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Energy Diplomacy

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FOREIGN AFFAIRS RESEARCH PAPERS March 2019 11

REPUBLIC OF BULGARIA Ministry of Foreign Affairs Diplomatic Institute

Energy Diplomacy

FOREIGN AFFAIRS RESEARCH PAPERS 11 March, 2019

This Journal is issued with the support of:

Consultant: Slavtcho Neykov Editor: Stela Stancheva Prepress and Print: Alliance Print Ltd., Graphic Design and Cover: Alliance Print Ltd. Sofia, 2019

Published by: © Bulgarian Diplomatic Institute, 2019 http://bdi.mfa.government.bg Facebook: Bulgarian Diplomatic Institute

Sofia ISBN 978-619-7200-13-3 CONTENTS

Energy Diplomacy journal – Introduction……………………………………….6 Foreword by Slavtcho Neykov

Energy security as a global policy concern – Historical development and evolution of the concept………………………………………………………..12 Velislava Dineva The Black Sea region – Energy security and connectivity……………………..27 Hristo Mihaylov

Political and policy aspects of preferential energy prices at EU and national levels and Bulgaria’s approach…………………………………………………41 Kaloyan Staykov

The EU Presidency and the Process of shaping up the Fourth Energy Package…………………………………………………………………………56 Hristiyana Popova DG Competition – The new European energy regulator? ...... 67 Assoc. Prof. Atanas Georgiev, PhD

Hydropower and energy diplomacy on the edge – The dispute between Ukraine and Moldova over the Dniester River...... 75 Ion Efros

Caspian Aspects of the Bulgarian energy strategy – How Azerbaijani gas can contribute to the Balkan Gas Hub...... 85 Gulmira Rzayeva, Plamen Dimitrov, PhD

The energy component of modern-day conflicts in the Eastern Mediterranean…………………………………………………………………..92 Plamen Hristov, PhD

Energy co-operation between the EU and Iran – Future challenges and the way forward………………………………………………………………………..106 Dimitar Ivanov

More about the Bulgarian Diplomatic Institute……………………………….126 More about the Hanns Seidel Foundation………………………………….…129 Notes….…………………………………………………………………….…131 Аnnexes…………………………………………………………………….…133

The contents of this paper are the authors’ sole responsibility. They do not necessarily represent the views of the Bulgarian Diplomatic Institute.

ENERGY DIPLOMACY JOURNAL, 2019

Slavtcho Neykov1 INTRODUCTION

By the end of 20182 the energy topic remains as turbulent as before – and the turbulence trends are upwards. The energy issue continues to provide substantial reasons both for serious considerations and political and policy concerns – regardless whether one refers to international, European or regional level while considering specific national developments. The papers included in the current issue of the Energy Diplomacy Journal, prepared as part of the activities of the Diplomatic Institute to the Bulgarian Minister of Foreign Affairs3, reflect the above-mentioned trends, even though they examine in earnest a small part of these. In this context, this latest issue provides the authors’ views on a wide variety of subjects of different nature: conceptual (e.g. energy security); global (e.g. the Iranian nuclear deal, the United States and the European Union); EU-related (e.g. the role of the Directorate-General for Competition in the energy field); regional (e.g. some specific energy aspects in the Eastern Mediterranean region); and some with distinctly national flavour (e.g. certain conflicts between Ukraine and Moldova). Thus, one shall have a chance to get concrete opinions on completely different aspects of the energy related trends and developments – even if the readers do not necessarily share the expressed personal positions, including mine in the current introductory notes. In fact, reasoned disagreement is always welcome in such cases.

1 Slavtcho Neykov has more than 26 years of uninterrupted experience in the energy sector, including as Secretary-General of the Bulgarian Ministry of Energy, Member of the State Energy Regulatory Commission, expert at the Energy Charter Secretariat in Brussels, and Director of the Energy Community Secretariat in Vienna. In addition to his experience as a state and international official, he has sat on the board of directors of several energy companies. Prior to his involvement in the energy sector, he has worked as a state prosecutor and legal advisor. In addition to holding a law degree from Sofia University ‘St Kliment Ohridski’, Mr Neykov has completed a two-year postgraduate programme on international economic relations and foreign economic activities. He also holds a Master of Arts in European Integration from the University of Limerick, Ireland. Since the end of 2014, he has been serving as Chairman of the Board of Directors of the Energy Management Institute in Sofia. Mr Neykov is also a member of the Board of Directors of the Union of the Electricity Industry – EURELECTRIC.

2 The current comments reflect facts as till 04.12.2018. 3 This issue of the Energy Diplomacy Journal has been made possible with the support of the Hanns Seidel Foundation [Hanns Seidel Stiftung] in Bulgaria. 6

The outlined frame and the presented content of the edition should be also looked at along some specific energy related aspects of more general nature, which in my view as a consultant to the journal, are worth recalling – particularly at European level. In parallel, however, there are some regional points, which need to be mentioned, from the perspective of South-East Europe. Further, the review would be certainly not complete without some references to the Bulgarian energy policy. Thus, once again one could trace the strong link between the national, regional and European energy trends, which – without any doubt – are also subject to influence by worldwide considerations. In the Bulgarian context, however, there was something else, which influenced very much the national scene and in parallel marked substantial steps at European level – this was the EU Presidency.

ENERGY AND THE BULGARIAN EU PRESIDENCY 2018 was a specific year for Bulgaria in the overall EU context – it was the year of the Bulgarian Presidency of the Council of the EU, which took place for the first time. And here one should recall a rather common statement - there are no unsuccessful presidencies. And – as per outside evaluations - the Bulgarian one is no exception. Nonetheless, without any doubt, it could not be considered individually outside the overall EU developments – this provided the background for some analysts to state that the Bulgarian Presidency was successful, but EU crises are still not solved4. Certainly, such a view on the topic should not undermine what has been achieved within this six months’ period (January-June 2018). Further, it should be noted that Bulgaria is in a Presidential trio with Estonia and Austria – and one of the common priorities of this troika is also linked to energy, targeting the development of the Energy Union with a forward look at the climate policy. However, prior to focusing on energy, there is one specific point to be underlined in relation to the Bulgarian Presidency. This is its motto– “UNITED WE STAND STRONG” – and there is hardly better combination of words for the EU at the moment. In fact, in the energy field the Bulgarian Presidency proved that this motto refers not only to the EU member states. One of the Presidency priorities was linked to the Western Balkan countries and their European perspective. In fact, within the EU there was consensus agreement expressed on the necessity to invest particularly in connectivity, including in the energy field. Thus, concrete objectives, including in the field of energy, were identified, the achievements of which should benefit both EU and the Western Balkans – this was summarized in the Sofia Declaration dated 17.05.2018. There are several explicit references to energy in its text. Thus, “...The EU agrees to promote a market- and investment-friendly environment in the Western Balkans to move faster towards a digital economy and to sustainable and climate-friendly societies in line with the Paris agreement. Energy security will be prioritized, including through improved energy efficiency, better cross-border inter- connections, diversification of sources and routes, as well as a balanced energy mix better integrating renewable energy”. Further, it is stated that “… the EU welcomes the Western Balkans partners’ commitment, inter alia, to accelerate the implementation of the acquis under

4 See The Brussels Times, 24.06.2018, available at http://www.brusselstimes.com/eu-affairs/11720/successful- bulgarian-presidency-but-eu-crises-still-not-solved 7 the Energy Community and Transport Community Treaties, to remove all administrative barriers at borders, to complete the Regional Electricity Market...” 5 Substantial steps during the Bulgarian Presidency were also made when it comes to the development of the EU energy related acquis concerning energy efficiency, renewables, the Agency for Cooperation of the Energy Regulators and the Energy Union governance6. Thus, although the energy topic was only one among others within this EU Presidency period, the Bulgarian authorities certainly gave in this relation an important footprint in the overall process of EU integration. Let’s recall that energy has always been considered as a backbone of the cooperation between EU and non-EU states. This resulted in concrete in the successful Energy Community process7, via which the energy policy of the European Union gradually became energy policy of the whole of Europe – and the Bulgarian Presidency gave its visible contribution in this development.

FEW POINTS ON THE REGIONAL SCENE … Although the perception of energy regions changes and has different dimensions, depending on the context, some general trends and summary conclusions can be made when it comes to South East Europe (SEE). In the energy context this region should be perceived as including not only the Contracting Parties of the Energy Community plus Turkey, but also some EU members – particularly Bulgaria, Greece and Romania. Despite the different EU related status, the common denominator is the EU energy related acquis, which the non-EU countries have committed to implement prior to joining the Union. In fact, in reality the biggest teaser for them in relation to this commitment is hardly the EU membership, although it is the most important political target. What is more important in real and shorter terms is the rule of law in general and the investments in the energy sector in concrete. The small individual markets (with some exceptions e.g. Ukraine) are hardly attractive for big investments – particularly if they lack common legal framework. Therefore, it has been decided that the market unification as a process shall follow the EU rules, which resulted in the Energy Community Treaty and the ongoing positive steps towards its implementation. In general, countries in SEE share same goals within the frame of the European energy policy – but they all suffer individually. Thus, along the achievements there are substantial problems as well. Some of these problems have specific national or strictly regional dimension, while others seem to have their roots outside SEE. Further, some examples shall be presented only for illustration purposes. One of the key challenges is the uneven implementation of the acquis by both some EU members and the Energy Community Contracting Parties. The lists of infringement procedures and disputes related to failures for compliance with the Energy Community Treaty are substantial and tend to increase8. This trend e.g. is reflected recently in the annual

5 https://www.consilium.europa.eu/media/34776/sofia-declaration_en.pdf - see items 7 and 9 explicitly. 6 Details on the Bulgarian Presidency of the Council of the EU and its outcome are to be found on https://eu2018bg.bg/ 7 Details on the Bulgarian Presidency of the Council of the EU and its outcome are to be found on https://eu2018bg.bg/ 8 See e.g. the latest decisions of the Ministerial Council of the Energy Community from 29.11.2018 8

Implementation Report for 2018, prepared by the Energy Community Secretariat9 and published at the end of October this year and indicates both substantial achievements and clear differences at national level, which prevent effective cooperation at regional one. These differences affect mostly the market integration and the development of big energy projects. Another issue, influencing very much the energy developments, which is at the doorstep, is the political instability. It is certainly for political experts to make analysis and conclusions in this specific field – I would just mention some objective facts, which negatively affect SEE in general e.g. the increasing tensions concerning the relations between Ukraine and Russia, between Serbia and Kosovo etc. Further to these problems, which seem to be mostly in the field of the individual countries, but have a regional impact, there are other issues, which influence the energy sector developments in SEE and which to a big extent are objectively or subjectively outside it. One of these issues is linked to the relations with Russia. And here the opinions vary both at national (even within the EU) and individual expert’s level. It is hardly the time and the place to make overall analysis on the topic. In summary, my personal opinion is that the relations with Russia have been unnecessarily complicated by sometimes improper political reactions. Directly or indirectly, Russia is and will remain a long term energy partner to most of the countries in SEE – and this refers not only to gas. Thus, from the perspective of the energy sector, where I feel more comfortable to express opinion, for me the sanctions against Russia have always been completely counterproductive. In this context, I gladly note some signs for principle change in positions at political level – and without any doubt, aside the factual side, this has also substantial economic background. The latter definitely refers to big projects (Turkish Stream; Nord Stream, some nuclear power considerations etc.). In addition, it also refers to new challenges, which might affect the energy security as a whole, where common efforts, including with Russia, are becoming more and more needed – e.g. the cybersecurity etc.

…….. AND COUPLE OF POINTS OF MORE GENERAL NATURE The list of specific points in the energy context can be certainly quite long. In the current frame I would like just to mention two of them, which are known, but for which the society will continue facing a long debate at all levels – these are the clean energy issue and the energy poverty. Unfortunately, it seems that there are no easy solutions in both aspects. Aside the summarized results on the implementation activities in the Energy Community process, the Secretariat’s implementation report for 2018 underlines that progress has been made in relation to the upgrade of the energy sectors, but more efforts are needed – and that such efforts are especially important, “... if the clean energy transition is to succeed in the Energy Community”10. However, the process of clean energy transition is not an issue only for the Energy Community – it is a well-known topic with international dimension, regardless how it has been formulated. After the Paris Agreement this old/new focus has different set up at global

9 https://www.energy-community.org/news/Energy-Community-News/2018/10/31.html 10 Ibid. 9 level. In fact, the work along the agreement is being widely supported and even led by the EU since its very start. In parallel, the EU itself continues its activities along the formal set- up, known as the “Clean Energy for All Europeans” package, where policy directions are combined with concrete set up of acquis. In fact, its most recent steps at Council level took place very recently (on 04.12.2018)11. The practical dimension of the clean energy topic attracts huge international attention. It is directly linked to healthcare, employment, investments, demography, as well as to the future of a whole set of industry – the one based on coal. Thus, upon some overenthusiastic considerations after signing the Paris Agreement in 2015, a wave of realism seems to gradually sweep away the initial emotions – and some countries (e.g. the USA) started to reconsider their participation in the agreement already in 2017. In the EU, the topic has a very pragmatic dimension particularly for countries, which rely much on coal in their energy mix (Poland, Bulgaria etc.) – and this results even in opposite views among the EU member states. In the Energy Community there are countries, which are subject to dispute settlement procedures for lack of transposition of the legislation, linked to emissions’ control. The debates, started in Katowice at the beginning of December 2018 along the so called COP24 (24th Conference of the Parties to the United Nations Convention on Climate Change), just reconfirm the complexity of the topic at international level – some refer to it as to a “battle for clean energy future”12. And I doubt that at this stage anyone can predict where this battle will lead us all. The other topic of particular importance is linked to what is called “energy poverty”. I personally do not think that the latter can be separated from the income poverty, but certainly the term has growing popularity. Aside the theoretical debate on the terms and their usage, the issue is without any doubt of importance even in the richest EU countries13 - not to mention the poorest like Bulgaria. One of the biggest problems in this context is again created by politicians. While thinking for their standard four years’ mandate and focusing on their reelection, they tend to promise things and undertake steps, which have nothing to do with the market economy developments. In other words, politicians often mix the energy policy with the social policy – and this is done either due to lack of sufficient knowledge or deliberately. In fact, it should be strongly underlined that the energy sector is not a social sector. Thus, the protection of vulnerable consumers should happen via the social policy of the state and not via steps towards breaching the market rules. In practical terms, by using political mechanisms, the governments and the parliaments tend to push down the energy regulatory authorities - which are in charge of the price policy and which are presumably independent - as to influence the prices. This, however, is a major whip against the investments – and thus the society is not far from a vicious circle as the investors are those who create jobs and pay taxes, but they might be strongly demotivated by wrong policy steps.

11 https://ec.europa.eu/energy/en/topics/energy-strategy-and-energy-union/clean-energy-all-europeans 12 See e.g. http://neweasterneurope.eu/2018/12/03/forefront-battle-clean-energy-future/ and many others. 13 See e.g. “Is 330 000 German households without a power a lot?” at https://energytransition.org/2017/11/is- 33000-german-households-without-power-a-lot/ 10

INSTEAD OF A CONCLUSION As already mentioned, the wide variety of energy-related topics covers both old questions and new themes and challenges. The presented edition of the “Energy Diplomacy” journal touches upon some of them. The problems and views, referred to in this edition, represent just a small set of issues, which, however, well illustrate the complexity of the energy policy and the politics behind. And I hope the readers will enjoy the professional attitude by all the authors.

Slavtcho Neykov

11

Energy security as a global policy concern - Historical development and evolution of the concept

Velislava Dineva14

Although the question of energy security has come to be regarded as an integral part of modern political agenda, as a policy problem it emerged in the early 20th century, and academic references to the term ‘energy security’ date back to the 1960s. While the term is frequently used, there is no official definition agreed among members of the international community. In one of the most widely accepted definitions, the International Energy Agency (IEA) describes energy security as ‘uninterrupted availability of energy sources at an affordable price’15. However, this definition contains subjective and hard-to-measure variables, considers only security of energy supply, and narrows the viewpoint to that of energy importing countries while ignoring demand security concerns of energy exporting countries. Therefore, in order to understand why there is still no commonly agreed interpretation of energy security, it is reasonable to first look at the historical development of the very concept of energy security and the factors and events that led to the international community’s increased interest in the topic.

Industrial Revolution and First World War At the beginning of the 19th century, Europe entered the Industrial Age with steam-powered machinery and large-scale industry.16 Less than a century later, the availability of energy resources is perceived as a key factor in the socio-economic development of industrialised countries. Towards the end of the 19th century, Germany (then the German Reich after Prussia’s victory over France in 1871) emerged as a major economic player on the European map. It conducted a substantial industrial and agricultural expansion. The government and the industry began to look beyond the national borders for sources of raw materials as well as potential markets for German goods. In 1888, the Oriental Railway connecting Austria to Constantinople via the Balkan cities of Belgrade and Sofia, was opened. In 1899, Deutsche Bank was awarded a concession to build a railway in the Anatolian part of the Ottoman Empire — from Konya to the Persian Gulf via Baghdad. As part of the railway concession, the representatives of Deutsche Bank negotiated subsurface rights to extract minerals from any area within 20 km to either side of the proposed railway line. Deutsche Bank and the German government ensured

14 Velislava Dineva works for the Ministry of Energy of the Republic of Bulgaria, Energy Projects and International Co-operation Directorate. She holds a bachelor’s degree in nuclear technologies and energy from Sofia University ‘St Kliment Ohridski’ and a master's degree in international and comparative (nuclear) energy law and policy from the Centre for Energy, Petroleum and Mineral Law and Policy, University of Dundee, UK. She is currently working on a PhD thesis with the title Energy Security in Southeast Europe at the Moscow State Institute of International Relations. She has undergone postgraduate training in the fields of energy and security in several international institutes.

15IEA official website. See http://www.iea.org/ 16Sassi, M., ‘The Emergence of the French Oil Industry between the Two Wars’, Business and Economic History, Vol.1, 2003, p. 12. See http://www.thebhc.org/sites/default/files/Sassi.pdf 12 that this included sole rights to any petroleum that might be found on the territory in question.17 That is why the project was immediately opposed by the British, as it represented a threat to their oil interests in Mesopotamia18. It has been well-documented how Winston Churchill, soon after he became First Lord of the Admiralty in 1911, converted the British Navy from coal to oil as primary source of power for vessels to make its fleet faster than the German Navy. Churchill also recognised that, in doing so, he created a new vulnerability: coal was a domestic source of fuel, but oil had to be imported. Relying on oil meant that the British Navy would, for the first time, be dependent on foreign sources of fuel.19 On that score, Churchill said, ‘We must become the owners or, at any rate the controllers at the source, of at least a proportion of the oil which we require.’20 From that point on, the conversion to oil of the British fleet determined the national security priority to secure large oil reserves outside Britain. In 1913, less than 2% of global oil output was produced within the British Empire.21 The British were so concerned about the security of their oil supply prior to the war that they wanted guaranteed British dominance in any oil company extracting Mesopotamian oil. The political implications of oil interests in Mesopotamia reached new heights during the First World War in the secret Sykes-Picot Agreement signed between Britain, France, and later Russia in April-October 1916 for the fall of the Ottoman Empire.22 The agreement led to the division of Turkish-held Syria, Iraq, Lebanon, and Palestine into various French- and British-administered areas.23 By the start of the First World War in 1914, petroleum already was an extremely important energy source, and the war served to illustrate that some countries were significantly ahead in this sector, while emphasising the vulnerability of others. During the war, France was completely dependent on its Anglo-Saxon allies for oil for its armed forces. In late 1917, before the final great offensives mounted by the Central Powers in the spring and summer of 1918, France feared that it would not receive sufficient oil supplies from the Americans. The newly appointed Prime Minister George Clemenceau sent a telegram to US President Woodrow Wilson, noting the importance of oil supplies and stating that at the peak of the expected German offensive France must possess the ‘gasoline that will be as necessary as blood in tomorrow’s battles’24. France had learned some hard lessons and wanted to increase and reinforce its provisioning. In the aftermath of the First World War, the French petroleum minister Henry Berenger wrote a 1921 memorandum that examined the transformative power of petroleum: He who owns the oil will own the world, for he will rule the sea by means of the heavy oils, the air by means of the ultrarefined oils, and the land by means of petrol and the illuminating oils. In addition to these he will rule his fellow men in an economic sense, by reason of the

17Engdahl, F.W., ‘Oil and the origins of the “War to make the world safe for Democracy”’, 22 June 2007. See http://www.oilgeopolitics.net/History/Oil_and_the_Origins_of_World_W/oil_and_the_origins_of_world_w.HT M#_edn15 18According to Encyclopedia Britannica, Mesopotamia is a historical region referring to the land between the Tigris and Euphrates rivers but can be broadly defined to include the area that encompasses modern eastern Syria, south-eastern Turkey, and most of Iraq. 19Website of American Energy Independence. See http://www.americanenergyindependence.com/security.aspx 20 Kent, M., Moguls and mandarins — oil, imperialism and the Middle East in British foreign policy, 1900-1940, Routledge, 2011, p. 50. 21Mohr, A., The oil war, New York, Harcourt, Brace & Co., 1926, pp.118-120. 22 Demirmen, F., ‘Oil in Iraq: The Byzantine Beginnings — Part I: The Quest for Oil’, website of Global Policy Forum, 25 April 2003. See https://www.globalpolicy.org/component/content/article/185-general/40548.html 23Sykes-Picot Agreement 1916 , website of Encyclopedia Britannica. See http://www.britannica.com/event/Sykes-Picot-Agreement 24‘The Emergence of the French Oil Industry between the Two Wars’, See supra note 3, p. 13. 13 fantastic wealth he will derive from oil – the wonderful substance which is more sought after and more precious today than gold itself.25 (Energy of Slaves: oil and the new servitude)

This is to show how energy security became all about the oil supplies in that period. And it continued to be so over the following several decades. While the war was devastating for France and the United Kingdom, for example, these countries were able to recover economically in a relatively short time. Two years later, the national economies of the warring states were visibly recovering. Reaching the pre-war levels of the most important economic indicators was a task successfully achieved.26 The First World War accelerated the American industrial production — as the US formally proclaimed its neutrality from 1914 to 1917, it met the demands of the warring states for ammunition, weapons, and food products in that period.27 That led to an economic boom in the United States throughout the 1920s, with an increased demand for American goods and rapid industrial growth. Above all, the automotive industry grew rapidly, which led to an increase in the demand for oil products, gasoline in particular, in the country.

The Seven Sisters By the year 1925, about 70% of global oil production was concentrated in the hands of industrial companies in the United States.28 Before 1928, the history of the international oil industry was one of fierce competition for both markets and profits. In order to prevent a full- scale price war, the seven major oil companies (which became known as the Seven Sisters)29 sought to suppress conflict and limit the damage by entering into two significant agreements. These agreements covered both the production and the marketing stage. The first one was the Red Line Agreement, signed in 1928 following the discovery of a massive oil field in Iraq. Its most important feature was the ‘self-denying’ clause, which stipulated that the participating companies would agree not to develop oil fields within an area specified in the agreement

25Nikiforuk, A., Energy of slaves: Oil and the new servitude, Greystone Books, 2012, p. 28. 26Tolmacheva, R.P., Ekonomicheskaya istoriya —Uchebnik [Economic history, textbook], 2nd, extended, edition with corrections, ´Dashkov and K´ Izdatelsko-Torgovaya Korporatsiya , 2003., pp. 203-205. 27Ibid., pp. 200-203. 28‘Oil — Oil and world power’, website of Encyclopedia of the New American Nation. See http://www.americanforeignrelations.com/O-W/Oil-Oil-and-world-power.html 29 Enrico Mattei coined the name ‘the Seven Sisters’ to describe the Anglo-Saxon companies that controlled the Middle East’s oil after the Second World War. These included: - Anglo-Persian Oil Company (United Kingdom): This company subsequently became Anglo-Iranian Oil Company and then British Petroleum. Following the merger of Amoco (which in turn was formerly Standard Oil of Indiana) and Atlantic Richfield into British Petroleum, the name was shortened to BP in 2000; - Gulf Oil (United States): In 1984, most of Gulf Oil was acquired by SoCal and the enlarged SoCal; entity became Chevron; - Royal Dutch Shell (Netherlands/United Kingdom); - Standard Oil of California (SoCal) (United States): Became Chevron in 1984 when SoCal acquired Gulf Oil; - Standard Oil of New Jersey (Esso) (United States): Subsequently became Exxon, which renamed itself ExxonMobil following the acquisition of Mobil in 1999; - Standard Oil Co. of New York (Socony) (United States): Subsequently became Mobil, which was acquired by Exxon in 1999 to form ExxonMobil; - Texaco (United States): Acquired by Chevron in 2001; 14 without first securing the consent of the other members.30 The second agreement — The Achnacarry (or ‘As Is’ Agreement) — evaded the task of reconciling differences among members whose preferred price targets did not align. Instead, it took quotations as reported daily in Platt's Oilgram for US crudes on the Texas Gulf Coast, added freight rates from the Texas Gulf to any destination as reported in daily shipping journals, and produced a quotation for all sellers at the destination regardless of the origin of the oil (the ‘Gulf-plus’ formula).31 For a period of nearly three decades starting in 1928, these seven companies — five American, one British, and one British-Dutch — dictated the international petroleum order.32 For the following several decades, these companies aimed at keeping the prices low. That policy allowed for expanding the market and increasing the profit volumes.33 With cheap oil available, the question of energy security did not seem to be of great priority for the industrial countries until the mid-1970s. However, cheap oil led to economic growth, which in turn led to rising oil consumption. That increase of the oil share in the energy balance made it difficult to ensure adequate supplies in return. Moreover, no alternative sources of energy were being developed.34 In the 1950s and 1960s, the global demand for energy more than doubled, driven by North America, western Europe, the Soviet Union, and Northeast Asia.35 In these regions, economic growth, living standard improvement, motorisation, and electrification pushed up energy demand in all sectors. More importantly, international energy trade, mainly of oil, more than quadrupled over the same period.36

First oil crisis In this period, the Seven Sisters controlled about 85% of the world's oil reserves.37 With a near-monopoly and a surplus of oil, the seven chairmen dictated to the Arab producers what price they were going to pay for oil in the next year. The Arab producers reluctantly agreed to sign the fixed-term contracts.38 However, resentful of the cartel, Saudi Arabia and four other leading Middle East producers39 formed the Organization of the Petroleum Exporting Countries (OPEC) in 1960 to challenge

30‘The 1928 Red Line Agreement’, website of the US Department of State’s Office of the Historian. See https://history.state.gov/milestones/1921-1936/red-line 31Moran, T.H., ‘Managing an oligopoly of would-be sovereigns: the dynamics of joint control and self-control in the international oil industry past, present, and future’, International Organization, Vol. 41, 1987, pp. 575-607. 32For a good historical account of the formation of these companies, see Sampson, A., The Seven Sisters: The great oil companies and the world they made, Hodder and Stoughton, 1975. 33Mironov, N.V., Mezhdunarodnaya energeticheskaya bezopasnost [International energy security], MGIMO University, Ministry of Foreign Affairs of the Russian Federation, 2003, p. 32. 34Ibid., p. 49. 35International energy security: Common concept for energy producing, consuming and transit countries, Energy Charter Secretariat, March 2015, p. 6. See http://www.energycharter.org/fileadmin/DocumentsMedia/Thematic/International_Energy_Security_2015_en.pd f 36Ibid. 37‘Supermajordämmerung’, website of The Economist, 3 August 2013. See http://www.economist.com/news/briefing/21582522-day-huge-integrated-international-oil-company-drawing 38Mann, I.,‘Shaky industry that runs the world’, 24 January 2010, website of Times Live. See http://www.timeslive.co.za/opinion/columnists/2010/01/24/shaky-industry-that-runs-the-world 39Those were Iran, Iraq, Kuwait, and Venezuela. The five Founding Members were later joined by nine other Members: Qatar (1961); Indonesia (1962) – suspended its membership from January 2009 until December 2015; Libya (1962); United Arab Emirates (1967); Algeria (1969); Nigeria (1971); Ecuador (1973) – suspended its membership from December 1992 until October 2007; Angola (2007); and Gabon (1975-1994). 15 the major oil companies for their reserves. In accordance with its Statute40, the mission of OPEC is to co-ordinate and unify the petroleum policies of its member countries and ensure the stabilisation of oil markets in order to secure an efficient, economic, and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry. OPEC’s establishment by the five oil-producing developing countries in Baghdad in September 1960 occurred at a time of transition in the international economic and political landscape, with extensive decolonisation and the birth of many new independent states in the developing world.41 In 1967, OPEC declared an oil embargo42 and later demanded higher prices. The Seven Sisters tried to present a united front, but it did not last long. Sensing their weakness, the Libyan and Iraqi governments began partial nationalisation of western oil interests and the buyer's market for oil ended soon after that, with oil prices rising 400% from $2.90 a barrel to $12. That led to the disintegration of the Seven Sisters and the industry's transformation. OPEC rose to international prominence during that decade, as its member countries took control of their domestic petroleum industries and earned a major say in the pricing of crude oil on international markets.43 Twice, oil prices rose sharply in a volatile market, triggered by the Arab oil embargo in 1973 and the outbreak of the Iranian Revolution in 1979.44 The oil price may have gone above or below a certain average for the historic period, but it never fell below that 4-time rise resulting from the 1970s crisis.45

Second oil crisis During the Yom Kippur War crisis of 1973-1974, the main industrialised nations became painfully aware of their vulnerability to the new economic power of the oil-producing countries. For the industrialised nations, the problem in that crisis stemmed from their sudden need to respond to the oil embargo imposed by a number of Arab producers and from the price spike that took oil prices rapidly to historic and damagingly high levels. The 1973-74 oil crisis followed years of often sharp negotiations between the members of the Organization of Petroleum Exporting Countries (OPEC) and western oil companies over petroleum production and pricing levels. In October 1973, Arab members of OPEC, in response to the huge US support (including financial) provided to Israel when the Yom Kippur War46 began, raised the posted price of crude by 70% and placed an embargo on exports to the nations allied with Israel. In November 1973, oil exporters cut production to 25% below the September levels, and the following month they doubled the price of crude. By January 1974, global oil prices were four times higher than they had been at the beginning of the crisis.47

40Article 2, Statute, OPEC Secretariat, Organization of the Petroleum Exporting Countries, 2012. See http://www.opec.org/opec_web/static_files_project/media/downloads/publications/OPEC_Statute.pdf 41OPEC official website. See http://www.opec.org/opec_web/en/about_us/24.htm 42 While commonly called the Arab oil embargo or the OPEC oil embargo, neither is technically correct. Arab nations were joined by Persian Iran and founding OPEC member Venezuela did not join the embargo. 43Simoniya, N.А., ´Neft v mirovoy politike´ [Oil in global politics], Mezhdunarodnye protsessy [International Processes], No. 3(9), 2005, pp. 4-17. 44OPEC official website. See supra note 27. 45Ibid. pp. 4-17. 46Also known as the 1973 Arab–Israeli War, it was a war fought by the coalition of Arab states, led by Egypt and Syria, against Israel from 6 to 25 October 1973. 47 Oil Shock of 1973-74, official website of US Federal Reserve System History. See http://www.federalreservehistory.org/Events/DetailView/36 16

There is an opinion (shared by David Hammes and Douglas T. Wills, among others) that the drastic change in the value of the dollar was an undeniably important factor in the oil price increases of the 1970s. Since the price of oil was quoted in dollar terms, the falling value of the dollar effectively decreased the revenues that OPEC nations were seeing from their oil. OPEC nations resorted to pricing their oil in terms of gold and not the dollar. Due to the ending of the Bretton Woods Agreement, which had pegged gold to a price of $35, the price of gold rose to $455 an ounce by the end of the 1970s.48

Establishment of the International Energy Agency The industrialised countries joined together to take remedial action through organised international co-operation. In order for their combined efforts to be effective, the main industrialised countries in North America, western Europe and the Far East (already grouped together in the OECD) decided to found a new energy body. The International Energy Agency (IEA) was the co-operation vehicle they created to ensure their future energy security (including an emergency oil-sharing system) and the optimum management of the energy policy problems that had pushed them into the crisis.49 At its founding, the main objectives of the IEA were to maintain and improve systems for coping with oil supply disruptions and to promote rational energy policies in a global context through co-operative relations with non-member countries, industry and international organisations.50 Over the ensuing twenty years, the agency’s operational mandate expanded, particularly in the energy and environmental sectors and co-operation with non-member countries, without reducing the importance of ensuring the overall objective of security of energy supply in adequate amounts at affordable prices.51 From 1974 to 1978, the global crude oil price was relatively flat, ranging from about $12 per barrel to $14.5 per barrel.52 When adjusted for inflation, global oil prices were in a period of moderate decline. During that stretch, OPEC capacity and production remained relatively flat at near 30 million barrels per day. In contrast, non-OPEC production increased from 25 million barrels per day to 31 million barrels per day. Following that crisis, many countries introduced a new direction to their foreign policy and diplomacy — namely, energy policy and diplomacy.53 The primary task of the energy diplomacy of any state is to provide a foreign policy approach to protecting its national energy interests in international economic relations. This is related to solving energy security tasks facing the various groups of countries: importers (ensuring security of supply at reasonably low prices), exporters (ensuring security of demand at reasonably high prices), and transit countries (ensuring maximum profits for providing transit services), in addition to keeping the balance between their interests.54

48Hammes, D. & Wills, D.T., ‘Black Gold: The End of Bretton Woods and the Oil Price Shocks of the 1970s’, Independent Review, Vol. 9, No. 4, spring 2005, pp. 501-511. 49IEA, the first 20 years: The history of IEA 1974-1994 — Vol. 1 Origins and Structure, IEA, p. 11. See http://www.iea.org/media/aboutus/1ieahistory.pdf 50IEA official website. See http://www.iea.org/aboutus/ 51 IEA, the first 20 years. See supra note 36, p. 12. 52‘Petroleum Chronology of Events 1970-2000’, U.S. Energy Information Administration, 2002, http://www.eia.gov/pub/oil_gas/petroleum/analysis_publications/chronology/petrochrohotgraph.htm 53Zhiznin, S.Z., Osnovy energeticheskoy diplomatii [Energy diplomacy basics], Moscow State Institute of International Relations [MGIMO University], Ministry of Foreign Affairs of the Russian Federation [MID Rossii], 2003, Vol. 1. p. 78. 54Zhiznin, S.Z. & Timohov, V.M., Sovremennye tekhnologii i mezhdunarodnye otnosheniya —Tekhnologisheskie aspekty energeticheskoy diplomatii Rossii [Modern technologies and international relations: technological aspects of Russia’s energy diplomacy]. 17

One would imagine that after the crisis of 1973-1974 the industriaised countries would have learnt their lesson and would continue to keep the energy security question at the top of their policy priorities. However, due to energy sources’ accessibility and relatively low prices, the fear of energy supply shortages was quickly forgotten or at least pushed down in the national policy agenda.

