European Energy Security and Transatlantic Cooperation: a Current Assessment
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ISSUE BRIEF European Energy Security and Transatlantic Cooperation: A Current Assessment JUNE 2019 RICHARD L. MORNINGSTAR ANDRÁS SIMONYI OLGA KHAKOVA IRINA MARKINA INTRODUCTION This brief emerged from discussions during an Atlantic Council Global Energy Center roundtable on European energy security held in Brussels on March 27, 2019, as well as other events and individual meetings with government officials, private sector executives, and leading academics in the global energy sector. The collective dialogues and key takeaways are reflected in this brief. Because the conversations took place under the Chatham House Rule, the information will not be attributed to any spe- cific individual. The brief will provide a current assessment of EU energy security focusing on the role of gas markets, while future briefs in the European Energy Security series will take a closer look at other critical issues impacting European energy security. Following these briefs, a final report in 2020 will propose specific recommendations for the US and EU governments on how to address transatlantic energy security issues. he transatlantic community has made significant progress leverag- ing global energy resources to increase energy security, thanks to Ttechnological advancements in renewable energy, energy efficiency, shale oil extraction; the development of alternative sources and routes; The Global Energy Center promotes and new infrastructure. However, security challenges for European energy energy security by working along- continue to arise as malign actors use energy for geopolitical coercion, side government, industry, civil society, and public stakeholders to communities around the globe grapple with the realities of climate change, devise pragmatic solutions to the and geopolitical conflicts threaten the security of supply and access to geopolitical, sustainability, and eco- sustainable resource development. Transatlantic cooperation on energy nomic challenges of the changing security will be essential to addressing those global challenges and should global energy landscape. be prioritized by US and European Union (EU) leadership, since energy security translates into national, political, and economic security. ISSUE BRIEF European Energy Security and Transatlantic Cooperation Despite tensions in the areas of trade and sanctions, States have created 4.3 million jobs.2 In addition to and growing nationalism on both sides of the Atlan- their mutually beneficial economic relationship, the tic, energy security has been, and should continue to United States and EU hold shared values regarding the be, at the pinnacle of US-EU collaboration. US and EU importance of the free market, rule of law, and demo- energy security interests also have a strong economic cratic societies. A united and well-connected Europe is component, as trade between the two totaled $1.3 tril- a more resilient Europe, and the United States benefits lion in 2018.1 Moreover, 54 percent of global investment in many ways from having a strong ally with vast ener- into the US comes from Europe, while 64 percent of gy investment opportunities. US engagement in Euro- US global investment goes to Europe. US companies’ pean energy security is motivated by national strategic investments in Europe have produced 4.7 million jobs, priorities, mutual economic interests, and transatlantic while European companies’ investments in the United interests in liberalized and integrated energy markets. Figure 1: Figure 2: EU-28 Total Final Consumption by Source, 1995 EU-28 Total Final Consumption by Source, 2016 3.03% 3.99% 4.21% 6.68% 0.23% 0.06% 17.14% 21.04% 4.09% 0.23% 7.93% 41.20% 45.96% 0.24% 21.83% 22.12% Coal Oil products Geothermal Electricity Biofuels Crude oil Natural gas and waste Heat Source: World Energy Balances 2018, International Energy Agency. 1 “European Union,” Office of the United States Trade Representative, accessed April 2019, https://ustr.gov/countries-regions/europe-middle- east/europe/european-union. 2 Daniel S. Hamilton and Joseph P. Quinlan, The Transatlantic Economy 2018: Annual Survey of Jobs, Trade and Investment between the United States and Europe, Center for Transatlantic Relations, 2018, https://archive.transatlanticrelations.org/wp-content/uploads/2018/03/TA2018_ FullStudy.pdf. 2 ATLANTIC COUNCIL ISSUE BRIEF European Energy Security and Transatlantic Cooperation Engagement in European energy security also pre- efficient functioning of EU energy markets and pinpoint sents an opportunity to reinvigorate transatlantic ties priorities for US and EU cooperation. with US allies in times of uncertainty and transforma- tional change across the energy sector. KEY EUROPEAN ENERGY TRENDS AT A GLANCE This brief provides an overview of the current energy security landscape in Europe. This series will continue An overview of the EU’s current energy mix demon- to appraise the progress made to liberalize and inte- strates both the diversity of energy sources powering grate EU energy markets, which is imperative to iden- the