated
pipelines. If you look around the world, with the exception of
the Russian pipelines which were built in a different era, there
are almost no pipelines anywhere in the world which cross more
than two borders. Even one border is difficult. I would say let
us get our framework clear: it is going to be very difficult to
do these things. I disagree with John about South Stream because,
although I think he is right logically that we should be able
to repair the Russian-Ukrainian gas transit relationship, the
post-Soviet period suggests to me that that is not going to be
possible. Unfortunately. For a number of reasons to do with Ukraine
and the Russian-Ukraine relationship. Because 20% of Europe's
gas is dependent on that corridor, we cannot, I think, continue
to hope that things are going to come right. We are unfortunately
required to support transit diversification pipelines.
Q101 Mr Holloway: I hear what you
say in terms of how you mitigate this in the longer term, but
it strikes me as if they have got us over a barrel. What sort
of leverage do we have over them? What could we create over them?
Mr Roberts: Seventy per cent of
Gazprom's income comes from its exports to Europe; in other words,
we have seen that at a time when Russia itself, when Mr Putin
himself decided that he would not pump gas through the Ukrainian
system to Europe, the decision he took on 7 January, that had
an immediate impact on Russian revenues. You are looking at a
country at the moment that has collapsing reserves, that has limited
funds for investment, that exhibits an enormous array of problems
related with being an energy-reliant state rather than having
diversified into a broader economy. Energy is either a form of
partnership or it is a two-edged sword. This is a very complex
relationship. It is not one in which Russia can use its leverage
against Europe or its customers in Europe—and I agree that
it is a diversified position in Europe—as a weapon without
harming itself. I think the best thing that Europe can do is to
prompt Russia to take a more commercial attitude to energy, and
the way to do that is by putting Russia in a position where it
faces greater competition. At the moment it faces competition
to a degree from Norway, North Africa, indigenous North Sea, LNG.
I think we should add a new source; namely, Caspian. Put that
in and it frees up the Caspian states to sell their gas commercially,
it ends Russia's position as a monopsonist purchaser of the bulk
of Caspian energy, and at the same time it forces Russia to adopt
a little bit greater degree of competitive practice in terms of
the kind of market it faces in Europe—not wholly, not completely,
but usefully.
Professor Stern: I agree with
almost all of that, except I would say that I think it is going
to take 20 years before Caspian energy becomes anything like a
competitor for Russian energy, certainly gas, in Europe. Although
it does not affect this country, because we do not have any contracts
with the Russians, the Russians have long-term gas contracts with
every single European country. Many of them stretch out beyond
2030. These are internationally legally binding contracts with
liquidated damages, so none of this is going to change very quickly.
I completely agree with John about leverage of markets and revenues,
but the other thing that I think is possible, because it is non
confrontational, is solidarity mechanisms which were sadly lacking,
although the European gas companies did their best in January,
so that we can indicate to the Russians: "If you attempt
to threaten any single European state, whether they are an EU
state or not, we have enough infrastructure to be able to make
up the gas that you may or may not be able to withhold. I think
that is a non confrontational statement. The one thing that I
think is completely counterproductive would be to try to threaten
the Russians by trying to force them to do something, because
then they even more dig their heels in. The gas situation is far
more stable than people realise because of long-term contracts
and because of the infrastructure which exists.
Mr Roberts: Perhaps I could add
one further comment on that. I agree with that in principle, but
there was the comment from Mr Golovin, who is the Russian special
envoy to the Caspian, and newly appointed boundary negotiator
for South Ossetia and Abkhaziav, that said: "Do not presume
we will necessarily be able to deliver as much gas as you expect
in the next 10 years."[1]
It was said in Vienna in January and it was quite clearly a reference
to the fact that Russia might not be in a position to fulfil contracts.
Mr Havard: You said earlier, Mr Roberts,
that as far as the Ukraine is concerned we should "insist".
I would like to know how we "insist". There seems to
be a different view from you, Professor, which is that that relationship
is irrevocably broken anyway, so I am not quite sure how we insist
on mending an irrevocably broken process. It spills into whether
this means for NATO, red lines, what it also means for them as
well as the EU. I would like to be clear. You now seem to suggest
that the way you would insist would be the weapons of competition.
You, Professor, say that that is going to take too long and in
the meantime we will all be frozen to death, so we need to get
on with doing something else. Where is the Ukraine in this? Are
we wasting our time in relation to that or not?
Q102 Chairman: Could you answer that
briefly, because David Crausby wants to come in on this as well.
Mr Roberts: If you are asking
about the term "insist" I was meaning that we need to
make sure that both Russia and Ukraine, but particularly in that
regard, I would say, Ukraine, honours its obligations as a transit
state. The key point of that is that Ukraine is now deeply and
increasingly in debt to western societies in general to maintain
a very shaky economy. The very least it can do is to honour its
obligations on the smooth transit of gas across Ukraine.