Iranian Revolution and the Iran-Iraq War In 1979 and 1980, a series of events in Iran and Iraq led to another round of price increases for crude oil. That crisis lasted two years and unfolded in two stages. The first stage55 was related to the Iranian Revolution, which began in late 1978 and resulted in a drop of 3.9 million barrels per day in crude oil production in Iran between 1978 and 198156. The second stage began with the Iran-Iraq War in 1980, when many Persian Gulf countries reduced their output as well. OPEC crude oil prices rose to unprecedented levels between 1979 and 1981.57 The loss of production resulting from the combined effects of the Iranian Revolution and the Iran-Iraq War led to more than a double increase in crude oil prices. The nominal price went from about $14 per barrel in 1978 to about $35 in 1981, when the crisis came to an end. The supply security system, established by the industrialised countries with the support of the Shah of Iran during the 1970s, collapsed and the fear of possible oil insufficiency spread panic among societies. In the late 1980s and the 1990s, the academic interest in energy security somewhat declined following the stabilisation of oil prices and the receding threat of political embargoes. Security of energy supply was mostly neglected in the 1980s, especially in the latter half of the decade. Significant reasons for this were supply expansion and weaker demand due to high energy prices after the oil crises. Global oil imports dropped by 25% over the first half of the decade.58 Oil was, to a significant extent, replaced by nuclear fuel and natural gas, especially for power generation. The OPEC lost control over oil prices, and pricing was increasingly market oriented. Some oil-exporting countries started to enter the downstream market in importing countries, the first sign of attempts to manage the international security of demand59.

The Persian Gulf War and the fall of the Soviet Union

The 1990s started with the Persian Gulf War and the dissolution of the Soviet Union. In the aftermath of the Iran-Iraq Wars, the economic situation in Iraq was grim. Kuwait was viewed as a potential solution. According to some researchers and experts60, there were several

55Skorohodova, O.N., ‘Evropa i energeticheski krizis 1979-1980 godov: pouchitelnye uroki’ [Europe and the energy crisis of 1979-1980: A valuable lesson], Sovremennaya Evropa [Modern Europe], 1(61), 2015, pp. 104- 115. 56‘Petroleum Chronology of Events 1970-2000’. See supra note 39 57Ibid. 58International energy security: Common concept for energy producing, consuming and transit countries, See supra note 22, p. 7. 59Ibid. 60 Belonogov, A.M., Deputy Minister for Foreign Affairs of the USSR (1990–1991), interview for the Research Centre for National Security Studies [Nauchno-issledovatelski tsentr problem natsionalnoy bezopasnosti], 31 January 2016. See http://nic-pnb.ru/operational-analytics/vojna-v-zalive/ 18 possible motives behind Sadam Husein’s invasion of Kuwait: acquiring the nation’s large oil reserves, cancelling a large debt Iraq owed Kuwait, and expanding Iraqi power in the region61. As Iraq was perceived as a potential threat to Saudi Arabia (the world’s largest oil producer and exporter), a US-led coalition of 34 states formed to counter its hostile actions. After Iraq’s invasion of Kuwait on 2 August 1990, the UN Security Council delegated its Chapter VII62 powers to the coalition and did not involve itself in the matter until Operation Desert Storm had finished and a ceasefire agreement had been formulated.63 The conflict led to lower oil production, causing a spike in crude oil prices. The world of oil defied expectations on the second day of the Persian Gulf War. Oil prices crashed in their biggest one-day fall.64 After the Gulf War, crude oil prices steadily declined, reaching their lowest level since 1973 in 1994.65 (see Annex I, Figure 1) The limited impact of the war on the global energy market fostered optimism in relation to energy security.66 In the 1970s, the Soviet Union started to play a significant role as a hydrocarbons importer in Europe. The gas pipeline Souyz (with transfer capacity of 26bn m3 a year) was built in 1975-76 in order to transport gas from the Orenburgh fields to western Europe67. Later on, in 1983, the first transcontinental gas pipeline — Urengoy-Pomari- Uzhgorod — was commissioned. It was 4 500 km long68 with projected capacity of 32bn m3 a year. By 1990, the main transit flows of energy resources in Europe were within the central planning transport system, mainly through the territories of the former Soviet Union. The establishment of newly independent states led to the emergence of new risks to energy transits69. For example, as a result of the dissolution of the Soviet Union, Russia lost some of its energy infrastructure on the Baltic and Black Sea coasts and faced competition by the newly independent states in pipeline-transported oil and gas. Moreover, new transit states appeared on oil and gas routes from Russian fields to the European markets. This caused changes to control over the energy transport infrastructure in the region and created conditions for raised transit risks and uncertainties, including suspension of energy transport, commercial losses, transit disputes, and political interference.

61Persian Gulf War: 1990-1991, website of Encyclopedia Britannica, 2015. See http://www.britannica.com/event/Persian-Gulf-War 62Action with respect to threats to the peace, breaches of the peace, and acts of aggression, United Nations, Charter of the United Nations, 24 October 1945, 1 UNTS XVI, available at: http://www.refworld.org/docid/3ae6b3930.html 63Freedman, L. & Karsh, E., The Gulf conflict, 1990-1991, Princeton University Press, 1995. 64Patrick L., Impact of the Gulf War: Crude Plunges; Gasoline Prices to Dealers Cut: Energy: The movement defies predictions. But analysts warn that negative news could quickly reverse the market's course, Los Angeles Times. See http://articles.latimes.com/1991-01-18/business/fi-102_1_oil-prices 65See the ‘History of oil prices’ graph. 66Yergin, D., 2006, ‘Ensuring Energy Security’, Foreign Affairs, Vol. 85, No. 2 (March/April), p. 76. 67Neftegaz.ru, http://neftegaz.ru/tech_library/view/4838-Soyuz-gazoprovod. 68Website of the Giprospetsgaz Project Institute for the Gas Sector in Russia [АО ‘Giprospetsgaz’ – stareyshi proektny institute gazovoy otrasli Rossii]. See http://www.gsg.spb.ru/ 69Bolkunets, D.V., ‘Problemy I perspektivy tranzita rossiskikh energoresursov cherez Belarus’ [Problems and perspectives concerning Russian energy resources’ transit via Belarus], Teoriya i praktika obshchestvennogo razvitiya [Theory and Practice of Social Development], No. 8, 2014, http://teoria- practica.ru/rus/files/arhiv_zhurnala/2014/8/ekonomika/balkunets.pdf 19

The 2000s The topic of energy security re-emerged in the 2000s, driven by issues like rising demand in Asia, disruptions to gas supplies in Europe, and the pressure to de-carbonise energy systems.70

The rise of the Chinese dragon Over the last two decades, large Asian countries such as China and Japan have expanded production and become large suppliers of factory goods. Due to rapid economic development and industrialisation, the demand for energy sources has been constantly increasing. China and India have combined demand for coal, oil, and natural gas greater than that of the rest of the world. Their consumption levels have led these countries to exhaust all available resources on their own land. They are no longer self-sufficient, and currently rely on imports from other regions of the globe.71 One of the most important consequences of the global energy system’s centre of gravity shifting to Asia is that countries in the region are facing growing dependence on imported oil, gas, and coal, as demand for these resources increasingly cannot be met by traditional suppliers within the region. The IEA projects that Asia will be the final destination for 80% of regionally traded coal, 75% of oil, and 60% of natural gas by 2040.72 In terms of global energy security, such strong competition for limited resources may lead to conflicts and limit co-operation in the field of energy. Asia has no single, overarching collective energy security arrangement. Regional co-operation in Asia’s energy security has not taken hold to the extent of the IEA’s oil-sharing and oil stockpile programme, despite the existence of several multilateral fora73. Furthermore, neither China nor India is a party to any multilateral energy security programme that includes an international oil-sharing scheme or co-ordinated management of strategic oil stocks, which may pose different problems in future.74.

Energy terrorism After 11 September 2001 and in light of the intensification of terrorist attacks around the world, it is not surprising that energy infrastructure is also facing a greater risk of such attacks. The energy sector has become a focus for targeted attacks and is now among the top five most targeted sectors worldwide.75 As international economies grow and societies develop, so does the importance of energy and the infrastructure that produces and supplies this energy. Reliable electricity service is essential to health, welfare, national security, communication, and commerce. Because of their scale, geographical reach, and complexity, energy systems pose many security challenges to maintaining reliable operation. Today, a

70Cherp, A. & Jewell J., ‘The concept of energy security: Beyond the four As’, Energy Policy Journal, Vol. 75, December 2014, pp. 415-421. See http://ac.els-cdn.com/S0301421514004960/1-s2.0-S0301421514004960- main.pdf?_tid=a402586e-6162-11e6-8266- 00000aacb360&acdnat=1471098876_f666b140f8e4321c60f28981eaf0d482 71 ‘Meeting growing energy demands in Asia’, Economic and Social Commission for Western Asia (ESCWA), 2015. See http://www.semmuna.org/uploads/2/4/2/3/24230689/committee15_economic_and_social_council_for_western_a sia_meeting_growing_energy_demands_in_asia.pdf 72 IEA, World Energy Outlook 2015, 53. 4. 73Such as the Association of Southeast Asian Nations (ASEAN), the Asia-Pacific EconomicCooperation (APEC) forum, and the East Asia Summit (EAS) 74Cutler, T. & Gillispie, C., ‘Rising to the challenge of energy security: How the United States, India, and China can lead the way’, 14 March 2016, website of the National Bureau of Asian Research. See http://www.nbr.org/research/activity.aspx?id=657 75Wueest, C., Targeted attacks against the energy sector, Version 1.0 – January 13, 2014, 14:00 GMT, p. 3. 20 growing number of interconnected and diverse threats, mainly physical and cyber threats, are challenging critical pieces of infrastructure. Some energy subsectors, such as the oil and gas industries, are not a new target for terrorists. Terrorist groups have always been aware of the economic and political benefits of attacking these strategic resources.76 Digital technologies play an increasingly important role in energy infrastructure and are used to control energy production, transmit data about consumption, and monitor demand.77 However, this innovation places the energy sector at higher risk of cyber threats because of the potential for attacks on the computer systems that are being used for these purposes. Although al-Qaida and its affiliates, along with Daesh, are currently perceived as the primary terrorist threats to the energy sector, there are many different groups operating in this field. As a report by Semantec78 shows, attacks cannot be attributed to only one group or geographical region. It could be anybody from individuals, competitors, and hacktivist groups to possible state-sponsored agents carrying out attacks against energy companies. Some of the attacks have been purely opportunistic, seeking any valuable information available. Other campaigns look like they were planned over a lengthy period and carried out methodically with a clear goal in mind. The term ‘energy terrorism’ is not strictly confined to armed attacks against energy generation, storage, and transmission facilities, but also includes illegal activity conducted against or in connection with these facilities. The latter category varies from criminal theft of oil from pipelines to extortion by threatening to cause damage to these facilities through such activity in order to provide financial and logistic support to a terrorist organisation.79 With a plethora of targets, including depots, gas stations, personnel, pipelines, production plants, tankers, terminals, refineries, electric power transmission and distribution systems, etc., energy infrastructure is intrinsically vulnerable, and the knock-on effects of production or distribution disruptions can severely and immediately impact economies.80 Despite its enormous economic and political consequences, unlike other types of terrorism, energy terrorism has not been able to attract a significant amount of attention. However, it is very unlikely that in the near future the threat of terrorist attacks on energy infrastructure will diminish. On the contrary, apart from the old threats, new threats are set to emerge – the installation of smart grids worldwide over the next decades, for example, will bring new challenges like securing the network and protecting the data produced81.

Gas transit crises in Europe Among the events that have led to the ever-growing interest in the topic of energy security are what is known as the gas transit crises of 2006 and 2009, in which some European states, including Bulgaria, faced gas flow disruptions as a consequence of disputes between Russia and Ukraine over import and transit contracts. These events have been interpreted differently by various interested parties and the media and their diverging perspectives could be generally

76Makarenko T., ‘Terrorist threat to energy infrastructure increases,’ Jane’s Intelligence Review, 1 June 2003. 77 ‘Cyber Security in the Energy Sector: Recommendations for the European Commission on a European Strategic Framework and Potential Future Legislative Acts for the Energy Sector’, EECSP Report, February 2017. See https://ec.europa.eu/energy/sites/ener/files/documents/eecsp_report_final.pdf 78Wueest, C., Targeted attacks against the energy sector, Version 1.0 – January 13, 2014, 14:00 GMT, p. 16. 79Luft, G. & Korin, A., eds., Energy security challenges for the 21st century: A reference handbook, 2009, pp. 18-19. 80Ibid. 81Targeted attacks against the energy sector, See supra note 62, p. 8. 21 divided into two groups.82 The first view the gas crises as employment of ‘energy weapon’ by Russia to regain political and economic influence, while the second perceive gas trade as strictly business relations and the gas crises as a problem of non-payment and business as usual. Regardless of the perspective, the gas crises indeed gave rise to, as some describe it, a detrimental matrix and domino effects for the system of Russian gas supplies to Europe83. These tensions between Russia and the European Union have undermined their historical partnership on energy matters. The two events, or about 22 days of halted supplies in total, erased the previous 40 years of stability and continuity of supply. They also exposed Europe’s vulnerability and sparked demands for improved energy security on the continent, which led to amendments in the legal and policy framework of the European Union in the energy field.

Climate change concerns With energy consumption and production accounting for around two thirds of GHG (greenhouse gas) emissions globally84, it has become a common understanding that addressing climate change necessarily involves solutions for energy decarbonisation and more efficient use of energy. This entails acceleration of global development and deployment of technologies that have high potential to decarbonise energy, such as renewables, and improve energy efficiency. Despite the existing will for decarbonisation, the future outcome of the rapid deployment of such technologies is surrounded by many questions and concerns regarding energy security. The security aspects of renewable energy are seldom analysed and so there is a significant research void in this field85. As noted by Bengt Johansson in his analysis of the security aspects of renewable energy86, there are several characteristics that make renewable energy quite different from many fossil fuels: the dependence on flows rather than exhaustible stock, the widespread location of the resources, the variable character of some renewable energy electricity generation technologies, and the close interaction between renewable energy and biological systems (namely biomass). All this leads to security aspects that partly differ from those arising from fossil fuel-based energy systems, which is something to be further assessed.

82Hogselius P., Red gas: Russia and the origins of European energy dependence, Palgrave Macmillan, 2013 83Konoplyanik, A.A., ‘Sovremennye gazovye voyny’ [Modern gas wars], Nezavisimaya Gazeta [Independent Newspaper], 9 September 2014. See http://www.ng.ru/ng_energiya/2014-09-09/9_gas_wars.html 84 ‘White Paper on Scaling Technologies to Decarbonize Energy’, World Economic Forum, October 2015. See http://www3.weforum.org/docs/WEF_GAC_Decarbonizing_Energy_White_Paper.pdf 85Nevertheless, examples of such works exist: - Ölz, S. & Sims, R. & Kirchner, N., ‘Contribution of renewables to energy security — IEA information paper’, OECD/IEA, Paris, 2007; - Tänzler, D. & Luhmann, H-J. & Supersberger, N. & Fischdick, M. & Maas A. & Carius, A., ‘Die Sicherheitspolitische Bedeutung Erneuerbarer Energien’, Adelphi Consult & Wuppertal Institut, Berlin, 2007; - Valentine, S.V., ‘Emerging symbiosis: Renewable energy and energy security’, Renewable & Sustain Energy Reviews, Vol. 15, December 2011. 86Johansson, B., ‘Security aspects of future renewable energy systems: A short overview’, Journal Energy 61, 2013, pp. 598-605. 22

Conclusion As a policy concern, energy security emerged at the beginning of the 20th century. Since then, it has been moving up and down the international policy agenda due to different events and historical periods triggering fluctuations in energy resources’ availability and prices. In the beginning, there was a concern over secure supply of fuels (mainly coal and oil) for naval fleets and armies. In the second half of the 20th century, oil became increasingly important not only to the military but also for sustaining such vital functions of industrialised societies as transport, electricity generation, heating, etc. Political and military leaders sought to ensure security of fuel supplies through diversifying suppliers, substituting imports with domestic production, and seeking military control over energy resources and infrastructure. The oil embargoes in the 1970s brought energy security to the forefront of political attention in industrialised countries. Strategies motivated by these events included establishing emergency stocks and joint-response mechanisms in the OECD countries, replacing oil with other energy sources in heating and electricity generation, investing in oil reserves outside the OPEC, and promoting energy efficiency to reduce intensities of economies. Since the 1990s, events like, inter alia, the dissolution of the Soviet Union, the sharp increase in demand for energy supplies in Asia, the gas transit crises in Europe, and the 11 September terrorist attacks revealed new challenges to the global energy security, in addition to the traditional ones. As energy security concerns have evolved over time and have developed differently in individual regions and countries, it is no surprise that no commonly agreed perception of energy security exists at present. However, it is reasonable to consider energy security more holistically as a security of the energy supply chain as a whole.

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39. Encyclopedia Britannica, http://www.britannica.com/event/Sykes-Picot-Agreement

40. Encyclopedia of the New American Nation website, http://www.americanforeignrelations.com

25

41. IEA, official website, http://www.iea.org

42. Neftegaz.ru

43. OPEC, official website, http://www.opec.org/

44. Project Institute for the Gas Sector in Russia ‘Giprospetsgaz’ [АО ‘Giprospetsgaz’ – stareyshi proektny institute gazovoy otrasli Rossii], website, http://www.gsg.spb.ru/

45. Times Live website, http://www.timeslive.co.za

46. US Department of State Office of the Historian, website, https://history.state.gov/

47. US Federal Reserve System History, official website, http://www.federalreservehistory.org/

26

The Black Sea region — Energy security and connectivity

Hristo Mihaylov87

I. Introduction Situated between Europe, the Middle East, and Asia, the Black Sea is the scene for some of the most acute problems of the modern world order. This is due to the fact that it is the convergence point for the national interests of two leading regional states, Russia and Turkey, on the one hand, and the geopolitical and economic interests of major players such as the United States (US), the European Union (EU) and, increasingly, China, on the other hand. Another reason for the attention paid to the Black Sea region is its significance as a transit route, which, in its military and political dimension, provides Russia with access to the Mediterranean Sea, the Red Sea, the Gulf of Aden, and the Persian Gulf and vice versa — allows the possibility of the country’s opponents entering the ‘soft, unprotected parts of Russia’.88 The region, inter alia, is of great economic importance as a result of lying on the path of important highways linking the West with the rich-in-natural-resources areas of central Asia, the Middle East, and the Caucasus. This paper analyses the interests of Russia, the EU, and the US in the Black Sea region, focusing on the issues of energy security and transport connectivity in the broader Black Sea area. Therefore, the analysis also looks at the policies of China and Turkey, since the geopolitical landscape of the Black Sea region would be incomplete without these two countries. Bulgaria's role is also highlighted in the context of energy security and connectivity in the Black Sea region, with recommendations given in connection with the country’s options for action.

II. Specific features of the broader Black Sea region Research works on the Black Sea region emphasise its valuable function as an energyjunction, a bridge connecting the East and the West, and a natural corridor between Europe and Asia. In its broader definition, the region is not limited to the states bordering the Black Sea but is treated as an ‘extended Black Sea area’, also covering parts of the south Caucasus and the Caspian basin. The area is seen by some analysts89 as the intersection of four geopolitical axes: (a) Caspian Sea – Black Sea – Mediterranean; (b) East-West axis along the Silk Road, where relations with China and the Shanghai Cooperation Organization in general are of key

87 Hristo Mihaylov is attaché at the Common Foreign and Security Policy Directorate of the Ministry of Foreign Affairs of Bulgaria and a former intern at the Court of Justice of the European Union. He holds a bachelor’s degree in international relations and a master’s degree in law from the Faculty of Law of Sofia University ‘St Kliment Ohridski’. He has also completed international diploma courses in American criminal justice system, Austrian private and economic law, and introduction to English and European Union law. At the Ministry of Foreign Affairs, he is the desk officer for the Working Party of Foreign Relations Counsellors of the Council of the EU, which examines horizontal (legal, institutional, financial) matters concerning EU’s CFSP and assists the Political and Security Committee and COREPER II in the proper consideration of these issues in CFSP activities.

88 Radomirski, V., ‘Geopolitics and Frozen Conflicts in the Black Sea Region’, Diplomacy, issue no. 21, 2018 89 Yoneva, E., ‘The Black Sea Region and the Energy Security of the European Union (Evolution of Strategies and Policies)’, authored a dissertation thesis for the award of PhD educational and scientific degree, 2013, p. 28, available at http://konkursi.unwe.bg/documents/218Awtoreferat.pdf 27 importance; (c) the West-East Corridor of the EU (Rhine – Main – Danube – Black Sea); and (d) North-South axis and the link between the Baltic Sea and the Black Sea.

Explorations of the Black Sea region’s potential as a factor in the EU energy security are based on its consideration as a link between central Asia, the Caucasus-Caspian region, and Europe. This role predetermines the region’s growing importance for the Old Continent as one of its ‘energy arteries’. Recent years have been marked by the intensification of efforts to build a new pipeline architecture in the region, although only a small part of the projects have been realised, while the rest remain at conceptual stage. Assuming that the generation of new proposals has come to an end (given the many alternatives presented), the difficult task of selecting the most suitable routes and feeding them with raw materials is now at hand.90 The existing perspectives for realisation of promising new pipeline projects are a good starting point for predicting the growing role of the Black Sea region in the global economy and geopolitics. At the same time, the region is developing as one of the world’s spots carrying a high risk of conflicts arising. The neighbouring region of the Caspian Sea also has massive amounts of energy resources, some of which are exported to European markets and there are plans under way to facilitate the export of even more — both through the Russian pipeline system and Turkey. A possible alternative source of gas could be the countries of the Eastern Mediterranean, in particular Israel (with sufficient quantities to export from the Leviathan gas field), Cyprus,91 etc.

As an important transport junction, with its roads, railways, and rivers, the Black Sea region is located at a crossroads. With new actors on the scene, such as China, showing strong investment interest in the region, the countries of the Balkan Peninsula and the Black Sea region strive to balance co-operation with various external partners in a way that best serves their own national interests.

III. Geopolitical dimensions of energy security and connectivity in the broad Black Sea region — major actors

In view of the Black Sea region’s strategic and energy role, the processes transpiring there are largely a function of the dynamics of the interests of global and regional forces. The Black Sea area is the arena of a geopolitical rivalry between forces such as the US, the EU, Russia, China, etc. International companies have their sights on the region, as geopolitically it is of interest to four major energy importers (China, India, the EU, and Turkey) and two major energy exporters (Russia and Iran). At the same time, the problems the EU is facing in its co- operation with the Caucasian-Caspian countries are related to the self-imposed constraints that the bloc has in its policy towards the region. Thus, in the absence of sufficient guarantees of integration into the structures of the West, these countries are forced to diversify and balance both their political and economic relations with regional and global powers such as Russia, China, the EU, India, Iran, and the US. Energy security is becoming a strategic issue, including for large consumers, by being linked to a combination of necessary conditions for a given country. Above all, these concern the provision of energy supplies in order to achieve sustainability in economic development. The issues related to ensuring energy security have their geopolitical implications. The struggle to gain access to and control over energy resources creates tension on a regional and global scale. It stems from the growing and increasingly intense rivalry between the major

90 Ibid. 91 Hristov, P., ‘Energy Security - the New Challenge to the Cyprus matter’, Diplomacy, issue no. 21, 2018. 28 consumers on the world’s energy markets as well as the parameters of exporter-importer relations, encumbered by the latter group’s fears of exports of raw materials being used as a political weapon. In the course of these transformations, the strategic importance of regions rich in energy resources is increasing. The volatile political situation in those regions causes disturbances on a scale going beyond national boundaries. Locked in the struggle to eliminate the competition and secure the necessary raw materials, countries rely on different strategies. Nowadays, energy resources are also used to strengthen the global positions of certain countries. In this respect, examples can be given both with some countries and with the EU, taking into account the specificities of the relevant political and economic positions.

1. Russia

In light of the foregoing, a typical exampleis Russia, which leverages its energy export to gain strategic foreign policy and/or economic advantages. Russia has serious interests in the Black Sea area, both from a political and an economic standpoint, as well as from a security perspective. Following the annexation of Crimea in 2014, the dynamics in the security environment intensified, which manifested in a sharp increase in the presence of armed forces and the concentration of heavy weapons, resulting in escalating tensions in the region. Having a presence in the Black Sea area is important to Moscow not only for securing its activities towards the Middle East but for strengthening its policy and influence in central Asia as well. Russia defending its interests, including through the use of force, is a permanent fixture in the Black Sea area, as the country wants to unequivocally demonstrate its role as a leading Black Sea state in a way that will not be challenged by other players.

Since the beginning of the 21st century, Russia has been perceived as the main obstacle to US attempts to control the energy routes connecting Europe with Asia through the Balkans. The US (for reasons related to geopolitical security and the ability to sell raw materials) and the EU (mainly due to economic reasons) are using various means to promote the energy diversification of European countries in order to limit the latter’s dependence on Russian gas. Russia’s energy policy on transit issues needs to be balanced. Excessive dependence on Turkey, whose role as a transit country appears to be growing, would not be conducive to stability of supplies, as the specificity of the Turkish regime and the presence of a number of areas of conflict in Turkish-Russian relations may have negative consequences. Balancing the use of the gas pipelines Nord Stream 1, Nord Stream 2, Yamal-Europe, Blue Stream, and Turkish Stream and the gradual deployment of liquefied natural gas (LNG) production capacities is the most optimal option, according to Russian authorities.92 In this regard, what should also be taken into account is the view that even once transit dependence on Ukraine is minimised, Ukrainian transit should not be completely discontinued, as limiting possible supply routes in any way would reduce the ability of Russian companies to manoeuvre and find better ways to supply energy sources.93 In the opposition between the US and Russia on the main energy market — the EU — the Caspian region (possibly even including Iran), the Eastern Mediterranean, and the Middle

92 Energy Strategy of Russia for the Period up to 2030, Энергетическая политика [Energeticheskaya politika], pp. 60-61, available at: http://www.energystrategy.ru/projects/docs/ES-2030_(Eng).pdf; see also Katona, V., ‘Problems of Black Sea Energy Transit’, Geopolitics, issue no. 2, 2018, available at: https://geopolitica.eu/spisanie-geopolitika/168-2018/broy-2-2018/2811-problemite-na-chernomorskiya-energien- tranzit 93 Ibid. 29

East can be seen as alternative sources. The energy confrontation is set to intensify. On the one hand, particularly relevant in this regard is the Syrian conflict, which is important in terms of control over the territories along the future gas supply corridor from the Middle East to Europe, in which the regional actors Iran and Qatar are particularly interested. On the other hand, it should also be taken into account that the Russia-Ukraine crisis is enabling Russia to strengthen its position when it comes to European gas routes.94

2. Turkey

Due to its central location as a bridge between Asia and Europe as well as the indecisive policy of some neighbouring countries, Turkey has every chance to establish its status as an energy hub. This is also made possible by the fact that Ankara is not directly subjected to external regulatory measures — including the requirements of the ‘Third Energy Package’ of the EU and the Gas Directive95 in particular.

The Bosporus and the Dardanelles Straits on Turkish territory have been at the basis of Turkey’s transformation into a transit hub between the Middle East and Europe. The Montreux Convention (1936)96 reaffirms Turkey's right to control the Straits and effectively impose a ban on the passage of warships of non-Black Sea states as well as limit the passage in the case of military action. Turkey has another lever to influence the situation in the Black Sea — although according to the Montreux Convention it cannot interfere in the regime of unimpeded passage through the Straits, Ankara reserves the right to determine the regulatory requirements regarding security measures and protection of the environment. Turkey's significance, however, is not limited to the Straits. Its diverse infrastructure, including energy infrastructure — existing (two LNG terminals) and future (TANAP, Turkish Stream, etc.) — brings numerous benefits to the country. An important feature of Turkey's energy infrastructure is also the oil pipelines Kirkuk-Ceyhan and Baku-Tbilisi-Ceyhan (which carries most of the supplies of Azerbaijani oil to Turkey).

Turkey plays a key role in the realisation of the two most significant projects for Europe in terms of supply diversification –– TANAP and TAP. These projects are direct competitors of Russian transit and, to a large extent, claim the same piece of the pie. The Trans-Anatolian Natural Gas Pipeline (TANAP), which is supported by the EU and the US, passes across the EU through its connection with the Trans-Adriatic Gas Pipeline (TAP). Currently, Azerbaijan’s Shah-Deniz 2 field is the only source of natural gas for TANAP. Although it was initially thought that Turkmenistan may also join this project (via the Trans-Caspian Gas Pipeline), it is becoming increasingly clear that the starting point of the pipeline will continue to be the Sangachal terminal near Baku. At nearly 1 900 km in length and a cost of about $8-9 billion97, TANAP, which was inaugurated in June 2018, interconnects to the Baku-Tbilisi- Erzurum pipeline (South Caucasus Pipeline), whose route follows that of the Baku-Tbilisi-

94 Papatulica, M., ‘Black Sea area at the crossroad of the biggest global energy players’ interests. The impact on Romania’, 2015, available at https://www.sciencedirect.com/science/article/pii/S2212567115002403 95 Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC, available at https://eur- lex.europa.eu/legal-content/BG/TXT/?qid=1546777666641&uri=CELEX:32009L0073 96 Montreux Convention Regarding the Regime of the Straits, signed at Montreux on 20 July 1936, available in English at http://sam.baskent.edu.tr/belge/Montreux_ENG.pdf 97 Chestney, N., ‘EBRD board approves $500 mln loan for TANAP gas pipeline project’, 2017, available at https://www.reuters.com/article/europe-gas-ebrd/ebrd-board-approves-500-mln-loan-for-tanap-gas-pipeline- project-idUSL8N1MR4YS; for more information, see also the project website https://www.tanap.com/ 30

Ceyhan oil pipeline. Thanks to TANAP, Turkey secures supplies of 6 bcm of gas per year, while the remaining 10 bcm of the pipeline’s total capacity of 16 bcm will be delivered to the markets of south and south-eastern Europe (SEE). Around 8 bcm of those will be delivered to Italy, and the remaining 2 bcm — to the Greek and Bulgarian markets. The first gas deliveries to Turkey started at the end of June 2018 and those to SEE are expected to commence at the end of 2019.98

If it is extended by building the Poseidon gas pipeline to Italy, the competitive Russian- Turkish project Turkish Stream will practically duplicate the TAP route in that section. Gazprom's interest in the south route including the possibility to branch out the infrastructure to Bulgaria, is due to a number of factors: already existing infrastructure that was built for the realisation of the South Stream gas pipeline; shorter route to the gas network of Serbia (where Gazprom is a major shareholder); and intentions to reduce dependence on supply routes through the territory of Ukraine, which would significantly limit supply-related risks. The discount that Gazprom will obviously provide to the Turkish buyers of Russian gas is an additional factor contributing to the economic appeal of Turkish Stream, as is the opportunity for Gazprom to position itself to benefit from the ability to obtain third party access (TPA) to the additional TAP capacity, after its expansion. Turkey is an important regional actor in the Black Sea region and on the Balkans. Without its co-operation, it is difficult to export goods from the Black Sea basin or to move from Asia to Europe and vice versa bypassing Russia. In addition, its political and economic impact extends to the EU, as Turkey is one of the largest trade partners for some Member States. Turkey is continuing its efforts to become a regional energy hub, which will be made possible if the country builds a significant own natural gas storage capacity.

