Examination of Witnesses (Questions 400
- 411)
WEDNESDAY 23 JANUARY 2008
Mr Jim Murphy, Mr Nick Latta and Mr Martin Shearman
Q400 Lord Hannay of Chiswick:
Could we turn to the Energy Charter, Minister, and its Transit
Protocol. As we understand it, the EU entered into that Charter
in good faith with an aim of introducing transparency and a sound
legal basis for the very large energy transactions between Russia
and the European Union, but for reasons which I do not want to
go into, and I do not think there is any need to go into, the
Russians seem to have decided and to have communicated any number
of times that they will not ratify the Energy Charter and its
Transit Protocol. Do you assume now that whoever is elected in
March that will remain the Russian position and that there is
virtually zero hope of getting the Energy Charter and its Transit
Protocol as currently drafted into effect? If you do accept that,
do you think there is any value in continuing to try to persuade
the Russians to bring it into effect in the face of their determination
not to do so? The third part of the question: in that case, is
there any sense in trying to save as much as possible of what
is in the Energy Charter and the Transit Protocol either under
the negotiations for the new PCA or in the discussions on the
four bases or in some kind of separate discussion about energy?
Mr Murphy: On each of those points, do we think
that post the presidential elections there will be reasons to
be more optimistic? Mr Medvedev, we know from his cv that he does
not come from a similar background to many of the other prominent
individuals and leaders in Russia, so there are some reasons to
be optimistic; not naïvely so, but there are some reasons
to be optimistic in terms of his background. I am not sure it
would be helpful to second-guess the outcome of that, but the
Charter is the only multilateral agreement in play. The additional
difficulty we have, notwithstanding the dynamic of the Russian
elections, is that Russia has been remarkably imprecise as to
what her concerns are. That is the difficulty. It is difficult
to respond to concerns which are general in term and in tone and
imprecise on any detail. As to whether this should be renegotiated,
it partially depends on Russia's concerns, but we would also have
to be convinced that in opening the process there was a political
will at a senior level—and it comes back to the first question,
of course—that there is a willingness to conclude something
which is genuinely in our collective interest and which would
then be adhered to. So there is no clear sense—there is
an assessment but there is no assertion from Russia—as to
what her concerns are with the current process and our assessment
is that there is no compelling case that Russia is actually willing
to enter into something which is binding and strategically worthwhile.
In terms of whether it should be inside the new PCA, my understanding
of the Charter is that it is more than, of course, just the EU
and Russia, it is the EU, the former Soviet Union and Japan—and
North America[1],
I am told—so it is intricate in that nature. I think the
best way forward is to remain with the Charter, willingly renegotiated
if necessary, but only in principle entering into renegotiation
if there is something worthwhile on the other side.
Q401 Lord Truscott:
Minister, how much (if at all) does the EU need to worry about
Russia using energy as a political weapon or at least a tool of
foreign policy; and in that context do you have any views on the
"Pipeline politics" controversies which there currently
are—I am thinking of Nordstream and Nabucco, the South Stream
recent agreement with Serbia, the proposed trans-Caspian pipeline
system—and are we really witnessing a new great gain stretching
from Central Asia through to the Balkans?
Mr Murphy: In general terms for Russia, energy
sourcing, routes to market, is part of the wider geopolitics.
That is clear by some of the activity. Our worry is not that there
will be a wholesale turning off of the tap in future, our actual
bigger worry, which I think I perhaps shared with your Lordship's
Committee in the recent past, is that our assessment is within
five years with the level of current investment Russia will not
be able to meet her domestic demand and her international obligations.
That is the bigger concern which we have, very clearly, since
I appeared before your Lordships before and that is not a concern
which has disappeared at all. It still remains live in terms of
the pattern of investment in the Russian energy infrastructure.
In terms of the specific oilfields, I warned Mr Latta that this
was a question I was going to ask him to make observations on,
but certainly there is a number of principles which guide our
approach. Firstly, the pipelines are driven by market and our
assessment is that if that is the principle, then that would lead
to a diversity of routes to market which should not give the European
Union in general or any one nation in particular cause for specific
concern. It is only when that market is distorted that that difficulty
would arise. Therefore, alongside that first principle is the
need for strong regulation of the market to avoid the distortion
of competition, the distortion of the investment framework around
the individual pipelines. As to the specific pipelines, I wonder
if Mr Latta could offer his observations? It concerns Poland,
it concerns Sweden and others around certain pipelines.
Mr Latta: My Lords, another element which would
be key in all of this is the completion of a genuine internal
market for gas and energy within Europe. So long as individual
Member States are 100%, 90% or 70% reliant on gas from a single
source, then there is an unhealthy reliance and a lack of diversity.
