SENATE FOREIGN RELATIONS SUBCOMMITTEE ON EUROPEAN AFFAIRS HEARING
Congressional Documents and Publications
July 8, 2014
“Renewed Focus on European Energy Security.”
Testimony by Brenda Shaffer, Professor, Center For Russian, Eurasian
And East European Studies, Georgetown University, Washington , DC
The twenty-first century is the era of natural gas. In the nineteenth
century, coal was the dominant fuel source and in the twentieth
century, it was oil. In the twenty-first century, enormous new natural
gas sources have been discovered and produced. These new discoveries
are vast in quantity and varied in location, with new parts of the
globe becoming natural gas producers and new volumes far exceeding the
rise in global demand for natural gas. Natural gas has many benefits
as a fuel source, such as its low environmental impact and lower
carbon emissions than most other energy sources. In many markets,
it is also the cheapest source of energy for power generation and
other functions. With these economic and environmental advantages,
natural gas consumption has become widespread and in many places is
supplanting coal as the main source of power generation. Natural gas
is also the fuel that is most compatible with the use of renewable
energy as a base load in power generation, and thus consumption of
natural gas goes hand in hand with consuming of renewables under
current technologies.
However security of supply is more challenging with natural gas than
most other fuel sources, as natural gas’ physical qualities make it
complicated and expensive to ship. Consequently, there is a greater
need in the coming decades for meticulous policies and government
involvement to ensure security of supply of natural gas. The market
alone will not create the infrastructure, multiple supply sources,
storage, and contingency plans that can ensure security of supply.
In recent years, Europe has had a number of challenges in the sphere
of energy security: carbon emissions are rising, high power generation
costs are challenging the competitiveness of Europe’s industry, and
the security of the continent’s natural gas supplies is tenuous. The
recent Ukraine crisis serves as a new wake-up call regarding the
importance of ensuring Europe’s continued energy security.
The United States treats Europe’s continued energy security as an
integral part of U.S. national security policy. In recent years, the
United States has significantly improved its capacity to integrate
international energy policy into its foreign policy through the
successful establishment of the State Department’s Bureau of Energy
Resources. In this recent crisis in Ukraine and in a number of arenas
around the world, it is clear that this bureau plays an important role
in promoting U.S. national security and energy interests, including
developing a comprehensive policy to improve European energy security
in light of the recent crisis.
A number of measures can improve European natural gas energy security:
focusing policies on specific markets in Europe that are at high
risk for disruption of security of supply; respecting legitimate
Russian commercial demands, such as payment for the gas it has
shipped to Ukraine; developing new natural gas sources for Europe,
especially the Southern Gas Corridor; identification organizations
that are funded by Russia to undermine European energy security
under the guise of promoting environmental protection; preventing
European companies from acting as surrogates for Gazprom; halting
potential price manipulation at gas sale hubs; requiring that NATO
and EU members such as Bulgaria adopt EU energy security policies;
and separating out EU climate change and renewable energy policies. In
my testimony, I will elaborate on these policy suggestions and propose
a policy approach for natural gas energy security policy in Europe.
The natural gas supply situation in Europe is quite complex, and U.S.
policies should focus on improving the security of supply in Europe’s
most vulnerable markets. Observers may speak of a single European
energy market, but that is an illusion. States on Europe’s periphery
have much higher energy prices and bigger security challenges than
those in the west and center of Europe. The European Council’s recently
drafted Energy Security Strategy recognizes the uneven nature of the
supply situation in Europe, and the EU is beginning to take positive
steps to address this asymmetry.
Assessing a market’s vulnerability to supply disruption depends on
a number of factors, including the diversification of a state’s fuel
mix, its supply connections with neighbors, its capacity to switch to
different fuels in power generation, the extent of its fuel storage
(and especially natural gas storage) capacity, and the extent to
which natural gas forms a part of a country’s fuel mix. n1 Some
markets, such as Germany, have multiple suppliers, and have energy
infrastructure that connects it with neighbors. Other states, such
as Poland, currently have access only to Russian natural gas, but
natural gas is a small part of its power generation and total fuel
consumption. Hungary also has only a single gas supplier, but it
maintains extensive natural gas storage capacity and thus can easily
endure supply disruptions.