3. European Union

The Black Sea region as one of the factors in the European energy security has come to be much more relevant in the process of EU enlargement to the еast. With the accession of Bulgaria and Romania to the EU, the Black Sea became an external border of the bloc. That circumstance pushed the issue of EU relations with the countries on the Black Sea coast and with the ‘neighbours of its neighbours’ high on the agenda. With Black Sea co-operation matters, special significance is placed on the energy sector in view of the role of the region both as a production area and as a transit and distribution area of strategic importance for the security of energy supplies to Europe. The region’s considerable potential for the provision of energy resources makes it an important component of the EU’s external energy strategy. As the largest importer of energy resources globally99, the EU is faced with the need to diversify its supplies. The importance of diversification as a priority for the EU became particularly evident in the course of the Russian-Ukrainian gas crises of 2006 and 2009 and the events in the Middle East and northern Africa (the so-called Arab Spring of 2010–2012 and the subsequent spread of radicalism and Islamic extremism in the region). Undoubtedly, diversification is a strategic concept for reducing uncertainty in the energy field, which can be realised in three main areas — sources, routes, and suppliers.

98 Katona, V., ‘Problems of Black Sea Energy Transit’ 99See the Framework Strategy for a Sustainable Energy Union with a Future-oriented Climate Change Policy, p. 2, available at: https://eur-lex.europa.eu/resource.html?uri=cellar:1bd46c90-bdd4-11e4-bbe1- 01aa75ed71a1.0014.01/DOC_1&format=PDF 31

It should be noted that Member States continue to demonstrate their attachment to preserving sovereignty in the energy sphere and therefore resist the transfer of such competences to the EU. Therefore, countries develop and conduct their own energy policies geared to their geostrategic interests, individual resources and needs, and specific relationships and connections with suppliers of raw materials. The EU does not have significant powers in this area. However, the European institutions have stepped up their efforts to develop legislation on this issue, and policy papers highlight the need for a coherent external energy policy for the bloc.

The real structural problem facing the improvement of EU energy security is the diverging interests of Member States as regards Russia. This is largely due to Russia’s gas export practice, which involves political factors affecting bilateral negotiations and confidential clauses determining the final price. George Friedman, president of Stratfor Global Intelligence, points out that Russia is practising ‘trade imperialism’ through economic relations in the energy sector, exploiting them to influence the policies of partner countries that endanger Russian interests. The main targets of this practice are the countries of central and eastern Europe (CEE), which do not negotiate from a position of strength as economically powerful EU Members States do.100

The Black Sea countries — as well as the EU and its Member States — have a strong interest in foreign investment contributing to the development of recipient countries’ economic capabilities, without weakening their long-term stability and independence, and in the case of the EU its unity. At the regional level, the EU has implemented the Trans-European Transport Network and the Trans-European Energy Network (TEN-T and TEN-E, respectively) strategies in order to identify priority projects to be completed by 2030. The TEN-T corridors Orient/East Mediterranean and Rhine-Danube are particularly important for the Black Sea countries, and in 2017 the TEN-T network was also extended to the Eastern Partnership countries.101 The TEN-T programme has provided a serious boost to the development of road infrastructure, but progress on railways has been limited.102 Brussels and Member States should take note of the disappointment of some countries in the Black Sea region in the EU’s failure to adequately allocate economic benefits and tackle political challenges such as migration. The EU should also be more specific in its actions in the region, including as relates to the implementation of the strategy for the Western Balkans.103

European companies, which are key economic players in the Black Sea region, and the Western Balkans in particular, with a more than 70% share of trade and foreign direct investment in 2016104, should step up their activity in the region. Against this background, the EU should rethink its potential by launching new and better-structured initiatives that do not

100 Papatulica, M., Op. cit. 101 The initiative was launched with the Joint Declaration of the Eastern Partnership Summit (8435/09 (Presse 78)), adopted in Prague on 7 May 2009, available in English at https://www.consilium.europa.eu/media/31797/2009_eap_declaration.pdf; for more information, see https://eap- csf.eu/front-page-full-width/eastern-partnership/ 102 Okano-Heijmans, M., ‘Promoting Sustainable Connectivity in the Balkans and Black Sea Region’, Clingendael Institute, 2018, p. 5, available at: https://www.clingendael.org/sites/default/files/2018- 08/PB_Promoting_sustainable_connectivity_BBS_region.pdf 103 See Communication A strategy for a credible enlargement perspective for and enhanced EU engagement with the western Balkans, COM (2018) 65 final, 6 February 2018, available in English at https://ec.europa.eu/commission/sites/beta-political/files/communication-credible-enlargement-perspective- western-balkans_en.pdf 104 Okano-Heijmans, M., Op. cit., p. 9. 32 compete with each other. The Black Sea Synergy105 was an initiative with great potential, but due to the stronger influence of certain Member States, greater emphasis was placed on the Eastern Partnership. The EU has its opportunities and they should be materialised both through Euro-Atlantic co-operation and by co-ordinating and following a strategic approach to the Black Sea region. These processes should involve the active participation of Member States located in the region and should utilise the potential of the Organization of the Black Sea Economic Cooperation (BSEC). It is precisely its experience that could be integrated into the multi-pronged security policy (including energy) in the Black Sea area in order to create a multi-vector architecture with mechanisms allowing co-operation between larger and smaller states as well as between international organisations.106

4. United States

The US has strategic interests in the Black Sea region determined by the latter’s location. The region is a hot point in terms of the US sustaining its foreign policy influence (independently or through NATO) in the Middle East and the Black Sea region itself and its potential towards central Asia. This is based on the concept of the broader Black Sea area, followed by US foreign policy.107 The US could further strengthen its influence through its commitment to a more active role in building the new security architecture in the region. In its implementation, however, it is necessary to strike a balance between the main factors but also allow for greater participation in these processes of the countries that are located in the Black Sea region, regardless of their size, influence, or political orientation.108

It is important for the US that SEE countries have different options to counteract Russian influence. A major consequence of the annexation of Crimea by Russia is the control that the latter gained over the deposits of hydrocarbons in the continental shelf adjacent to the peninsula and over the energy and transport corridors from Asia. In this context, Washington is against the construction of a branch of Turkish Stream to Bulgaria as well as the implementation of Nord Stream 2.109 These projects would make the countries involved more dependent on Russia and will ‘punish’ Ukraine. Both Russia and the West, represented by the US and the EU, would benefit from keeping Ukraine in their own spheres of influence.

105 See Black Sea Synergy – a new regional cooperation initiative, COM (2007) 160 final, 11.04.2007, available at https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2007:0160:FIN:BG:PDF 106 Belova, G. & Marin, N., ‘Mnogovektorni izmerenia na sigurnostta v chernomorskia region’ [Multi-vector dimensions of security in the Black Sea region], available at https://bit.ly/2HrhVxb 107 Ibid. 108 Ibid. 109 Ivanov, S., ‘John Sullivan before bTV: The US Government does not support the “Turkish Stream”’, available at https://btvnovinite.bg/predavania/120-minuti/dzhon-salivan-pred-btv-pravitelstvoto-na-sasht-ne- podkrepja-turski-potok.html; ‘The United States oppose the" Turkish flow” in the EU, Ankara is not negotiating its extension’, available at https://www.dnevnik.bg/sviat/2018/12/17/3363385_sasht_sa_protiv_turski_potok_v_es_ankara_ne_pregovaria/; Ivanova, Y., ‘The United States opposed to the energy domination of Russia in Europe’, available at https://www.capital.bg/politika_i_ikonomika/sviat/2018/11/14/3345826_sasht_se_obiaviha_sreshtu_ energiinoto_gospodstvo_na/; Gotev, G., ‘US warns Hungary and neighbours against Turkish Stream’, 2018, available at https://www.euractiv.com/section/global-europe/news/us-warns-hungary-and-neighbors-against- turkish-stream/; Johnson, K., ‘With Trump Going Soft on Nord Stream, Congress Moves to Kill the Pipeline’, 2018, available at https://foreignpolicy.com/2018/07/19/with-trump-going-soft-on-nord-stream-congress-readies- to-kill-the-pipeline-russia-helsinki/ 33

The US has a positive view of the Three Seas initiative, which is discussed later in this paper. For the country, this platform serves not only an economic but a geopolitical and a geostrategic purpose as well and primarily aims to achieve energy connectivity and diversification and overcome the region’s energy dependence on Russia. The construction of liquefied gas terminals in the Baltic and the Adriatic Seas with the assistance of the US is seen as a key aspect of diversifying gas supplies to the CEE region110 by selling a US product.

5. China

The People's Republic of China is obviously in the process of formulating an independent strategy for positioning in the broader Black Sea region. China employs an unobtrusive method of gaining foothold in the region through the instruments of commercial, economic, investment, cultural, and educational relations, while respecting sovereignty and without explicitly attaching, at least for the time being, political conditions to co-operation.111 Chinese interests in the region should be viewed through the prism of three key strategic aspects.

The first is related to the revival of the Silk Road, which enters Europe by land (through central Asia and the Balkan Peninsula) and sea (through the Indian Ocean and the Eastern Mediterranean). A land route through the Black Sea region would provide China with a transport corridor bypassing territories that are part of or controlled by Russia or the US.

The second aspect covers Beijing’s relations with CEE countries within the 16+1 format. China is taking advantage of the economic stagnation and the decline in serious investments in Europe to establish economic presence in the CEE, develop meaningful trade, realise large- scale infrastructure projects, and set up a working mechanism for investment financing. Beijing’s third strategic aspect in the region concerns its relations with the countries of the South Caucasus as an important link between the Caspian Sea and the Black Sea. China’s increased activity in the field of agriculture has resulted in the establishment of the Association for the Promotion of Agricultural Cooperation between China and the CEE countries as part of the 16+1 format. Beijing is also encouraging the development of a southern railway corridor from Europe to China via Turkey, Georgia, Iran, and central Asia, whereby European farmers would avoid the sanction regime against Russia.

The EU’s concern that China-funded activities may hinder the implementation of TEN-T projects prompted the launch of the EU-China Connectivity Platform in 2015, which aims to harmonise policies and projects.112 However, the results have been limited and a step towards overcoming this problem was made in July 2018 with the reached agreement for the implementation of the EU-China Connectivity Platform Short-Term Action Plan and the formulation of an annual ‘work plan’ to promote infrastructure connectivity between the EU and China113. Apart from this, it should be noted that the initial euphoria surrounding China’s investment intentions is beginning to give way to a more realistic assessment of the potential

110 Callus, K., Ciurtin, H. & Magheru, G., ‘The emergence of a European project. Three Summits for the Three Seas Initiative, NSC and OSW policy paper, 2018, pp. 9-10, available at https://newstrategycenter.ro/wp- content/uploads/2016/04/NSC_OSW_3SI_policy_paper.pdf 111 Katrandzhiev, V., ‘The Chinese Strategy in the Large Black Sea Region’, Geopolitics, issue no. 2, 2015, available at https://geopolitica.eu/136-broy-2-2015/2228-kitayskata-strategiya-v-golemiya-chernomorski-region 112 Okano-Heijmans, M., Op. cit., p. 5. 113 The document is available in English at https://ec.europa.eu/transport/sites/transport/files/2018-07-13-eu- china-connectivity-platform-action-plan.pdf 34 for beneficiary countries becoming indebted to Chinese banks, regardless of whether the projects are implemented or not and regardless of their economic benefit to the countries of the 16+1 format.114

IV. The Three Seas Initiative — new opportunities for increasing energy security and connectivity in the Black Sea region

The initiative115 has a geostrategic and a transatlantic aspect related to ensuring energy security, sustainable economic development, and connectivity for the CEE countries. Among the key elements of the initiative are energy, transport, and digital connectivity along the North-South axis, aiming to complement and balance the currently prevailing East-West model. In this regard, the participating nations have identified as Three Seas Initiative priorities: strengthening transport links in the region in order to enhance development and integration into the TEN-T network, achieving the objectives of the European energy policy, promoting private sector participation in joint economic projects, and adherence to the EU policies. These goals are coupled with the creation of an investment fund to provide financial support for projects proposed by the countries in pursuit of the initiative’s objectives. Bulgaria has presented seven projects: five are related to modernisation of railway infrastructure and the other two concern the construction of intermodal port terminals in Varna and Vidin.

Specific Three Seas Initiative projects in the energy field are: 1) connecting the LNG terminal in Świnoujście (on the Baltic coast of Poland) to that of Island of Krk (Croatia); 2) construction of the BRUA (Bulgaria-Romania-Hungary-Austria) gas pipeline. The aim of both projects is to ensure the diversification of energy supply not only to the CEE region but to the EU as a whole. The first project will allow LNG to be supplied by the US, Norway, Algeria, Qatar, etc., with the natural gas entering the European energy market via a new route and moving along the North-South axis. The BRUA gas pipeline will create an opportunity for Europe to access Caspian gas through Turkey (through the TANAP gas pipeline), thus providing the Old Continent with an alternative to Russian gas supply projects. Gas deposits in the Black Sea are considered as a possible next energy source. The BRUA gas pipeline’s final point is the gas network of Austria (the Baumgarten gas hub), from where the gas can reach any point in the EU.

With regard to transport infrastructure, countries participating in the Three Seas Initiative will co-operate on the construction of the Via Carpathia transport corridor, through which the Lithuanian city of Klaipėda will be connected to Thessaloniki in Greece. In addition, the Rail Baltica project is expected to connect Helsinki with the capitals of the Baltic states, Warsaw, and Berlin. The creation of land links and the strengthening of transport networks in the CEE is a priority, as the planned projects will allow faster movement of goods, people, and capital in the region and beyond — in western Europe, Russia, Ukraine, and the Western Balkans.116

114 For more information, see Elder, T. & Mardell, J., ‘Belt and Road reality check: How to assess China’s investment in Eastern Europe’, available at https://www.merics.org/en/blog/belt-and-road-reality-check-how- assess-chinas-investment-eastern-europe 115 Official website of the Three Seas Initiative – http://three-seas.eu/ 116 Callus, K., Ciurtin, H. & Magheru, G., Op. cit., 2018, pp. 12-13. 35

V. Bulgaria's role in the Black Sea region in the context of energy security and connectivity — recommendations for possible actions on the part of Bulgaria

1. Energy security

When examining the opportunities for Bulgaria in the context of regional and European energy security and connectivity and the issues thereof, one should first and foremost proceed from the fact that the country is part of the EU. As a Member State, Bulgaria pursues an energy policy that is in line with the main EU energy policy objectives for security, competitiveness, and sustainable development, both for the country and the bloc as a whole. A starting point for the formulation of the main policy guidelines is ‘A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy’117, published by the European Commission on 25 February 2015. Within the framework of the European energy policy, Bulgaria is committed to working towards limiting the external dependence on imported energy resources and ensuring secure and affordable energy for consumers. Nevertheless, in its factsheet on Bulgaria, the European Commission’s Third Report on the State of the Energy Union, covering 2017,118 indicated significant deficits in the achievement of the targets. According to the document, almost all of the country’s energy imports come from one supplier (Russia) and via only one route (the Trans-Balkan gas pipeline). The Commission notes that relations with the supplier lack transparency and equality when it comes to pricing. Bulgaria inter alia has no alternative options, such as an LNG terminal or a gas centre (hub). For these reasons, the Commission’s conclusion is that the country is vulnerable to supply disruptions.

However, the Commission takes into account the measures introduced by Bulgaria to mitigate its energy dependence, namely the actions aimed at modernisation of the gas transmission infrastructure, the projects for new gas interconnections with neighbouring countries, and the protection measures that should shield certain consumers in the event of a serious gas supply crisis.

Given the above, it is evident that Bulgaria should continue to work towards reaching the EU energy policy objectives, while still considering the national energy development features. In the area of gas supply security, national efforts could be focused on several aspects:

 Bulgaria should continue its active participation in the implementation of EU strategic initiatives for building the necessary infrastructure to diversify energy supply sources, including through a North-South axis connection along what is known as the ‘Vertical Gas Corridor’, which will allow reverse flows in CEE.  Given the country’s location, Bulgaria needs to strive to remain an important energy player in the region and, at the same time, a reliable member of the EU, including by finalising gas interconnection projects with neighbouring countries.  In order to ensure national and regional energy security and achieve competitive gas prices, Bulgaria should continue to work on the realisation of the Balkan Gas Hub — a concept for a regional gas distribution centre on Bulgarian territory that is supported by the European Commission.

117 COM(2015) 80 final, 25.02.2015, available at https://eur-lex.europa.eu/resource.html?uri=cellar:1bd46c90- bdd4-11e4-bbe1-01aa75ed71a1.0014.01/DOC_1&format=PDF 118 SWD(2017) 386 final, 27.11.2017, available at https://ec.europa.eu/commission/sites/beta- political/files/energy-union-factsheet-bulgaria_en.pdf 36

The recommendations presented are based on objective needs of and practical benefits for Bulgaria. The construction of gas interconnections is one of the main prerequisites for the realisation of a gas distribution centre on the territory of the country. Bulgaria has already made strides in that regard, having completed the interconnection with Romania in 2016. In addition, the commissioning of the Interconnector Greece-Bulgaria is foreseen for 2020. The project is a significant component of the policy for diversification of sources and routes of natural gas in the region, as it will connect the North-South Gas Corridor to the Southern Gas Corridor. The EU reaffirmed the strategic importance of the project by including it on the list of projects of common European interest and providing it with access to grants under the European Energy Programme for Recovery. Its implementation will be of importance for the regional energy security and will contribute to the realisation of the Balkan Gas Hub. In addition, Bulgaria is interested in acquiring a share in the floating LNG terminal project in Alexandroupolis, which is also a move under discussion.

A project of common interest for the EU is that of the Bulgaria-Serbia gas interconnection, the construction of which was negotiated with the Memorandum of Understanding signed between the two countries on 19 January 2017 in Sofia. A joint declaration with an updated timetable for the implementation of the project was also signed at the Western Balkans Summit held in the framework of the Bulgarian Presidency of the Council of the EU119. The interconnector is slated to be commissioned in 2022, giving Bulgaria access to Hungary’s gas transmission network and from there to the networks of the countries of central and western Europe.

The Turkey-Bulgaria intersystem gas connection is a project to further develop the existing interconnection of the networks of the two countries by creating a technical capability to reverse gas flows. An accompanying extension of the existing gas transmission system will increase the system’s security and will allow the transfer of additional quantities across the Bulgarian-Turkish border. The Turkey-Bulgaria intersystem gas connection is expected to ensure supplies not only from Azerbaijan but also from gas traders via the liquefied gas terminals in Turkey.

As regards the concept of the Balkan Gas Hub, the expected advantages of its construction are: concentrating natural gas supplies from alternative sources from the Caspian region and the Eastern Mediterranean via the Interconnector Greece-Bulgaria; supplies of Russian natural gas; utilisation of local gas potentially extracted from the Black Sea (Khan Kubrat and Khan Asparuh blocks) as well as continued modernisation and rehabilitation of the existing gas transmission network in the country, including the Chiren gas repository, whose expansion is forthcoming. The idea is for significant amounts of natural gas from different sources to enter the planned gas hub for further transport, while the centre also serves as a gas trading venue where each market participant can carry out market-based transactions. In the context of the European objectives for building an interconnected and integrated pan-European gas market, the creation of the Balkan Gas Hub will allow for the gas markets of the EU Member States in the region (Bulgaria, Greece, Romania, Hungary, Croatia, Slovenia) to be linked by building the necessary gas infrastructure. This, in turn, will connect the markets of central and western Europe as well as those of the Energy Community countries (Serbia, Macedonia, Bosnia and

119 ‘Bulgaria and Serbia reaffirmed their commitment for building an intersystem gas connection’, 17 May 2018, available at: https://www.me.government.bg/bg/news/balgariya-i-sarbiya-zatvardiha-angajimenta-si-za- izgrajdaneto-na-mejdusistemna-gazova-vrazka-2597.html?p=eyJwYWdlIjo5fQ 37

Herzegovina, etc.) Thus, the project will contribute to the achievement of the main priorities of the European energy policy.

Bulgaria should seek and recognise its interest when examining all, including emerging, opportunities for diversifying its energy supplies, reducing supply prices for its internal market, and potentially benefiting from transiting volumes of natural gas in the region through its well-developed and rehabilitated domestic transmission network. The country should make efforts to preserve its transit role in the region.

2. Connectivity

Due to its location, Bulgaria has the opportunity to become a transport link between the countries of western and central Europe and the Asian countries. The land transport network of the country has sufficient density and level of development, which allows it to develop and establish itself as an efficient distribution centre for the cargo flows to and from the European countries. With that in mind, it is essential that Bulgaria should build land connections to the Western Balkan countries where such do not exist and modernise those with extremely insufficient capacity. Expansion of the TEN-T network to the west of Bulgaria, following the heavy freight and passenger flows in the region, will significantly improve trade and transport connectivity in the SEE.

In view of the above-mentioned, it is necessary to emphasise that new ‘Guidelines for the development of the Trans-European Transport Network’ (Regulation 1315/2013120 and Regulation 1316/2013121) have been in force since 2014, focusing on networking, reducing the differences between the infrastructure of Member States, removing bottlenecks, and overcoming technical barriers. Attention is also paid to the links between the EU transport system and the neighbouring regions’ systems. The new TEN-T policy identified two corridors from the ‘core’ network to pass through the territory of Bulgaria — the Rhine- Danube and Orient/East-Mediterranean. These routes are the natural transport links between countries in central Europe and the Black Sea region. It should be noted that the Orient/East Mediterranean corridor of the ‘core’ TEN-T network includes almost all routes of Pan- European Transport Corridors IV, VIII and X, while the sections from Sofia to the Serbian and Macedonian borders are part of the ‘core’ network as important cross-border sections. The route of Corridor VIII via Bulgaria is included as a priority European route — part of the TEN-T network. This makes it possible to use the European funds for the development of both railway and road infrastructure.

In addition, it is worth noting that as of 1 January 2019 Bulgaria assumed the Chairmanship- in-Office of the BSEC. The territorial boundaries of BSEC place the organisation geographically close to the EU, which is currently the largest trading partner and source of investment and political support to countries in the Black Sea region. As a member of both the EU and the BSEC, and during its chairmanship of the latter, Bulgaria could promote effective

120 Regulation (EU) No 1315/2013 of the European Parliament and of the Council of 11 December 2013 on Union guidelines for the development of the trans-European transport network and repealing Decision No 661/2010/EU, latest consolidated version available at https://eur-lex.europa.eu/legal- content/BG/TXT/?qid=1546613386236&uri=CELEX:02013R1315-20170608 121 Regulation (EU) No 1316/2013 of the European Parliament and of the Council of 11 December 2013 establishing the Connecting Europe Facility, amending Regulation (EU) No 913/2010 and repealing Regulations (EC) No 680/2007 and (EC) No 67/2010, latest consolidated version available at https://eur-lex.europa.eu/legal- content/BG/TXT/?qid=1546613696458&uri=CELEX:02013R1316-20180802 38 maintenance and modernisation of transport infrastructure, its continued development, safety and security of the transport system, and accessible and environmentally friendly transport.

Given the above, the following recommendations for action can be identified:

 Bulgaria should continue to pay due attention to international transport projects within the TEN-T Network and the Pan-European and the Euro-Asian corridors in the region to achieve an optimal level of integration of transport networks.  The country should strive for a co-ordinated development of European transport corridors and promote co-operation on transport development in the region in implementation of the Memorandum of Understanding on the Coordinated Development of the Black Sea Ring Road between the BSEC countries122, the Memorandum of Understanding on the Development of Maritime Highways in the BSEC region,123 and the Memorandum of Understanding on the Facilitation of International Road Transport of Goods in the SECI Region124.  It is necessary for Bulgaria to work towards boosting the ferry and ro-ro transport market in the Black Sea region on the basis of free market competition — for example, by helping other BSEC countries join the existing bilateral agreements.  Bulgaria should endeavour to develop cruise shipments in the Black Sea, which would create new regular maritime links between BSEC countries and contribute considerably to promoting tourism and the regional economy.  The country can contribute to facilitating the exchange of data on maritime freight transport between BSEC countries by urging other partner countries to streamline procedures. Such administrative relief would greatly facilitate the traffic in the Black Sea.  Regarding civil aviation co-operation in the Black Sea region, Bulgaria could offer non-EU BSEC countries to focus their efforts on alignment of their national laws with the EU rules, standards, and best practices in this industry. Such co-operation would increase the level of civil aviation in the region.

V. Conclusion

The processes in the Black Sea region have their own dynamics, dictated by the interests of and interaction between global and regional powers. Given the role of the Black Sea area in strategic, energy, and communication and transit aspects, it is reasonable to expect that in the future the geopolitical snapshot of the region will be characterised by intertwining elements of co-operation and opposition, both between the countries of the region and between them and external actors. The above applies with full force as regards the energy security and connectivity matters. This is a strategic issue because energy security and connectivity provide any modern state with opportunities and necessary conditions for action. This determines the interests and behaviour of Russia, the EU, the US, Turkey, and China in the Black Sea region.

122 Approved by Decision No 196 of 4 April 2008 of the Council of Ministers. Effective as from 1 November 2008 Prom. in SG, no. 101 of 25.11.2008 123 Approved by Decision No 197 of 4 April 2008 of the Council of Ministers. Effective as from 1 December 2008 Prom. in SG, no. 5 of 20.01.2009 124 Approved by Decision No 550 of 30 July 1999 of the Council of Ministers. Effective as from 1 July 1999 Prom. in SG, no. 80 of 10.09.1999 39

Bulgaria’s actions towards ensuring energy security and connectivity are an important feature of the country’s foreign policy with a view to achieving sustainability in economic development. It is important for Bulgaria to pursue an active bilateral and multilateral policy in the region, while also contributing to the implementation of European Black Sea concepts and projects, with particular emphasis on the development of energy infrastructure and transport networks.

40

Political and policy aspects of preferential energy prices at EU and national levels and Bulgaria’s approach

Kaloyan Staykov125

Introduction With the implementation of the Europe 2020 strategy126 nearing its end, the European Commission (EC) and EU Member States have agreed on new targets for 2030127. While the previous strategy was more comprehensive, as it included targets for employment, R&D, climate and energy, education, and poverty and social inclusion, the 2030 target focuses solely on climate and energy, including developing the energy union. The 2020 targets on climate and energy are as follows:  20% reduction of greenhouse gas emissions compared to 1990 levels;  20% energy consumption from renewable energy sources (RES);  20% increase in energy efficiency.

The 2030 targets on climate and energy include:  40% reduction of greenhouse gas emissions compared to 1990 levels;  32% energy consumption from renewable energy sources (RES) (revised upwards in mid-2018 from the initial target of 27% set in October 2014);  27% increase in energy efficiency.

As each of the three targets is vast in its scope, the current paper focuses solely on power consumption from RES and its political and policy aspects. In order to analyse the future

125 Kaloyan Staykov is a senior economist at the Institute for Market Economics where he works on analyses in the fields of public finances, energy, health care, and financial systems. Prior to joining the IME team, he worked as an economist at the Center for Economic Development. He was also part of the team that authored the 2015 book Anatomy of the crisis, with a focus on the development of the public finances during and after the economic crisis. In 2017, he was part of the team behind the book Flat tax in Bulgaria: Background, introduction and results, with a focus on the policy in the field of corporate taxation policy. In recent years, he has been involved in the preparation and presentation of the IME's annual project Alternative State Budget, presenting a different view of Bulgaria’s public finances. Staykov is a member, and the vise-chair of the board of the Bulgarian Macroeconomic Association. He is currently a PhD student at Sofia University ‘St Climent Ohridski’, Bulgaria. He holds a master's degree in economics and management in energy, infrastructure and utilities from Sofia University ‘St Climent Ohridski’ and a bachelor's degree in international economics and business with and has specialised in finance at the University of Amsterdam, The Netherlands.

126European Commission, Communication from the Commission, COM(2010) 2020 final, Europe 2020: A strategy for smart, sustainable and inclusive growth, EUR-Lex, Document: 52010DC2020, 2010. 127European Commission, Communication from the Commission, COM(2016) 860 final, Clean Energy For All Europeans, EUR-Lex, Document: 52016DC0860, 2016. 41 challenges that efforts to achieve the RES targets may pose, one needs to take a look at the experience of Member States in reaching the 2020 RES targets. During the development of the 2020 strategy, and specifically its climate and energy targets, the debate was centred on two main approaches to organising the support mechanisms. The first was a one-size-fits-all approach with a top-down decision-making process determining support schemes to be introduced in all Member States. It was expected to take the form of a quota obligation scheme with tradeable green certificates (TGC) working at European level. The second approach, which was eventually favoured, advocated for a tailor-made, bottom-up development of RES support mechanisms with the EC acting as a monitoring authority. The implementation of different support mechanisms, as well as the development of RES technologies and power markets, has prompted governments to re-evaluate their approach. As support mechanisms are financed by consumers either through their energy bills or through higher taxes, the usual driver behind policy changes is the rising consumer prices. However, due to the bottom-up approach, best practices have emerged from Member States and have led to the evolution of support mechanisms for future RES generation, if not for existing capacities. Ultimately, this can produce some sort of convergence of support mechanisms across the European Union and has already resulted in the development of the European Commission guidance for the design of renewables support schemes, published in November 2013128. Although there is a vast body of knowledge, as well as databases, covering the initial RES support schemes and their development, little attention has been devoted to the source of financing for the support mechanisms. The current paper is divided into two parts. The first one presents an overview of RES support schemes in the European Union, including their strengths and weaknesses, and the policy implications of pursuing such schemes in a bid to achieve the 2030 targets. The second one presents the financing mechanisms backing RES support schemes and an in-depth review of the Bulgarian experience in financing its RES policy. It also focuses on Bulgaria’s approach to financing RES support mechanism, as it is unique in that it involves a number of revenue sources, as opposed to the standard practice among Member States of dividing the financial burden between consumer levies and public budget support.

