Memorandum by Dr Frank Umbach, German
Council on Foreign Relations (DGAP)
THE EUROPEAN UNION AND RUSSIA—PERSPECTIVES
OF THE COMMON "STRATEGIC ENERGY PARTNERSHIP"
Personal Analysis for the Sub-Committee on Foreign
Affairs, Defence and Development Policy, House of Lords, Great
Britain
1. Strategic Energy Partnership: In
October 2000, the European Union (EU) and Russia have initiated
an "energy partnership" to discuss all questions
of common interest relating to their energy sectors and mutual
energy cooperation. Both sides have declared themselves as "natural
partners" in the energy sector. Until 2006, for the EU, Russia
had been a reliable energy partner for many years, even during
the Cold War and periods of internal difficulties. The overall
objective of the energy partnership aims to:
— enhance the European energy security
by binding Russia and the EU into a closer economic-political
relationship due to long-term nature of investments in energy
production and transport;
— open and integrate energy markets
on both sides, reflecting the "strong mutual dependency and
common interest in the energy sector"; and
— "to improve the investment opportunities
in Russia's energy sector in order to upgrade and expand the energy
production and transportation infrastructure as well as improve
their environmental impact, to encourage the ongoing opening up
of energy markets, to facilitate the market penetration of more
environmentally friendly technologies and energy resources, and
to promote energy efficiency and energy savings".
2. In many ways, Russia seems to be the
natural energy partner for the EU: It holds the world's largest
natural gas reserves (48 trillion cubic meter), the second largest
coal reserves, the eighth largest oil reserves, and being already
the world's largest exporter of natural gas, the second largest
oil exporter (only behind Saudi Arabia) and the third largest
energy consumer. At present, Gazprom alone supplies almost
25% of the EU's natural gas needs, and the EU buy's 70% of Russia's
oil and gas exports. For modernising and expanding its energy
sector, Russia needs more than $900 billion by the year 2020.
In this respect, the EU appears as the perfect modernisation partner
of Russia. The supposed mutual interdependence on energy, trade
and investments has been seen as the major strategic factor of
the EU relations with Russia. This strong mutual interest and
interdependence suggest that energy is an ideal sector in which
relations can be progressed significantly—a kind of test
case—for the further development of an EU-Russia strategic
partnership. Success in the energy sector could then serve as
a model for other areas of common interest.
3. Given the political instabilities in
the Middle East, the natural solution for Germany and the rest
of the EU seems to be to expand imports of oil and particularly
natural gas from Russia for satisfying its rapidly growing gas
(import) demand. At first glance, there are indeed a number of
persuasive reasons (not least the argument of improved political
stability) for a drastic escalation of energy imports from Russia,
being the EU's fifth largest trading partner (after the US, Switzerland,
China and Japan). However, the results of the "Thematic
Groups of the Energy Dialogue" and the newly created
"EU-Russia Permanent Partnership Council (PPC)"
on Energy in December 2006 to address energy strategies, forecasts
and scenarios and other cooperation issues have been limited and
rather disappointing due to different strategic interests on both
sides and Russia's renationalization policies of its energy sector.
Furthermore, Russian energy export policies, in particular pipeline
routes (which are often determined by geopolitical considerations
rather than just an economic calculus), are still seen in the
Kreml not just as an tool of its economic/energy policies but
also as one of its very few effective foreign policy instruments
to preserve and maintain its "strategic interests"
in neighbouring countries which are either highly dependent on
Russian energy sources or function as important transit states.
In this light, the EU has been unsuccessful in persuading Russia
to pursue a market-oriented energy policy or in aligning the "EU-Russian
energy partnership" with market principles.
4. Russian-Ukrainian Gas Conflict of
January 2006: The energy conflict between Moscow and Kiev,
importing a third of its energy from Russia, has shown that the
Russian government and President Vladimir Putin are prepared
not only to use its energy to force customers to pay much higher
prices almost over night, but also as a foreign policy tool to
pressure customers to concede to Moscow's geopolitical interests.