Mr Havard: We shall discuss that with
both of the Ukraines, shall we? They are not monolithic.
Q103 Mr Crausby: Specifically on
Ukraine and its implications for EU energy supply, what are the
connections between Ukraine and Russia's wider political struggle?
What impact can we have on that? To what extent are these conflicts
involved with the use of Sevastopol port, for instance. Will there
be future negotiations on Sevastopol that will effectively make
a difference to the deal on gas supply and how Russia and Ukraine
react to each other?
Professor Stern: I am going to
leave the wider political issues to the gentlemen who are coming
next because they are certainly better equipped than me to deal
with them. I would say that any attempt to barter off gas supply
with other issues in the relationship, like the Black Sea Fleet,
has been tried before and did not work. I am not sure that it
could work in the future. I have to say—and I hope I am
wrong about this—I am deeply depressed about the short-
to medium-term future of Ukraine. Anyone I see being elected as
the next president in January 2010, makes me unsure the situation
will get very much better. At the moment we have a completely
hopeless situation where neither the Prime Minister nor the President
can agree on anything, and we have extraordinary things like armed
security services breaking into the gas companies' offices in
order to, so called, "inspect their accounts". It is
just bizarre. I want to make one comment on transit. John was
mentioning Ukrainian obligations. The Ukraine is a ratified party
to the Energy Charter Treaty and its transit protocol. The Ukraine
failed to live up to any of its obligations and, I am deeply disappointed
to say, not a single official European voice was raised in criticising
that. That has done enormous damage to the credibility of European
transit arrangements in the eyes of the Russians. That is another
reason why I am not at all confident that this transit corridor
can be a long-term going concern.
Q104 Robert Key: What practical and
strategic difference will the Nord Stream project make to this
debate?
Mr Roberts: It adds a substantial
volume of gas, 13 bcm, from the Shtokman field, as and when the
Shtokman field finally comes on line—and we do not know
because they have not yet taken the final investment decision
in the first place.[2]
Essentially, for the bulk of its projected eventual 55 bcm capacity
it simply reassigns existing gas supplies to a direct route, from
a Russian perspective, to Germany. The Russians are perfectly
entitled to spend their money on that if they want. The Germans
too. The same will go with South Stream and Russia and ENI. But
these are essentially pipelines that serve existing production
areas; they do not bring new supply online. And that is the paradox.
When you look at Nabucco, it is planned as a transit line open
to anybody to use, but in practice it accesses new sources of
supply. One is a producer's pipeline that does not add fresh production;
the other is a transit pipeline that curiously does add fresh
production.
Q105 Robert Key: Do you agree with that,
Professor?
Professor Stern: I agree with
the last part. I think it is important to say that Nord Stream
is two pipelines. The first one would bring gas from Western Siberia,
and that is over 30 bcm. The second is intended to bring gas from
the Shtokman line and when that will occur is hard to say. The
key thing is that these pipelines would allow diversification
of about 40% of the gas which flows through Ukraine, and that
would enormously assist in any kind of crisis that we might have
in Ukrainian transit. It would not be a complete answer, but it
would be an enormous assistance, because it would mean that the
Russians would be able to keep a very substantial amount of gas
flowing through a winter if there was a problem with Ukraine.
It is an important strategic issue for Europe. However, just to
go back to something I said earlier, the problem in Europe in
January was not in the North West, it was in the South East, and
therefore, the significance of South Stream is considerable.
Q106 Chairman: You said, Jonathan
Stern, in relation to Ukraine, that Europe did itself a lot of
damage by not criticising a failure of Ukraine to stand by its
obligations. It has been suggested to us in the past that the
arrangements between Ukraine and Russia were so opaque and had
so little transparency that it was very difficult for anybody
to work out what those arrangements meant and whether Ukraine
or Russia were to blame for what happened. Do you think that is
fair or unfair?
Professor Stern: I think it is
probably unfair, in this sense: people who are not familiar with
the gas business in Europe do not realise how opaque the gas business
is. In fact, we know an enormous amount more about Ukraine/Russia
commercial relations than we know about, shall we say, German/French
commercial relations. In a paper that we have just published on
the January crisis, we have the contracts, we have all of the
details of the agreements between the countries. I would say there
are some legal questions about exactly how to construe some of
those agreements, and, in particular, how to construe the January
2006 agreement. But to my way of thinking we need to set this
aside a little bit, because the Energy Charter Treaty is absolutely
crystal clear in its principles and one of its principles is:
No matter what the bilateral disagreement between two countries
are, that will not be allowed to stop the transit of energy through
either of those countries. This is what I was referring to when
I said it was enormously disappointing not to see any European
voices raised, pointing this out to Ukraine, that, whatever the
rights and wrongs of the bilateral dispute, their obligation was
to continue to transit energy to Europe.