RES support schemes in the EU Along with the pan-European challenges posed by the task of selecting a policy approach conducive to meeting the 2020 and 2030 energy and climate targets, there are also national challenges involved in designing support schemes effective in achieving the set goals. Furthermore, policies need to be cost-efficient, so that they do not lead to placing excessive financial burden on consumers/taxpayers or to gold-plating for investors. Generally, there are three broad approaches to setting support levels – it can be done by the administration (e.g. regulator), through a competitive process, or through a quota system (e.g. the obligation scheme discussed earlier). In pursuing their 2020 targets, most Member States first chose administrative approaches to setting RES support schemes based on different variables such as the investment required for building new RES generation, the respective country’s target share of RES generation, etc. However, over time it became clear that, although effective in promoting construction of new

128European Commission, European Commission guidance for the design of renewables support schemes — Accompanying the document — Communication from the Commission — Delivering the internal market in electricity and making the most of public intervention, 2013. 42

RES capacities, the administrative approach was inefficient, as it led to initial over- compensation, followed by adjustments and, in most cases, ultimately under-compensation for investors. As already mentioned, this led to the EC publishing guidelines for the design of support schemes for renewables in November 2013, followed by the adoption of new rules for State aid for environmental protection and energy129. Although administratively determined support schemes have been deemed inefficient, they have not completely fallen out of favour, which is why some of the lessons learnt from their implementation should not be forgotten. One of the main challenges posed by this approach is the problem of information asymmetry, as national regulators do not have access to up-to-date CAPEX and OPEX data for specific technologies – and this can lead to over-compensation (which was the case in Bulgaria in 2012) or under-compensation. A related challenge is the need for timely adjustments to support schemes due to technology maturation and competition. This can be done either for new RES installations (recommended) or for existing ones (not encouraged, as it hampers the investment climate and can lead to law suits). Another challenge is designing different support schemes for different types of RES generation. In order to limit the risk of investor over-compensation, regulators usually impose a limit on the total production from RES technologies that can benefit from preferential prices. This is a paradoxical and inefficient solution as the scheme simultaneously supports RES production and limits it to an administratively preset level, thus hamstringing the financial and ecological benefits of the policy itself. Although this measure was not originally part of the Bulgarian RES support schemes, it was introduced in August 2015 by a decision of the national energy regulator130. Ironically, the decision was overturned in court in early October 2018. Initially, some Member States opted for competitive procedures in supporting new RES installations, and with time other countries followed suit — either in line with best practices or on the grounds of EC recommendations. The positive sides of these competitive procedures include:  cost efficiency – due to competition for the market, as well as technological maturation, support levels for new RES installations have decreased significantly (one prominent example is France);  simplicity of procedures – e.g. introducing competition through tenders makes other existing support schemes (as tariffs) redundant because investors will always choose the ones involving the least amount of risk and the highest pay-out.

However, competition for the market is not a panacea and entails several risks that should be managed. The primary task in that regard is making sure that there actually is competition, as the lack thereof would prevent a cost-efficient procedure. This could be the result of either the tender procedure or the market itself. The next consideration is safeguarding investor confidence, as there is an inverse correlation between confidence and support levels. For example, if competitive procedures increase the administrative burden on potential investors, compared to an administratively designed support scheme, tender results may be less efficient. Other obstacles include attracting a wide range of investors in order to ensure

129European Commission, ‘Guidelines on State aid for environmental protection and energy 2014-2020’, Official Journal of the European Union, C 200, 2014, pp. 1–55.

130Energy and Water Regulatory Commission, Decision No SP-1, 31 July 2015. 43 competition, designing tenders in a way that would not discourage smaller investors and would prevent strategic bidding, etc. In contrast to the two categories of support schemes already discussed, which revolve around preferential prices for RES generation, the quota-based support scheme, also known as green certificates, is a volume-based one. This support mechanism sets an RES consumption obligation either as a share of final consumption or as a nominal amount of power consumption. Initially, six Member States incorporated such schemes in their policies131. In recent years, however, Italy, Poland, and the UK have replaced them with the feed-in premium as a compensation system. Along with setting an obligation for consumption of RES power, the state requires that consumers (through non-RES producers, suppliers, and grid operators) buy a green certificate so as to prove they have fulfilled their obligation. This creates demand for green certificates, while RES producers are awarded such certificates for their production. Thus, the remuneration RES producers receive is the sum of the revenue they make selling power and their revenue from the green certificate market. The experience with green certificates of Poland, Italy, and the UK, which have already transitioned away from this scheme, is indicative of the shortcomings of its design. There are two main problems that regulators face in implementing it — these concern limiting the distortions of the market for certificates and managing profits for lower-cost technologies, since the market does not differentiate between sources of certificates. Regulatory and political decisions can easily skew the market for certificates in either direction, which can result in either under-compensation for RES producers or decreased economic competitiveness due to higher energy prices. Overall, there is a great variety of support schemes across Member States132 and for the sake of simplicity this paper’s focus further is on the major ones. One of the most commonly used support schemes, including in Bulgaria, is the feed-in tariff (FIT), which usually has the following characteristics: guaranteed fixed prices, long-term scope, and priority dispatch. Some Member States have opted to customise these characteristics. For example, in Germany RES producers enjoy guaranteed prices for a number of years, usually 15, while in Denmark some projects have fixed prices for a predetermined production – 10 TWh. In its initial implementation, the scheme was also known as an ‘all-inclusive’ support, as RES generation was insulated from market risk. In this case, a central counterparty, usually the grid operators, or in countries with semi-liberalised markets the Public Supplier, had the obligation to purchase the RES generation (up to a predefined volume, if applicable) at a preferential price. It then sold the power at market price and was compensated for the difference through a compensation scheme, usually in the form of a surcharge — e.g. a price for public service obligation (or price for obligations to society, as it is known in Bulgaria) — added to consumers’ power bills. However, that type of support mechanism was incompatible with the liberalised market and Member States had to adjust the FIT. To this end, the regulators changed the support scheme so as to introduce some market risk for RES producers, while keeping the guaranteed price

131Belgium, Italy, Poland, Romania, Sweden, and the UK; Norway also uses the same mechanism, however it is not included as the country is not a Member State. 132Haas, R., Panzer, C., Resch, G., Ragwitz, M., Reece, G. & Held, A., ‘A historical review of promotion strategies for electricity from renewable energy sources in EU countries’, Renewable and Sustainable Energy Reviews, 2011, pp. 1003-1034. 44 fixed. Under the new approach, the guaranteed price is paid out only for quantities of power that the producer manages to sell on the market and represents a top-up on the market price. The other widely applied support scheme is the feed-in premium (FIP), which, as its name suggests, pays out a premium on market prices for RES production. In its architecture, the scheme is somewhat similar to the green certificate scheme, as it provides an additional revenue stream on top of the revenue from selling power on the market. However, the premium is administratively set, rather than being dependent on the market for certificates. Similar to the FIT, the premium support is usually granted for a fixed duration, as is the case in Italy, or for a pre-set amount of production, as is the case in Denmark. There are different types of FIP based on different elements of their structure, with the main ones being:  Fixed FIP – the regulator determines a fixed price per MWh as a premium for different technology groups, which is the case in Denmark, Spain, Estonia, and Slovenia.  Floating FIP – the regulator determines a fixed compensation price, known as the reference value or strike price, and the premium is calculated as the difference between the market price and the strike price. Setting the strike price is not straightforward, as there is a trade-off between the increase in market risk that RES producers bear and the efficiency of the support scheme. If the strike price is set as the hourly market price, the market risk is completely removed and the support scheme works as a FIT. However, if it is set as the yearly average market price, RES producers face higher market risk, which can cause financial strain. The Netherlands uses a yearly fixed price, the UK — a seasonal (6-month) for baseload RES generation, and Germany — a monthly price.  Caps-and-floors – the regulator determines a price band, which incorporates both fixed and floating premiums. Inside the band the compensation is fixed, and outside of it – a kind of a floating premiuim.

Before enacting its Electricity Market Reform in 2013, the UK conducted a consultation regarding RES support schemes and three options were presented:  feed-in tariffs, including fixed FIT (Spain), premium FIT (Germany), and with a contract for difference (CfD), which is similar to the Dutch mechanism of sliding premiums;  supplier obligation mechanism, which had been in place in the UK and in Romania at that point;  Regulated Asset Base (RAB) model, which is similar to the regulation approach used for natural monopolies such as grid operators.

The following table presents the results of the UK discussion on the pros and cons of each of the proposed mechanisms: Table 1: Summary of UK Government assessment of low-carbon support options in the Electricity Market Reform consultation

Proposed option Advantages Disadvantages

 High degree of revenue  Goes against government FIT certainty agenda of market-based energy approach Fixed FIT policy  Used widely amongst Member States – may make oversee  All electricity price risk (short

45

investment more attractive and long term) and offtake risk  Simple to implement transferred from generators to  Transferring some risks from Government generator to government may  Difficult to ensure limit barriers for new market remuneration is cost-reflective entrants – improving – strong potential for over- or wholesale market liquidity under-compensation

 More market-based than fixed  Less revenue certainty for RES FIT approach i.e. premium generators as generators dependent on wholesale price exposed to both short- and  Practically, a premium FIT long-term electricity price risk. approach is the closest FIT This may act as a barrier for approach to the current RO smaller companies who are less

scheme, minimising risk of able to accommodate this level Premium investment hiatus (compared to of risk FIT other FIT approaches)  May be difficulties with setting  Simple to implement, with a level of premium that is added advantage over fixed FIT accurate, cost-reflective, and that it is more difficult to durable in the long term ‘game’ the system.

 High degree of revenue  Risk of over-supply certainty  Generators are not exposed to  May be more attractive to a long-term electricity price risk wider range of investors  Greater complexity compared compared to premium FIT FIT with to other FIT schemes CfD  Cost-effective advantages due to the generator ‘pay-back’ when the reference price is higher than strike price

 Simplicity of building on an  Complexity may restrict existing scheme rather than investment to larger generators implementing a new approach  Calculating the obligation may  Advantages associated with the lead to excessive (or in some Supplier obligation provision of revenues on top of cases insufficient) levels of revenues resulting from the remuneration direct sale of electricity largely  Variability of ROC prices the same as above increases revenue uncertainty

 Evidence that suggests costs of  Loss of market efficiency capital for regulated businesses signals because generators are are lower than unregulated. insulated from all risks – better RAB model could lead to a suited to natural monopolies reduction in cost of capital and where such incentives do not RAB model hence support costs for RES generally exist. generators.  High risk involved with such radical change to RES regulatory framework

Source: Department of Energy and Climate Change133

As a result of the consultation, the CfD model was deemed most cost-effective and was implemented in the Electricity Market Reform in 2013.

133Department of Energy and Climate Change, Electricity Market Reform Consultation Document, 2010. 46

Financing RES support schemes Although there has been ample research on the support mechanisms for RES technologies, their revenue sources have attracted far less interest and information is scarce. Furthermore, the available academic and policy literature lacks thorough analysis of the incentives that each financing scheme is creating and of the effect they are having on consumption and production patterns, reaching energy and climate targets, competitiveness and economic activity, public policy, etc. For example, ‘nationalising’ the cost of supporting RES technologies by financing it through general taxation can easily create moral hazards, as it lowers the price each consumer is paying (through cross-subsidies) and does not encourage energy efficiency. Socialising costs leads to large industrial consumers ‘paying’ the same amount as other consumers (including households), regardless of consumption, energy efficiency, or ecological impact. On the other hand, financing support schemes entirely through levies on power bills can easily hinder competitiveness, especially in energy-intensive sectors, and can damage overall economic activity, particularly in less-developed countries relying to a greater extent on energy-intensive (not to be confused with energy inefficient) industries. Although end consumers ultimately face the financial burden, either via higher power/grid prices or higher taxes, the financing sources can be divided into two main groups – general taxation and non-tax levies charged through the consumers’ power bills. The latter category can be further divided into levies related to power prices and levies related to grid prices. The majority of Member States (20 as of 2016134) have chosen to impose non-tax levies, which can take a number of forms and are set by different public/private bodies. The levy can be determined by:  the government - Austria, Belgium, Croatia, and Spain;  the national regulatory agency - Bulgaria, the Czech Republic, Greece, Ireland, Italy, and Luxemburg;  the transmission system operator – Germany (under the supervision of the national regulator), Denmark, and Estonia.

The latest Status Review of Renewable Support Schemes in Europe report by the Council of European Energy Regulators groups the countries (although some use more than one financing source) according to their financing sources in the following categories:  levies paid by consumers via their power bills — Austria, Belgium, Bulgaria, Croatia, Cyprus, the Czech Republic, Denmark, Estonia, Germany, Greece, Ireland, Italy, Lithuania, Luxemburg, the Netherlands, Poland, Portugal (incorporated in grid access tariffs), Romania, Slovenia (levy extended to fossil energy sources such as natural gas and crude oil derivatives), Spain, Sweden, and the United Kingdom;  quota obligation scheme (ultimately paid by the consumer) — Croatia;  general taxation — the Czech Republic, Finland, France, Latvia, Luxemburg, Malta, and Norway.

While most countries have picked a clear financing scheme employing one or two sources, Greece seems the odd one out in the group with completely different financing sources. In addition to levies, the country also uses a special tax on lignite coal consumption and part of

134CEER, Status Review of Renewable Support Schemes in Europe, 2017. 47 the income from auctions of CO2 permits. However, as specified below, when it comes to number of support mechanisms, Bulgaria is the unrivaled champion.

Financing RES support schemes in Bulgaria Bulgaria’s 2020 target was set out in the government’s National Renewable Energy Action Plan adopted at the end of 2012. The document provides for a binding RES target, as a share of gross final energy consumption, of 16%. However, it also sets out non-binding targets for three sub-sectors as follows: heating and cooling – 23.8%, electricity – 20.8%, and transport – 10.8%. Renewable power generation is supported through a feed-in tariff, which applies to producers of electricity from renewable sources that inject their electricity into the public grid. Plant operators are contractually entitled to priority purchase and dispatch of all electricity from renewable sources supplied. The FIT is determined annually by the Energy and Water Regulatory Commission and applies over the entire duration of the power purchase agreements (PPAs) signed for projects implemented before the achievement of the RES targets under the National Renewable Energy ActionPlan.

RES component levy Initially, the preferential RES prices under the FIT support mechanism were financed via a levy on grid charges introduced in July 2009 at 2.12 BGN/MWh (or 1.06 BGN/MWh when averaged over the entire year), which quickly rose to 7.41 BGN/MWh135 by 2012 – a sevenfold increase in just three years. The sharp rise of the RES component in households’ energy bills in 2012 accounted for almost 50% of the overall increase in electricity bills (power prices, grid prices, levies, excluding excise duties and VAT, calculated with 70% day consumption and 30% night consumption). This substantial change in power prices in 2012 combined with a stagnating economy to cause social protests during the winter of 2013, which in turn led to a series of questionable regulatory decisions regarding the power market as a whole, as well as the RES component in particular. Until July 2013, the imposed levies on consumers could clearly be seen on power bills as part of grid prices. They included an RES component – 11.10 BGN/MWh, a high-efficiency cogeneration of heat and power component – 3.83 BGN/MWh, and a non-recoverable cost component – 3.38 BGN/MWh. Between August 2013 and July 2015 the individual components were hidden and the NRA (national regulatory authority) made decisions, and published information, only on an aggregate levy — known as obligations to society (OTS) price. Although there is no information for that period, one can make an educated assumption (Figure 1) that the RES component was undervalued in response to the social protests, meaning that the revenue stream from the RES component was insufficient to cover the costs related to the RES support mechanism. This was also the conclusion of the NRA in its June 2014 price decision, stating that the Public Supplier (the sole buyer of RES generation and counterparty in the FIT support mechanism) had accrued a tariff deficit of BGN 1.5 bn, around half of it related to RES support. The bottom line is that the RES component levy was insufficient to cover the costs of RES support, which, at least partly, can be attributed to the NRA’s levy-setting mechanism. It would seem that it was favouring consumers far more than other stakeholders in the sector, resulting in a large tariff deficit.

135Since the price periods for which the NRA sets the levy – 12 months, start on 1 July and end on 30 June, we calculate a weighted average of the levy for each calendar year. 1 euro equals 1.95583 leva. 48

Greenhouse gas emission allowances In order to at least partially offset the shrinking revenue stream after lowering the OTS price, and specifically its RES component, the Bulgarian government agreed and made legislative changes in mid-2013 to allow for income from auction sales of greenhouse gas (GHG) emission allowances to be used to subsidise the Public Supplier. Initially, the redistribution was limited to 71% of revenues from GHG allowances, but in July 2016 the share was increased to 100%. This revenue stream continues to play a significant role in lowering the OTS price; however, since August 2015 it has been part of the Security of the Power System Fund (SPSF), which is discussed in more detail later on. In spite of the additional revenue stream generated by redirecting funds from the auctions of GHG allowances, the tariff deficit related to the RES support mechanism increased. One reason for that development could be inaccurate calculations. For example, overvaluing the expected revenues from auctions of GHG allowances would let the regulator set a lower RES price, ultimately leading to a shortfall in the revenue streams, which then generates a deficit with the Public Supplier. One can easily see how this could be the case, as social protests in the winter of 2013 led not only to a shift in the regulatory policy in the sector but also to early parliamentary elections and change in government. Another reason could be inaccurate projections for revenues from auctions of GHG allowances, which could be the result of lack of administrative capacity, government interference, or a natural outcome of lower prices in the EU emissions trading system (ETS) stemming from depressed economic activity in the European Union. The bottom line is that with the NRA’s price decision of August 2015 the RES component was set twice as high compared to its July 2012 decision, even though during the same period a new revenue stream - 71% of income from auctions of GHG allowances, was introduced. All of this suggests that the OTS prices were set unrealistically low during the period between August 2013 and July 2015.

Stability of the Electricity System Fund Despite securing an additional revenue stream, on top of the RES component levy on electricity bills, in the form of 71% of the income from auctions of GHG allowances, the tariff deficit related to RES support schemes persisted and in 2015 the government created the SPSF. The accompanying motives outline the fund’s goals as ‘reduction of the current tariff deficit in the Public Supplier’ and ‘addressing the vacuum created over the years as a result of the accumulated financial deficit with the Public Supplier’.136 The SPSF has two main revenue sources – income from auctions of GHG allowances (since 2013 it had been going directly to the Public Supplier but in 2015 was transferred to the fund) and a 5% tax on the turnover of power generation companies and trading companies for power imports and sales on the local market. As of July 2016, the 5% tax on turnover applies also to the power and gas transmission system operators, including on turnover of gas storage facilities. Additional revenue sources include statistical transfers of energy from RES used for the development of renewable energy sources, fines and interest on late payments, and donations. The expenditure side of the SPSF’s profit and loss statement is set by the NRA and with its price decisions it looks as follows: BGN ‘000 07.2015 06.2016 06.2017

136Parliament, ‘Motives Accompanying the Bill Amending and Supplementing the Energy Act’, 2015. 49

Costs related to PPA137until the entry into force of the negotiated 89 375 0 0 discount Compensation for Public Supplier costs, related to the Methodology 79 500 79 500 79 530 from 2012 Discount related to the Ordinance for RES component reduction for 97 857 103 085 108 426 energy-intensive industrial consumers Compensation of the Public Supplier for the 5% tax on the turnover 51 854 51 386 51 663 of power producers with PPA Revenue from the SPSF used to reduce the OTS price 118 414 245 235 239 028 Total: 437 000 479 206 478 647 Source: EWRC price decisions

The table clearly shows that although one of the reasons behind establishing the SPSF was ‘reduction of the current tariff deficit in the Public Supplier’ and ‘addressing the vacuum created over the years as a result of the accumulated financial deficit with the Public Supplier’, its focus is severely skewed towards reducing current tariff deficits rather than correcting past mistakes. The only contribution towards compensating the accrued tariff deficit, valued at around BGN 1.5 bn as of June 2014, is the BGN 79.5 m contribution. At the current pace, the entire accrued deficit is going to be fully covered in about 16 years, or around the year 2034. Furthermore, the compensation represents around 16.6% of the total SPSF expenditure, while the revenue used to reduce the OTS price rose from 27% in the year the fund was established to 50% in 2017.

SPSF effect on the power sector and the economy There are numerous questions surrounding the fund’s activities and its effect on the energy system and the economy as a whole, and they are yet to be addressed either by the government or by the NRA. Although the inclusion of an additional revenue stream from auctions of GHG allowances in 2013 was questionable, given that there is a variety of climate change activities that can be funded with that income, the introduction of a 5% turnover tax on power producers and traders was borderline unreasonable. A turnover tax is usually imposed as a balancing mechanism in sectors/professions that benefit from excess profits/revenue as an addition to the corporate/personal income tax. A good example is mining and manufacturing companies dealing with natural recourses, whose profits are sometimes more heavily dependent on the international demand for those recourses rather than on productivity and competitiveness and this often leads to excess profits. Another example is the recent proposal of the European Commission for a 3% turnover tax on various online services provided by digital companies. In this case, the turnover tax may be justified given the difficulty of establishing the correct source of digital companies’ revenues and levying a tax on them at the source. However, with regard to the Bulgarian companies in the power sector, there is no evidence of excess profits; neither is there a problem with their taxation. What is more, given the large accrued tariff deficit in the Public Supplier, there is actually inter-company indebtedness in the power sector and draining company liquidity by introducing a new tax can only exacerbate the situation.

137power purchase agreement 50

The turnover could be viewed as a support mechanism for the sector, if it were used to compensate for the accrued tariff deficit and as a part of a larger cost-sharing mechanism. As it was made obvious in 2013-2014, society as a whole is extremely sensitive to increases in power prices. This means that putting the entire burden for covering the accrued deficit on consumers is unthinkable. The situation has been made even more complicated by the government introducing a discount on the RES component that energy-intensive industries have to pay, which is bound to lead to an even higher increase in the levies for other consumers. Keeping that in mind, the government could have divided the burden between all stakeholders in the power sector – consumers (through raising levies), producers, grid companies, and traders (by introducing an additional tax) – while footing some of the bill through the public budget. This way, the reduction in the energy companies’ liquidity might have been lower and would have been partially offset through reduced inter-company indebtedness. However, as it was indicated earlier, only a small fraction of the SPSF revenue – around 16.6%, is used to compensate for the accrued deficit in the sector. As the turnover tax on power producers and traders as well as electricity and gas transmission operators is used to compensate for current deficits in the sector, it is having an adverse effect on the economy in the short run and will continue to have one in the long run. Reducing companies’ revenue streams usually translates into a combination of lower profitability and higher prices (companies cannot pass the entire effect on to consumers, given that the country is part of a regional power market). The lower profitability affects both private and state- owned enterprises, the latter of which comprise the bulk of power generation in the country. Lower profits, naturally, lead to delaying investment programmes, thus increasing the risk of unplanned repair works and lowering the quality and reliability of power supply in general. Some of the increased financial burden on power generation companies and traders is passed on to consumers through higher prices, which somewhat makes the introduction of a new tax — so as to avoid increasing the OTS price — redundant. However, due to the continued existence of a regulated power market in Bulgaria, that is not the case for all consumers. Under the legislative changes introducing the turnover tax, the additional company expenditure is not recognised for regulatory purposes, meaning that the NRA cannot include it in the regulated power prices. This creates a form of cross-subsidising between two consumer groups:  consumers on the liberalised power market (consumers of high- and mid-voltage power, and some consumers of low-voltage power) pay a ‘premium’ twice – once to cover the increased expenditure (resulting from the turnover tax) of power generation companies and trading companies on quantities later sold on the liberalised market and a second time to cover the increased expenditure (resulting from the turnover tax) on quantities later sold on the regulated market;  consumers on the regulated power market (largely households and some non- household consumers of low-voltage power) continue to pay the same price despite the introduction of the turnover tax.

Rather than introducing a cost-sharing mechanism, as we mentioned earlier, the legislator essentially transfers the entire burden on the consumers on the liberalised power market, while shielding the consumers on the regulated market. Cross-subsidising between consumer groups is explicitly prohibited both by national and European law. By extending the turnover tax to the gas transmission operator, in effect, the legislator increases the reach of the cross- subsidy to include natural gas consumers. The breakdown of natural gas consumption in Bulgaria in 2016 included 47% industrial consumption, both energy and non-energy use,

51 while central heating plants accounted for 29%. This again shows that industrial consumers of natural gas are bearing the brunt of the increased financial burden, while a smaller part is transferred to households via central heating. By creating a cross-subsidising mechanism in contravention of the Bulgarian Energy Act, the legislator also violates another principle – the fair distribution of the OTS price among all consumers, also established in the Energy Act.

The SPSF budget As the fund was established in mid-2015, the starting year for its budget was 2016, so only two full years of data are available. Nevertheless, there is a clear indication of its effects on the market and the support it provides in order to lower the OTS price. There are two general problems. The first one is that there is a considerable difference between planned and reported revenue and expenditure. While there are difficulties with respect to forecasting revenues, this should not be the case when it comes to expenditures, as the fund has full control over the latter. The serious discrepancy between projected and reported expenditures suggests that the NRA has struggled to correctly forecast the volume of the additional revenue stream needed to lower the OTS price. If that trend persists in the following years, it will lead either to a surplus in the fund, indicating an OTS price set too high, or a deficit, indicating an OTS price set too low, in which case the sector will be underfinanced. The second problem is that in 2016 the fund generated a surplus, money that could have been used for one of the following:  lowering the OTS price in 2016 and 2017;  lowering the turnover tax in 2016 and 2017;  covering part of the accrued tariff deficit.

Generating a surplus distorts the role of the fund, which is to provide an additional revenue stream to help alleviate the financial pressure from current and past expenditure on financing the RES support mechanism. It raises the question whether the surplus is due to inaccurate projections or to the Public Supplier generating outstanding liabilities to its counterparties, which are carried into future periods.

The SPSF’s new role Starting in 2019, the fund is assuming a new role as the central counterparty to the RES support scheme and the high-efficiency cogeneration of heat and power. The current feed-in tariffs are being replaced by feed-in premiums with the day-ahead market determining the market price and a strike price set by the NRA. This means that the revenue side of the SPSF will increase by the part of the OTS price related to the RES and high-efficiency cogeneration support schemes and its expenditure side will increase by the related payments for these schemes. The fund’s financial performance in the past two years raises the question of whether the administrative capacity in the NRA is adequate in determining the required revenue and expenditure. As of 2019, forecasting the expenditure side of the fund by the NRA is being linked to forecasting power prices on the wholesale market in Bulgaria (which is virtually impossible, as has been proven historically by other markets), as this is the approach chosen by the legislator. Other countries have set a much more market-oriented mechanism. In Germany, for example, the average market price for intermittent generation is calculated on a

52 monthly basis as the sum of the products of hourly intermittent generation and the market clearing price for all hourly contracts, divided by monthly intermittent generation. And in the UK the market price is the hourly day-ahead price. If the financial performance of the SPSF, as seen in the last two years, does not improve, it will mean an increased burden on consumers and the energy sector as a whole due to generating surpluses and an increased uncertainty in the sector related to companies’ cash- flow.

The public budget and SPSF As of 2019, the SPSF has a new source of revenue which is formally a transfer from the public budget. As mentioned earlier, this could be viewed as a prudent move towards establishing a cost-sharing scheme. However, a closer look reveals that the transfer is contingent on the budgetary performance of the Energy and Water Regulatory Commission. Typically, the NRA’s budget generates surpluses, which are also to be transferred to the fund. The regulator’s budget surpluses have been the topic of many discussions in the country, as they make little sense – either its revenue is too high, hampering the competitiveness and the quality of services of regulated companies, or its expenditure is too low, hampering its administrative capacity. Either way, there is no logical reason for the NRA’s budget to provide an additional revenue stream in order to finance the RES support scheme. On the contrary, its budget, similar to the fund’s budget, should not be generating surpluses and an improved financial performance is not only warranted but necessary.

Overview of the OTS price and other financial support The OTS price in Bulgaria, and more specifically the RES component, has followed a rather politically driven path and has not been an objective representation of the cost of funding power support mechanisms. The RES component was introduced in July 2009 and quickly rose from 0.7% of the average electricity price in 2009 to 14.8% in 2017. The levy has been constantly rising, while RES installed capacities have shown a dramatic increase only once — in 2012 when they reached 1 713 MW, while five years later, in 2017, they were 1 822 MW, or an increase of only 6.3%. During the same five-year period, the RES component increased from 7.41 BGN/MWh to 23.11 BGN/MWh, which is a rise of over 200%. This shows that, while there was a clear support mechanism for RES technologies – a feed-in tariff – the legislator and the regulator struggled to secure revenue sources to finance that mechanism. (see Annex III, Figure 1 and 2)

In addition to the rising RES component, we can also calculate the support provided through the SPSF in 2016 and 2017 as an additional top-up on the OTS price. In 2016, the fund contributed an additional 6.19 BGN/MWh on top of the OTS price and in 2017 the support was 7.97 BG/MWh. These figures mean an increase of the OTS price of 27% in 2016 and 34.5% in 2017, which is considerable, given the steep rise of the OTS price throughout the examined period.

Conclusions There is ample literature on the support mechanisms for RES technologies in Member States, and the field is still developing, with new climate and energy targets set for 2030. This applies to the effectiveness of these mechanisms on reaching the EU targets, as well as their efficiency and the consequences from implementing them. However, little consideration has

53 been given to the means by which these support mechanisms are funded and their effects on the economy. As specified, most countries have chosen to finance their support mechanisms through a levy on energy consumption, through the public budget, or both. There are others, like Croatia, which uses a quota obligation system — it is, again, ultimately financed by the consumer; however, the examples of Italy, Poland, and the UK show that this system has its drawbacks. Another interesting example is Greece, which — on top of the consumer levies — utilises a special tax on lignite coal consumption and part of the income from auctions of CO2 permits. Bulgaria seems closer to the Greek approach than to other Member States, as it utilises numerous financing sources. It has the typical consumer levy, uses all of the income from auctions of GHG allowances, imposes a 5% turnover tax on power producers and traders and on electricity and gas transmission system operators, and — starting in 2019 — will include the surplus of the NRA’s budget. Despite the additional financing sources, in 2017 the consumer levy on power consumption (known as the obligation to society price) was around twice as high as it was in 2012. Further, the RES component in the levy tripled during that same period, while installed RES capacity increased by only 6.3%. These mismatches raise the question of whether the RES support mechanisms had adequate financing to begin with and if not, whether the expansion of revenue sources to include auctions of GHG allowances, turnover tax, and the public budget transfer is going to be enough. Starting in 2019, the feed-in tariffs for supporting RES technologies are being replaced by feed-in premia, which introduces a new variable to the regulatory equation – these are market forces, which can be expected to further complicate the situation. Overall, the source of financing for RES support mechanisms has attracted little attention. However, it is as important as the design of the support mechanism itself. Calculating and setting consumer levies as a simple compensation mechanism for RES support has proven to be a difficult process in Bulgaria, as these levies led to social protests and early elections in 2013. On the other hand, suppressing them, with no alternative source of financing, has led to the Public Provider (who is the counterparty for the feed-in tariffs) accruing a tariff deficit to the tune of around BGN 1.5 bn as of June 2014, as well as inter-company indebtedness in the sector. Using other sources of financing for RES support mechanisms can be prudent only if they are well thought out and work smoothly. Unfortunately, that does not seem to be the case in Bulgaria. The many and sometimes inexplicable regulatory decisions, coupled with the ad-hoc introduction of new revenue sources in the country, suggest that the Bulgarian government was not well-prepared to financially support its own policy targets for RES integration. This can easily lead to unintended consequences, such as, but not limited to, the accrued tariff deficit with the Public Supplier, which will be a burden in devising new policies aimed at reaching the 2030 climate and energy goals.

54

Bibliography

CEER, Status Review of Renewable Support Schemes in Europe, 2017. Department of Energy and Climate Change, Electricity Market Reform Consultation Document, 2010. EWRC, Decision № SP-1, 31 July 2015. EWRC, Annual Report to the European Commission, 2017. EWRC, Annual Report to the European Commission, 2018. European Commission, Communication from the Commission, COM(2010) 2020 final, Europe 2020: A strategy for smart, sustainable and inclusive growth, EUR-Lex, Document: 52010DC2020, 2010. European Commission, European Commission guidance for the design of renewables support schemes — Accompanying the document — Communication from the Commission — Delivering the internal market in electricity and making the most of public intervention, 2013. European Commission, ‘Guidelines on State aid for environmental protection and energy 2014-2020’, Official Journal of the European Union, C 200, 2014, pp. 1–55. European Commission, Communication from the Commission, COM(2016) 860 final, Clean Energy For All Europeans, EUR-Lex, Document: 52016DC0860, 2016. Haas, R., Panzer, C., Resch, G., Ragwitz, M., Reece, G. & Held, A., 2011, ‘A historical review of promotion strategies for electricity from renewable energy sources in EU countries’, Renewable and Sustainable Energy Reviews, pp. 1003-1034. Parliament, 2015, ‘Motives Accompanying the Bill Amending and Supplementing the Energy Act’, 2015.

55

The EU Presidency and the process of shaping up the ‘Fourth Energy Package’

Hristiyana Popova138

INTRODUCTION AND SCOPE

The current paper reviews the development of the ‘Clean Energy for All Europeans’ package of proposed legislation139 through three presidencies of the Council of the EU — these of Estonia, Bulgaria, and Austria.