Once the EU creates a single market, then you should be looking
more at 25% of EU gas coming from Russia. That is the headline
figure, as opposed to individual Member States importing 100%
of their gas from any particular country. Moreover, once you have
created a complete internal market and the only issue is that
the gas which comes in on any one pipeline suddenly mixes with
all the other gas in the network, the power of an individual pipeline
to influence the market is reduced. So delivering on this internal
EU process of improving the energy market will be a key element
in maximising energy security.
Q402 Lord Truscott:
I appreciate, Mr Latta, that is the theory but it is difficult
to actually implement that, is it not, when the EU Member States
cannot agree themselves on the unbundling proposals, for example,
liberalising the EU market? Whilst the EU market is not liberalised,
that gives the Russians the opportunity to work bilaterally within
the market and to develop bilateral relations rather than working
in an open, free market?
Mr Murphy: In terms of the unbundling, usually
the Government's argument is well-rehearsed unbundling. In principle
we supported the UK citizens' benefit from the competition which
is provided in the UK. Many millions of UK citizens have their
power supplied by other European companies. The evidence is that
unbundling increases investment and reduces cost, and that is
important in the current environment. I think other European citizens
should have that opportunity, and so should UK companies. There
are some proposals, again as yet unspecified, about a third option
from the Commission motivated partly, I think, by German concerns,
but again the difficulty is that we are unable to respond to speculation
about a proposal which has not yet been tabled. But we are waiting
to see the specifics of this as yet to be announced third option
from the Commission on completing the energy market. Also—and
Mr Latta mentioned this—the tone of the conversation in
respect of reliance on Russian imports and Russian gas is different,
of course, in different capitals. Lithuania, Latvia and Bulgaria
are 100% reliant on imports of Russian gas. Ourselves, Ireland,
Sweden, the Netherlands and some others have zero imports of Russian
gas[2].
So the tone and the nature of the debate, for understandable reasons,
is different in different capital cities but the important thing
is to try and get European agreement around this 25% figure.
Q403 Lord Hamilton of Epsom:
My question follows on from that. Some of the evidence we have
been given indicated that it is in no way in Russia's interests
under any circumstances whatsoever to unbundle either their monopoly
of gas supplies or their control of the pipelines, so are we not
rather wasting our time believing that is going to happen? The
greatest beneficiary of unbundling might well be the European
consumer if we had a European grid system which actually extended
over the Continent of Europe. Would we not be better off concentrating
really on our own home areas rather than trying to bash away at
the Russians, who are not going to move on this anyway? It is
a complete waste of everybody's time.
Mr Murphy: We do think it is still worthwhile
to continue to press the Russians on it for the reasons we have
already spoken about, and we are making progress. Some of the
moves in terms of the extension of qualified majority voting,
for example, on energy policy may help in this direction and reduce
the opportunity for protectionist tendencies within the European
Union to block the completion of the single market on energy.
It is an added opportunity to give impetus to the completion of
the single market on energy, so it is about doing both in parallel.
Q404 Lord Anderson of Swansea:
Future generations may say that by failing to have a degree of
solidarity against Russia we allowed the tentacles of Russian
influence to spread all over Europe. Lord Truscott mentioned the
recent purchase of the Serb gas company, the way Bulgaria has
reached a pipeline deal with Russia which will lead to spurs going
to Austria and Hungary, and in one sense the pass has been sold.
We have no grid. Already the Russians appear to have a very substantial
influence. What are the prospects of having solidarity, given
the fact that when we in the UK did not need solidarity during
the good days of North Sea gas in the eighties we were not very
keen on it? Are there any real prospects of Europe as a whole
having an "all for one and one for all" policy, or is
it much too late to do that?
Mr Murphy: I do not think it is. I do not think,
if we are all frank with one another, we are ever going to enter
into a position where there is going to be a unanimity of approach
on every issue. I do not think there is much mileage in investing
vast political capital in a deal on unanimity on every issue,
but on the big strategic issues it is of fundamental importance,
and that is the importance of the success of the PCA agreement,
particularly the matters I alluded to earlier which are not currently
contained within the existing PCA. Those issues I referred to
earlier, climate change, terrorism, migration, and others are
judicial cooperation, are the issues which the European Union
collectively will seek to form the content of the success of the
PCA. It is on those very strategic issues that there is a collective
position.
Q405 Lord Anderson of Swansea:
Not on strategic energy?
Mr Murphy: I have explained some of the difficulties
around that to your Lordships, the reliance of Bulgaria in particular.
I think Bulgaria is one of those countries which are 100% reliant.