Ukraine's "Orange Revolution" in December 2004
and the demise of the Kuchma government not only tore it
out of Moscow's sphere of influence, but was also a personal setback
for Russia's President Vladimir Putin, who had backed in
an unprecedent way the losing presidential candidate, Viktor
Yanukovich. However, it provoked a national-democratic backlash
in Ukraine that ended up strengthening Viktor Yushchenko and
increasing international criticism at Putin's foreign policy
toward Ukraine. Shortly before the outbreak of the conflict, Gazprom
took steps in order to ensure its leverage by blocking all
other regional producers from providing Ukraine with alternative
sources by buying up all of their production itself such as those
of Turkmenistan. The intended gas conflict was also a new attempt
by Putin to influence the forthcoming parliamentary elections
in Ukraine in March 2006. As the Russian reformer and head of
the liberal Yabloko party, Grigorii Yavlinskii criticised:
"Right now, instead of helping Ukraine move along [toward
Europe] and moving along with it, Russia is uselessly trying to
prevent Ukraine from doing so, and is itself trying to pursue
some sort of `third way'. In reality, there is no `third way'—there
is only the Third World".
5. Furthermore, Moscow was not so much interested
at world market prices than to acquire the Ukrainian pipeline
system—especially after Moscow took over the ownership of
the Yamal-gas pipeline on the territory of Belarus in December
2005. Already before, Gazprom has tried to buy into the
gas-distribution networks in Hungary and Poland to regenerate
itself as a great power in Europe and beyond. It has also put
immense pressure on the Georgian government to cede control over
the gas pipelines that ship gas from Russia to Georgia and beyond
to Armenia. However, Georgia and Ukraine have opposed any Russian
ambitions to take over their pipeline system which would have
severe consequences for their pro-Western foreign and security
policies.
6. Renationalization of Russia's Energy
and Resource Sectors: Because economic circumstances have
changed, the Russian government is now undermining production
agreements (Sakhalin 1-2, Kovykta) that were signed in a period
of low energy prices in the early 1990's, but its flaunting of
contractual agreements will permanently scare off investors in
the future. Thus Western investors are not permitted to hold more
than 49% of Russian companies. This limitation is unlikely to
dispel reservations or create an investment-friendly climate in
Russia. In practice, western shareholders of Russian energy companies
must content generally themselves with much smaller stakes.
7. Implications for the EU: The bilateral
ties between European gas companies and Gazprom resemble
very much like "cartel-like relations", which
tend not to be very transparent, and very protective of the market
position of European importers of Russian energy resources. Until
very recently, the EU and its member states have granted Gazprom
access to the European downstream assets without opening the
consumer markets in Europe as well as the production sector in
Russia. But for the EU's future energy security and liberalizing
its energy (and particularly gas markets) it is highly important
to guarantee fair competition rules and the reciprocal opening
of the Russian energy markets in order to minimize the risk of
downstream monopolization by Gazprom and other producers.
On 19 July 2006, Putin has signed the new law "On
Natural Gas Exports", which has legalized the Russian
gas export monopoly de jure. It has wide-ranging consequences
for the EU because any effective downstream competition with a
total legal monopoly on the supply end is hardly realistic.
8. Emerging Russian Gas Crisis: Russia's
reputation as a reliable EU energy partner is also undermined
by the imminent threat of a dramatic gas shortfall-one that, until
mid-2006, both Moscow and Gazprom's European energy partners completely
denied. Although Putin finally acknowledged this supply gap in
domestic discussions in September 2006, he did not reveal its
full scope or bring transparency to the issue, which is all-important
for the European Union.
9. With over 47 billion cubic meters of
natural gas reserves (26% of global reserves) but covering 50%
of its own domestic energy demand, there are two main reasons
for the Russian gas crisis: 1) the decline in output from the
vast natural gas fields in the region of Nadym Pur Taz (NPT),
and 2) an unwillingness on the part of the state energy giant
Gazprom to make timely investments in developing new fields in
Russia itself. Although Gazprom has adequate capital, it has failed
to develop any major new fields apart from the gas deposits in
Zapolyarnoye, which can mitigate the effects of the NPT decline
only for a short time.
10. The Research Institute for the Economics
of the Gas Industry (NIIGazekonomika), a Gazprom subsidiary,
has recommended a dramatic change of strategy: Russia should decrease
exports of natural gas to European markets and concentrate instead
on developing new gas fields to keep up with domestic demand.
The latter will rise up to 654 bcm per year instead of Russia's
Energy Strategy's estimate of 436 bcm until 2020. Therewith, it
has confirmed Western experts who have criticized the lack of
investment into new gas fields and pipeline construction and maintenance
as a growing threat to the EU's gas consumption.
11. Gazprom's and the Kremlin's priorities
are not the modernization of its gas sector or even customer satisfaction,
but rather rent-seeking and the expansion of its monopoly power.
During the last four years (2003-06), Gazprom has spent
nearly 18 billion Euros on the acquisition of shares in companies
outside the gas sector backed by the Kremlin's strong support.