Southern Europe and southeastern Europe contain some of the markets
that are most vulnerable to potential natural gas supply disruptions.
Not only do a number of the markets in the region rely on Russia as
their single gas supplier, most of the markets in southern Europe
are not interconnected by gas pipelines.
Natural gas sectors must be properly organized to guarantee security
of supply, regardless of the origin of the supplies and the political
situation. Supply disruptions most frequently result from technical
glitches, natural disasters, or extreme weather. One of the biggest
challenges in recent decades to the security of the natural gas supply
in Europe took place in winter 2012 when severe cold weather created an
extreme demand for gas, leaving some nations, such as Italy, Bulgaria,
and Slovakia, without adequate supplies.
Price disruptions also hit European states in an uneven manner. States
with multiple supply options, mostly in western Europe, are able to
contract gas for much lower prices than states located in Europe’s
periphery, such as in the continent’s south and east, which rely
mostly on supplies from Russia. Thus, natural gas energy security
policies should target Europe’s most vulnerable markets.
Next, the United States and Europe should make sure that Kiev gets
its natural gas sector in order. In order to improve the security of
energy supply, consumers should honor their contractual agreements
with their Russian supplier. Ukraine’s unpaid gas bills to Russian-led
Gazprom, therefore, are a legitimate Russian concern. Ukraine is the
major transit point for Russian gas into Europe. In the last decade,
Ukrainian political elites across the political spectrum engaged in
reckless siphoning of gas, disregarded payments, and provided massive
subsidies that encouraged runaway gas consumption. In addition,
Ukraine houses Gazprom’s most important gas storage facilities. By
acting as a reliable transit and storage partner, Kiev can create
additional supply options for itself, from both neighbors in Europe
and even Russia. However, companies will not utilize these immense
storage facilities if they do not trust Ukraine to release these
supplies or pay its bills.
Additional natural gas suppliers can also improve the security of
supply in Europe. The most promising new source of gas into Europe
is the Southern Gas Corridor. Beginning in 2019, this project will
bring natural gas from Azerbaijan to southern Europe. This project is
the first in decades to bring new volumes of natural gas into Europe
(as opposed to only transiting existing supplies). This project also
reaches specific gas markets of southern Europe that have previously
relied primarily on a single source, leading to supply vulnerability
and high import prices.
The Southern Corridor is a massive project, involving seven countries,
six regulatory systems, twelve investing companies, and costing $45
billion. It will bring significant investment and create tens of
thousands of jobs in southern Europe. The Southern Gas Corridor is
an energy superhighway that can facilitate transport of increased
volumes of gas from different sources, such as additional fields
in Azerbaijan, Central Asia, Iraq, and potential production in the
eastern Mediterranean. Spurs can be built from the Southern Corridor
to reach additional markets in Europe, such as the Balkans. The project
is being built with double the capacity that is needed for its current
supply contracts and can be scaled up to a capacity of 60 BCM (2.2 tcf)
annually in order to serve as a conduit for additional supplies into
Europe. The Southern Gas Corridor will also serve as a catalyst for
new interconnectors in Southern Europe and thus should help improve
the supply situation in this region.
The State Department’s Bureau of Energy Resources (and specifically
Ambassador Carlos Pascual and Deputy Assistant Secretary Amos
Hochstein) and Directorate-General for Energy of the European
Commission, led by Commissioner Gunther Oettinger, have played a vital
role in cultivating this project and arriving at the final investment
decision in December 2013. This project, however, needs continued
support to ensure that Russia does not succeed in undermining it
along the route. Final Investment Decision is only one stage in the
process of establishing the Southern Gas Corridor.
Azerbaijan could have sold its natural gas at a higher profit to
neighboring Iran and Russia, but embarked on the ambitious Southern
Gas Corridor project in order to link itself with Europe and lower its
dependence on these neighboring states. This strategic choice entails
closer cooperation with Europe, Turkey, and the United States., but
also elicits potentially negative responses from Russia and Iran,
and thus needs U.S. and European political attention. Moscow may try
to disrupt this project by supporting bogus environmental movements
or using surrogate companies to buy infrastructure along the route.
