The EU-Russia Gas Connection: Pipes, Politics and Problems Edited by Kari Liuhto
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Edited by Kari Liuhto The EU-Russia gas connection: Pipes, politics and problems Electronic Publications of Pan-European Institute 8/2009 ISSN 1795 - 5076 EU-Russia gas connection: Pipes, politics and problems Ed. by Kari Liuhto Contents Foreword 2 European security of gas supply - A new way forward 3 Edward Christie Europe’s triple by-pass - The prognosis for Nord Stream, South Stream and Nabucco 23 David Dusseault The impact of Nord Stream, South Stream on the gas transit via Ukraine and security of gas supplies to Ukraine and the EU 49 Michael Gonchar, Vitalii Martynyuk and Andriy Chubyk EU-Russia gas relations 70 Leonid Grigoriev and Maria Belova EU-Russian natural gas relations - Pipeline politics, mutual dependency, and the question of diversification 92 Roderick Kefferpütz The EU needs a common energy policy - not separate solutions by its member states 109 Kari Liuhto Some institutional factors of the EU’s logistics in EU-Russia natural gas relations 141 Miklos Losoncz Energy security in Europe in the aftermath of 2009 Russia-Ukraine gas crisis 158 Peeter Vahtra Nord Stream - A solution or challenge for the EU? 166 Bendik Solum Whist 1 PEI Electronic Publications 08/2009 www.tse.fi/pei Foreword Siberian Blue Gold caused cold in South-East Europe at the beginning of this year, when the natural gas deliveries from Russia via Ukraine to the EU were stopped for a few weeks. This non-delivery, not the first time this has occurred, has finally forced the EU politicians into a re-think about the Union’s energy security and Russia’s reliability as an energy supplier. In order to aid this evaluation process, the Pan-European Institute has approached several intellectuals to offer their view on the EU’s gas imports and assess the various pipeline alternatives proposed. This report provides a reader with a comprehensive information basis and an objective starting point for a larger debate on the issue, which will determine the energy security of the EU and its neighbours for decades to come. The generations of tomorrow will judge us through the decisions and actions we will take today. The discussion on the European energy issues will be continued in the publications of the Pan-European Institute and economic monitoring reports, namely Baltic Rim Economies review. The aforementioned publications and reports are free of charge and available to all the audience at the Pan-European Institute’s website indicated below. I wish to thank all the writers and the following Finnish research foundations which have made it possible to conduct this report and numerous earlier studies linked with the theme; Emil Aaltonen Foundation, Foundation for Economic Education, Jenny and Antti Wihuri Foundation, The Marcus Wallenberg Economic Foundation and The Paulo Foundation. Turku, April 14th 2009 Kari Liuhto Professor, Director Pan-European Institute Turku School of Economics Finland www.tse.fi/pei 2 PEI Electronic Publications 08/2009 www.tse.fi/pei European security of gas supply - A new way forward Edward Christie 1 Contents Foreword 4 Introduction 4 EU demand scenarios and demand-side policies 5 Russian supply potential 7 Russia’s geopolitical energy strategy 10 Transit corridors and transit investment projects 15 Conclusions 20 References 22 1 Edward Christie is Economist at the Vienna Institute for International Economic Studies (wiiw). His research interests include energy economics and energy policy; the informal economy, tax evasion and non-compliant economic behaviour; and the links between economics and geopolitical issues. He is also the Editor of the wiiw Working Paper Series. 3 PEI Electronic Publications 08/2009 www.tse.fi/pei Foreword It is March 2009. The European Union has once again been surprised and shaken by a cut in Russian gas supplies in the middle of winter. Bulgaria was hit hard. Ukraine seems to be on the verge of collapse. Less than one year ago, Russian tanks rolled into the sovereign state of Georgia, and imposed on the world a de facto annexation of two parts of that country’s territory. For a few tense months in late summer and autumn 2008, many wondered how far relations between the Russian Federation and the Euro- Atlantic community would fall. Paradoxically, the onset of a global financial and economic depression seemed to offer a temporary reprieve. However there is little doubt that Europe went through a dangerous phase. US Vice President Joseph Biden summarised the situation succinctly in his speech at the 2009 Munich Security Conference, stating that “the last few years have seen a dangerous drift in relations between Russia and the members of our Alliance”. While the new administration of US President Barack Obama is attempting to re-define the parameters of US-Russia relations, the strategic question of