Chairman: Thank you.
Q107 Robert Key: As some of us discovered
two weeks ago, this all looks a bit different if you are in Latvia,
Estonia or Lithuania. Are there any strategic implications for
those three rather delicate Baltic economies of the dispute between
Russia and Ukraine? Or, indeed, would it make any difference when
Nord Stream is on tap, as it were, even though it bypasses those
three countries?
Mr Roberts: It is a relatively
small gas market. It could be supplied by LNG if the three Baltic
states could agree on an LNG common terminal. If the Russians
had really been looking to security of their customers as well
as their own in developing Nord Stream, the obvious route would
have been to have channelled it onshore and through the Baltic
states, which as Members of the EU would, one would presume, have
been more inclined to honour obligations of international treaties
such as the Energy Charter. The Russians had no interest in doing
this whatsoever. They wanted direct access to the biggest single
market of all: Germany—and, if they could, control beyond
that. For the Baltic states I think there is little prospect of
diversification in emergency outside Russia beyond either an LNG
system or an ability to do without Russian gas in the form of
increased electricity interconnection with Finland, which is almost
as complicated.
Q108 Linda Gilroy: To what extent
was energy a factor in the Russian-Georgian conflict?
Mr Roberts: I am going to be as
honest as I can and genuinely say that this is a question that
is still to be determined. The reason I say that is that, on the
whole, I do not believe it was. The factors, including the nature
of governments in both Tbilisi and Moscow, the personal animosity
between President Saakashvili and Prime Minister Putin, the impact
of the more neocon side of US policy in Georgia that gave the
Saakashvili administration an overconfident belief that it was,
as it were, somehow a beacon or a bulwark of western strategy
in the region, all contributed. The role of Georgia in energy
is very important because of its position as a key transit country
through which one of the world's biggest transnational pipelines,
the Baku-Tbilisi-Ceyhan line, runs. It is a pipeline that currently
accounts routinely for around 2% of the world's trans-border flows
and is probably going to account for about 4% of it in the next
five or six years. It is already a corridor for gas supplies to
Turkey and, indeed, to part of the EU, to Greece, and has the
potential to play a much more important role as a major conduit
for Caspian gas, not only for Azerbaijan but, in time, from Turkmenistan.
It is very clear that during the course of the war, the Russians
took just about every step that they could, not to be seen to
be targeting specifically energy installations. Railway bridges
were hit. That damaged rail traffic and that stopped the flow
of rail cars but they did not go for the pipeline. The pipelines
were stopped as a result of force majeure. Then we come
to the most critical question that has the potential to turn all
of this completely on its head; namely, what happens if proof
ever emerges that the incident at the valve 30 pumping station
in Turkey two days before war broke out turns out to have had
a Russian connection.
Q109 Linda Gilroy: It seems a big
coincidence.
Mr Roberts: It is a big coincidence.
It is also true that the PKK, the Turkish/Kurdish guerrilla movement,
has stated repeatedly that it regarded the BTC as a target. I
can remember two years earlier being in South Eastern Turkey when
Turkish security forces told me that the PKK was, indeed, in that
area trying to target the line. We are left with a coincidence.
We are left with uncertainty. You have Turkish oil company officials
saying, "No, it was definitely an accident." You have
other oil company corporate officials arguing privately that they
think it was too sophisticated to have been an accident and therefore
probably too sophisticated for the PKK, and you have western diplomats,
including a diplomat from NATO nations, again taking much the
same line, that it was sabotage and that it was too sophisticated
for the PKK. We do not know and there has not been either an independent
investigation or, as far as I know, the leaked report of any internal
investigation that would shed significant light on the matter.
It is an extreme worry because you start with the presumption,
which I still hold to in the absence of any evidence to the contrary,
that essentially it was the Georgian Government that triggered
the immediate crisis by ordering the bombardment of Tskhinvali,
the South Ossetian capital, on the evening of 7 August last year.
But if it turns out that the Russians were in some way involved
in the valve 30 incident—and, as I stress, that is pure
hypothesis—it does turn that argument on its head.
Linda Gilroy: Thank you.
Q110 Chairman: Do you have anything
further to add to that?
Professor Stern: I do not have
anything further to add to that, but I would like to add a comment
on the Baltic question that I think was asked before. Particularly
for CIS countries but also for the new Member States and Europe,
with the break up of the Soviet Union, every single one of these
states repeatedly and almost forensically looked at options to
diversify their energy supplies away from Russia. Even with the
help of many, many EU studies and consultancy studies, the results
over the last 20 years have been very, very modest, and this suggests
that it is extremely difficult and expensive and we should not
expect that to change very greatly in the future.
