EU-Russia: energy security and geopolitics

17 March 2006

The European Policy Centre, together with the King Baudouin Foundation, held a Policy Dialogue on EU-Russia: energy security and geopolitics. Keynote speakers Pierre Noël, Research Fellow, Energy Studies, Institut Français des Relations Internationales (Paris), and Andrew Monaghan, Director of the Russian Research Network (London) were joined by panellists Howard Chase, Director, European Government Affairs, BP Europe; Jeffrey Piper, Directorate-General for Energy and Transport (International Relations), European Commission; and Konstantin Trofimov, Deputy Permanent Representative of the Russian Federation to the European Communities. The meeting was chaired by EPC Senior Advisor Fraser Cameron.

A brief history of energy

Pierre Noël summarised the recent history of the Russian energy industry: after a decline at the end of the 1980s, the sector had been reorganised and production had risen from an 8% share of the world market in the 1990s to 12.5% in 2004. This “revival” had helped to balance world oil supply by compensating for the decline in non-OPEC sources.

Despite this positive picture, short- and medium-term disruption of oil supplies has significantly increased, triggering a rise in prices, explained Mr Noël. He indicated ‘hot spots’ where short-term disruption affects supply: Nigeria Venezuela, Iraq, Iran and Saudi Arabia. The major areas for mid-term risks are the Middle East, Latin America, sub-Saharan Africa and the Caspian Basin.

Meanwhile, said Mr Noël, Russia presents mid-term challenges of its own, since financial shortfalls, coupled with legal and political insecurity, make it difficult to open up new oil reservoirs. Despite this, Russia is still a “bright spot” for international investment as it is a “governed”, orderly country and, for the EU, a large potential energy source.

Unlike its oil sector, Russia’s gas industry has not undergone a major reorganisation and the market is still dominated by the Russian company Gazprom. There is high domestic demand and almost all of Russia’s current exports are directed at the EU. However, it could play a bigger role on the world market when ‘stranded’ gas resources in the Barents Sea and eastern Siberia are developed.

Active engagement with Russia needed

Andrew Monaghan stressed the importance of active political, financial and practical engagement with Russia.

Events over the last six months have highlighted the EU’s apparent dependence on Russian oil and gas, prompting suggestions that, to make itself less vulnerable, the Union should diversify its energy sources and suppliers. However, Mr Monaghan questioned whether “diversity would solve all problems”, arguing that it would not guarantee energy security, as different EU Member States already get supplies from diverse sources. Diversification could also prove expensive where it involves constructing new transit lines.

He also questioned just how secure alternative suppliers such as Iran, Nigeria or Libya were, arguing that a better solution for the EU would be to emphasise “domestic energy security”, with greater energy efficiency and reduced consumption.

Perceptions of comfort or vulnerability “play a crucial role in energy security”, said Mr Monaghan, adding that the current view of the energy issue as ‘producers versus consumers’ was “too simplistic” as it ignored the fact that some countries were both suppliers and consumers. In Russia, for example, this could mean that as its industry improved, domestic consumption would rise. This could drive national companies such as Gazprom to concentrate on the domestic market to the detriment of foreign consumers.

The ‘consumer vs producer’ definition also overlooks the mutual dependence of both parties. The EU “is crucial for the Russians”, said Mr Monaghan, as Russia is concerned that the Union could look for other suppliers or use the energy dialogue to press for other changes in Russia. The relationship between the two sides should be nurtured and strengthened to overcome mutual insecurity.

Mr Monaghan argued that people had unrealistic expectations about Russia’s long-term energy supply. It currently relies on large oil fields, but these are in serious need of investment, and new fields in Siberia and the Arctic require costly infrastructure. As for the gas industry, production is likely to plateau by 2010 and Gasprom’s financially straightened position means that it will not be able to invest in new fields.

Despite these obstacles, Mr Monaghan was enthusiastic about the EU-Russia energy dialogue, launched in 2002 and suggested a three-pronged approach for the EU. He said it should work towards greater domestic efficiency, consider policy strategies for transit states, and bring the EU-Russia energy relationship within the remit of the EU’s Common Foreign and Security Policy.

Energy - the global viewpoint

Howard Chase looked at EU energy from the global perspective and argued that, given the diversity of its supplies, the Union was well-placed to cope with disruptions and uncertainties.

For Mr Chase, the real issue was “investment” in energy, both to maintain the current energy infrastructure and to develop new energy sources. He pointed out that because of the long time frame involved in developing new infrastructure – which sometimes takes more than 20 years - investors in the Russian energy sector needed to have confidence that they would make long-term financial gains.

He was unhappy about the language of ‘dependency’ being used in relation to energy, preferring the more “productive” language of the market-place; i.e. “customers”, “supply” and “demand”.

Mr Chase said that given all the positive developments in the Russian economy, the EU was politically and geographically well-positioned to develop a long-term relationship with Russia as its major energy supplier. However, he stressed the need for clear Russian and EU energy policies.

EU Green Paper sets out the key challenges

Jeffrey Piper began by introducing the Commission’s Green Paper on energy. This sets out the key challenges: increasing energy efficiency; creating open and competitive energy markets; making long-term investments in energy; and diversifying the energy mix, including low-level and renewable resources.

It was important for the EU to have coherent external and internal energy policies, said Mr Piper. It needs to complete its internal oil and gas market, creating an integrated market of the 25 Member States, and is drawing up treaties with regions outside the Union.

Mr Piper saw the EU-Russian energy dialogue as a positive confidence-building exercise and a forum for discussion about investments, infrastructure and trade. This relationship should be further developed, he said, to create security and predictability for both parties. During its presidency of the G8, Russia would be stressing the importance of energy security, both in supply and demand.

Understanding energy needs first-hand

Konstantin Trofimov praised the achievements of the EU-Russian dialogue over the last six years. Its recommendations had been practically oriented, and it had looked at the need for investment in Russian energy and efficiency polities.

He explained that Russia knew from direct experience about the importance of preserving energy supplies: for example, during this year’s very cold winter, the government had cut off energy supplies to less important industries in order to preserve enough for domestic heating.

Russia was opening up its energy market and encouraging EU companies to participate in its energy strategy, as well as working directly with individual EU Member States, said Mr Trofimov. It is also diversifying its own resources, including nuclear energy (provided it is safe).

Energy security is an important issue, and research is being carried out to find new deposits and develop more efficient technologies. Moscow has set a target of reducing energy use by one third by 2010 and, said Mr Trofimov, would welcome EU support to achieve this as part of a mutually advantageous EU-Russian cooperation.