Europe’s energy supplies remains on the table, partly unsolved, and potentially subject to further tensions and disagreements. However the United States will not, and cannot, solve all of Europe’s problems. The time has come for Europeans to make their own contribution to the future strategic stability of their continent. Introduction The European Union is in many dimensions a global heavyweight. It is the world’s largest economy as well as its largest trading block. It has a population of roughly half a billion inhabitants, with very high average income levels, and is for most goods and services the world’s largest market. On the other hand, the European Union presents a number of structural weaknesses. Its internal political cohesion is far below that of a federal state, as crucial areas of policy, notably foreign policy, security and defence policy, and indeed energy policy, are still mostly in the hands of the governments of its member states. Moreover, and this compounds the latter in the current debate, it has very low domestic reserves for all major types of fossil fuels, in particular crude oil and natural gas, but also coal. At the same time, the European Union has set ambitious targets for itself in terms of reducing greenhouse gas emissions, and is naturally not immune to global geopolitical developments, which, moreover, potentially affect the Union in a highly asymmetric manner. 4 PEI Electronic Publications 08/2009 www.tse.fi/pei On the other side of the debate one finds the Russian Federation, a great nation that has taken a wrong turn on its way to democracy. Russia’s vast resources can be a gift or a curse for Europe, depending on what strategies are pursued. The Russian Federation has pursued a careful strategy of divide-and-rule over the European Union and is likely to continue to do so in the future. That strategy can however be countered. EU demand scenarios and demand-side policies The European Union is the 2nd largest regional market for natural gas, closely behind North America. However, in great contrast to North America, the EU as a whole has relatively small natural gas reserves and a fast increasing import dependence ratio. This is in part due to the fact that UK and Danish North Sea gas reserves, the bulk of EU gas reserves, will be almost completely depleted by 2015. General EU gas consumption is already high. In addition, environmental policies are incentivising countries and industry to shift their energy product mix in favour of natural gas. Older regulations with respect to sulphur emissions already favoured natural gas over coal or fuel oil. Moreover, natural gas is less CO2 intensive per unit of energy than coal. Therefore, in the absence of any strategic or national security imperative, current policies naturally encourage both governments and industry to demand more natural gas. Fortunately there are a number of ways in which these trends can be forestalled, and in this respect environmental policies can make a favourable contribution if they are adequately designed. The European Union recently committed to the 20-20-20 initiative. The vision was proposed by the Commission, and endorsed in 2008 by the Council (the member states) and by the European Parliament. The goal of the 20-20- 20 initiative is that by 2020 the EU should be emitting 20 % less greenhouse gases as compared to 1990 levels, it should have a share of renewables in its energy mix equal to at least 20 %, and its energy efficiency should improve by at least 20 %. That general strategy is forecast to yield favourable results in energy security terms. A lower energy intensity as well as a higher reliance on renewables both lead, ceteris paribus, to lower demand for natural gas, and hence to lower demand for imported natural gas. On the other hand, the goal of reducing greenhouse gas emissions can lead to perverse incentives from an energy security viewpoint. Naturally, climate change must be tackled, and the only currently available policy is to reduce the volume of 5 PEI Electronic Publications 08/2009 www.tse.fi/pei combustion of fossil fuels. Given more general constraints on prices and technology, non-renewable fossil fuels (oil, gas, coal) are widely predicted to remain by far the most important component of the global and European energy mix for the next few decades. Innovative solutions such as carbon capture and storage (CCS) are being actively pursued at the pilot level by leading energy companies and are strongly encouraged (also financially) by the EU and many member states. That said, in the absence of CCS, the EU’s Emissions Trading Scheme (EU ETS) naturally incentivises natural gas over other fossil fuels. This has contributed to what has been dubbed the ‘dash for gas’, and these incentives, far from being removed, will in fact increase over the next decades. As a result, the relative shift in favour of natural gas will continue over the next years.