European Energy Security: A New Pattern of External Stability and Internal Risks
The fundamental dilemma of energy policy is its irreconcilable aims. Energy should be cheap, secure, and clean. While it is comparatively easy to achieve two of these objectives, it is, at least in today’s world, impossible to reach all three of them at the same time. Fossil fuels form the center of energy problems. They provide for 76 percent of European energy consumption and raise main concerns of supply security and environmental impact. The European Union has responded to the conundrum of energy policy with a miscellany of legislation, with mixed results. While some conventional concerns about European energy security have been adequately addressed, the transformation of the EU’s energy system toward a carbon-free economy poses new risks for energy security.
European Oil Security: A Mixed Picture
Petroleum is traditionally the commodity first referred to when the question of energy security is raised. As a result of being traded on a global market, supply disruptions in one area of the world cause almost immediate price reactions around the globe, affecting all consumers regardless of their actual region of supply and type of consumed petroleum. Consequently, independence from the global oil market is unrealistic. However, the problems of peak oil prices and possible disruptions of supply remain, with probably severe consequences for economic stability. The European Union’s answer to these fundamental problems has been threefold in recent years:
1. Strengthening the crisis mechanism: To protect consumers from supply disruptions, member states of the International Energy Agency (IEA) and a couple of additional countries have built up strategic petroleum reserves. But as oil security is a non-excludable public good, the market will generally under-supply reserves to meet supply interruptions, and individual nations will tend to under-invest in or completely free ride on oil security. Until recently, this problem also applied to the EU, where some member states had only small or practically no strategic reserve. Directive 2009/119 by the European Council on emergency oil reserves addressed the issue and imposed an obligation on member states to maintain minimum stocks of crude oil and petroleum products for at least 90 days of average daily net imports or 61 days of average daily domestic consumption, whichever of the two quantities is higher. This provision is even stricter than the IEA regulation and will have to be transposed into national law by the end of 2012.
2. Expansion of overall supply: Generally speaking, oil security depends on overall global consumption, the number of producers, and the stability of supplier countries and transport infrastructure. Given the global characteristics of the petroleum market, oil security ought to be an international effort. Oil security, and energy security in general, has gained some importance in the EU’s Common Foreign and Security Policy (CFSP). However, deliberations were clearly dominated by questions on natural gas. Consequently, energy security played its biggest role in the Union’s foreign policy toward Russia and the Caspian region. Toward the main producers of oil in the Middle East and Africa, however, the inclusion of energy interests in CFSP was rather an exception. Even in the case of a strong institutionalization of energy policy in external relations, as in the legal cooperation framework of the Euro-Mediterranean Partnership, the actual outcome was limited. Member states preferred to pursue their own policies toward energy-rich countries in the Middle East and Maghreb.Especially France, Italy, Spain, and the UK repeatedly undercut each other in their efforts to get access to energy resources in the region, especially in Algeria and Libya.
3. Improvement of energy efficiency: The EU and its member states pin their hopes to diminish the effects of high oil prices on the European economy on changes in the energy mix and the improvement of energy efficiency. Even though 62 percent of petroleum products are consumed by the transportation sector, which is not included in the EU’s energy efficiency policy, the aim is nevertheless correctly set, as a rising oil price leads—generally with some time lag—to higher prices of other energy commodities, especially alternative fossil fuels.
Energy Efficiency Improvement: The Funding Challenge
Although decisions on the energy mix fall exclusively into the area of national competence, member states agreed on joint targets for energy efficiency and transferred competences in this area to the supranational level. The EU’s “2020 Strategy For Sustainable Growth” aims to improve energy efficiency by 20 percent by the end of this decade. However, despite various measures at all levels of government, the recent impact assessment of the European Commission concluded Europe is not on track to realize its target. Nationally-adopted policies for energy efficiency improvement have not been ambitious enough to reach the 20 percent aim, and illustrate “piecemeal thinking” rather than a comprehensive approach, as the Commission’s impact assessment states.