EU and the crucial role that imports play in meet- tify where US engagement on EU energy security will ing its energy needs. In the last twenty years, the EU’s be most effective, and it will explore obstacles to the energy mix has shifted to include more renewables and Figure 3: Figure 4: 2016 World Energy Production by Region 2016 World Energy Consumption by Region 8% 6% 19% 17% 14% 29% 16% 39% 5% 10% 5% 5% 15% 12% Africa EU-28 Russia Rest of the world Asia Middle East United States Source: EU energy in figures, Statistical pocket-book 2018, European Commission. ATLANTIC COUNCIL 3 ISSUE BRIEF European Energy Security and Transatlantic Cooperation natural gas, while decreasing the share of solid fuels and shift the balance of power away from market pricing and petroleum products.3 toward the ability of monopolistic suppliers like Gaz- prom—a Russian state-owned natural gas extractor, pro- The EU produces about 5 percent of global energy sup- ducer, and transporter—to utilize energy for geopolitical ply, while consuming around 12 percent.4 As long as the pressure. This is a serious energy and political security EU relies on imports for more than half of its energy con- threat for energy consumers. sumption, diversification of supply, including clean ener- gy, will be key to ensuring energy security. US and European Gas Market Trends Diversified Gas Markets are Natural gas markets have gone through tremendous Key to EU Energy Security changes in the last decade. Thanks to technological advancements and efficiencies in the production and The EU’s reliance on energy imports will increase as coal transportation of LNG, the United States experienced and nuclear power plants retire, domestic production the shale revolution.6 Global LNG markets have shifted continues its decline, the transportation sector ramps up toward market-driven pricing mechanisms. Stronger cli- electrification, and the EU member states devise plans mate targets and pollution controls have also elevated to meet climate targets under both the Paris Agreement the role of natural gas in serving global energy needs. and the Energy Union policy framework. Natural gas pricing is moving away from oil-linked pric- The robust growth in renewable energy deployment and ing models and in the direction of hybrid, market-based continued investments in energy efficiency will take care hub pricing and spot pricing. “Take or pay” and “desti- of some of the lost capacity. Nevertheless, natural gas— nation” clauses in LNG contracts—which restrict where both piped gas and liquefied natural gas (LNG)—will shipments of gas can be unloaded and prevent buyers continue to play an essential role in fueling Europe and from selling on excess cargoes—are becoming less pop- serving as a bridge fuel in the shift toward a low-carbon ular and, in some cases, obsolete.7 While suppliers and economy. The EU’s energy leadership acknowledges investors prefer the predictability of long-term con- that natural gas will remain “an important component” tracts, such terms are becoming less attractive. In the of the EU’s energy mix, but its role will evolve by the current “buyer’s market,” consumers flock to destina- middle of the century to become a “complement” to tion flexibility and spot or short-term contracts, which electricity generation from wind and solar power.5 Ac- reinforce optionality. cess to LNG and a well-integrated internal pipeline net- work remain essential to European energy security, as These changes demonstrate that gas markets are be- gas fuels 23 percent of the EU’s total energy needs, sec- coming more competitive and transparent in pricing. ond only to oil’s roughly 36 percent share of the energy However, a fully liquid global gas market does not yet mix. However, gas is not as fungible of a commodity as exist. Large price disparities remain across North Amer- oil, meaning that it is not as easily traded on global mar- ican, European, and Asian natural gas and LNG markets. kets. Though European gas markets have become more This is an opportune area for US and EU collaboration. liberalized and better connected, the price discrepancies The United States has an important role to play as a throughout EU states and regions are a testament to the reliable LNG supplier for Europe, and the transatlantic infrastructural barriers and market distortion caused by allies have a unique opportunity to work together on having a dominant single supplier. Those constraints managing key natural gas market trends driving the shift 3 EU energy in figures: Statistical pocketbook 2018, European Union, September 25, 2018, https://publications.europa.eu/en/publication- detail/-/publication/99fc30eb-c06d-11e8-9893-01aa75ed71a1/language-en/format-PDF/source-77059768. 4 Ibid. 5 Frédéric Simon, “Cañete sees gas as ‘a bridge’ to reach EU’s clean energy goals,” EURACTIV, February 11, 2019, https://www.euractiv.com/ section/climate-strategy-2050/news/canete-sees-gas-as-a-bridge-to-reach-eus-clean-energy-goals/. 6 Ellen Scholl, The Future of Shale: The US Story and Its Implications, Atlantic Council, January 8, 2019, https://www.atlanticcouncil.org/ publications/reports/the-future-of-shale.