Mr Jenkin: The energy consequence of
the Georgian conflict effectively now puts this 2% pipeline, with
great potential for much more, under Russian control. What is
the significance of that?
Q111 Chairman: Do you think it does
have that effect?
Mr Roberts: I do not think it
places it under Russian control. I think you could also argue
that, were the pipeline for some reason to come under Russian
control, the Russians would more or less simply allow it to function
but perhaps to function a bit more in their own interest. I think
there is a curious thing. Immediately the war happened, you suddenly
got something happening that had not been there before; namely
interest at the very highest level about the state of the corridor.
The Prime Minister drew attention to it in an article in The
Observer, I think on the last day of August, that there
was the need to look to the southern corridor for energy and to
safeguard it. That I think shows the kind of attitude that is
required. The one point that really does have to be borne in mind
is that, as a result of the war, perceptions—which I think
were gross misperceptions—in the Governments of Georgia
and Azerbaijan that somehow being a partner to NATO might have
implied some kind of protection from NATO, have been thrown out
the window. These are now very nervous Governments. They are Governments
that understand the great commercial advantages of having direct
access for their energy resources to European markets but that
are also concerned about making sure that they have cover from
Russia. In this context I would like to say one thing very, very
strongly indeed: any cover for western energy interests or for
energy production and transit from the Caspian to Europe has to
be essentially safeguarded through diplomatic rather than military
means. It has to be made quite clear that, in practice, if there
is Russian interference with this, this is contrary to Russia's
own long-term energy relations with the West. It is not a question
of us, or anybody, whether it is NATO, being able to put military
forces in there. I know there is a military aspect because of
the lines of communication to Afghanistan, but essentially I do
not think we are in a position to put in a military guarantee
for the security of either Azerbaijan or Georgia.
Q112 Mr Jenkin: Is Europe wise to
become more energy dependent, particularly for gas, on Russia?
Or is your advice that we should be seeking to diversify supplies
elsewhere?
Professor Stern: I think diversification
of supplies elsewhere is fine. It is always the best policy. The
problem is, as I said earlier, it is not a new policy. You need
to be very, very clear that supplies from the Caspian region coming
through a large number of countries, many of which have had problems
with each other, may also not be the most secure of supplies.
Chairman: The next question will be the
final question to these two gentlemen.
Q113 Mr Holloway: Your answer to
this question may not be only energy related—and I know
we have covered part of it already. What is the list of measures,
short of military confrontation, that we have or where we could
create leverage over them? It strikes me at the moment that you
send the fleet in their direction if they invade Georgia, and
surely we need to develop other mechanisms or other areas where
we can do this.
Mr Roberts: The Eastern partnership
initiative is one approach. Obviously, improved trade relations.
One would hope for an improved focus on human rights, democracy
involved in rule of law in the partner states. I think the best
way is essentially trying to get across two concepts: (1) that
the states with which we are proposing to deal that are not Russia
are in and of themselves independent states with a right to be
treated as independent states, and (2) that what we really want
is, in cliche terms, win-win relationships with everybody, including
Russia, and that we do not regard the energy issues of the region
as a zero-sum game. We are not looking to replace Russia. We want
a productive co-operative relationship with Russia and we are
not sure how we are going to get that.
Mr Holloway: How do you restore Russian
pride?
Chairman: That is a question, because
the previous one was the final question, which could take you
a couple of days.
Mr Holloway: It is quite important.
Q114 Chairman: It is important, but
may I suggest that we should move on and possibly ask that question
to the next—
Mr Roberts: You treat Russia as
a grown-up nation.
Chairman: Right. Let us pursue that question
with the three people coming after you. Thank you very much indeed
both of you. It has been most helpful and very interesting.
1 Note by witness: The actual quotation is as follows:
"It is highly probable that in a not so distant future Russia
will not be able to offer gas to the EU in the quantities the
EU will be ready to buy. First domestic gas prices increase in
Russia thus opening a huge domestic market to our producers. Second,
the Asian gas market is growing so rapidly that Russia will probably
be inclined to partially reorient its operations." [Alexander
V. Golovin: Ambassador-at-large, MFA Russia. Caspian Sea negotiator.
Speech to the European Gas Conference in Vienna, 28 January 2009]. Back
2
Note by witness: Correction: The 13 bcm/y figure is probably
too high. Shtokman Development (SD) AG (which comprises the Shtokman
partners Gazprom, Total and Statoil), says only that Phase One
field development is intended to produce 11 billion cubic metres
a year (bcm/y) of pipeline gas and 7.5 million tonnes a year (7.5
mt/y or around 10.35 bcm/y). Back
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