This is more than had been invested in the development of upstream
gas production in a decade. As the result of failing investment
in the exploration of new gas fields, confirmed by the IEA,
a deficit of gas supplies is expected to Russia and Europe of
100 bcm per year in 2010 compared to actual demand. Already today,
Russia is increasingly dependent on gas imports from Central Asia
and the Caspian region (80 bcm) in order to satisfy domestic gas
consumption and maintaining high-price exports to Europe.
12. Meanwhile, also Russian officials have
confirmed the gas deficit. On 19 June 2007, the Deputy CEO of
Gazprom, Alexander Ananenkov, indicated that the gas agreement
with China of 2006 (delivering 80 bcm to China annually) could
be given up because Russia needs the gas for its domestic markets
as well as for maintaining its gas exports to Europe. On 2 August
2007, the Russian government demanded from the Sachalin-2 consortium
to sell all gas to Gazprom and not directly to China, Japan and
other Asian markets because of its increasing domestic gas consumption.
In November 2007, the Russian Ministry for Economic Development
and Trade warned that a gas deficit is emerging in 2010 which
could constrain the domestic gas market.
13. Implications for the EU: Russia's
gas production is expected to rise from an estimated 608 bcm in
2003 to 655 bcm in 2010 and 898 bcm in 2030 (IEA in 2004). Net
exports of gas are hoped to increase from 169 bcm in 2002 to 182
bcm in 2010 and 274 bcm in 2030. Even in the case that Russia
may export as much as gas as originally expected in its Energy
Strategy of 2003 (274 bcm in 2030) and would not diversify its
gas exports to the Asian and US markets (LNG), it is totally insufficient
in regard to the EU's gas imports in 2030 (488 bcm), which can
only been covered by gas imports from other countries and regions
such as Norway, the Middle East, Central Asia/Caspian region and
Africa. With other words: The EU is forced to diversify its gas
imports. In this respect, the EU is in a very favoured position:
Unlike any other region of the world, the EU is geographically
surrounded by many gas-exporting countries within a range of 3,000-3,500
km, which can be connected by pipelines. However, most of them
are considered as politically unstable.
14. Hope on Russia's "independent"
gas suppliers? Theoretically, these independent Russian gas
producers could partially close the supply gap if the Russian
domestic market were made more attractive by raising prices. Russia's
2003 national energy strategy foresees independent companies covering
roughly 20% of natural gas demand by 2020 (compared with 13% now).
Based on its own projections, the IEA hopes that independent suppliers
will account for 40% of the market in 2015-meaning deliveries
of 260 to 290 bcm of natural gas. Even so, Novatek and TNK/BP
are probably the only companies capable of making a substantial
contribution. Reserve levels and available capital are already
placing limits on gas-producing oil companies like Rosneft, which
are also being lured by the prospect of greater profits in the
oil business. This means that the more conservative approach in
the 2003 national energy strategy, which envisions a contribution
of 120 to 135 bcm, or perhaps even 150 bcm in 2015, seems probably
more realistic. Moreover, the amount of gas contributed by independent
players will depend on their capital resources and on formal guarantees
by Gazprom that they will be able to utilize its network. At the
moment, both are highly questionable since they undermine the
vision of a vertically integrated energy behemoth controlled by
the Kremlin. In the future, independent companies are likely to
face even greater restrictions in accessing Gazprom's network.
The more quickly Gazprom depletes its own reserves, the more companies
it will need to purchase to make up for its gas shortfall. In
such a scenario, it is extremely doubtful that the weakened, once-independent
companies taken over by Gazprom will be able to maintain their
high production levels.
15. Furthermore, a full independence of
these gas producers is also a political chimera because they always
include other state-controlled companies such as Gazprom (in the
case of Novatek) or Rosneft and they must sell their gas to Gazprom
for exports since Gazprom has an exports monopoly. And they have
to act in respect of the Kremlin's declared strategic and geopolitical
interests inside Russia and beyond. Ownership of the companies
does not equal with real independence.
16. Rising EU-Competition with Russia
towards Central Asia and the Caspian Region (CACR): Russia's
recent policies of a bilateralism with Hungary, Austria, Italy,
Greece and Bulgaria are part of a larger strategy to undermine
a common European policy toward Central Asia and in particular
the Nabucco-pipeline project, which is of crucial importance for
the EU's energy security and the diversification of energy supply.
Russian politicians and advisors to the Kremlin are very frank
about their objections towards a direct pipeline between Central
Asia and Central Europe. By circumventing Russian pipelines, the
Nabucco project would result in a "loss of money and strategic
influence" for Russia. From Moscow's perspective this could
potentially trigger "a geopolitical" and "energy
crisis". In that context, German and EU policy-makers are
overlooking two important facts:
— Independent gas pipelines from the
Caspian region to Central Europe would force Russia to invest
in the exploration of new gas deposits in their own territory.