Russia may also attempt to reignite the Nagorno-Karabagh conflict
between Azerbaijan and Armenia or destabilize Georgia in order to
thwart the Southern Corridor. In May 2014, the U.S. representative to
the OSCE Minsk Group, Ambassador James Warlick, made an important
statement reaffirming the long-standing U.S. policy on the
Nagorno-Karabakh conflict, and the State Department is attempting
to invigorate the peace process between Azerbaijan and Armenia. n2
Continued U.S. interest in resolving the conflict is important for
removing a potential means for Russia to destabilize the region.
Another potential new source of natural gas into Europe is from Israel
and Cyprus. Eastern Mediterranean gas will only be able to serve as
a source for mainland Europe if additional discoveries are found. At
this point, there is most likely only 200 to 300 BCM (7-10.6 tcf)
available for export, and these volumes would not justify a major new
export project. Exploration is continuing and additional volumes may
be discovered. Existing natural gas volumes, however, are still very
useful in improving the energy security and prosperity for Cyprus,
Israel, and their neighbors.
The discovery of significant reserves of offshore natural gas in Israel
in 2009 and 2010 and rather smaller volumes of offshore natural gas in
Cyprus in 2011 has sparked interest in their potential to contribute
to regional cooperation and peace. These newfound resources, it is
often said, can serve as peace catalysts and promote reconciliation
between Israel and its neighbors, facilitate the reunification of
Cyprus, and foster cooperation between Cyprus and Turkey. However,
the probability that these new natural gas resources may serve as
a lever for conflict resolution or produce far-reaching geopolitical
effects is rather low. There is no evidence from elsewhere in the world
that trading in energy is an incentive for peace. Case studies show
no instances in which the incentive of energy trade led countries to
make concessions on issues critical to peace agreements such as borders
and the status of refugees.n3 Energy trade reflects existing peaceful
relations; it does not create them. In many cases, the causal arrow
points the other way; disputes over energy resources or commercial
conditions of trade can exacerbate existing political conflicts.
While the new natural gas volumes may not serve as “peace pipelines,”
cooperation in the development of these resources can reinforce any
political breakthroughs in the Middle East peace process or in efforts
to find a comprehensive solution to the problem of the division of
Cyprus. Moreover, the development of these resources has the potential
to benefit the greater region by lowering the costs of desalination and
increasing the supply of fresh water, and therefore these new natural
gas reserves can contribute to the elimination of water conflicts
in the region. The increased water supply enabled by the new natural
gas volumes has already had a positive impact in the region.
The new natural gas resources can also help the region by providing
reliable and affordable electricity to the Palestinian territories,
Jordan, and potentially to Lebanon and Syria. This is especially
significant to a region where most countries’ electricity supply is
limited to certain hours of the day and where electricity production
is unstable and cost-prohibitive.
In recent months, there has been some speculation that if a deal on
Iran’s nuclear program was reached with the West, Tehran could serve
as a new supplier of natural gas to Europe and thus reduce dependency
on Russia. This idea is quite far-fetched. While Iran indeed holds the
second-largest natural gas volumes in the world, today Iran is, rather
surprisingly, a net importer of natural gas. Due to low production
volumes, huge domestic consumption, and low energy efficiency–all of
which are exacerbated by gas price subsidies–Tehran imports today
more gas than it exports (to Turkey and Armenia). In addition, if
Iran tried to launch a gas export project to Europe, Russia would
surely block it. In the past, Moscow has taken steps to block the
entrance of Iran into European gas markets: in 2006, Gazprom bought a
pipeline from Iran to Armenia and limited its size to ensure that it
could be not be used to carry Iranian gas into Europe. While Russia
and Iran may seem like allies, their cooperation is tacit. Over many
issues there is strategic competition between Iran and Russia, and
especially in the sphere of potential natural gas export.