Tone of the conversation is different in different capital cities.
The solution to this is, as we alluded to earlier, the twin process
of continuing the market inside the EU and energy unbundling inside
Russia.
Q406 Lord Anderson of Swansea:
But the latest developments certainly assist the Italian/Russian
South Stream. Are we assuming that the recent developments are
likely to undermine the attempt to have a diversity of supply
through Nabucco?
Mr Murphy: Again, with your Lordships' permission,
I would ask Mr Latta to talk about some of the individual pipelines,
if he is in a position to do so.
Mr Latta: There is a tension inevitably between
the competitive agendas for individual pipelines—these are
businesses after all—and the geopolitics of the source of
gas, the route that it takes to market. South Stream is clearly
in competition with Nabucco. If I was a businessman I would talk
about the value options provided by the pipelines being distinct
to Europe, in that Nabucco does provide diversity of route and
supply, while South Stream provides some diversity of route but
not of supply. It is for the consumer and for the European Union
of 27 to assess the value to us of these different options, to
what extent is security important versus the simple cost. Additionally,
obviously, there is the question of how much individual pipelines
would cost. Therefore, if you move all of these questions to a
more commercial footing, the cost of gas coming through them becomes
clearer and the consumer ultimately is better informed to make
a decision.
Q407 Lord Truscott:
If I may make a brief comment on the question, will Nabucco really
improve security of supply as far as the EU is concerned because,
as the Minister said, the real issue is future shortfalls in the
Russian gas supply, and if there are those shortfalls then we
are going to have a problem in terms of future supplies for Europe,
whether Nabucco exists or not? My second point is really for the
Minister. Are we really talking about reciprocity in our relations
with Russia in terms of unbundling and open access to markets
and pipelines? My understanding at least is that that is not the
policy of the Government, that we are not asking for pure reciprocity
with Russia, because that is certainly not the case with, say,
Saudi Arabia.
Mr Murphy: We are attracted to reciprocity as
a principle guiding this. In terms of the other point about Russia
five years hence—it is less than five years now in terms
of the assessment—in addition to what Mr Latta has already
said and what I have alluded to, an additional component of the
solution to this is a different business environment where we
all have business contacts in Russia, where the degree of bureaucracy
(bureaucratic interference, to put it as neutrally as possible)
is such that transparency in the market, operation in the market—because
notwithstanding the phenomenal UK investment in Russia, the fact
is that on occasion investors and business people continue to
find that the market is not transparent enough. Again, I put it
gently. So that is part of the solution in terms of the investment
environment. The second in terms of the five year timeframe is
just energy efficiency. Where we can be critical in general and
in some specific terms, Russia is intellectually absolutely seised
of the energy efficiency argument, which as we all know is a clear
read-across in terms of climate change policy, and in fact in
some cases engaging with Russia on climate change is much more
effectively done through the argument of energy efficiency rather
than a way which would be extreme in the United Kingdom.
Q408 Lord Hannay of Chiswick:
Surely, Minister, it all comes back to the point you put your
finger on, which is the doubts we all have about whether Russia
is or is going to invest enough in its gas industry to provide
the demand which Europe as a whole is going to put on it. We have
heard a lot of evidence, quite compelling evidence, which says
that they are not investing enough and that, moreover, they are
not going to run their depletion policy to suit us. When one sees
not only the developments in Serbia or Bulgaria but also, for
instance, their proposal to spend a great deal of money in Nigeria
you are left with the feeling that they are not waking up every
morning in a sweat wondering how they are going to provide enough
gas for the Europeans in five or 10 years' time. If that is so—and
you have put your finger on that issue yourself—then surely
the very large investments which would need to be made to have
an alternative supply from Turkmenistan, Kazakhstan, and so on,
through a pipeline of the type of Nabucco is something which Europe
may have to contemplate even if it costs an awful lot of money
up front, because finding out in five or 10 years' time that the
Russians are not supplying enough and that the price is going
through the roof is not going to be a very comfortable position
to be in?
Mr Murphy: In terms of the point about the profile
of current investment, our assessment is that the current trajectory
of investment and the publicly announced investment portfolio
is not substantial enough to meet the obligations I alluded to
earlier. It is not just a matter of the Russian state or Gazprom
investing, it is also about the business environment. The degree
of openness for foreign investment in the sector in Russia is
an important component of this debate. In terms of whether the
solution to it is the European Union collectively investing in
a pipeline network through Central Asia, I return to almost where
I started, which is that really if we set a business environment
which allows the market to dictate pipeline directions and diversity
of routes to market, that gets us to where we need to be. The
short answer to this is that the European Union has not been and
is not attracted to the colossal degree of investment which it
would require. Your Lordships may, of course, have a different
perspective on it and in five years' time you may say, "Why
didn't the European Union do that?" but it is not currently,
I think, in the short term expected to be part of any European
agreement with the vast capital investment it would require.