This, in turn, would secure long-term Russian as well as European
gas supply.
— The Russian focus on gas imports
from Central Asia has geopolitical reasons and contributes to
the "gas crisis" in Russia. Moscow has thus become a
less reliable energy supplier for Europe.
17. The aftermath of the EU Spring summit
of March 2007 has seen European energy companies, with the backing
of their respective governments, intensify their relations with
Moscow. In light of such bilateral energy deals, the European
Council conclusions run the risk of becoming political lip service.
The construction of the Nabucco-Pipeline needs to be supported
more decisively by Germany and the EU. The United States' policy
to secure the Baku-Ceyhan and Baku-Erzurum pipelines should be
seen as a model in this regard. Otherwise, Russia will be able
to successfully undermine the EU's options to diversify its gas
imports even before the first steps of a common external energy
policy can be implemented. From a strategic viewpoint this situation
is unacceptable for the EU. But short-sighted national special
interests are threatening a unified approach to the EU's external
energy policy.
18. Mutual and Symmetric Interdependency
between EU and Russia: the argument that pipelines make suppliers
and buyers fundamentally dependent on one another is overlooking
the following facts at least at the short-term perspective:
— It is only true as long as both
sides do not have and do not seek access to alternative markets.
— Both sides must recognise the economic-political
interdependence and guide accordingly their strategies and policies.
However, that interdependence is not fully been accepted on the
Russian side. They deliberately ignore Russia's corresponding
dependency on Europe as a market for Russian gas. In political
reality, the EU-Russian relationship can be rather characterised
as an "asymmetric interdependency".
— Russian foreign and security experts
have speculated—to some extent rightly—that EU politicians
and industrial decision-makers tend to a policy of anticipatory
kowtows towards Moscow ("silence for gas"). As
the Representative of the EU's Common Foreign and Security Policies
(CFSP), Mr Javier Solana, has warned on 20 November 2006: "We
may have to deal increasingly with governments whose interests
are different from our own and who do not necessarily share our
values. Sitting on huge reserves of oil and gas gives some difficult
regimes a trump card. They can use energy revenues for purposes
which we may find problematic. And it shields them from external
pressure. Thus, our energy needs may well limit our ability to
push wider foreign policy objectives, not least in the area of
conflict resolution, human rights and good governance".
— There is a major difference to the
situation of the Cold War when Russia proved to be a reliable
energy partner: During that days, Russian gas exports to Western
Europe were seen in Moscow primarily as an economic tool to earn
much-needed hard currency for the USSR as a declining economic
and military super power. Today, Putin and his followers
are seeing Russian oil and particularly gas exports to the EU-27
not just as a very important economic tool but also as a foreign
policy instrument that demands respect for Russian geopolitical
interests and ambitions—particularly in Europe and Eurasia.
19. Conclusions and Perspectives: Given
the EU's rising oil and in particular gas (import) demand and
its geographical vicinity to Russia, there is no real alternative
to a long-term engagement policy towards Russia. The lack of congruence
in the EU energy foreign policies towards Russia, however, made
it easy for Moscow to "divide and rule" the Union and
to enforce the "bilateralisation" of its energy political
cooperation with the individual EU member states and their national
energy champions.
20. For the EU-member states, a conflict
of goals has occurred: The EU's energy foreign policy will either
further complicate EU-Russia's relations, or given the EU's consideration
of Russia's energy and security interests, put into question the
Central Asia and diversification strategy of oil and gas imports
from CACR. However, the EU cannot forego diversifying its imports
of natural gas from CACR because (1) the Kremlin is exploiting
energy dependencies as means of foreign policy, and (2) Russia
solely cannot meet the forecasted EU's natural gas demand until
2030, if their need does not mitigate. Furthermore, in the light
of the EU's foreign and security interests, it has no alternative
than to extend and to deepen its relations with CACR.
21. Putin's energy foreign policy is in
bold contradiction to both the EU-policy of liberalizing the European
gas- and energy markets, its neighborhood policy and CFSP. A more
long-term energy cooperation with Russia implies a more concrete
definition of EU's own strategic interests in its energy foreign
policies, which, however, should not be exhausted in a "Russia
first"-policy. Hence, the EU's strategy should both aim at
an energy partnership with Moscow being equally entitled, and
be dedicated to a distinct reciprocity in the opening of energy
markets on each side.
20 December 2007
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