The European Union (EU) is one of the main world-wide fighters against climate changes and environmental pollution. By setting targets for Member States, it pursues common goals. The EU succeeded in further developing a united energy strategy by putting in place the ‘Third Energy Package’140 and by encouraging Member States to create stable and safe climate and energy environment. Further, the Union approved the ‘Fourth Energy Package’, focusing on clean energy and creating a stable framework for the upcoming novelties in the sector.

The ‘Clean Energy for All Europeans’ package provides basis for real implementation of the energy union by targeting three explicitly specified goals – putting energy efficiency first, achieving global leadership in renewables, and providing a fair deal for the consumers. The mechanism for this includes a set of acquis, updating available legislation (e.g. in the sphere of renewables and energy efficiency) and adding new elements (e.g. good governance). In parallel, in order to achieve its goals, the EU is in the process of improving key concepts concerning energy security (e.g. electricity market design)141.

This pack of documents, which provides the shape of the ‘Clean Energy for All Europeans’ package, received special and most attention during the above-mentioned last three presidencies of the Council of the EU. Estonia, Bulgaria, and Austria dedicated their efforts in the energy sector to creating a sustainable energy union and reliable energy security through regional co-operation — and this was not just theory.

138 Hristiyana Popova has more than seven years of non-interrupted experience in the energy field, working for some of the biggest private and state-owned energy companies in Bulgaria. She is currently part of the EU Regulatory Policies and Market Development Unit of the state- owned Electricity System Operator in Bulgaria. Ms Popova was involved actively in the preparation and the operational work of the Bulgarian Presidency of the Council of the EU as a member of the working group established by the Ministry of Energy, where her involvement was with a focus on the revision and implementation of the ‘Clean Energy for all Europeans’ package. She holds an MA in energy policies and strategies from Sofia University ‘St Kliment Ohridski’ as well as an MA in energy business form the University of National and World Economy. She also gained practical experience as intern in EU institutions (European Parliament) and Bulgarian state authorities (Ministry of Foreign Affairs; Geodesy, Cartography and Cadaster Agency). Further, she has participated in several youth energy projects in Italy and Turkey.

139 https://ec.europa.eu/energy/en/topics/energy-strategy-and-energy-union/clean-energy-all-europeans 140 http://europa.eu/rapid/press-release_IP-07-29_en.htm?locale=en 141 For more details on this see the documents under Reference 2 above. 56

Estonia is well known for being digital, innovative, creative, and progressive. From an economic point of view, it is often mentioned as the Baltic Tiger142. The country is at the top of rankings when it comes to implementation of new technologies and progressive ideas. In the energy field, Estonia applies the same approach. Even though the initiative on ‘Clean Energy for All Europeans’ was not taken during the Estonian Presidency of the Council of the EU, the country oversaw the biggest progress on the legislative proposals during its six-month chairmanship of the Council. Further, the country was able to prepare the relevant files for active interinstitutional debate beyond its presidency period.

The Bulgarian approach was to push for decisions in the energy field that represented balanced and fair compromises. The attention was concentrated on a small sub-package of the legislative proposals, where renewable energy sources (RES) and energy efficiency were inter alia the special focus.

The Austrian Presidency focused on finding the best path towards the improvement of the electricity market. The Austrian efforts targeted issues related to the electricity market design. That concerned a set of specific points such as interconnectors’ definition, regional security, capacity allocation, risk preparedness, the role of the Agency for the Cooperation of Energy Regulators (ACER), etc.

As the role of any EU Presidency in the process of achieving the targeted goals is of concrete importance, it seems necessary for the purposes of the current presentation to remind a several major aspects of the status of the rotating presidency itself.

BRIEF OVERVIEW OF THE PRESIDENCY AND ITS TASKS

Together with the European Parliament, the Council of the EU is the main decision-making body of the EU. It negotiates and adopts EU laws, based on proposals put forward by the European Commission. It also co-ordinates Member States’ policies and provides frameworks for development of different sectors. A concrete example for this is the development of a common energy policy in specific areas via adoption of e.g. detailed and well-justified rules such as those included in the ‘Fourth Energy Package’.

The Council also has a special super power – it allows every EU country to hold the presidency for six months at a time on a rotating basis. This instrument is of particular importance, as it provides inter alia each EU Member State with substantial opportunities to show what it can contribute to the overall EU policy — and this is regardless of how big the country is in terms of territory and population. The rotating presidency enables states to try and push vital policy concepts forward. It shares administrative burdens, supports the co- ordination of policies, proposes the Council agenda, and provides Member States’ public administrations’ with a chance to learn and gain experience. However, along with the opportunities it affords, it entrusts the involved Member States with enormous responsibilities.

At the beginning, when the EU institutions were first founded, the Council did not have so many topics on its agenda and Member States were fewer, so the presidency rotated between two countries every six months143. With the development of the EU and its institutions, the

142 https://www.businesstimes.com.sg/hub/estonia-100-years/small-baltic-tiger-with-a-big-roar 143https://www.consilium.europa.eu/en/council-eu/presidency-council-eu/ 57 workload increased rapidly and new Member States started to participate in the presidency rotation. The need for consistent, long-term policies to be applied by the countries chairing the Council of the EU imposed the development of long-term programmes encompassing the presidency programmes of three consecutive countries — the so-called trios. Thus, the six- month period for a Member State to hold the Presidency of the Council of the EU stays, but now three countries have to work together and to identify and follow common EU priorities. This provides continuity — the current presidency is supported by the work of the previous one — and ensures more consistency. The approach also allows new Member States to take over the presidency sooner, while it helps older Member States to pass their experience on to the new.

During the six-month period, the country holding the presidency chairs meetings at every level in the Council. The presidency trio works together closely in order to set the goals and prepare a common agenda of the Council for the whole 18-month period. Based on this programme, each of the three countries prepares its own, more detailed six months’ programme. Of the countries of the last trio, only Austria had previous presidency experience. Before the trio idea was introduced, Austria had chaired the Council of the EU two times (1998 and 2006), while for Estonia and Bulgaria that was their first time chairing Council meetings. An interesting fact about that particular trio is that initially it was supposed to be the UK, Bulgaria, and Austria. However, due to Brexit, the UK government informed the EU that it was abandoning its commitment to assume the presidency in the second half of 2017 and the country was subsequently replaced.

One of the main tasks of the presidency is to plan and prepare and then chair the meetings of the Council and its preparatory bodies. Proposals are discussed at working party level and then approved by the COREPER144. Once this is done, the relevant documents receive mandate for further discussion at higher level — within the trialogue format145 or at Council of Ministers meetings, for example.

This brings the attention to the other main task of the presidency — to represent the Council in relations with other EU authorities. To be precise, these are the Commission and the Parliament, where the role of the presidency is to mediate an agreement on the legislative documents through trialogues and informal meetings. Without a doubt, this is fully applicable to the legislation included in the ‘Fourth Energy Package’ as well.

The presidency and the ‘Clean Energy for All Europeans’ package

In the energy field, the three presidencies of Estonia, Bulgaria, and Austria joined forces to push forward the ‘Clean Energy for All Europeans’ package (hereafter CEP) — and their efforts were more than successful. The initiative was launched during the trio of the Netherlands, Slovakia, and Malta146 but achieved its concrete outcome during the Estonia- Bulgaria-Austria one.

144 Committee of Permanent Representatives of EU Member States. 145 An interinstitutional meeting between the European Commission, the European Parliament, and the Presidency of the Council of the EU. 146 https://www.eu2017.mt/en/Pages/Trio-Programme.aspx 58

On 30 November 2016147, the Commission presented a new package of measures aiming to provide stable legislative framework in order to facilitate the clean energy transition and make significant steps towards the creation of the common energy union. As previously noted, the proposals are designed to help the EU energy sector become more stable, competitive, and sustainable in the context of energy transition, new technologies, and intensive usage of renewable energy sources in the every-day life of citizens and in the economy.

Looking at the details of the package’s content, a wide scope of goals are explicitly and clearly observed. In addition to the above-mentioned, the CEP targets further promoting energy efficiency and encouraging consumers to be more active on the electricity market. It also provides mechanisms for and guidelines on achieving global leadership in renewable energy. Furthermore, one of the ideas of the legislative proposals is to encourage cross-border co-operation and promote public and private investments in clean energy. The CEP files review the application of renewables and innovative technologies as good example of decreasing CO2 emissions and a great opportunity for Member States to achieve the newly set targets. Another opportunity that the proposed legislation provides is for consumers to achieve better quality of life by being able to lower their electricity bills and by being engaged e.g. in different community formats bringing together the technological and conceptual developments of the energy markets.

More specifically, CEP consists of eight legislative proposals: four of them deal with energy performance of buildings, renewable energy sources, energy efficiency, and governance of the energy union, respectively, and the other four documents address the electricity market design, including ACER rules and risk preparedness148. Some of these legislative initiatives are elaborated on later in this paper.

CLEAN ENERGY FOR ALL EUROPEANS — TRIO’S PACKAGE DEVELOPMENT

As of the end of October 2018, four of the eight legislative proposals were no longer subject to discussion and the other four files were finalised by the end of December 2018. The Energy Performance of Buildings Directive was published in the Official Journal of the European Union149 on 19 June 2018. Two of the other directives, concerning renewables150 and energy efficiency151 respectively, and the Regulation on the Governance of the Energy Union152 were published in the Official Journal on 21 December 2018. The problematic files that remained under question mark until the end of 2018 were the ones concerning the electricity market design — the Electricity Directive, the Electricity Regulation, the ACER Regulation, and the Risk-Preparedness Regulation. The last four documents were subject to discussion at energy party level (Member States still provide their positions on specific articles from the documents) and interinstitutional agreements (trialogue meetings with the Parliament and the Commission) during the last weeks of the trio presidency.

147https://ec.europa.eu/energy/en/news/commission-proposes-new-rules-consumer-centred-clean-energy- transition 148 https://ec.europa.eu/energy/en/topics/energy-strategy-and-energy-union/clean-energy-all-europeans 149https://ec.europa.eu/info/news/new-energy-performance-buildings-directive-comes-force-9-july-2018-2018- jun-19_en 150 https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018L2001&from=EN 151 https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018L2002&from=EN 152 https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L:2018:328:FULL&from=EN 59

Being a global leader in mitigating climate change and adapting to the impacts of climate change are some of the key priorities with the EU in the energy context. In that regard, the three presidencies took the work forward on the modernisation of the EU economy and the implementation of the energy union strategy. The goal was to finalise the rules about this implementation and thus to secure further follow-up activities — inter alia in the context of the Paris Agreement.

Priorities of the trio energy programme153

Although the revision of the legislative proposals started during the trio presidency of the Netherlands, Slovakia, and Malta (January 2016–June 2017), substantial steps were made during the trio of Estonia, Bulgaria, and Austria. In co-operation and by working together, the three countries set common priorities in the field of CEP. One of the main goals was to achieve sustainable and reliable energy union by mostly promoting regional co-operation. Other means of achieving the common wealth foreseen by the trio were linked to diversification of energy sources and suppliers and to reducing administrative burdens as much as possible. Member States noted as a challenge the accomplishment of market integration with respect to the increased usage of and investment in RES. This challenge was of practical importance, as the three Presidencies wanted effectively to promote a decarbonised, environment-friendly, healthy, and digitalised energy transition.

All these emphasised areas are evident upon closer inspection of the presidency priorities of each of the Member States in the Estonia-Bulgaria-Austria trio.

Estonian Presidency of the Council of the EU

 The presidency’s energy programme154

Being first in line, Estonia had the chance not only to work on its own plans but to set the parameters for the rest of the trio’s 18-month term. This is why its presidency’s emphasis on CEP deserves particular attention.

In the context of the trio programme, the Estonian presidency identified priorities regarding CEP and the energy market modernisation within a wide variety of topics. One of the main goals of the presidency was to achieve effective and stable energy market by combining efficient energy supply with consumer-friendly environment. The Estonian presidency addressed in practical terms all important aspects of the energy union, but some of them needed to be explicitly highlighted. Thus, the Estonian presidency focused on integrating EU electricity markets by encouraging energy efficiency and investments in power generation. It strived to create conditions for enhancing the role of consumers on the market.

Another important priority for the Estonian presidency was related to steps concerning the implementation of the Paris Agreement, bearing in mind the link between energy transition, environmental protection, and economic stability. And this was well justified — climate change is progressing rapidly and increasingly affecting the environment and citizens. In that aspect, one of the tasks of the Estonian presidency was to review the current EU Emissions

153 https://eu2018bg.bg/en/trio-programme 154 https://www.eu2017.ee/node/3062.html 60

Trading System as well as to create conditions for the reduction of emissions from other sectors such as transport, agriculture, and waste management.

 The outcome in summary

Estonia was able to oversee a political agreement, known as ‘general approach’,155 on the Governance Regulation, which sets out the rules on governing the energy union and regulates the implementation of the EU’s 2030 energy and climate targets.

The other file, on which the Council agreed a general approach during the Estonian presidency, was the Renewable Energy Directive, which promotes usage and application of renewables across the EU and, in particular, empowers consumers to take initiative and become producers themselves.

As regards the electricity market design, Estonia facilitated a general approach on the Electricity Regulation, which establishes the rules on ensuring a modern, well-functioning, and competitive market. On the Electricity Directive, the Council managed to reach a partial general approach. More specifically, approval was given to texts setting out the common rules on ensuring that the EU electricity market is consumer-centred, flexible, and non- discriminatory by enabling consumers to have more rights and be more engaged in the market. Among the approved texts were those providing a framework that will enable electricity suppliers to set prices freely by limiting distortions, thus boosting competition and leading to lower retail prices. The general approach was partial only because of the definition of interconnectors, which was not approved by Member States and was left for further discussions.

On 18 December 2017156, the Estonian presidency accomplished a common political decision on the bigger part of CEP and prepared the documents well for subsequent discussions by the Bulgarian Presidency.

Bulgarian Presidency of the Council of the EU

 The presidency’s energy programme157

In the energy context, Bulgaria stated that its presidency would focus on increasing the potential for regional co-operation by promoting new infrastructure projects, while paying special attention to the Western Balkans and the Energy Community. Ensuring security of supply through diversification of sources and routes, protecting the critical energy infrastructure, and promoting measures aimed at increasing energy efficiency were among the key issues on which the Bulgarian presidency worked with a view to finding sustainable solutions.

As regards CEP, the Bulgarian presidency sought balance between the interests of Member States and compromise solutions based on broad consensus. For the Bulgarian presidency, priority files within the CEP were the Energy Efficiency Directive, the Renewable Energy Directive, and the Governance Regulation. Bulgaria supported the energy union principle that

155 The Council reaches agreement in principle before the European Parliament delivers its position. 156 https://www.consilium.europa.eu/en/meetings/tte/2017/12/18/ 157 https://eu2018bg.bg/en/programme 61 energy efficiency comes first and saw this principle as an effective way to achieve low-carbon economy. Another objective of the Commission that the Bulgarian presidency supported and strived to reach an agreement on was the targets set out in the Governance Regulation and more specifically — reducing administrative burdens, increasing transparency, and encouraging co-operation. Although the electricity market design files were not a priority for the Bulgarian presidency, they were not completely left behind either.

 The outcome in summary

After long trialogue negotiations on the Commission proposal for the Renewable Energy Directive, the Bulgarian presidency was able to provide an agreement, more specifically on a binding EU-wide renewable energy share target of 32%, with the possibility of revision in 2023158. Among the main achievements envisioned in the adopted document are: improvement of RES support schemes, reduction of administrative procedures, establishment of a stable regulatory framework, increase in the level of ambition for the transport and heating/cooling sectors159.

Another highlight during the Bulgarian presidency concerned the proposal for recast of the Energy Efficiency Directive160 and the Governance Regulation161. In fact, the achievement in that aspect should be viewed as an important step towards the EU's ambitious targets on the way to a low-carbon economy. The new regulatory framework sets a balanced approach by providing flexibility to Member States. An indicative EU target of 32.5% for energy efficiency is envisioned for the period until 2030. For the first time, Member States have the freedom to choose different elements in the implementation of the energy efficiency policy, taking into account the specificities of their economies and based on their national priorities. With the Governance Regulation, a reliable and flexible framework for Member States’ climate and energy policies has been adopted in line with energy efficiency and renewable energy targets by 2030 and the EU’s international commitments.

In co-operation with the Austrian presidency, Bulgaria succeeded in conducting a trialogue on the Electricity Directive and the Electricity Regulation162 as well. That meeting between the three institutions was rather informal but gave directions for next steps, including within the Austrian presidency. In addition, the Austrian presidency had to cope inter alia with reaching interinstitutional agreements on some other files, including on those related to ACER and risk preparedness.

Austrian Presidency of the Council of the EU

 The presidency’s energy programme163

In the energy field, the Austrian presidency was focused on continuing the work of the trio partners, Estonia and Bulgaria, while also providing its own contribution to the process. Its

158 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52016PC0767R%2801%29 159https://ec.europa.eu/clima/news/commission-welcomes-european-parliament-adoption-key-files-clean-energy- all-europeans-package_en 160 https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX:32012L0027 161 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM:2016:759:REV1 162 27 June 2018. 163 https://www.eu2018.at/agenda-priorities/programme.html 62 general goal was to successfully complete all legislative proposals on which work was still pending. As all files’ proposals are interconnected, Austria needed to find and finalise overarching solutions. Given the ambitious targets set at national, international, and European level, Austria made active contribution towards the practical development of the energy union, while achieving an integrated energy and climate policy.

Some of the main priorities of the Austrian presidency included integration of renewable energy sources, active consumers, and digitalisation164 — all in line with the trio programme. The Austrian presidency focused on developing viable compromises with respect to both the Electricity Directive and the Electricity Regulation in the course of the trialogue negotiations. Furthermore, the proposals for the ACER Regulation and the Risk Preparedness Regulation, which could not be completed earlier, were also part of the plans of the Austrian presidency to finalise the CEP-related activities.

Paying attention to competition in connection with ensuring stable energy business and industry in the future is a permanent priority; however, it was also one of particular relevance to Austria within its presidency. The focus in this regard was on the aspects of market development and transition to new technologies, while also taking into account the security of supply. Austria also prioritised energy storage solutions, digitalisation, and smart grid technologies, which are among the main means of achieving efficient energy transition.

Thus, the Austrian presidency was both ambitious and balanced, building on the achievements and successfully concluding the trio’s policy. The Austrian presidency conducted several trialogues, with a focus on the issues concerning the new electricity market legislation as well as topics related to ACER and Risk Preparedness.

The Presidency aimed at reaching final agreement and approval on all open items under the four legislative documents concerning the electricity market design by the end of 2018. During the Council of Ministers held on 19 December 2018 the ‘Clean Energy for All Europeans’ legislative package was finalised165.

The presidency trio and the problematic ‘leftovers’

As mentioned earlier, there is a need for greater elaboration on some of the proposed legislation included in CEP, for which further steps are needed and expected. Each presidency of the Estonia-Bulgaria-Austria trio had to cope with some problematic issues, left from the previous presidency. However, before outlining the common problems, let us recall the focus of these texts in order to better understand their importance in the context of pursuing the EU energy-related goals during the next presidencies. Certainly, only key aspects of the issues are indicated below:

165 https://www.consilium.europa.eu/en/meetings/tte/2018/12/19/ 63

 On the Electricity Regulation166

The recast of the Electricity Regulation establishes rules ensuring the functioning of the internal energy integration. In particular, it revises specific rules on renewable power generation facilities and on balancing responsibilities as well as a threshold for CO2 emissions of new generation capacity. Further, it aims at setting the basis for an efficient achievement of the objectives of the European energy union and of the climate and energy framework for 2030 in particular.

The Electricity Regulation also lays down basic principles with regard to tarification and capacity allocation. The general principles of capacity allocation and congestion management were some of the most discussed topics under the file. These referred in practical terms to issues like: level of approval of the resource adequacy assessment (local or EU one), should strategic reserves be part of the capacity mechanisms or not, or what should be the threshold for power generators regarding the CO2 emissions, etc. The Austrian presidency, in its role as negotiator between the institutions, and by being familiar with the Member States’ positions, the Parliament’s ambitions, and the Commission’s directions, managed to reach an agreement on these important issues and to finalise the file.

 On the Electricity Directive167

The recast of the Electricity Directive aimed at ensuring affordable energy prices for consumers, high degree of security of supply, and a smooth transition to a low-carbon energy system. It lays down key rules relating to the organisation and functioning of the European electricity sector — more specifically, rules on consumer empowerment and protection, on open access to the integrated market, on third party access to transmission and distribution infrastructure.

One of the main issues actively discussed during the revision of the file, was the provisions on regulated prices, closely related to issues such as vulnerable consumers and energy poverty. Advantages and disadvantages of the application of regulated prices were taken into account in order to protect vulnerable customers and to reduce energy poverty. The possibility for citizens to create and be part of energy communities as active customers and the interconnectors definitions were the most disputed issues that found balanced resolutions during the Austrian presidency.

 On the ACER Regulation 168

The revised regulation is the last legal text of the ‘Clean Energy for All Europeans’ package and the Council reached a common approach on most of the issues during the Bulgarian presidency. The proposal for a recast regulation preserves the current ACER model as the

166 Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the internal market for electricity (recast) COM/2016/0861 final - 2016/0379 (COD), available at https://eur- lex.europa.eu/legal-content/EN/TXT/?uri=celex:52016PC0861 167 Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on common rules for the internal market in electricity (recast) COM/2016/0864 final - 2016/0380 (COD), available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM:2016:0864:FIN 168 Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL establishing a European Union Agency for the Cooperation of Energy Regulators (recast) COM/2016/0863 final - 2016/0378 (COD), available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM:2016:863:FIN 64 body responsible for co-ordination between national regulators, with key monitoring functions and providing arbitration when needed. In particular, the new proposal generally updates ACER's list of tasks and responsibilities in the areas of wholesale market surveillance and cross-border issues. There is greater responsibility for the ACER in the development and implementation of codes and guidelines for the electricity grid and the co-ordination of certain functions related to regional security coordinators.

The main problematic issues that were seriously discussed and respectively solved by the Austrian presidency concern the scope of the ACER’s arbitration competencies; the powers of the Board of Regulators; and the adoption of the general conditions and methodologies for the implementation of the network codes and guidelines.

 On the Risk-Preparedness Regulation 169

The purpose of the proposal is to ensure that adequate instruments exist in all Member States to prevent and manage crises in the electricity sector. The risk of such crises can be caused by a number of circumstances such as extreme weather conditions or vicious attacks (incl. cyber- attacks and fuel shortages) even in well-functioning markets.

At present, Member States have different approaches to preventing crises as well as to being prepared to deal with crises and their management. National rules and practices focus primarily on the national context and do not take into account cross-border effects. The rules allow Member States to take preventive measures in crises but do not determine how they should prepare for such situations and how to manage them. It is assumed that the current legislation no longer reflects the real conditions of the connected modern electricity market. In this regard, three main problems were defined in the risk-preparedness file: lack of EU- level approach, only national scope of crisis action plans and related actions; lack of information sharing and transparency; lack of common approach to identifying and assessing risks.

As regards the ‘leftovers’ from the four files, the Austrian presidency had Member States’ comments on the issues as well as the recommendations of the Commission; further, it certainly was well aware of the Parliament’s expectation for improvements. However, the tasks were not easy. By being a good negotiator and proposing flexible and suitable-for-all- parties texts, Austria managed to deal with all the problematic issues left on the files from the other presidencies of the trio. The Austrian presidency ensured balanced solutions and proved to all institutions that with good co-operation and intensive work, the ‘Clean Energy for All Europeans’ legislative package could be agreed by all.

CONCLUSIONS

The lack of experience of two of the three trio members (Estonia and Bulgaria) in chairing Council meetings coincided with dealing in substance with one of the major energy reforms in the EU — the ‘Clean Energy for All Europeans’ package. Further, for Austria that was also the first time holding the presidency as part of a trio programme.

169 Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on risk- preparedness in the electricity sector and repealing Directive 2005/89/EC COM/2016/0862 final - 2016/0377 (COD), available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM:2016:862:FIN 65

Nonetheless, the three Member States deserve to be congratulated on the results achieved in that area. Estonia started the though discussions on the ‘Fourth Energy Package’ and, with tight schedule, intensive discussions, and numerous arrangements, managed to facilitate a general approach on the bigger part of the legislative proposals. Bulgaria, via its achievement of proposing balanced compromise texts, managed to close the files concerning the Regulation on the Governance of the Energy Union, the Energy Efficiency Directive, and the Renewable Energy Directive and to finalise the Energy Performance of Buildings Directive. Austria managed to facilitate the negotiations on the electricity market design and by that to finalise the overall negotiations of the whole legislative package.

Three presidencies, three strategies, one legislative package, one common EU energy policy, one deadline for reaching agreement between Council, Parliament, and Commission — what could be more challenging?

The negotiations over the ‘Fourth Energy Package’ came to their end within relatively short deadlines. However, one should not forget that what comes afterwards is the difficult part – this is the actual implementation of the package. Unfortunately, it is more and more often stated that the EU works and develops at two speeds; regretfully, this statement may be considered justified. Thus, on the one side, having common ambitious aims and targets throughout the Union is very stimulating; on the other side, the regional and national particularities should be adequately considered. Let us not forget – this is a package for all Europeans!

66

DG Competition – The new European energy regulator?

Assoc. Prof. Atanas Georgiev, PhD170

Since the beginnings of the European single market in the late 1980s and early 1990s, with implementation starting mostly during the Delors Commission’s term, the integration of electricity and natural gas markets of EU Member States has been a priority. Both the creation of a single market for energy and the energy union strategy171 relied heavily on the harmonisation of national legislation and regulatory practices. The end goal was to ensure a level playing field and unobstructed competition between single energy sector players and thus facilitate an improved energy market for all European stakeholders. Discussions about the need for a single European energy regulator have accompanied that transformation period the entire way. The establishment of the Agency for the Cooperation of Energy Regulators (ACER) in 2009 was the first step towards European-level energy regulation. However, developments during the Juncker Commission’s term have shown that the European Union’s energy regulation centre may reside at another institution – the European Commission’s Directorate-General for Competition. Current regulatory framework at EU level When the ‘third energy package’ was adopted 10 years ago172, one of its highlights was the establishment of ACER. The new organisation, which can be deemed a successful one a decade later, is far from a federal regulator (e.g. the Federal Energy Regulatory Commission (FERC) in the United States) but more of a formalised platform for co-operation between national energy regulators in the European Union. ACER was built on the successful experience of the European Regulators’ Group for Electricity and Gas (ERGEG) — an advisory group to the European Commission on internal energy market issues, founded in 2003 with the ‘second energy package’ and dissolved in 2011.

170 Atanas Georgiev, PhD is Vice Dean of the Faculty of Economics and Business Administration at Sofia University ‘St Kliment Ohridski’ and an associate professor there. He is a director of and a lecturer in the MA programme Economics and Management of Energy, Infrastructure and Utilities. He is also chief editor and publisher of the Utilities monthly business magazine and the website publics.bg, responsible for the editorial contents of the electricity and natural gas sections. Assoc. Prof. Georgiev has taken part in various energy-related programmes and workshops in the United States, the Russian Federation, Azerbaijan, Italy, etc. He is a member of the Management Board of the National Committee of Bulgaria for the World Energy Council (NCBWEC), member of the MB at the Bulgarian Association for Assets and Maintenance Management, as well as member of the International Association for Energy Economics, the Faculty of Economics and Business Administration’s Alumni Club, and the Scientific Committee of the Turin School of Local Regulation.

171 Georgiev, A., ‘Regulatory Aspects of the European Energy Community’, Energy Diplomacy — Foreign Affairs Research Papers 5, Bulgarian Diplomatic Institute, Sofia, 2013. 172 European Parliament, ‘3rd Energy Package gets final approval from MEPs’, 29 April 2009, available at http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+IM- PRESS+20080616FCS31737+0+DOC+XML+V0//EN 67

The legal document, establishing ACER, is Regulation 713/2009173, where some of its functions, inter alia, are described as follows:

 The Agency should monitor regional cooperation between transmission system operators in the electricity and gas sectors as well as the execution of the tasks of the European Network of Transmission System Operators for Electricity (ENTSO for Electricity), and the European Network of Transmission System Operators for Gas (ENTSO for Gas). The involvement of the Agency is essential in order to ensure that the cooperation between transmission system operators proceeds in an efficient and transparent way for the benefit of the internal markets in electricity and natural gas.

 The Agency should monitor, in cooperation with the Commission, the Member States and relevant national authorities, the internal markets in electricity and natural gas and inform the European Parliament, the Commission and national authorities of its findings where appropriate. Those monitoring tasks of the Agency should not duplicate or hamper monitoring by the Commission or national authorities, in particular national competition authorities.

The formal description of ACER’s role does not include competition regulation per se. According to the official website of the European Union174, ACER:  complements and coordinates the work of national regulatory authorities;  helps formulate European network rules;  where appropriate, takes binding individual decisions on terms and conditions for access and operational security for cross-border infrastructure;  advises European institutions on issues relating to electricity and natural gas;  monitors the internal markets in electricity and natural gas and reports on its findings;  monitors wholesale energy markets to detect and deter market abuse, in close collaboration with national regulatory authorities (it was given this function in 2012 under EU Regulation 1227/2011 on wholesale energy market integrity & transparency – REMIT)’. The most significant energy market regulatory functions were added to the agency’s powers only after the adoption of REMIT175, but this role is still highly dependent on the performance and actions of national regulatory agencies. Alberto Pototschnig, the director of ACER, also does not see the agency as a single European regulator and in a 2015 interview had this to say on the topic:176 ‘…it is still useful to have a national regulatory approach because consumers would not want to come to Ljubljana [where ACER is headquartered] to have their rights protected. … I do not really subscribe to the idea of a single European energy regulator, at least not now. Nevertheless, in the long term we

173 Regulation (EC) No 713/2009 of the European Parliament and of the Council of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators, Official Journal of the European Union, 2009. 174 Ibid. 175 Regulation (EU) No 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency (REMIT), Official Journal of the European Union, 2011. 176 Georgiev, A., ‘There could be a single European energy regulator for the wholesale market’, publics.bg, 2015. The full interview with Alberto Pototschnig is available at https://www.publics.bg/en/interviews/143/ 68 could have a single regulator for the wholesale segment and the horizontal networks, but when it comes to retail and consumer rights and awareness, national regulators will still have a lot to do.’ In the interview, Alberto Pototschnig further notes that, even though ACER has become very influential, the agency is issuing recommendations, while the powers remain at national level. He believes that the ‘FERC should be considered as a concept, three steps forward, to where Europe might want to get’, noting the distinction that ACER does not have any enforcement powers. The European energy business itself is looking for a stronger community-level regulation, a sentiment echoed by Eurelectric’s Kristian Ruby177 in a 2015 interview discussing the legislative package ‘Clean Energy for All Europeans’178. His view is that a strong regulatory body at EU level is needed for the ultimate establishment of the energy union. The pan-European role of ACER in ensuring competition in the electricity and gas markets should not be underestimated. The ‘third energy package’, which created the European Network for Transmission System Operators for electricity (ENTSO-E) and gas (ENTSOG), and the supervision role of ACER have been essential to developing the technical rules that govern the infrastructure, collectively known as network codes and now mostly adopted and in the course of being implemented. This has supported the creation of a level playing field for all players in the electricity and gas markets, while the independent management of infrastructure has afforded customers throughout Europe the freedom to choose suppliers. Even though the above-mentioned steps have undeniably laid the foundation for a single European energy market, an additional push is still needed. And this is not to underestimate the current (and future) role of ACER as a European regulatory institution in any way, but we have observed some crucial measures being implemented by another institution — the European Commission’s Directorate-General for Competition (DG Competition).