Q409 Lord Selkirk of Douglas:
May I ask about what you, Minister, consider to be the most effective
way of making clear to the Russians our concerns about violations
of human rights? It has been made clear to us that they do not
wish to accept lectures from the European Union about domestic
political matters. How would you suggest representations should
be made which are not counterproductive and which are highly persuasive?
Mr Murphy: I think there are two components
to that response. Firstly, which might sound a little counterintuitive,
at one level we will continue to support NGOs, civic society,
in Russia, even though on occasion that then allows them to be
singled out as agents of a foreign government, which is regrettable
and does not bear any analysis. For example, we provide funds
to the equivalent of the National Union of Journalists in Russia
and programmes on prison reform, sensible, reasonable, international
norms in both fields. In terms of the most effective way, I think
to some degree we have each individually reflected on it in our
own way, to come back to this point about on all occasions seeking
to do it in a multilateral environment and to contextualise it
in terms of agreements which Russia herself as a proud sovereign
nation signed up to. I know perhaps each individual would think,
"Why don't we just say this?" but it is counterproductive
at all sorts of levels and will not achieve the desired response.
It is in the context of international agreements and the multilateral
approach, not just the EU but through others, the G8 and others.
Q410 Lord Anderson of Swansea:
Minister, over the past six months Russia has hardened its position
on Kosovo. It is very likely that after the second round of the
presidential elections in Serbia independence will be declared
unilaterally and that the Russians will probably prevent any recognition
within the United Nations Security Council. Do you see any hopeful
prospects at all of Russia's position in respect of Kosovo moving
positively?
Mr Murphy: Not at the moment. Forgive me if
that was rather frank, but not at the moment. We have been through
a process with the United Nations. We have had a period of discussions
through the Troika process. I think we have exhausted that process.
The solution now is a coordinated (rather than unilateral) declaration
of independence based on the Ahtisaari plans. We remain absolutely
convinced of the merits of the Ahtisaari proposals and that the
international community has a responsibility entered into in 1999
that we need to fulfil. In terms of the UN process, individual
Member States will recognise an independent Kosovo and I think
the European Union has a responsibility to create a reality on
the ground by a prompt, coordinated response and recognition of
Kosovo's independence to influence the situation on the ground
and influence the diplomatic response throughout the rest of the
world, not just within the European Union.
Q411 Lord Swinfen:
What does this mean for the EU's increasing responsibilities in
the Western Balkans?
Mr Murphy: Some of those who oppose the impending
outcome in Kosovo try to overstate the read across the whole of
the Balkans and this has a substantial fundamental impact on,
for example, Bosnia. The way in which we argue this is that the
international community has taken a different response to those
issues in the Dayton Accordant and one of the Ahtisaari proposals
on the other, so I think there is a willingness across the bulk
of the international community to keep the momentum on a solution
on each to continue without contaminating one with the other,
but I accept in this process that others in fact from our assessment
who have neither Kosovo's nor Bosnia's interests at heart can
contaminate one with the other. Allied to this and of fundamental
importance is that whilst never seeking to interfere in Serbia's
elections—the people of Serbia will make their own judgment—the
UK's view is that Serbia has a decision to make which will influence
her future for many years to come, but that depending on the posture
and the response from the newly-elected government, whichever
colour or shape it chooses to be it should have a European perspective,
to put it euphemistically, for the opportunity to be part of the
European family if it so wishes, as Kosovo should as well. So
it is important that Serbia is fully aware—and we will seek
to make sure this is the case—of the potential benefit of
a successful outcome in Kosovo.
Chairman: Thank you.
1 The United States and Canada are signatories to
the 1991 Energy Charter and are observers to the Energy Charter
Conference established by the 1994 Energy Charter Treaty. Back
2
It is difficult to measure for certain the exact volumes of Russian
gas imported into the UK. There are no direct gas imports to this
country from Russia. Technically the UK can import Russian gas
by pipeline only via the Bacton-Zeebrugge Interconnector or the
Balgzand-Bacton pipeline (BBL). Given significant Dutch gas production,
gas imported via BBL is probably Dutch. Thus the Bacton-Zeebrugge
Interconnector is likely to be the main source if any Russian
gas imported into the UK. In 2007 imports from Belgium are likely
to account for only about 0.5% of inland consumption, making that
the absolute ceiling for imports of Russian gas. Back
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