The problems originate partly from the “Services Directive” and the “Cogeneration Directive” that are currently in force. The soft wordings of these two directives on energy efficiency did not include fixed obligations and most member states are failing to meet the minimum agreed-upon energy-saving targets. To remedy this, the Commission put forward a proposal for a new directive that includes a string of policies and measures covering the full energy chain, including energy generation, transmission, and distribution; buildings and appliances; and households and industry. Transportation, which consumes a vital proportion of energy products in Europe, will continue to be excluded from the regulatory framework. As in the past, energy saving in the transport sector will be steered by national duties and taxes instead. The proposal for the new directive includes binding targets for the public sector and energy-producing companies. Yet, measures in other sectors will not be binding, and even the proposed (binding) targets include some, probably decisive, opt-out clauses.
A leading role in energy efficiency improvement is envisioned for the public sector, whose total spending is equivalent to 19 percent of Europe’s GDP. It should lead investment in more efficient buildings and technologies and thereby stimulate overall market transformation. The Commission proposes a binding target of 3 percent of public buildings to be renovated annually. However, the proposal lacks a clear definition of the term “renovation” and excludes small public buildings with a total floor area under 250 square meters. Furthermore, it is also unclear how the proposed measures will be financed. Investments in energy efficiency are beneficial in the long run, as decreasing energy consumption can free up public resources for other purposes. An analysis from October 2011 by the German banking group Kreditanstalt für Wiederaufbau in conjunction with the Jülich Research Center on the effectiveness of energy efficiency investments showed that public investment in the promotion of energy-efficient construction and refurbishment in 2010 generated 400-500 percent in revenue for public authorities. Economically strong member states already used assets from the stimulus packages in recent years to invest in energy efficiency. The problem, however, is that most of the countries with the lowest efficiency rates, and therefore the biggest potential for improvement, currently lack adequate resources for investments due to the public debt crisis and are unable or unwilling to redirect assets toward efficiency improvement. These states are mainly situated in Eastern Europe and many of them do not regard investments in efficiency improvement as a priority. Instead, they focus public spending primarily on energy infrastructure to diminish their harsh dependence on Russian energy imports. Diversification of suppliers and extension of domestic production are regarded by their governments as more promising ways to increase energy security than efficiency improvement.
Gas Security: From Source of Concern to Anchor of Stability?
Eastern Europe’s primary concerns about energy security do not focus on the security of oil supply, but the reliable supply of affordable natural gas. This view is shared by most EU member states, as all have to import some or all of their gas from abroad. With the foreseeable depletion of resources in the North Sea, the share of imported gas will rise even further from currently 64.2 percent of total consumption. Europe’s most important supplier is Russia, which provides 34.2 percent of imports, followed by Norway with 30.7 percent and Algeria with 14.1 percent. Furthermore, Russia is unequivocally the dominant supplier in Eastern Europe, where Russian gas accounts for around 80 percent of domestic consumption. Some member states like Finland, the Baltic States, and Slovakia receive all their imports from Russian monopolist Gazprom. The fact that the majority of European gas imports is transported by pipeline and that European distribution networks lack flexibility compounds the problem. The system infrastructure proved to be unable to redirect gas from Western and Southern to Eastern Europe during the major supply disruptions in 2006 and 2009 in the course of the conflict over transit tariffs between Russia and Ukraine due to missing interconnectors.