The new energy regulator? DG Competition, as part of the European Commission, together with the national competition authorities, directly enforces EU competition rules, namely Articles 101-109 of the Treaty on the Functioning of the European Union (TFEU), to make EU markets work better by ensuring that all companies compete equally and fairly on their merits. To meet its TFEU-based obligations, DG Competition performs the following functions at EU level179: - enforcement of antitrust and cartel policy; - enforcement of merger control; - enforcement of State aid control; - development of EU competition policy, competition policy instruments, and guidance to companies and Member States in all these areas;

177 Georgiev, A., ‘South-Eastern Europe is becoming a hot spot for the energy transition’, publics.bg, 2015. The full interview with Kristian Ruby is available at https://www.publics.bg/en/interviews/197/ 178 Communication ‘Clean Energy for All Europeans’ from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the Committee of the Regions and the European Investment Bank, COM/2016/0860 final, EUR-Lex, 2016. 179 ‘Management Plan 2018 — DG Competition’, available at https://ec.europa.eu/info/sites/info/files/file_import/management-plan-comp-2018_en.pdf 69

- promoting competition culture and international cooperation; maintaining and strengthening the Commission's reputation worldwide and striving for greater transparency and basic disciplines on subsidies control. As noted in the institution’s annual report for 2017, ‘The digital economy, energy, the pharmaceutical and agro-chemical sector, the network industries and the financial markets are among the sectors where competition policy efforts kept making a difference for European consumers’180. DG Competition has performed a crucial role for the single European energy market (and for national energy markets as well), mostly through its antitrust and State aid decisions and cases. The most important energy cases of DG Competition in the past few years include:181 - a capacity mechanism in the electricity sector inquiry; - Guidelines on State aid for Environmental Protection and Energy (including RES); - Case 40335 Romanian gas interconnectors (the ‘Transgaz case’); - Case SA.38454 Possible aid to the Paks nuclear power station; - Case 38700 Greek lignite and electricity markets; - Case 39767 BEH Electricity; - Case 39849 BEH gas; - Case 39816 Upstream gas supplies in Central and Eastern Europe (the ‘Gazprom case’) – it would be addressed further in the current article due to its particular significance.

DG Competition itself is quite aware of the role which the European Commission is playing in the European energy market regulation. The directorate-general’s 2018 plan182 states:

DG Competition will continue to ensure fair access to indispensable energy infrastructure, remove obstacles to market integration and foster competition between and within Member States, keeping an eye on energy prices, ensuring that gas and electricity flow as freely as possible across Member States, promoting interconnectivity and avoiding territorial restrictions or artificial market partitioning within the EU to speed up the finalisation of the Energy Union. … In 2018, DG Competition will continue to apply the State aid rules applicable to the energy sector. Energy from renewable sources will continue to be one of the key areas of work. In parallel to renewables, DG Competition will continue to pay close attention to capacity mechanisms in 2018.

The powers of DG Competition are derived from three articles in the TFEU, which are also relevant to the energy sector: - In Article 101, anti-competitive agreements are ‘prohibited as incompatible with the internal market’. The article prohibits agreements with anti-competitive object or effects whereby companies co-ordinate their behaviour instead of competing independently.

180 European Commission, ‘Report on Competition Policy 2017’, COM(2018) 482 final, 2018, available at http://ec.europa.eu/competition/publications/annual_report/2017/part1_en.pdf 181 Ibid. 182 ‘Management Plan 2018 — DG Competition’. 70

- Article 102 prohibits abuse of a dominant position. It prohibits the abusive behaviour of such dominant undertakings which prevents new entry or squeezes competitors out of the market. - Article 106 prevents Member States from enacting or maintaining in force any measures contrary to Treaty rules regarding public undertakings and undertakings to which Member States grant special or exclusive rights (privileged undertakings). All the articles mentioned above are important, but Article 102 will be addressed further here as a crucial one for the energy sector and one that has already provided for decisions with practical content and application.

Article 102 of the TFEU

DG Competition has been successfully implementing the provisions of Article 102. As the article stipulates, ‘Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States.’ The key to understanding Article 102 is to keep in mind that its goal is to prevent the use of a dominant position which may impair trade between the EU Member States183. As other scholars184 have pointed out, this article does not prohibit dominance as such but merely places specific restrictions on companies that have a dominant position.

Failure to comply with Article 102 – if confirmed by the European Court of Justice (ECJ) – may lead to fines of up to 10% of the respective group’s global turnover, as well as possible legal actions from third parties, who may show that they have suffered loss as a result of the anti-competitive behaviour.

The alternative resolution is the provision of legally-binding commitments by the company under investigation. If the Commission accepts the proposed commitments, a conditional decision follows, and the commitments are attached to it as conditions and obligations. The logic of such decisions is that the Commission and the investigated company would not turn to the ECJ to decide the case. However, if the commitments are not observed, the Commission may impose a fine of up to 10% of the company’s global turnover without asking the ECJ. There are three main types of commitments accepted by the Commission: divestitures, structural remedies, and/or behavioural commitments.

In the Commission’s experience, divestiture — i.e. privatisation or sale of the asset — are the best way to eliminate competition concerns resulting from horizontal overlaps. In general, divestitures are a preferred structural remedy by the Commission as they bring ‘an immediate and clear-cut change in market structure and their fulfilment can be monitored at relatively low cost’185. For example, in Case 39767 BEH Electricity, the Bulgarian Energy Holding (BEH) and the Commission negotiated the divestiture of the Independent Bulgarian Energy Exchange (IBEX) — the transfer of 100% of its shares from BEH to the Ministry of Finance (IBEX was eventually sold by BEH to the Bulgarian Stock Exchange) before a specified deadline.

183 Frenz, W., Handbook of EU competition law, Springer, 2016, p. 829. 184 Lorenz, M., An introduction to EU competition law, Cambridge University Press, 2013, p. 188. 185 Ibid 71

Other similar commitments by energy companies across Europe include the sale of assets through a special procedure managed by a ‘monitoring trustee’ – an independent company or individual tasked with organising the divestiture under transparent rules and procedures. For instance, the Italian energy company ENI has sold shares in international pipelines, the German-based RWE has divested the German gas transmission network (more than 4 000 km of high-pressure pipelines), and the other Germany energy giant E.ON has sold some of its generation – 5 000 MW. As mentioned before, the other two types of commitments are structural remedies (i.e. granting access to key infrastructure) and behavioural commitments (i.e. the company promises to refrain from a particular market conduct).

Going from competition regulation back to the energy sector itself and its security of supply considerations, it is worth noting that sometimes divestitures may be geopolitically riskier than behavioural commitments. While in 2010 RWE did sell Thyssengas (its German supra- regional gas-transmission network) to infrastructure funds managed by Macquarie Infrastructure and Real Assets, a similar divestiture in a CEE (central and eastern Europe) country like Bulgaria may lead to unexpected results. This may be one of the reasons why the Bulgarian government refused to offer enough convincing commitments to the Commission during the negotiations for its BEH Gas case, where the divestiture of the Bulgarian transmission system operator (TSO) Bulgartransgaz was discussed.

Even in Germany, eight years later, the situation is now quite interesting. In 2016, the Dutch investment fund DIF and the French multi-utility EDF purchased Thyssengas, paying roughly 1.5 times the book value of the company. Selling a TSO to pension funds is one thing, but vertically integrating local gas grids with foreign energy traders may be quite a different thing. There have been even more sales of infrastructure assets by strategic investors to financial investors, so the reluctance to propose such remedies is growing.

The Gazprom case

On 27 September 2011, the European Commission informed that its officials had conducted unannounced inspections at the premises of companies active in the supply, transmission, and storage of natural gas in several Member States. The Commission had concerns that the companies in question might have engaged in anti-competitive practices in breach of EU antitrust rules or that they were in possession of information relating to such practices186. On 4 September 2012, the European Commission opened formal proceedings to investigate whether the Russian gas giant Gazprom might be hindering competition in CEE gas markets, in breach of EU antitrust rules187. The jurisdiction of the Commission over the Russian company was a result of its company’s broad operations in the European Union and thus the extraterritoriality of EU competition law was not contested by Gazprom188. The Commission expressed concerns that Gazprom may have been abusing its dominant market position in upstream gas supply markets in CEE Member States in breach of Article 102 of the TFEU. On 22 April 2015, the European Commission sent Statement of Objections to Gazprom, insisting that some of its business practices in CEE gas markets constitute an abuse of its dominant market position in breach of EU antitrust rules. The Commission objected to the

186 European Commission, MEMO/11/641 ‘Antitrust: Commission confirms unannounced inspections in the natural gas sector’, 2011, available at http://europa.eu/rapid/press-release_MEMO-11-641_en.htm?locale=EN 187 European Commission , Press Release ‘Antitrust: Commission opens proceedings against Gazprom’, 2012, available at http://europa.eu/rapid/press-release_IP-12-937_en.htm 188 Martyniszyn, M., ‘On Extraterritoriality and the Gazprom case’, European Competition Law Review, 36(7), 2015, pp. 291-294. 72 company’s overall strategy ‘to partition Central and Eastern European gas markets, for example by reducing its customers’ ability to resell the gas cross-border’. According to the Commission, this may have enabled Gazprom to charge unfair prices in certain Member States, and Gazprom may also have abused its dominant market position by making the supply of gas dependent on obtaining unrelated commitments from wholesalers concerning gas transport infrastructure189. In March 2017, the Commission published the initial commitments proposed by Gazprom and invited comments from third parties. On 24 May 2018, the Commission published the final version of the commitments and the related decision, which imposed ‘binding obligations on Gazprom to enable free flow of gas at competitive prices in Central and Eastern European gas markets’190.

The Commission’s decision would eventually affect eight EU Member States: Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, and Slovakia. The main effect would be on the destination and the ‘take-or-pay’ clauses, in addition to the introduction of a new optional pricing mechanism replacing the long-term oil-indexation contracts with prices dependent on the spot market in the most liquid European gas hubs. In addition, Gazprom’s clients would be able to redirect their supplies from the existing entry points to entry points in other Member States (i.e. from Poland or Slovakia to the Baltic states, or from Slovakia and Hungary to Bulgaria and vice-versa), which would allow a more integrated gas market in the CEE region. The Commission also negotiated with Gazprom some fixed fees to be charged by the company for that redirection ‘service’.

Both Gazprom’s and BEH’s cases deal with specific prices and their regulation. In the BEH case, there was a concrete provision, stating that ‘the electricity will be offered by BEH and BEH's subsidiaries on the day-ahead market of the exchange at a maximum offer price [based on the costs of BEH's subsidiaries]’191. In the Gazprom case, the Commission accepted the wholesale price revision tool offered by Gazprom, ‘without the need for the Commission to start prescribing specific gas prices for individual gas contracts’, but at the same time negotiated a specific ‘fixed and transparent service fee’ for Gazprom when all or parts of the contractual gas volumes delivered at certain delivery points in the CEE region are instead delivered to Bulgaria or the Baltic states.

Thus, the behavioural remedies offered by energy companies as part of their competition cases have become a de facto pricing regulation, as they affect greatly the regional wholesale prices of natural gas and electricity (in the above-mentioned two cases). It should be noted that such regional effects would not have been possible, or at least would not have been so stringent, if the cases had been handled on a country-by-country basis by the national energy or competition regulators.

189 European Commission, Press Release ‘Antitrust: Commission sends Statement of Objections to Gazprom for alleged abuse of dominance on Central and Eastern European gas supply markets’, 2015, available at http://europa.eu/rapid/press-release_IP-15-4828_en.htm 190 European Commission, Press Release ‘Antitrust: Commission imposes binding obligations on Gazprom to enable free flow of gas at competitive prices in Central and Eastern European gas markets’, 2018, available at http://europa.eu/rapid/press-release_IP-18-3921_en.htm 191 European Commission, Commission Decision of 10/12/2015 relating to a proceeding under Article 102 of the Treaty on the Functioning of the European Union – Case AT.39767 – BEH Electricity, 2015, available at http://ec.europa.eu/competition/antitrust/cases/dec_docs/39767/39767_2018_3.pdf 73

Conclusion

The establishment and the emancipation of independent national energy regulatory authorities (ERA) is an ongoing process and it will be supported by the legislative package ‘Clean Energy for All Europeans’, if it is adopted. In that scenario, national ERAs would predominantly deal with retail market issues resulting from the ongoing market liberalisation and the increased number of energy suppliers. On the wholesale market level, however, there is now a new regulatory mechanism, dealing with energy market regulation and, inter alia, pricing issues. At this point, can we describe DG Competition as the new European energy regulator?

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Hydropower and energy diplomacy on the edge - The dispute between Ukraine and Moldova over the Dniester River192

Ion Efros193

INTRODUCTION

With its length of 1 362 km and a catchment area of 72 000 km2, the Dniester is one of the major rivers in Europe. Half of this length, or 652 km (middle and lower reaches of the Dniester) lies within the Republic of Moldova, while the remainder crosses the densely populated areas of western and south-western Ukraine. Up to 4 million people, mostly from Moldova and the Ukrainian city of Odessa, use the Dniester River basin as a source of drinking water.

Since 1958 the Dniester’s flow has been altered by a number of large hydropower dams and reservoirs. Most of these facilities are located in Ukraine as part of what is known as the Dniester hydropower complex. The complex was launched back in the 1970s and is still subject to expansion. As of 2016, the Ukrainian government planned to build an additional cascade of six hydropower plants by 2026. The existing and planned hydroelectric infrastructure is intended to enhance energy security, decarbonise the energy system, and solve the peak-demand issues of the power grid of Ukraine. However, a detailed examination of the impact of the Dniester hydropower complex to date, its expansion, and the incremental effects from the new facilities reveals a ‘clean energy’ scenario that threatens to trigger:

 permanent water scarcity in Moldova;  food security risks and soil degradation in Moldova;  slowdown of economic activities in Moldova;  environmental consequences for the middle and lower reaches of the Dniester, including permanently raised risk of droughts and floods;  migration and depopulation in certain areas due to lack of drinking water.

All these consequences could strongly influence the two countries’ bilateral relations.

192 The content of this paper is drawn from a more detailed report dedicated to the impact of hydropower infrastructure on the Dniester River, prepared by Mr Efros and published by the Institute for Public Policies, Moldova in early 2018.

193 At the time his paper was submitted, Mr Ion Efros was at the end of his contract as an energy & environmental analyst with the Institute for Public Policies, Moldova. Prior to this, he was a national consultant for the United Nations Industrial Development Organization (UNIDO) in Moldova and served at the Ministry of Environment of Moldova, covering energy and environmental issues. Mr Efros has also been an intern at UNIDO and the Energy Community Secretariat in Vienna and is the holder of an MSc degree in Global Energy Management from the University of Strathclyde, Glasgow.

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The above-mentioned risks are presently being legitimised and institutionalised through the negotiations between the Moldovan and Ukrainian governments on the Agreement on the Functioning of the Dniester Hydropower Complex194. These negotiations seem to have substantial deficiencies, including circumvention of EU environmental legislation as well as principles of good practice in the Energy Community. They also seem to lack key safeguards for preserving the Dniester ecosystem and the right to clean water (UN Resolution 64/292 of 28 July 2010195) of some 4 million people. And this, as indicated below, will certainly affect citizens and territories both in Moldova and Ukraine. That is why there is a need to review the agreement itself. This paper narrows down the discussion to the weaknesses of the agreement under negotiation and proposes solutions to avoid the above-mentioned consequences.

1. On the necessity of a bilateral agreement concerning the operation of the Dniester hydropower complex

In 2017, Moldova and Ukraine entered into negotiations on the Agreement on the Functioning of the Dniester Hydropower Complex. The energy infrastructure on the Ukrainian stretch of the Dniester River dates back to the 1970s. It is still being expanded and currently comprises several facilities. More specifically, this hydropower complex consists of two hydroelectric plants in Novodnistrovsk and Nahoriany, a hydroelectric power plant with pumped storage and a buffer reservoir between the first two facilities, regulating the flow of water downstream to the Moldovan stretch of the Dniester. Ukraine's existing hydropower facilities on the Dniester produce 4b kWh per year, the equivalent of the annual electricity consumption of Moldova. In addition to this infrastructure, Ukrainian authorities announced in 2016 plans for the construction of six new hydropower plants (HPPs) by 2026.

These sources of power generation are supposed to cover the periodic generation deficit of Ukraine, substitute the polluting sources of electricity with renewable ones (especially coal- fired thermal power plants whose life cycle is expiring) and add more flexible sources of energy to the local energy mix for the integration of the inflexible (wind and solar).

In principle, the need for bilateral agreement on the topic is self-evident. In reality, the Ukrainian government seems especially interested in having it for several reasons. The Ukrainian side wants substantial access to the buffer lake, some of which is on the territory of Moldova. Unrestricted access to that part of the Dniester would allow Ukraine to continue the consolidation and expansion work on the reservoir so that the Pumped-Storage Hydroelectric Power Plant could be used at full capacity. At the same time, signing such an agreement and finding a non-conflict solution will allow Ukraine to access financial resources from

194The text of the agreement was drafted in 2017. The document has already undergone several changes and is still under negotiation and therefore not publicly available.

195On 28 July 2010, through Resolution 64/292, the United Nations General Assembly explicitly recognised the human right to water and sanitation and acknowledged that clean drinking water and sanitation are essential to the realisation of all human rights. The resolution calls upon states and international organisations to provide financial resources and help capacity-building and technology transfer to aid countries, in particular developing countries, in providing safe, clean, accessible, and affordable drinking water and sanitation for all. See http://www.un.org/waterforlifedecade/human_right_to_water.shtml 76 international development banks for the completion of this expensive infrastructure and the construction of the planned six new HPPs, as Ukraine is unable to fully fund the projected costs with money from its state budget.

Further, it is well-known that donors and international financial institutions are sensitive to social and environmental issues, so they would like to solve those related to electricity supply and thus avoid creating additional problems. That is why development partners urge states planning to build facilities on cross-border watercourses to first settle all relevant disputes with neighbouring countries.

In any case, the obligation to obtain consent from neighbouring states (‘affected parties’) for projects with cross-border environmental impact is stipulated in various international documents to which Ukraine and Moldova are signatories (e.g. ESPOO Convention signed by Ukraine in 1999 and by Republic of Moldova in 1994196), as well as in binding environmental legislation outlined in association agreements and the Energy Community Treaty.

2. What provisions are under negotiation?

Forging such an intergovernmental agreement is a standard international practice in the operation of transboundary watercourses. As of 3 November 2017, the text under negotiation involved, inter alia, the following key points and circumstances:

 a debate on whose right it is to use the water of the buffer lake and for how long;

 the draft agreement makes no reference to European Union procedures (e.g. directives) for assessment of the likely environmental and social effects of infrastructure with cross-border impact — on quality of water intended for human consumption, on wildlife, etc. — or for consultation with the public in the affected country;

 there is no compensation mechanism for losses resulting from the operation of the Dniester hydropower complex, known also as compensation for lost ecosystem services (e.g. drinking water, fish, recreation, irrigation, etc.);

 the draft under negotiation does not define the minimum flow rate of the Dniester at different times of the year, or the ecological flow (spring debit);

 the draft agreement makes no mention of the six additional hydropower plants planned by the Ukrainian side on the upper segment of the Dniester.

 the draft agreement makes no mention of the need to conduct studies, taking into account the current environmental, social, and economic impacts, on expanding the existing infrastructure (particularly the buffer lake and the Pumped-Storage

196See https://treaties.un.org/pages/ViewDetails.aspx?src=IND&mtdsg_no=XXVII-4&chapter=27&clang=_en 77

Hydroelectric Power Plant). Aligning these laws with the corresponding EU directives is necessary pursuant to agreements in force between both countries and the European Union.

 the final text of the agreement will be signed only in three languages: Russian, Ukrainian, and Romanian. In the event of disputes, the proposed text of the agreement indicates Russian language as the only language for such proceedings. In essence, the language limitation restricts the choice of judges and arbitrators to The Hague tribunal. At the same time, such a limitation will create difficulties for development partners, who will certainly want to be involved in monitoring the agreement’s implementation.197

As it was stated in a position paper released on 21 November 2017 and signed by representatives of the Moldovan civil society198, the lack of these key elements threatens to lead to disastrous consequences. More specifically, it may affect the supply of water to some 3 million people from the Republic of Moldova, including the Transnistrian region, and over 1 million of the population of the Odessa region. At the same time, it may lead to the degradation and destruction of the ecosystems in the Dniester’s lower reaches and to enormous economic costs for identifying alternative sources of water intended for human consumption. In fact, the estimate of 4 million people is on the conservative side. Other specialists put that number at 8 million people. The additional 4 million represents the population of the Dniester River basin in the western regions of Ukraine, which will also be affected in the long term by the planned six new HPPs and will see the transformation of the river into a chain of six swamps spanning 300 km.199

The potential consequences seem to be especially dramatic for the Republic of Moldova, as Dniester is the country's main source of drinking water. Cities like Chisinau (700 000 inhabitants) and Balti (close to 150 000) and smaller towns such as Rezina, Soroca, Criuleni, and Orhei use the Dniester as a direct source of daily drinking water. Thus, a considerable part of Moldova’s population and territory may be directly affected, which will certainly lead to the above-mentioned consequences .

Considering all of this, it may be argued that the agreement, as it stands, is not only in breach of applicable environmental law and therefore a risk to the quality of life for people both in Moldova and Ukraine, but also unacceptably one-sided in its treatment of a shared transboundary resource.

197 SIC.MD, ‘De ce guvernul a luat apă în gură privind problema Nistrului?’, 5 December 2017. See http://sic.md/de-ce-guvernul-a-luat-apa-in-gura-privind-problema-nistrului/

198 POSITION PAPER on the negotiation of [an] agreement concerning the functioning of the Dniester Hydro Power Complex and its impact on the Dniester River basin, 22 November 2017. See http://ipp.md/wp- content/uploads/2017/11/position-paper.pdf

199 The number 8 million is estimated by Mr Alecu Reniță, chairman of the Ecological Movement of Moldova.

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3. What are the European rules deliberately omitted by the Moldovan and Ukrainian governments in the current negotiations and why?

The draft agreement under negotiation makes no reference to the Energy Community Treaty or the association agreements that Ukraine and the Republic of Moldova have signed with the European Union. This implies that Moldova forfeits more powerful international protection mechanisms that could better protect its economic interests and population as well as aid the prevention of an ecological disaster and even the escalation of a conflict.

The Energy Community Treaty refers to at least four environmental directives directly applicable to the existing and planned Ukrainian hydropower infrastructure on the upper reaches of the Dniester. Below are some notes on how each of the following directives relate to the Moldovan-Ukrainian negotiations on the topic:

 Directive 85/337/EEC on the assessment of the environmental impact of public and private projects200

So far, an environmental and social impact assessment relevant to the case has not been made public. Without such reliable study conducted independently by an international company with the necessary expertise, the construction of the six new hydropower plants and the commissioning of four new units of additional capacity for the Pumped-Storage Hydroelectric Power Plant should not be allowed. This directive, which was to be implemented by Moldova before 31 December 2010 and by Ukraine before 1 January 2013, clearly states in Annex 2 (point 3, letter ‘j’) that hydroelectric plants fall under the scope of the environmental impact assessment. Moreover, this directive was included in the accession package of Moldova and Ukraine to the Energy Community, meaning long before Ukraine expanded its existing infrastructure (the first unit of Dniester Pumped-Storage Hydroelectric Power Plant was commissioned only in 2009) and planned the construction of the new one. Consequently, both Moldova and Ukraine should have been taking into account the provisions of the directive since 2006-2007 when they declared their intention to join the Energy Community Treaty.

 Directive 79/409/EEC on the conservation of wild birds201

The Dniester Delta is an area with fragile ecosystem. The construction of hydroelectric power plants and the reduction of the water flow in the Dniester can also affect the number of bird species in this area, particularly as a result of insufficient ecological water flows during the hatching of birds. Article 4(2) of this directive was supposed to be implemented in Moldova by 31 December 2010 and by Ukraine no later than 1 January 2015. As in the case of the previous one, this directive was in the package of conditions for joining the Energy Community Treaty. So, it should have been considered seriously by the Ukrainian side long before the expansion of its existing infrastructure and before plans for new hydropower

200Council Directive 85/337/EEC of 27 June 1985 on the assessment of the effects of certain public and private projects on the environment. See http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A31985L0337

201Council Directive 79/409/EEC of 2 April 1979 on the conservation of wild birds. See http://eur- lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:31979L0409

79 facilities. According to experts in the field, routes of migratory birds normally pass through wetlands. The lower stretch of the Dniester is such a wetland, the richest protected area in Moldova (approximately 60 000 ha), inhabited by different plant and animal species.202 Limiting the water flow in the Dniester is already affecting these species. Around 170 species have already become extinct over the past couple of years. Twelve species of birds mentioned in Directive 79/409/EEC are listed in the Red Book of Moldova as endangered.203 The wild bird population of wetlands is also an indicator of water quality and the health status of an ecosystem. Among the key functions of a wetland are improving the fresh water supply, water purification, anti-flood protection, soil fertilisation, and carbon storage. Therefore, there is a real risk of more severe damage and even disappearance of these ecosystem services in the Republic of Moldova because of the Ukrainian hydropower infrastructure on the Dniester’s upper reaches.

 Directive 2001/42/EC on the assessment of the effects of certain plans and programmes on the environment204

Article 7 of this directive explicitly states that any cross-border plans or programmes are to be consulted with all relevant stakeholders, including the public in another country that stands to be affected. The Programme [for] Hydropower Development for the Period [until] 2026205 envisages the construction of hydroelectric power plants on the Dniester. However, this document was not consulted with Moldova’s government, public, or civil society organisations. Neither were Ukraine’s previous energy strategies that oversaw the gradual commissioning of the Dniester Pumped-Storage Hydroelectric Power Plant, the expansion and deepening of the buffer lake, and the transforming of the Nahoriany (Naslavcha) dam into HPP-2.

 Directive 2004/35/EC on environmental liability with regard to the prevention and remedying of environmental damage206

This directive establishes the penalties imposed on parties causing environmental damage. However, the draft agreement between the governments of Ukraine and Moldova does not specify in any way the liability and recovery mechanism as regards environmental damages

202Biotica Ecological Society, ‘Guide on Assessment of Core Areas of the Ecological Network’, Chisinau, 2014. See http://www.biotica-moldova.org/lib_bio.htm

203Corobov, R. et al. (2014), Climate Change Vulnerability: Moldavian Part of the Dniester River Basin, p.102, http://eco-tiras.org/docs/ecotirasFinal-small.pdf

204Directive 2001/42/EC of the European Parliament and of the Council of 27 June 2001 on the assessment of the effects of certain plans and programmes on the environment. See http://eur-lex.europa.eu/legal- content/EN/TXT/?uri=celex%3A32001L0042

205 The programme for hydropower development for the period until 2026 is available at: http://d2ouvy59p0dg6k.cloudfront.net/downloads/program_of_hydropower_development_in_ua_till_2026.pdf

206Directive 2004/35/CE of the European Parliament and of the Council of 21 April 2004 on environmental liability with regard to prevention and remedy of environmental damage. See http://eur-lex.europa.eu/legal- content/EN/TXT/?uri=celex%3A32004L0035

80 resulting from hydroelectric infrastructure on upper Dniester. This deprives authorities of effective compensation mechanism for damages, which may be very significant. In fact, the lack of such mechanisms favours the polluting country.

Without going into details, there are several other EU directives that should be considered, as they are referred to in the association agreements signed by Ukraine and Moldova. These are:

 Directive 2000/60/EC on the Community framework for water policy; 207

 Directive 98/83/EC on the quality of water intended for human consumption208;

 Directive 2003/35/EC of the European Parliament and of the Council of 26 May 2003 providing for public participation in respect of the drawing up of certain plans and programmes relating to the environment209;

 Directive 2011/92/EU on the assessment of the effects of certain public and private projects on the environment.210

As it was mentioned in the Moldovan civil society appeal of 21 November 2017, the lack of references to the association agreements and the Energy Community Treaty in the draft agreement between Moldova and Ukraine on an issue with clear cross-border impact is difficult to understand, considering that by virtue of these documents both states have made commitments to modernise, reform, and integrate into the EU’s legal, economic and cultural space211. Given its poor content, a potentially hasty signing of the deal could result in living conditions on both sides of the Dniester that cause drought, soil degradation, depopulation, and even a humanitarian crisis.

207Directive 2000/60/EC of the European Parliament and of the Council of 23 October 2000 establishing a framework for Community action in the field of water policy. See http://eur-lex.europa.eu/legal- content/EN/ALL/?uri=celex:32000L0060

208Council Directive 98/83/EC of 3 November 1998 on the quality of water intended for human consumption. See http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX%3A31998L0083

209Directive 2003/35/EC of the European Parliament and of the Council of 26 May 2003 providing for public participation in respect of the drawing up of certain plans and programmes relating to the environment. See http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=celex:32003L0035

210Directive 2011/92/EU of the European Parliament and of the Council of 13 December 2011 on the assessment of the effects of certain public and private projects on the environment. Text with EEA relevance. See http://eur- lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32011L0092

211POSITION PAPER on the negotiation of [an] agreement concerning the functioning of the Dniester Hydro Power Complex and its impact on the Dniester River basin, 22 November 2017. See http://ipp.md/wp- content/uploads/2017/11/position-paper.pdf

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Unlike the UN multilateral treaties, which suffer from ‘implementation deficit’212, the environmental directives in the framework of the association agreements and the Energy Community Treaty can be imposed via conditionalities. Both Moldova and Ukraine rely on budgetary support, grants, and preferential loans provided by European partners and institutions. These obligations cannot be as easily circumvented as the environmental agreements signed within the multilateral framework of the UN.

In addition, European environmental legislation is much more detailed and stringent, providing a higher degree of protection compared to the UN treaties, conventions, and protocols.

4. How can the Treaty of the Energy Community and the European Union help and why they should have a clearer position on these negotiations?

The reasons why the aforementioned directives should be included in the draft agreement are clear and undeniable: the European integration course of Moldova and Ukraine; higher degree of protection for the environment, water sources, and the population compared to UN mechanisms; investments and support for reforms that come largely from the European Union and its Member States; EU grants and EBRD and EIB loans being conditional on the implementation of the EU acquis; and even conditionalities imposed by non-EU financial institutions such as the IMF and the World Bank for applying the EU acquis (e.g. in the energy field), etc.

Let us recall that there are a few procedures that apply to non-compliance with the EU directives in the Energy Community framework that can culminate in the enforcement of Article 92 of the treaty (suspension of a country's voting rights, among other measures). Despite lacking recourse to impose financial penalties, the decisions of the Energy Community Secretariat are taken into serious consideration by both the European Commission and European and trans-Atlantic donors when deciding to allocate financial support to the Energy Community’s contracting parties. Once reference is made to the EU acquis, the secretariat can monitor how the directives are being implemented as regards the planned Agreement on the Functioning of the Dniester Hydropower Complex.

The same path could be followed by the European Commission once the directives signed under the Dniester deal are invoked. Unfortunately, the Court of Justice of the European Union in Luxembourg has no jurisdiction over the countries associated to the EU or the treaty’s contracting parties. The penalties imposed by this court are prohibitively high so as to deter countries from violating the rules. However, even without Moldova and Ukraine falling

212 The term ‘implementation deficit’ of multilateral environmental policy was used in a 1997 Chatham House report: ‘The global environmental governance system has been very prolific in negotiating MEAs but, except for a few exceptions, has a rather poor record of turning agreements into real change on the ground …. The implementation deficit is aggravated by the lack of enforcement mechanisms. The environmental system contains no meaningful dispute settlement body and few options to enforce compliance. As with many other international processes and institutions, consensus building in MEA negotiations is driven more by political feasibility than by informed decision-making.’ See Royal Institute of International Affairs, ‘International Environmental Governance’, p. 6. See https://www.chathamhouse.org/sites/default/files/public/Research/Energy,%20Environment%20and%20Develop ment/260707ieg1.pdf 82 under the jurisdiction of this court, the European Commission (like the European Parliament or the Council of Ministers) has enough mechanisms to discourage the abusive construction of an infrastructure that is in breach of the association agreements’ provisions. This is particularly valid when such an abuse can cause significant negative effects on the life of people and on the environment.

Therefore, in this specific case it is difficult to understand the non-use of the available protection mechanisms.

It should be also expressly underlined that if the EU chooses to turn a blind eye on the negotiations between Moldova and Ukraine, it would send a very bad message to both countries on the role of the EU itself. Thus, if the EU does not insist on the inclusion in the bilateral agreement of the relevant EU environmental directives of the association agreements and the Energy Community Treaty, or if it judges that it is up to these countries to decide on the inclusion of this acquis, then the soft power narrative and the EU’s neighbourhood policy would send extremely discouraging message to the region: that the EU is very selective in applying its own established norms.

5. A wrap-up: Some key recommendations, or what should be done further to ensure an effective bilateral agreement

Firstly, given the magnitude and dramatic consequences of the current negotiations between Moldova and Ukraine, the draft of the agreement should also be submitted for consultation with civil society and subjected to public debates for a minimum of two months. Civil society can offer valuable expertise and information that can be used by the Moldovan government in the negotiation process.