As part of improving the security of supply, Europe must foil Moscow’s
effort to prevent new supplies from reaching Europe. Moscow employs
sophisticated policies to continue its role as the dominant energy
supplier in Europe and blocks indigenous production efforts in
Europe and rival supply projects. For instance, Moscow sponsors and
funds bogus environmental movements to oppose shale gas production in
Europe and new gas pipeline projects. Astute, professional government
analysis should identify and disrupt the sophisticated organizations
and companies that Moscow utilizes to protect its dominance in Europe.
Policies should be enacted that would remove the nonprofit status of
these groups that collaborate with Russia and legislation similar to
that that combats terror financing should bar European organizations
from receiving funds from Moscow that are intended to promote Russia’s
foreign and security policy aims.
In addition, the EU should investigate Moscow’s use of surrogate
European and Russian companies and enact legislation that bars
this behavior. Moscow attempts to gain influence over rival projects
directly, via Russian companies, or indirectly, through closely allied
companies in Europe, to hold on to its influence over the supply of
gas to Europe. Gazprom and a number of European companies also use
informal alliances to circumvent EU legislation meant to unbundle
energy production, transmission, and distribution.
Another mechanism that Moscow can exploit to influence gas trade is
manipulation of gas hub trade in Europe. The EU has encouraged the gas
trade to transfer from long-term contracts with set prices or prices
pegged to oil or other commodities to gas trade hubs with spot prices.
Many new gas supply contracts signed in recent years have hub-based
prices for part or all of their supplies. In Europe’s case, the
adoption of hub pricing may actually allow outside players to increase
their hold on Europe. Gazprom, the largest source of gas traded
currently on the continent’s hubs, could manipulate hub prices by
flooding or withholding gas from particular hubs to its own advantage.
Policy mechanisms must be devised to prevent Russia or other actors
from price manipulation at Europe’s gas trade hubs.
The new EU energy security strategy calls for coordination among
its members and solidarity after recognizing that the energy supply
situation in eastern and southern Europe differs fundamentally from
that of western Europe. Eastern European states must embrace policies
designed to boost their own long-term security and independence, and
Washington and Brussels should clarify to NATO and EU members that
belonging to these organizations entails obligations related to their
energy infrastructure and security. Bulgaria’s reluctance to implement
policies intended to improve its security of supply is particularly
worrying, as it appears to reflect Russia’s strong influence and
frequent intervention in domestic political developments there.
Despite the EU’s strong public support for policies to avert climate
change, Europe’s carbon emissions have risen in recent years. This
is due primarily to the rise in coal consumption in Europe. It seems
that Europe’s failure to reduce its emissions emanates from the fact
that it has linked its climate change policy to its renewable energy
policies. Mandatory use of renewables has inadvertently encouraged
utilities to use coal as a way to lower electricity production costs,
thus contributing to the unintended consequence of rising emissions.
In order to address this challenge, the EU needs to separate its
climate change policy and renewable energy policy. Wind and solar
power in their current technological states, regardless of how many
subsidies are thrown at them, cannot deliver sufficient energy to
current consumption demands. Europe needs climate change policies
that address current consumption levels, with funds also invested in
Europe’s laboratories to discover the answers for the renewable future.
Ensuring Europe’s natural gas security of supply entails a paradigm
shift in energy policy. Up until this year, Europe’s approach to the
issue has focused on strengthening market mechanisms (“liberalization”)
and reducing both EU and national government involvement in Europe’s
gas trade. Over the years, as the challenges have grown, Brussels has
increasingly pulled European Union institutions and member states out
of the business of ensuring energy security and delegated the job to
the invisible hand of the market.
But the marketplace alone will not be enough to counter a relentless
Russia. National and EU institutions must take a more active,
strategic role.
n1 For more on natural gas supply disruptions and foreign policy,
see Brenda Shaffer. “Natural gas supply stability and foreign policy.”
Energy Policy 56 (2013): 114-125.
n2
n3 For more on “peace pipelines,” see Brenda Shaffer, “Natural
gas supply stability and foreign policy,” Energy Policy 56 (2013),
p. 6; Brenda Shaffer, Energy Politics (Philadelphia: University of
Pennsylvania Press, 2009), pp. 70-74.
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From: A. Papazian