However, the supply crisis of 2009 was a wake-up call for Europe and natural gas security across Europe has improved since 2010. The main reasons for this are improvements of gas infrastructure and structural changes on the international gas market. The EU and single member states took important steps toward an integrated network system during the last two years. With the development of new interconnectors, gas storage facilities, liquefied natural gas (LNG) terminals, and distribution pipelines, natural gas can nowadays be shipped around in Europe in larger quantities. Even though recent improvements still fall far short of what is needed for the establishment of a common natural gas market, they permit enough trans-border trade to enable sufficient crisis reaction to supply disruptions. Furthermore, infrastructure development, in combination with increased spot price gas supply, made Russian long-term fixed price gas contestable, especially in its key market Germany. The new availability of spot price gas in Europe is mainly the result of large-scale shale gas exploration in the U.S.; natural gas is suddenly abundant on the international market. Before, the U.S. was regarded as one of the likely main importers of LNG and, from a European perspective, as a primary competitor for supplies. Yet, due to surging U.S. domestic shale gas production, demand from the U.S. for LNG has been smaller than expected and is likely to decline further. Even though reduced demand from the U.S. was replaced in recent months by surging demand from Japan after the shutdown of nuclear power plants in the wake of the earthquake and tsunami disaster, the beneficial effect of U.S. gas independence for Europe is visible already, as spot priced gas supply has expanded rapidly. German energy suppliers RWE and E.ON already started to renegotiate price fixtures of long-term delivery contracts with Gazprom. A successful outcome, i.e., reduction of prices, however, cannot be expected in the short run, as power disparities between both sides likely impede compromise. German energy companies suffer from steeply falling revenues due to the nuclear phase-out, while Gazprom’s earnings have reached unprecedented heights as a consequence of continuously high crude oil prices. RWE’s earnings before interest, taxes, depreciation, and amortization, for example, have fallen by 20 percent in 2011 compared to the previous year, limiting resources for investment in projects to diversify supply away from Gazprom.
Yet, clear signs of a shift in the power balance between Gazprom and European consumers until the end of the decade are detectable. First, the integration of European distribution networks will continue in the coming years. Further interconnectors will be completed across Europe, which will facilitate intra-European gas trade, bring Europe closer to a common gas market, and strengthen the bargaining power of European energy companies in negotiations with Gazprom.
Second, the long-planned “Southern Gas Corridor,” which will transport energy from the Caspian region to Europe, and thereby circumvent Russian territory, is finally taking shape. On 12 September 2011 the EU officially opened negotiations with Turkmenistan and Azerbaijan on the Trans-Caspian Pipeline, which should bring gas from Central Asia to the EU. Currently, Turkmenistan sells its gas to Russia, which allows Gazprom to differentiate prices substantially between its domestic and foreign customers. Direct trade between the EU and Turkmenistan would strongly improve the bargaining position of European energy companies vis-à-vis Gazprom. A second important development is the end of the bidding process for 10 billion cubic meters of natural gas annually from the offshore Shah Deniz II field in Azerbaijan on 1 October 2011. Azerbaijan’s state oil company SOCAR will announce the outcome in April 2012. Clinching the bid is almost a sine qua non for the successful development of any of the competing pipeline projects, which are Nabucco, the Trans-Adriatic Pipeline (TAP), and the Turkey-Greece-Italy Interconnector (ITGI). Gas from Shah Deniz II is expected to be available for use by 2017 and all bidders promised that their pipeline will be ready by then.
Furthermore, on 26 December 2011, Azerbaijan and Turkey signed a memorandum of understanding concerning the construction of the Trans-Anadolu Gas Pipeline (TANAP), which will connect with any new pipeline leading to Europe. Which pipeline project will finally be successful is difficult to predict, because of the multitude of powerful interests. Not unlikely seems to be a merger between Nabucco and one of the other projects, as preferred by the European Commission. What is crucial, however, is that there is now convincing evidence that at least one of the projects will be realized, which was far from certain for a long time.
Third, it is by no means obvious that European dependence on Russian gas is going to rise. This argument has so often been repeated that it has almost strayed into tautology. Because European gas imports are rising and because Russia is Europe’s primary supplier and holds the world’s largest reserves, Europe will become increasingly dependent on Russia even if the Southern Corridor is developed. However, there is little empirical evidence so far that this is going to happen. While gas imports from Russia did indeed rise over the last decade by roughly 12 percent, the relative share of Russian gas in the EU has declined sharply from 47.7 percent in 2001 to just 34.2 percent in 2009.