Secondly, negotiations should be immediately internationalised. Moldova seems to be in a weaker position, as it evidently has no capacity to negotiate this agreement in the interest of its citizens.

Thirdly, it would be much more effective if the Moldovan side insists that references to the association agreements and the Energy Community Treaty be explicitly indicated in the preamble to the Agreement on the Functioning of the Dniester Hydropower Complex. However, referring to these documents in the text is no guarantee that their provisions will be fully considered. That is why the directives discussed above should be clearly indicated in the body of the agreement.

Fourthly, the governments of Ukraine and Moldova should be encouraged at EU level to refrain from signing the Agreement on the Functioning of the Dniester Hydropower Complex until an environmental and socio-economic impact assessment for the effects that the existing and planned upper Dniester hydroelectric infrastructure will have on Moldova is prepared. Meanwhile, development partners of Moldova and Ukraine should make financial support offered to building hydroelectric and any other infrastructure in these two countries provisional on the application of the above-mentioned rules.

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In conclusion, the preparation of the Dniester bilateral agreement should be reconsidered in detail along the above-mentioned aspects. Additionally, it should be subjected to in-depth public consultation, as it is the well-being of the affected regions’ population and environmental protection that are at stake. And there should be no compromises when it comes to any of these aspects.

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Caspian aspects of the Bulgarian energy strategy - How Azerbaijani gas can contribute to the Balkan Gas Hub?

Gulmira Rzayeva213

Plamen Dimitrov214

On 19 November 2018, the official opening ceremony of the offshore section of the Turkish Stream pipeline was held in Istanbul. The two lines of Turkish Stream, each with a capacity of 15.75 bcm per year, are on track to be operational by the end of 2019. The first line will supply Turkish clients of Gazprom, and the second one is designed to deliver Russian natural gas to European countries. The Turkish Stream factor is poised to change the landscape of gas deliveries in south-eastern Europe and thus warrants reconsideration of Bulgaria’s role as a transit country for natural gas. Meanwhile, Bulgaria is close to achieving its goal of diversifying its gas imports through the construction of an interconnector with Greece that will allow for Azerbaijani gas to be carried to the Bulgarian market, starting 2020. This article aims to explore the role of Azerbaijani gas for Bulgaria in two main aspects: - as an additional source that can diversify the country’s import portfolio; - as a source for the planned Balkan Gas Hub. The first part of the article focuses on the future of the gas market in Bulgaria and the country’s plans to become an important transit gas hub. Then, the question of how Azerbaijani gas can contribute to Bulgaria’s plans in this field is examined.

213 Gulmira Rzayeva is a senior research fellow at the Center for Strategic Studies (SAM) under the President of the Republic of Azerbaijan, research associate at the Oxford Institute for Energy Studies (OIES), and expert/advisor with the World Energy Council’s Global Gas Center based in Geneva. She is also on the directorates of the newly established Institute for Effective Governance and Stabilization based in Stockholm, Sweden and the Trade Forest trading company based in London. Her area of expertise is in energy security and covers issues such as the energy policy of Azerbaijan, the Black Sea/Caspian region energy security, the Turkish domestic natural gas market, and the European gas market. Ms Rzayeva, who holds a BA in international relations from the Baku Slavic University and an MA in global affairs from the University of Buckingham, UK, has published several scholarly works focusing on her area of expertise. She is the author of ‘Turkish natural gas market: Policies and Challenges’ and ‘The Outlook for Azerbaijani Gas Supplies to Europe’ published by the OIES.

214 Plamen Dimitrov is a political analyst and historian. He earned his PhD from Sofia University ‘St Kliment Ohridski’ with the thesis ‘Caspian Perspectives of European Energy Security’. His published scientific works are in the following fields: history and contemporary politics of Russia and the post- Soviet space, geopolitics, and geopolitical aspects of energy security. He is a member of the Board of Bulgarian Geopolitical Society and member of the Editorial Board of the Geopolitics magazine . Plamen has been a visiting lecturer in IR at L.N. Gumilyov Eurasian National University, Astana, Kazakhstan (2012-2014 and 2018) and a visiting researcher at the Center for Strategic Studies under the President of the Republic of Azerbaijan (2016).

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1. The Bulgarian gas market Bulgaria’s gas consumption was 3.3 bcm in 2017, which marked a slight increase of 1.77% compared to 2016. Yearly gas consumption per capita was 468 cu m, or a little over half of the European Union average of 910 cu m215. The share of gas in Bulgaria’s primary energy consumption is approximately 15%216, with the main gas consumer being the industrial sector. Gas used for electricity production accounted for a very modest share of 3.7% in 2017 (5% in 2016)217. No more than 90 000 out of a total of 3 million Bulgarian households use gas, which is less than 3%. This is why electricity generation and the expansion of the gas supply network for households have the potential to be the main drivers behind an increase in demand for natural gas. More than 42% of electricity in Bulgaria is produced by coal-fired power stations218. According to EU legislation, all Member States are required to meet legally binding targets concerning greenhouse gas emissions219. The Bulgarian government, however, has no clear plans for wider use of gas for electricity production. In all likelihood, this process will be dictated by market conditions and gas prices. According to some estimates, there is potential for a moderate growth in the use of gas in the electricity generation sector – 20-30%220. The Bulgarian government’s goal for the share of households using gas as a source of energy is 30% by 2020221. It is now obvious that the target will not be met in the next two years, but in a situation of real diversification of gas imports and favourable price conjuncture, one can reasonably expect a significant rise in the share of households using gas. The state-owned transmission system operator Bulgartransgaz plans to expand the existing gas network in five new municipalities — Svishtov, Panagyurishte, Pirdop, Bansko, and Razlog — by the end of 2020. Reaching the above-mentioned goal means that Bulgaria’s gas demand will rise by 0.7 bcm per year. When considering this prognosis, one should keep in mind the decline of the country’s population. It numbers approximately 7 million people now, but demographic projections have it at less than 6 million in the 2030s. Bulgaria’s own gas production is insignificant. Only 1.7% of the gas consumed in 2017 was of domestic origin. The remaining 98.3% of the volumes were imported from Russia under

215 The numbers are based on data published in BP Statistical Review of World Energy, June 2018, p. 29, available at https://www.bp.com/content/dam/bp/en/corporate/pdf/energy-economics/statistical-review/bp-stats- review-2018-full-report.pdf

216 2018-2027 Ten Year Network Development Plan of Bulgartransgaz EAD, 13 April 2018, p. 43, available at https://bulgartransgaz.bg/files/useruploads/files/TYNDP%202018/TYNDP_2018_2027_en.pdf

217 Energy Management Institute, ‘EMI: Energetikata prez 2017 — rast na potreblenieto no po-nisak dyal na niskoemisionnata energia v proizvodstvoto’, [EMI: Energy sector in 2017 — consumption growth, but lower share of low-carbon energy sources in industry], 3E – Energy, Ecology, Economy, 19 February 2018, available at https://3e-news.net. 218 Ibid. 219 European Commission, 2020 climate & energy package, available at https://ec.europa.eu/clima/policies/strategies/2020_en 220 Baringa Partners LLP, Bulgaria — Rolyata na prirodnia gaz v dekarbonizatsiyata [Bulgaria — The role of natural gas in decarbonising the economy], 19 April 2018, p. 16, available at https://www.shell.bg/media/2018/bulgaria-the-role-of-natural-gas-in- decarbonisation/_jcr_content/par/textimage.stream/1525353571601/4470786335cb15cf584401c62575a7d3a54c2 fa52579dfdee4ec21aaff943c66/baringa-shell-bulgaria-report-bg.pdf 221 Ibid., p. 15. 86

the provisions of a long-term contract with Gazprom Export set to expire at the end of 2022222. There are two main options before newcomer suppliers to the Bulgarian gas market – to contribute either to meeting the growing demand or to substituting some of the volumes supplied by Gazprom. As illustrated below, Bulgartransgaz projects demand to rise by 28% in the period 2018-2026. Domestic production is also expected to register a growth, while the import needs are expected to stay flat at the level of 3.3 bcm per year from 2019 on. Table. Bulgaria’s gas demand and imports during 2018-2026, prognosis (bcm) 2018 2019 2020 2021 2022 2023 2024 2025 2026

Demand 3.3 3.5 3.7 3.9 4.0 4.1 4.15 4.17 4.27

Import 3.24 3.3 3.3 3.3 3.3 n/a n/a n/a n/a

Source: Bulgartransgaz223 The company’s forecast for domestic production is conservative, as Bulgartransgaz sees it at 0.7 bcm in 2022. The picture could change significantly in the second half of the 2020s, if the consortium led by Total finds commercial gas deposits in the Khan Asparuh block. As far as gas imports are concerned, one can anticipate Gazprom maintaining its dominant position on the Bulgarian market, but Azerbaijani gas should be available from the end of 2020, too. Although it is less likely, Bulgaria can eventually receive gas from the planned LNG terminal in the Greek port of Alexandroupolis starting in 2020.

2. Who will supply Bulgaria’s Balkan Gas Hub? Once Turkish Stream is completed, Bulgaria will lose its role as a transit country for Russian gas delivered to Turkey via the Trans-Balkan pipeline. To avoid a serious loss of income from transit fees ($110 million per year), Bulgartransgaz has invited Gazprom to transfer its gas to Serbia and central Europe via Bulgaria, using the second line of Turkish Stream. The gas from Turkish Stream can also enter the Balkan Gas Hub, a project that the Bulgarian government has been pushing for. According to the official Balkan Gas Hub concept224, the new infrastructure will rely on many natural gas sources: Russia, Romania’s Black Sea deposits, Azerbaijan, the Eastern Mediterranean, the LNG terminals in Greece and Turkey, and potential domestic production from Bulgaria’s exclusive economic zone in the Black Sea. However, these expectations are too optimistic. In reality, Romania has not yet started extracting gas from the Black Sea and has no intention of transferring it to Bulgaria. Meanwhile, the LNG terminal in Alexandroupolis is not yet in existence; there is no pipeline from the Eastern Mediterranean to

222 Gazprom Export official web-site; http://www.gazpromexport.ru/en/partners/bulgaria/ 223 2018-2027 Ten Year Network Development Plan of Bulgartransgaz EAD, 13 April 2018, available at https://bulgartransgaz.bg/files/useruploads/files/TYNDP%202018/TYNDP_2018_2027_en.pdf 224 Bulgartransgaz, Construction of regional gas hub in Bulgaria – Balkan Gas Hub, available at https://www.bulgartransgaz.bg/files/useruploads/files/ITO/118-pcis/PCI- Public_info_HUB_january2017_ENG.pdf 87 the Balkans, and no evidence of commercial gas deposits in Bulgaria’s exclusive economic zone in the Black sea. So, in the short to medium run Bulgaria can rely only on gas deliveries from Russia and Azerbaijan. The infrastructure that carries Russian gas to Bulgarian territory already exists. Furthermore, the Interconnector Greece-Bulgaria (ICGB) will most likely be completed by the end of 2020. On 8 November 2018, the European Commission approved public support for the ICGB and confirmed that the project would receive a grant of €45 million from the European Energy Programme for Recovery225. The ICGB can also rely on additional grant funding of around €35 million under the EU structural funds for Bulgaria. All of this means that the project seems financially viable. Bulgaria’s Balkan Gas Hub can hardly be made possible with gas from only one source (Russia). Gas imports of all Balkan countries, excluding Turkey, are quite modest and cannot accommodate the big volumes that Russia is able to deliver via Turkish Stream. That is why — in order to keep its transit role with regard to Russian gas — Bulgaria needs a new big transportation infrastructure to central Europe. Such an infrastructure was the planned South Stream pipeline, which was never built as it did not meet the requirements of the European Union’s ‘third energy package’. In a world where South Stream is no longer an option and Turkish Stream is progressing, Bulgaria intends to use the Trans-Balkan pipeline in a reverse-flow mode to transfer Russian gas to Provadia, north-eastern Bulgaria. From that point, the gas is to be transferred to the border with Serbia and further on to Hungary and the Baumgarten hub in Austria. To implement this plan, Bulgartransgaz intends to build a new pipeline in northern Bulgaria, which will follow the South Stream route. The estimated cost of the project is BGN 2.6 billion (€1.33 billion).226 As a major piece of new gas infrastructure, this pipeline has to be approved by the European Commission227. It will hardly be possible to use the new pipeline for transfer of Russian gas only because that would obviously mean no diversification of gas sources. In order to justify its role as a gas hub, Bulgaria needs to secure gas supplies from additional sources. The same is valid for the planned pipeline from Provadia to the Serbian border — it should transfer some volumes of non-Russian gas too. Otherwise, Bulgaria will not be able to convince the European Commission that the new infrastructure is not just a transit pipeline that will strengthen the Russian dominance on the gas markets in south-eastern and central Europe. Therefore, for example, even small volumes of Azerbaijani gas (2-3 bcm per year), redistributed through the Balkan Gas Hub and directed to Serbia and central Europe, can change the picture.

225 State aid: Commission approves public support for natural gas interconnector between Greece and Bulgaria, European Commission Press release, 8 November 2018, available at http://europa.eu/rapid/press-release_IP-18- 6342_en.htm?fbclid=IwAR19OF0lTMCG3umyoTzcMNYZFbMIO5maRSMOWMHLTWSLFJ8RbeSx9- tNUDo 226 Petkova, T., ‘Investitsiyata na Bulgaria v Turski potok bi bila 2.6 miliarda leva’ [‘Bulgaria’s investment in Turkish Stream would be BGN 2.6 bn’], Investor.bg, 24 November 2018, available at https://www.investor.bg/energetika/472/a/t-petkova-investiciiata-na-bylgariia-v-turski-potok-bi-bila-26-mlrd-lv- 272459/

227 Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC, available at https://eur- lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32009L0073&from=EN

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3. Gas supplies from Azerbaijan If and when expanded, the scalable Southern Gas Corridor will carry 31 bcm of gas from Azerbaijan to Turkey and Europe. During the first stage, the Trans-Anatolian Natural Gas Pipeline (TANAP) will be operating at half capacity; it will be gradually expanded to its maximum capacity of 31 bcm/y in three stages. As half-capacity operation will lessen the economics of the pipeline, it is important to, first, find a market and then — fill the pipelines. The main question is whether Azerbaijan will be able to fill the pipelines on its own and supply the needed gas volumes. In transportation through the Sothern Gas Corridor (SGC) priority will be given to gas sourced in Azerbaijan. There is great potential to increase gas production from fields beyond Shah Deniz. The peak production in the country will come in the period between 2021 and 2027; afterwards there will be natural decline from year to year. The additional gas needed for the SGC will come from existing fields for which production-sharing agreements (PSAs) are already in place and that are at different stage of exploration, appraisal, and development. Another source may be newly discovered fields for which there is a firm intention to develop the relevant blocks, even though no data outside of seismic information is available yet and no wells have been drilled. The existing fields and structures in the country comprise two groups of reserves and resources. The first group is composed of fields and structures that are in the international consortia’s production portfolios, as well as structures/blocks that are expected to be released under a PSA with an international oil company. This group of reserves and resources comprises both (i) contracted gas and (ii) un-contracted gas, i.e. the so-called ‘free gas’ that will show a growing surplus, potentially available for new exports. The second group of fields consists of all the reserves that are included in the SOCAR/Azneft production unit’s gas production portfolio, which mainly supply the domestic market, with excess gas exported by SOCAR to Georgia and Turkey. The security of gas supply to the domestic market largely depends on the future development of these fields and the amount of gas that SOCAR will receive and/or produce. There are two types of gas fields in Azerbaijan — those already yielding production (Shah Deniz Phases 1 & 2, Azeri-Chirag-Guneshli (ACG) associated gas, Umid, and all SOCAR/Azneft fields) and the ones that are under development. The latter group of reserves includes newly discovered fields and structures for which some preliminary data is available, but either no well has been drilled or some wells are drilled and exploration work has not been done yet. Consequently, in this case, one can refer to un-contracted gas (or ‘free gas’) that will show a growing surplus, potentially available for domestic demand and/or new exports. Such fields are the Absheron (phases 1 & 2), the Babek structure, Garabagh, ACG non-associated gas (NAG), and the Shafag-Asiman structures. These fields and structures have all the potential to be explored, appraised, and developed in the medium run as the consortia/joint ventures are in place, PSA or an agreement for future PSA has been signed, and the partners and SOCAR have firm intention of developing the fields in medium-term perspective. Gas production in Azerbaijan will be increased significantly by 2021 and will reach its peak in 2023. In general, the peak production period will be between the years 2021 and 2027,

89 when the annual levels will reach almost 50 bcm/y compared to volumes of around 28 bcm/y in 2017 (Figure 1). In this context, it should be further noted that the country’s gas production projection does not include the ‘technical resources’ (Nakhchivan, Zafar-Mashal, Inam, Araz- Alov-Sharg, Kapaz/Sardar) — although these structures have been discovered and some preliminary 3D seismic data exists, SOCAR and the IOCs have no intention or plans to invest in and develop the blocks, and no legal arrangements are in place at this stage. In fact, the development of this group of structures will largely depend on political (relevant decision), technical (availability of drilling rigs), and commercial (the cost of gas production and marketing arrangements) factors. Thus, any assumptions about possible gas production quantities and timing will be broadly indicative in this context. For illustration purposes, some key data concerning the status of Azerbaijani gas production, export, and supply is presented (see Annex IV, Figures 1, 2, 3 and 4). As shown in Figure 1, the country’s gas demand is projected to reach 11 bcm/y in the low- case scenario, 12 bcm/y in the base case and 13 bcm/y in the high-case scenario by 2023, which is anticipated to be the peak production year in the country. Figure 2 shows committed export volumes versus gas production in the country, including Azeri-Chirag-Guneshli (ACG) non-commercial associated gas. Figure 3 shows gas production (including ACG re-injected gas) as well as aggregations of committed export volumes and each of the three gas demand scenarios (low, base, and high). With this non-commercial gas, the surplus of gas projects at about 15-16 bcm from 2022 to 2028. In Figure 4, gas production assumptions are indicated, while excluding ACG re-injected gas (approximately 10 bcm until 2025). The graduate decrease in the following years as a result of natural decline is also to be observed. Consequently, as demonstrated in the chart, potential gas surplus volumes may be available for uncommitted export – these will be about 10 bcm/y until 2027, if the low-case scenario in consumption is realised, and about 5 bcm/y and 3 bcm/y in the base- and high-case scenarios, respectively. The SGC pipelines, which include the South Caucasus Pipeline (SCP), TANAP, and the Trans-Adriatic Pipeline (TAP), are scalable to up to 30 bcm/y to accommodate larger volumes. According to SOCAR officials, there are plans to further expand SCP to 30+ bcm/y — this will certainly be possible if additional volumes of gas become available for export and if the economics of such a step allow it. As TAP is a European infrastructure, any decision to increase the capacity has to be in compliance with EU legislation. The decision will also largely depend on the economics of such an investment, availability of markets, and prices. The availability of additional volumes of gas in the country will also depend on future investments in technical resources. The Turkmen gas may provide another option for filling the pipelines. The export volumes from Azerbaijan will largely depend on whether the 6.6 bcm/y sales and purchase agreement (SPA) with BOTAS (Turkey’s state-owned company for crude oil and natural gas pipelines and trading) is extended beyond 2021. As the Shah-Deniz 1 field is set to have its natural production decline from 2024, one could assume that the contract may be extended but with smaller volumes. Another option, made possible because of the projected significant increase of gas production in the country starting 2022, is to add new volumes

90 from other fields to the export to Turkey, if necessary. In Figure 1 above, only the assumption for extension of the long-term gas contract with BOTAS for the Shah-Deniz 1 field was reflected, as any other scenarios are uncertain at this stage. Gas exports to Georgia are reflective to the combined volumes of these to Turkey and Europe (5% of overall export volumes as a payment in kind for providing Azerbaijan with a transit route) and around 1.3-1.5 bcm of SOCAR (through the Gazakh pipeline) exports. There might be several other export contracts with buyers in Turkey and Europe in the future as a result of production growth. However, as this assumption is highly uncertain, these potential contracts are not reflected in Figure 2. The initial capacity of the ICGB will be 3 bcm per year with an option to upgrade it to 5 bcm. This means that there will be no technical obstacles to Bulgaria receiving bigger volumes of Azerbaijani gas, exceeding the 1 bcm per year negotiated under the current contract. The question is whether Azerbaijan will be able to export more than 1 bcm to Bulgaria and when that could happen.

Conclusion Given that Azerbaijan’s gas demand is expected to be moderate throughout the period between 2018 and 2040, Azerbaijan should have around 30-35 bcm/y of gas available for export. If we deduct about 24 bcm/y from these volumes, accounting for the fact that exports to Europe are set to start in 2022, the remaining 5-10 bcm/y will still need markets. These numbers, however, are tied to the consumption growth scenarios – therefore, whether this gas is exported to Turkey or Europe will largely depend on gas prices and the availability of a market niche. Consequently, SOCAR may halt its gas imports from Russia and Iran starting 2020, when Azneft production is predicted to register significant growth to almost 8 bcm, from 5.8 bcm in 2017. Azneft production is expected to peak in 2025 with volumes of more than 12 bcm, after which Azneft projected data indicates a gradual decline. By that time, SOCAR will have significant excess volumes of gas, which can be used (as feedstock) to produce value-added products and/or to increase export to Georgia and start selling gas to private companies or BOTAS in Turkey. The Southern Gas Corridor’s mid-stream segments are scalable to export up to 30 bcm/y, if and when additional gas is available. However, the additional un-contracted volumes of gas will not be available before 2023, when production from the Umid gas field is expected to jump six times, production from the Bulla Deniz offshore gas field is expected to quadruple, and the Garabagh and Babek fields will start producing gas (in total around 7 bcm/year). Until then, the costly TANAP infrastructure will be operating on half capacity, significantly affecting the netback margin. Finally, it is worth mentioning that Azerbaijani gas can play not only an economic but also a geopolitical role in Bulgaria and in the Balkans. In a situation where the European Commission is determined to enhance competition in the EU gas market, especially in south- eastern Europe, any alternative supplier will be welcomed.

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The energy component of modern-day conflicts in the Eastern Mediterranean Plamen Hristov, PhD228

INTRODUCTION The discovery of commercially viable hydrocarbon deposits in the exclusive economic zones of Israel, Cyprus, and Egypt has introduced a new, energy-related component to the unresolved political conflicts between these Eastern Mediterranean countries. The absence of a solution to the Cyprus and Middle East conflicts hinders secure operations of extracting these hydrocarbon deposits. Furthermore, we are seeing a new stage in the military tension between Turkey, on the one hand, and Greece/Cyprus and Egypt, on the other. Even the smallest cross-border incident in the Republic of Cyprus's exclusive economic zone may provoke destabilisation of the overall security environment, further complicated by the unresolved Middle East conflict and exacerbated by the conflict in Syria. The Cyprus issue has never been examined in the context of the Middle East policies of Greece and Turkey, especially the latter’s. The Cyprus problem is widely viewed as an integral part of the Greek-Turkish disputes in the Aegean region. The emergence of this energy component of the Cyprus issue and the Arab-Israeli conflict necessitates a rethinking of the hitherto approach to their solution. The energy component’s inherent potential to directly impact these conflicts means it can either help resolve them or further aggravate the situation. The current paper focuses on some key elements of policies in the Eastern Mediterranean and their energy aspect.

THE ENERGY COMPONENT OF THE MODERN ARCHITECTURE OF THE MIDDLE EAST SECURITY ENVIRONMENT The Republic of Cyprus implements what it calls Energy Programme for Exploration, Discovery and Exploitation of Hydrocarbons in its exclusive economic zone (EEZ). Cyprus’s energy policy has a 2020 horizon and the following priorities: reducing the dependence of economic growth on energy consumption; improving energy efficiency by enhancing competitiveness through the introduction of new energy technologies; protecting the environment; ensuring adequate, secure, and cost-effective energy supply through

228 Plamen Hristov, PhD is executive director of the Friends of the Arab World Association. He has served as a diplomat at the Ministry of Foreign Affairs of the Republic of Bulgaria and has professional experience in countries such as Greece, Cyprus, and Afghanistan. He holds a PhD in energy security and political and military aspects of the security paradigm and an MA in technical sciences. He has also undergone specialised training by completing the Diplomatic Institute’s Consular Diplomacy Course.

92 diversification of energy sources; supporting the construction and use of renewable energy installations; helping to reduce energy losses during transmission and use of electricity; and improving the conservation of energy resources. Exploration and exploitation of hydrocarbons in Cyprus's EEZ is defined as a priority. The country aims to create a self-sufficient capacity of domestic energy resources that will help it transition from a net importer to a net exporter of energy resources. It should be noted that such a development is set to have its biggest economic effect on the construction sector, which consumes 30% of the electricity produced in the country. Achieving self-sufficiency will have a crucial impact on Cyprus's economic development and will significantly increase its regional role. Cyprus's energy programme faces a number of geopolitical, financial, economic, and technological challenges. Cypriot deposits lie at significant depths, of over 2 000 m, and therefore require the use of the most sophisticated drilling technology. The financial and economic viability of their exploitation is subject to adverse factors like the sustained trend of low energy market prices and increasing energy efficiency, as well as the growing share in the energy mix of sources different from hydrocarbons. The geopolitical risks are significant due to the unresolved Middle East conflict, the Cyprus issue, and, in the last seven years, the Syrian conflict, which has pushed the Kurdish issue229 back to the forefront. The global and regional players involved in these conflicts also have an immediate interest in the development of these deposits. Italy, whose energy company Eni has concession contracts with all the countries in the region — Cyprus, Egypt, Israel, and Lebanon, possibly Syria in the future — stands out in this respect. At the same time, Italy is both an entry point to the European Union and a consumer of hydrocarbons produced in the Eastern Mediterranean. At its current stage, the programme is about implementation of the concession contract struck with Italy’s energy company Eni and France’s Total for the exploration of Block 6 of the EEZ. Drilling began on 1 January 2018 at 1 600 m of water depth and reached a final total depth of 3 827 m, with volumes projected at about 5 trillion cubic metres. The reason behind the great expectations for the drilling process is the fact that the Onisiforos deposit in Block 6 is the same type as the Egyptian Zohr230 and exceeds the Aphrodite field (1.2 trillion cubic metres). Aphrodite will be developed by Shell (35%) and Noble Energy (35%). According to the Cypriot energy minister, the presence of 4.5 trillion cubic metres231 has been confirmed in the EEZ of Cyprus. If these and subsequent drillings in Block 3 (Eni / Kogas) and Block 10 (Exxon Mobil / Qatar Petroleum) prove to be successful, the discoveries will make Cyprus one of the major energy factors in the Eastern Mediterranean. Building a pipeline system to the two Egyptian natural gas liquefaction terminals Damietta and Idku, from where quantities can be shipped to regasification terminals in Europe, is shaping up as the most likely method of exploiting the Cypriot hydrocarbon deposits and the one preferred by energy experts.

229Chukov, V., review of the PhD thesis of the author, Military Academy, Sofia, 7 February 2018. 230Data is confirmed by an Eni statement, ‘Anakoίnosi ENI - Entharryntika ta apotelesmata’ [‘Announcement ENI - Encouraging Results’], available at http://www.philenews.com/oikonomia/kypros/article/487468/anakoinosi-eni-entharryntika-ta-apotelesmata 231‘G. Lakkotrypis: Kathoristikoί oi epόmenoi 12 mines gia FA’, philenews.com, available at http://www.philenews.com/eidiseis/politiki/article/472099/glakkotrypis-kathoristikoi-oi-epomenoi-12-mines-ga- fa 93

If quantities prove to be higher than projected, they could make financially and economically viable the construction of a local liquefied natural gas (LNG) terminal or the realisation of the East Mediterranean Corridor (Διάδρομος Ανατολικής Μεσογείου). In 2017, a memorandum of understanding was signed for the East-Med pipeline project between Cyprus, Greece, Italy, and Israel, with the intergovernmental agreement expected to be signed in the first quarter of 2019. Egypt also joined the project but with a separate agreement because of the existing Israeli-Egyptian disputes. On 19 September 2018, Egypt and Cyprus signed a memorandum for the construction of a gas pipeline connecting Block 12’s Aphrodite field to the Damietta LNG terminal. The East-Med project is in the process of conducting detailed technical feasibility studies funded under the EU’s Connecting Europe Facility. On this basis, the option for a corridor from Cyprus (Vasiliko) to Greece (Alexandroupolis, Komotini) and Bulgaria (Stara Zagora) is an idea for a new European-funded project of mutual interest in the context of the common energy security policy. Cyprus’s energy diplomacy examines the East Mediterranean Corridor as a regional project, encompassing the East Med one. The Cypriot concept is centred on building an Eastern Mediterranean energy alliance based on a regional pipeline system for the transmission of natural gas and electricity connecting the Eastern Mediterranean with Europe. Each of the options is directly related to the LNG terminal project near the Greek port city of Alexandroupolis, which directly concerns the energy security of Bulgaria. Turkey follows a political strategy in the Aegean and the Mediterranean regions known as Strategic Plan of Turkey on the Cyprus Issue, drafted by Nihat Erim back in 1956. The plan formulates Turkey's strategic interest in using the Cyprus issue in the context of its Middle East policy. In accordance with the outlined view, Ankara treats the problem as grounds to play a role in the island's security, including in its Greek part. The document also prescribes that Greek intervention in the implementation of Turkey’s Middle East policy should not be allowed. This part of Nihat Erim's plan unequivocally shows that for Turkey the Cyprus issue is an element of the Turkish policy on the Middle East issue, and not so much an element of the balance in Greek-Turkish relations. For Turkey, the balance of its relations with Greece is achieved in the Aegean, but with regard to Cyprus, Turkey is making efforts not to allow the Greek side to hinder the pursuit of its Middle East policy. That is why the Cyprus and Middle East issues should be viewed as one whole in the contemporary geo-energy context instead of separately. When it comes to Cyprus, this circumstance manifests itself in the Middle East situation through the ‘external’ aspect of the Cyprus issue. Finding a solution to it will represent significant progress in defusing the regional situation, which has been further complicated by the Syrian conflict. Since in 2008 Cyprus granted concessions for the exploration and commercial exploitation of gas fields in its exclusive economic zone to foreign еnergy consortiums (the UK’s Shell, France’s Total, the US company Noble Energy, and Israel’s Delek), Turkey has repeatedly responded negatively through political, economic, and military means. As a result, regional tensions have started escalating again. On 21 September 2011, Ankara and what is known as the Turkish Republic of Northern Cyprus signed a contract for EEZ delimitation. Since then, Turkey has invariably protested every move made by the Republic of Cyprus towards the delimitation of EEZs with its

94 neighbouring countries as well as hydrocarbon research operations there. The Turkish side claims that it has rights to the EEZ of Cyprus and its territorial waters stretching to the 32˚ 16΄ 18΄΄ parallel, east longitude. In early 2018, Ankara issued a series of navigational telexes232, including from military vessels, to hinder Cyprus’s progress in exploring for hydrocarbons, seeking to create new conditions for the Cyprus issue talks. On 9 February 2018 Turkish warships obstructed the work of a research vessel of the Italian company Eni in Block 6 and Block 3 of the EEZ of Cyprus. Additionally, Turkey challenged the air and maritime boundaries of Cyprus in Blocks 1, 3, 6, 7, 8 and 13 of the Cypriot EEZ, as a result of which the terms of Eni's concession contract with the Cypriot state were violated, causing significant financial losses due to missed implementation deadlines. A cloud of uncertainty was created over the further implementation of the Cyprus energy programme, which included new exploration operations in Block 10 in the second half of 2018 on the basis of a concession contract with the consortium of Exxon Mobil and Qatar Petroleum. What is notable about the Turkish side's approach is the refusal to enter into dialogue with the international institutions to which Cyprus has referred the matter. At the same time, those institutions have not responded in any significant way to the Turkish actions, despite the demarches undertaken by the Cypriot side. Turkey has established itself as an undeniable factor in the Middle East, and in particular in the Eastern Mediterranean, and is therefore able to dictate terms.233 Turkey’ actions in early 2018 prompted Italy to send its frigate to monitor and, if need be, intervene to protect the vessels of its energy company. The risk of inadvertently causing an incident is growing due to the accumulation of naval vessels in the area. It should be noted that, while the Turkish provocation in the EEZ of Cyprus was taking place, Greek and Turkish patrol boats collided in the region of the group of rocky islands of Imia (Kardak), the jurisdiction over which is subject to a territorial dispute between Greece and Turkey. Turkish provocations in the Aegean Sea and the Eastern Mediterranean have shown a trend of rising exponentially – from 90 in 2009 to 3 317 in 2017.234 The Turkish has been setting preconditions in order to dictate the formula of a possible solution to the Cyprus issue and the energy dispute with Cyprus. At the same time, it has been conducting its own research activities in the Mediterranean Sea, in an area overlapping with Blocks 2, 3, 4, 5, 6, 8, 9, 12 and 13 of the Cyprus EEZ. Turkey’s actions also concern

232Turkey states that the telexes reserve an area within the Turkish EEZ and continental shelf and the Search and Rescue Operations Area of the Turkish Republic of Northern Cyprus – ‘Thermi Deftera me navtex ston kόlpo Ammochostoy’ [‘Hot Monday with navtex at Famagusta Bay’], philenews.com, available at http: //www.philenews.com/eidiseis/politiki/article/483185/thermi-deftera-me-navtex-ston-kolpo-ammochostoy 233Indicative of Turkey's determination is a statement by President Erdogan, in which he directly threatens to turn the Eastern Mediterranean and the Aegean Sea into a new iteration of the African-Turkish challenge to EEZ limits – ‘Toyrkikes prokliseis stin AOZ: Sto keno oi parembaseis’, philenews.com, available at http://www.philenews.com/eidiseis/ politics / article / 489441 / toyrkikes-prokliseis-stin-aoz-sto-keno-oi- parembaseis 234 „Κλιμάκωση της τουρκικής προκλητικότητας δείχνουν και τα ετήσια στοιχεία, καθώς το 2017 οι παραβιάσεις του εθνικού εναέριου χώρου μας διπλασιάστηκαν: από 1.671 το 2016, έφτασαν τα 3.317. Αλλά και στις παραβιάσεις των χωρικών μας υδάτων παρατηρείται μεγάλη αύξηση. Από 299 το 2015, ανέβηκαν σε 414 το 2016 και το 2017 ήταν 6,6 φορές περισσότερες και έφτασαν τις 1.998. Αν πάμε μάλιστα ακόμη πιο πίσω, θα παρατηρήσουμε ότι το 2010 οι παραβιάσεις των χωρικών υδάτων στης Ελλάδας από τουρκικά σκάφη ήταν 133 και το 2009 μόλις 90.“, ‘Toyrkiko «fesi» sto Aigio, apokleismeni i Kypros’, philenews.com, available at http://www.philenews.com/eidiseis/politiki/article/491202/toyrkiko-fesi-sto-aigio-apokleismeni-i-kypros 95

Lebanon's EEZ, as well as the area of the island of Kastellorizo, which is included in the potential scope of the EEZ of Greece. Turkey’s ultimatum of February 2018 was either for the exploration activity to continue with the equal participation of the Turkish-Cypriot community or for the activity to be frozen until a solution to the Cyprus issue is found. At the same time, that condition was tied to the content of the potential solution, which had to be based on a two-state formula. The Turkish and the Turkish-Cypriot parties declared in an obviously co-ordinated manner that it was only then that talks on the Cyprus issue could be resumed. Recognition of the Turkish-Cypriot state was viewed as a guarantee that activities in the EEZ would be managed fairly and jointly. Consequently, until a solution to the Cyprus issue was found, the exploration, extraction of and trade with hydrocarbons located in the Cyprus EEZ shall be under moratorium. Thus, the new basis for resuming negotiations on the Cyprus issue should contain an explicit definition of the energy component.235 In addition to the above-mentioned conditions, Turkey added a new one in connection with the concession announced by Cyprus (fourth in a row) for Block 7 of its EEZ. The Turkish Ministry of Foreign Affairs responded with a harshly worded statement236, accusing the Greek-Cypriot side of failing to respect the rights of the Turkish-Cypriot community and of the Turkish side to the natural resources in the Mediterranean. Warnings were issued to any country or company considering engaging in exploration or production of hydrocarbons without securing Turkey's consent first. A situation has been created that does not allow the resumption of negotiations on the Cyprus issue. The President of Cyprus Nicos Anastasiades has said that talks remain impossible as long as Turkey is making threats. Instead, the appropriate prerequisites must be created first. Greece, in turn, was preparing to declare its EEZ. However, the strained Greek-Turkish relations, as well as the Turkish parliament's declaration237 that such a move would be considered a ‘casus belli’, prevented the Greek side from taking unilateral action. Exercising its sovereign rights provided for in the United Nations Convention on the Law of the Sea (1982), Athens said that it stands ready for only partial expansion of its territorial waters from 6 to 12 nautical miles seaward in the Ionian Sea. A source of contention is the area of Kastellorizo, along with Cyprus itself, as Turkey argues that the islands are not part of a continent and are therefore not entitled to a continental shelf or, by extension, the right to establish their own EEZ (see Annex V, Figure 1). Lebanon has stepped up its efforts to regulate and grant concession for hydrocarbons exploration in sections of its EEZ . Since a coalition government was formed in 2016, Lebanon has stepped up action to create the necessary regulatory framework for the exploration and exploitation of energy resources in its EEZ. In December 2017, Minister of Energy and Water Resources Abi Khalil

235Interview with Özdil Nami, energy minister of the Turkish Republic of Northern Cyprus – ‘Ozntil Nami: I Toyrkia borei na stamatisei oles tis erevnes’, philenews.com, available at http://www.philenews.com/eidiseis/politiki/article/493547/ozntil-nami-i-toyrkia-borei-na-stamatisei-oles-tis- erevnes 236http://www.kathimerini.gr/988203/article/epikairothta/politikh/o3eia-antidrash-ths-agkyras-gia-to-oikopedo-7- ths-kypriakhs-aoz 237 Reference 96 announced that Lebanon had granted a licence to an international consortium, which was expected to start drilling for hydrocarbon deposits in Block 3 and Block 9 in 2019.238 The international consortium is made up of Total (40%), Eni (40%), and Novatek (20%). The government foresaw between 55% and 71% of potential revenue going to the country. Israel responds to Cyprus’s and Lebanon's activities in the energy sphere. Israel’s response is conditioned by the official position of Cyprus (Greece) on the status of Jerusalem as future capital of Israel. In January 2018, Israel, Cyprus, and Greece planned to conclude a tripartite co-operation agreement for prevention of and response to marine water pollution resulting from breakdowns in energy installations. The position of Greece and Cyprus at the United Nations, which rejected the US initiative to recognise Jerusalem as the capital of Israel, caused the Israeli side to cancel, 8 January 2018, a scheduled visit of Prime Minister Benjamin Netanyahu to Cyprus. The signing of the tripartite agreement was postponed, as was that of the intergovernmental East-Med pipeline agreement. The agreement on prevention of and response to marine pollution was considered particularly important for Cyprus due to the higher risk of an accident in its EEZ that starting to extract, transport, and store natural gas entails. It should be noted that 60% of the Mediterranean trade is carried out by merchant ships, while 18% of the world traffic of oil tankers crosses the Mediterranean. A potential incident may have a significant negative impact on local tourism, which makes up a large part of the Cypriot and Israeli economies. Israel reacts to a concession agreement for Blocks 3 and Block 9 in Lebanon’s EEZ being awarded to the consortium of Total, Eni, and Novatek. Israel challenged Lebanon’s jurisdiction over part of the waters of Block 9 of Lebanon's EEZ. The dispute was over an area of 7% of the block, believed to have promising potential for future production. The United States acted as mediator in the dispute, but in March 2017 Israel declared the initiative unsuccessful and unilaterally annexed the disputed block to its EEZ239. The Lebanese side's response was a statement by the ruling Hezbollah party, which threatened to use force if Israel moved to start extracting from the block under dispute. In December 2017, the Lebanese parliament approved the concession agreement between the Lebanese government and the international consortium of the energy companies Total (40%), Eni (40%), and Novatek (20%), granting exploration rights to Blocks 3 and 9 of the Lebanese EEZ. The contract was valued at $160 million. In terms of financial and economic viability, the Lebanese government deemed as sufficient the realisation of the production on the domestic market in light of Lebanon's serious power supply problem. No export of the raw material was foreseen. A significant problem poses the fact that since 1948 Lebanon has been essentially in a state of war with Israel, with the border between the two countries not being established by a relevant bilateral treaty. At present, an internationally limited ceasefire line is in place between them,

238 https://aawsat.com/english/home/article/1113976/energy-minister-lebanons-oil-and-gas-exploration-begin- 2019 239‘Israel Decides to Annex ‘Maritime Triangle’ Disputed with Lebanon’, http://english.aawsat.com/nazir- majli/news-middle-east/israel-decides-annex-maritime-triangle-disputed-lebanon 97 the observance of which is monitored by the United Nations Truce Supervision Organization (UNTSO) in co-operation with UNDOF and UNIFIL. In December 2017, Egypt began extraction of natural gas from the Zohr deposit in its EEZ, operated by the Italian company Eni under a concession agreement. The government's goal is to reach a production capacity of about 2.7 billion cubic feet per day and a total capacity of about 30 trillion cubic feet240 by 2020. This will provide a significant relief for the country in securing energy supply for domestic consumption. The Noor deposit with an estimated capacity of around 90 trillion cubic feet is also very promising, according to evaluations made by the Egyptian government and the concessionaire Eni.241 Syria restores the energy sector and intends to unveil new hydrocarbon fields. For the purposes of this paper, the Syrian conflict is defined as an internal armed political conflict with intervention by regional and global players with vested interest. Russia has played a leading role in the handling of the Syrian conflict and the country’s post- conflict recovery. This reflects the wishes of the government of the Bashar al-Assad regime. The Syrian side signed its first agreements with Russia in this regard in 2013 and October 2015. They provide for a state-guaranteed priority treatment of Russian companies in signing recovery contracts. According to government estimates, the contracts stuck at the time had a combined value of €850 million.242 In June 2017, the Syrian government signed a contract with Russia’s Stroitransgaz, which gave the company 25% of the oil and gas production in the country. Concession contracts with counterparties of the ‘friendly country’ category were concluded for a total of five blocks in Syria’s EEZ. Stroitransgaz’s main subcontractor for Syria is EuroPolis. It is worth noting that the task of ensuring the security and protection of the Russian energy companies' infrastructure in Syria was assigned to the increasingly well-known Private Military Company Wagner. Also of note is its prominent involvement in the 8 February 2018 attempt made by a group of pro-regime and pro-Russian paramilitary organisations to take control of the Konoko gas field in the Deir ez-Zor province under the control of the opposition Syrian Democratic Forces supported by the United States-led international coalition.243 According to a 2018 statement by Syria's Minister of Oil and Mineral Resources Ali Ghanem244, the government has prepared an Energy Industry Reconstruction Plan, whose implementation is set to start in 2019. In a situation where the Syrian government is unable to restore territorial control east of Deir ez-Zor, where the majority of oil and natural gas resources are located, it is forced to seek an alternative in the development of fields in offshore territorial waters and to negotiate its own EEZ with its neighbouring countries (Cyprus, Lebanon, Turkey, and Israel). Minister Ghanem says that the country has an estimated 1 250 billion cubic metres of offshore natural gas reserves. The agreement between

240https://www.offshore-technology.com/projects/zohr-gas-field/ 241https://www.egyptindependent.com/egypts-noor-reserves-will-rank-among-the-largest-gas-fields-worldwide- eni/ 242Hauer, N., ‘To the Victors, the Ruins: the Challenges of Russia’s Reconstruction in Syria’, syriauntold.com, 2017, available at http://www.syriauntold.com/en/2017/08/to-the-victors-the-ruins-the-challenges-of-russias- reconstruction-in-syria/ 243‘Syria Aims To Begin Offshore Gas Exploration In 2019’, available at https://oilprice.com/Latest-Energy- News/World-News/Syria-Aims-To-Begin-Offshore-Gas-Exploration-In-2019.html 244Reference 98 the Syrian government and the Russian energy company Stroitransgaz provides for the concession of Block 2 in Syria's EEZ. The intentions of the Syrian side are to realise production capacity of 19 million cubic metres of natural gas per day in 2018 and 24.5 million cubic metres in 2019 and 70 000 b/d of oil and 219 000 b/d, respectively.245 The Ministry of Energy and Mineral Resources estimates the losses for the energy sector as of March 2017 at more than $65 billion.246 However, the ongoing conflict prevents the implementation of the agreements. Therefore, the government has to settle for restoring and expanding the production capacity of the gas facilities under its territorial control in the provinces of Homs, Damascus (Adra) and Tartous (Baniyas).

GEOPOLITICAL AXES AND THEIR RELATION TO OPEN REGIONAL CONFLICTS (CYPRUS, MIDDLE EAST, AND SYRIA). OPPORTUNITIES FOR BULGARIA The modern geo-energy environment in the Eastern Mediterranean is a reflection of the Sykes-Picot Agreement (1916).247 The distribution of zones of influence in the former Ottoman Empire between Great Britain, France, Russia, and Italy is illustrated by the participation of their energy companies in the exploration and exploitation of hydrocarbon deposits. Along with the participation of the United States, a completely new development, however, is Turkey's ambition to restore its influence in the former territories of the Ottoman Empire. The countries of the region, which, on the one hand, are directly interested in the development and commercial exploitation of hydrocarbon deposits in the Eastern Mediterranean and, on the other hand, are sides in open regional conflicts, are building new geopolitical axes, taking into account the fundamentally changed geo-energy environment. There are two major regional conflicts that influence the actions, positions, and intentions of these nations — the Middle East and the Cyprus conflicts. The existing deep principal, political, financial, economic, and legal disagreements between the countries practically prevent them from developing commercial operations for the extraction of the Eastern Mediterranean energy deposits in the Levantine basin. For this reason, the leaders of the countries direct stakeholders have geared their approach towards building new regional political axes in order to increase their regional political weight, influence, and impact. The complicated relations between Egypt and Israel preclude the creation of a regional energy alliance between Greece, Cyprus, Israel, and Egypt, which in turn necessitates the establishment of two separate axes. Egypt and Israel are yet to agree on the exact limits of the EEZ between them. Another complicating factor is the dispute between Israel and Lebanon on their maritime boundaries, impeding their ability to define their own EEZs, as the two countries formally remain at war due to the unresolved Middle East conflict. Lebanon also believes that part of Israel’s Leviathan gas field lies in its exclusive economic zone and is pushing for a share of it.

245‘Syria to start offshore energy exploration in early 2019 — oil minister’, available at https://af.reuters.com/article/commoditiesNews/idAFL8N1OD4SB 246‘Syrian Authorities Work out a Plan to Restore Oil and Gas Infrastructure’, available at https://en.insidesyriamc.com/2017/10/27/syrian-authorities-work-out-a-plan-to-restore-oil-and-gas- infrastructure/ 247 Reference 99

Lebanon insists that it has claim on gas extraction from Israel’s Tamar field too. The political party Hezbollah, which is represented in the parliament and has a key role in determining Lebanon’s policies, says Israel has appropriated no less than 3% of Lebanon's territorial waters and has threatened Israel with military action if it builds production and transport facilities enabling gas exports. The basis on which the new geopolitical axes are formed is co-operation, co-ordination, and joint operations in the exploration, extraction, and commercial and economic exploitation of natural gas fields. In parallel, the enhanced multilateral co-operation in the energy field generates impetus and intensifies bilateral relations in the fields of politics, trade, economy, defence, and education between the involved countries, which is conducive to better trade balance and deepening political relations. The immediate result is improvement in their positions in the efforts to find a lasting solution to the Middle East, Cyprus, and Syrian conflicts. This model of establishing axes can be applied to a certain type of situations inherently in need of balance — in a country's relations with two other countries with competing regional interests. Therefore, with regard to Israel and Egypt, Cyprus is in a position and has the ambition to use its energy policy to serve as a counterbalance to other factors in the region. Cyprus's interest in assuming that role is rooted in its desire for the security and guarantees system currently in place in the country to be scrapped. A solution to the security and guarantees issue, which is one of the negotiation chapters on the Cyprus issue, according to Greece and Cyprus, can be achieved by replacing the Zurich-London agreements248 with a friendship and co-operation treaty excluding the idea of external intervention. Such a treaty should be seen in the context of a new security architecture in the Eastern Mediterranean. The tripartite agreements concluded with Israel and Egypt (see below) can be used as a basis for such architecture and as a model for similar agreements with Jordan, Lebanon, the Palestinian Authority, and Turkey. In this way, a comprehensive regional approach by Greece and Cyprus would be implemented, incorporating the solution to the Cyprus issue. The latter is viewed not only as a source of balance in relations with Turkey in the Aegean but also as one in the Eastern Mediterranean. In this context, and learning from the example of former US Secretary of State Henry Kissinger’s ‘Chinese Card’, the case should also be examined from the perspective of Bulgaria’s interest in pursuing a strategy of triangular diplomacy when it comes to Turkey and Greece. This model could be transposed to a regional triangle Bulgaria-Greece-Turkey, with the balance between the sides managed in both examples by the two countries standing at the conjunction points – the United States at the global level and Bulgaria at the regional level. If the United States is in charge of managing the balance between Russia and China, Bulgaria has the grounded-in-history regional mission to serve as balancing force between Greece and Turkey, the heirs to the Byzantine and Ottoman Empires. Bulgaria also has a historically-predetermined regional mission to serve as the southern outpost of NATO and the EU, guarding against the influence of Russia and Turkey.

248 Reference plus short note on the substance of these agreements 100

Greece - Cyprus - Israel (2014) The first tripartite summit of the countries of this axis took place in January 2016 in Nicosia, Cyprus. The forum’s joint declaration249 states that the parties are united in their co-operation in the fields of energy, maritime transport, technological innovation, water resources utilisation technologies, transport, tourism, security, trade, and construction. A stated major goal of Greece is attracting Israeli investor interest in the areas of entrepreneurship, technological innovation, and joint start-ups with public support. Israel declares interest in investing in education, trade, technology, energy, and tourism. Special emphasis is placed on energy co-operation, with a proposed development of a joint gas pipeline to merge the natural gas output from deposits in Israel and Cyprus. The parties' intention to build an underwater cable to connect their power grids is reaffirmed. A permanent tripartite advisory commission in the field of energy is set up. It is noted that the rift in relations between Turkey and Israel remains, as do uncertainties surrounding the practical exploitation of the Aphrodite field due to the lack of progress in the open military and political conflicts in the region — Cyprus and the Middle East. The two issues are considered in the general context of Middle East issues, the Syrian conflict, and the threat of Islamic fundamentalism. On 2 December 2014, the Cypriot foreign minister presented the tripartite format for co- operation between Greece, Cyprus, and Israel in the context of the European Union's policy for diversification of energy sources and supply facilities. A format for summits of heads of state or government and meetings at the level of ministers of foreign affairs, defence, economy, and energy was established. A Greece-Israel High-Level Cooperation Council was set up to explore opportunities for promoting relations in the fields of energy, tourism, environmental protection, innovation, security, technology, and infrastructure. The actions of Greece, Cyprus, and Israel were backed by the superpowers the US250, the EU and Russia251, legitimising the creation of the new regional political axis at a global level. The Republic of Cyprus's right to develop its appertaining energy sources in line with the relevant UN resolutions was reaffirmed. Greece - Cyprus - Egypt (2014) The complex relations between Egypt and Israel necessitated the creation of a separate mechanism for co-operation, co-ordination, and joint action with Greece and Cyprus, leading to the formation of the Greece-Cyprus-Egypt axis.

249 Reference to the document 250Greek political analyst Aristotle Vassilakis believes that Washington was putting pressure on Greece to join forces with Turkey in exploring the oil and gas fields in the region. According to him, Washington proposed to allocate future revenues as follows: 20% for Greece, 20% for Turkey, and 60% for the American company Noble Energy, which had conducted successful studies in the Greek and Israeli offshore waters. Obviously, a key point in the US regional energy policy was the effort to persuade Greece, Cyprus, and Israel to include Turkey in the process as well. http://geopolitica.eu/spisanie-geopolitika-broi-6-2012/1338-balgariya-i-energiynite-parametri- na-sigurnostta-v-yugoiztochna-evropa 251‘Russia is also strongly interested in investing in the Eastern Mediterranean, given the opportunities opening before the European energy policy in the region. This explains why Russia has been so active in the region lately. Russian President Putin's visit to Israel should also be interpreted in the energy context. Russia maintains good relations with Israel, Cyprus, and Greece, but the growing interest in Syria and Lebanon will likely make it shift towards an open-door policy in order to maintain good relations with all participants in the future energy market.’ http://geopolitica.eu/spisanie-geopolitika-broi-6-2012/1338-balgariya-i-energiynite-parametri-na- sigurnostta-v-yugoiztochna-evropa 101

Egypt views the actions of Cyprus and Israel in the energy field as affecting its national interests. In 2011, the National Security Committee of the Egyptian Parliament insisted it had a claim on part of the reserves of Israel’s Leviathan deposit and Cyprus’s Aphrodite deposit. Accordingly, the Egyptian parliament recommended the establishment of an international commission for the delimitation of the exclusive economic zones of Egypt, the Gaza Strip, Israel, Cyprus, and Turkey. Israel was asked to provide accurate and detailed maps of all geological research carried out. A suspicion was expressed that Shell's refusal to perform deep-sea exploration in the Egyptian EEZ region of Nimid was a consequence of its contract with Israel and Cyprus. This served as a pretext for Cairo to cut gas supplies to Israel in April 2012. The dialogue between the three countries was built on their mutual interest in exploiting developed natural gas fields in Egypt's EEZ and potential gas supplies from discovered hydrocarbon deposits in the EEZ of Cyprus. The existing challenges to negotiating the delimitation of the EEZ between Greece and Egypt arising from the dispute between Greece and Cyprus, on the one hand, and Turkey, on the other, are the reason why stakeholder talks remain in the framework of research, technical consultations, and the search for Greece- Turkey and Cyprus-Turkey compromises to allow for further on-the-ground action. Egypt is extremely invested in the process of regulating relations in the energy sector in the Eastern Mediterranean region. It has plans to start exporting natural gas to Europe in 2025 thanks to the major deposits Zohr and North Alexandria, which the Italian company Eni discovered in its waters in November 2015. Production from both fields began in 2017 and the plan is to reach full production capacity in 2019. However, due to its rising domestic needs as a result of demographic growth, the country will be forced to import natural gas until 2022 in order to generate enough electricity to meet household and industrial consumption needs — this assessment was made by the Egyptian Minister of Petroleum and Mineral Resources Tariq al-Molla at the Bahrain Energy Forum held on 19 November 2015. Egypt also has an ambition to and a realistic chance of becoming a regional energy hub for extraction, storage, and export of natural gas in the Eastern Mediterranean. The Egyptian government points to low cost and guaranteed return on investment as incentives for foreign investors to finance the project. Against this background, a tripartite format was established on 8 November 2014 in Cairo between Greece, Cyprus, and Egypt at the level of heads of state and government. A joint declaration on co-operation in the energy sector was signed with an emphasis on hydrocarbon resources and mutual support for resolving the Cyprus issue and neutralising Turkey's actions in the exclusive economic zone of Cyprus. However, it should be noted that that declaration cannot be interpreted as a commercial agreement for the exploitation of the exclusive economic zone. Still, that last matter is on the agenda of Cyprus-Egypt relations. Subsequently, intensive inter-institutional dialogue was developed between the countries and taken to especially deep level on issues in the energy, defence, and political areas. The third meeting, held in December 2015 in Athens between Prime Minister Alexis Tsipras, the President of Cyprus Nicos Anastasiades, and the Egyptian President Abdel Fatah al-Sisi, defined three areas of co-operation: - delimitation of EEZs between Greece, Cyprus, and Egypt;

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- co-operation in the field of security; - co-operation between Egypt’s ports Alexandria and Damietta and Greece’s Kavala and Alexandroupolis. A tangible result from the co-operation within the tripartite axis is the bilateral agreement between Cyprus and Egypt for supply of natural gas from Cyprus’s EEZ to meet the needs of the Egyptian market, which was signed on 22 August 2016 during an official visit of the Egyptian oil minister to Cyprus (from 29 August to 2 September 2016). In September 2018, the parties also signed a contract for the construction of an offshore pipeline that will connect the Aphrodite field in Block 12 of the Cypriot EEZ to the LNG terminal in the Damietta port and serve future Cypriot production. Negotiating a connection to the Egyptian terminal in Idku is also on the agenda. Each of the two new geostrategic axes discussed above is guided by the financial and economic viability of exploring and exploiting oil and gas fields in the Aegean and the Eastern Mediterranean regions. Mutually beneficial opportunities for energy and economic co-operation are being created through bilateral and trilateral agreements. Then there are the political considerations to exploration for hydrocarbon resources and commercial and economic exploitation of the extracted volumes. In view of the current geopolitical situation, and more specifically the potential consequences of a political and/or military response by countries with competing interests, a negative impact on the negotiating positions in the ongoing military and political conflicts — Cyprus, Middle East, and Syria — is possible. Other circumstances — such as the Brexit talks between the UK and the EU and the ensuing concerns about the bloc’s unity in the future — have created additional stimulus for Greece and Cyprus to further develop the newly formed regional axes. Thus, through the energy component, the Cyprus issue is tied to the other unresolved regional conflict — the one in the Middle East, and might be tied to the Syrian conflict too in the future. The weakening institutional power of major political alliances such as the EU is leading to increasingly intensive bilateral and multilateral processes, in which countries are looking for independent, nationally grounded decisions, actions, and positions on regional security issues in the Eastern Mediterranean.

THE ENERGY COMPONENT OF THE SET OF ASSESMENT AND SOLUTION CRITERIA IN CONFLICT MANAGEMENT POLICIES IN THE EASTERN MADITERRANEAN The objective need to define an energy component of the process of solving the open political conflicts in the Eastern Mediterranean justifies its introduction into the concerned parties’ system of environment assessment and political decision-making criteria. Using correlation and prognostication as methods for analysing the above-mentioned circumstances, combined with holistic analytical approach, the following criteria can be identified:

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 Financial and economic criterion This criterion is based on considering the financial and economic viability when making a decision whether to fund a particular venture. It is a factor that affects the motivation of the parties to include the energy component in the negotiations on chapter ‘economy’ during efforts to solve open conflicts. At the same time, it is also a criterion in assessing the geopolitical risk to investors and energy companies before undertaking operations for exploration and possible extraction of hydrocarbons. The financial and economic indicator, related to the probability of a political agreement between the countries embroiled in a conflict, represents the value of the geopolitical risk to investors and energy companies. • Legal criterion Hydrocarbon exploration and extraction in the Mediterranean objectively affects all unresolved regional political issues, as it is related to several key factors such as overall legal status; historical and political foundations; the relevant positions of the stakeholders; the reactions and actions of their governments; the state of the common energy market; and the economic environment. That is why, the energy component of unresolved regional conflicts has global importance in the context of building the modern Eastern Mediterranean security system. The major international legal agreements concerning the energy component are: the Sykes- Picot Agreement (1916), the United Nations Convention on the Law of the Sea (1982), and the European energy legislation. These agreements constitute the legal basis for the positions, responses, and claims of the countries concerned.  Geopolitical The geopolitical criterion should be defined as the dynamics between the historical interests of the actors involved. The modern geostrategic environment brings to the forefront the possibility of building energy connectivity and integration between countries engaged in conflicts, to be used as a tool for generating momentum in efforts to find lasting solutions to regional conflicts in the Eastern Mediterranean. Israel, Egypt, and Jordan provide an example in this regard. In this particular context, the energy component is defined as a relevant factor in the negotiation process regarding conflicts in the Eastern Mediterranean, carrying the potential to either create momentum in their resolution or further deepen them.

CONCLUSION Energy security in the Eastern Mediterranean is the new challenge facing conflict resolution in the region. It is emerging as a major factor in the region’s issues and therefore should be addressed through harmonisation of national energy policies and definition of common goals in them; managing the geopolitical risk to security; and the trend of developing new energy technologies as alternatives to hydrocarbons. Weighing geopolitical risk and financial and economic benefit is at the basis of deciding on the feasibility of participating in exploration and production concession agreements in the

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Eastern Mediterranean. The effect of geopolitical risk may be partially minimised by putting in a clause guaranteeing that the contracts’ duration will be extended. The criterion of financial and economic viability is not able to override political disagreements and so influence the geopolitical risk, even in the presence of obvious financial benefits. It is therefore unclear to what extent the energy component can become a driver for positive or negative development in the negotiations for solving open conflicts in the Eastern Mediterranean.

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Energy co-operation between the EU and Iran - Future challenges and the way forward

Dimitar Ivanov252

This paper examines the dynamics of bilateral relations between the European Union (EU) and Iran since the Islamic Revolution of 1979, as well as the development of the negotiation process, which culminated in the Joint Comprehensive Plan of Action (JCPOA). The text outlines the nuclear deal’s effects on economic and energy relations between the two actors as well as the potential role of Iran as an alternative energy supplier to the EU. Finally, the implications of the US withdrawal from the JCPOA for the future of EU-Iran co-operation are also examined. The decision of President Donald Trump to pull the United States (US) out of the JCPOA253 has ushered yet another chapter in the Iranian nuclear saga. The EU has, on several occasions, expressed its support for the preservation of the deal, but there are serious challenges lying ahead. It took over 12 years of negotiations before the crucial accord was finally signed in Vienna in July 2015. The JCPOA is considered a great diplomatic success for the EU and defines the bloc’s role as primus inter pares within the Joint Ministerial Commission, which consists of the five permanent members of the United Nations Security Council, Germany, Iran, and the EU. As a chairman of the commission, the high representative of the European Union for foreign affairs and security policy facilitates and mediates the negotiation process. More than three years after the deal’s signing, the EU found itself confronted with a real test to the long-term efficiency of what had been accomplished to that point. In May 2018, President Trump announced his country’s intention to violate its obligations under the agreement and re-impose the economic sanctions that had been in force until 2016. In his speech254, he argued that the nuclear deal did not address the full spectrum of threats coming from Iran, nor did it guarantee that the Islamic republic would not develop nuclear weapons. President Trump reiterated the view that the JCPOA provided Iran with additional financial resources with which to pursue its ballistic missile programme and support its regional ‘malign activities’255. It was also mentioned that the Iranians have not abandoned their

252 Dimitar Ivanov is junior fellow at the Bulgarian Diplomatic Institute, where, inter alia, he co- ordinates the annual International Seminar on Energy Diplomacy. He has also worked as a liaison officer during the Bulgarian Presidency of the Council of the European Union. He has completed internships at the Bulgarian National Bank and the United Nations Association in Bulgaria. Dimitar holds an MA in European integration and diplomacy of the EU from Sofia University ‘St. Kliment Ohridski’ and is a PhD student in the same educational institution.

253 ‘Remarks by President Trump on the Joint Comprehensive Plan of Action’, White House, 8 May 2018, available at https://www.whitehouse.gov/briefings-statements/remarks-president-trump-joint-comprehensive- plan-action/ 254 Ibid. 255 Katzman, K., Kerr, P. & Heitshusen, V., US Decision to Cease Implementing the Iran Nuclear Agreement, Congressional Research Service, 9 May 2018, p. 1, available at https://fas.org/sgp/crs/nuke/R44942.pdf 106 intention to acquire nuclear weapons. The traditional US allies in the Middle East — Israel and Saudi Arabia — hailed the country’s decision to withdraw from the deal. Israeli Prime Minister Benjamin Netanyahu even provided evidence that the Iranian government continued to maintain and develop its nuclear facilities, despite being part of the JCPOA. What was unclear was whether the intelligence gathered by the Israelis revealed new and troubling information that had to be investigated and verified or whether it was all old, known history256. Under the JCPOA and the Additional Protocol, the International Atomic Energy Agency (IAEA) is authorised to request an inspection of any facility in Iran, provided that it has sufficient evidence of violations of the deal. As of December 2018, the IAEA had prepared 13 reports257, all of which confirmed that the Iranian government was abiding by the provisions of the JCPOA. Aside from the EU, the other parties to the deal (the UK, China, France, Germany, and Russia) consider the agreement successful and delivering on its main goal of not allowing Iran to acquire nuclear weapons in medium-term perspective, i.e. the next 10 years. For the EU, the JCPOA serves as the basis for further settlement of major issues with Iran, such as regional security, protection of human rights, fight against terrorism, etc. By supporting the nuclear accord, the EU does not reject the notion that the Iranians have geopolitical aspirations over counties in the Middle East that clash with those of other regional and global players. However, the EU is committed to following its engagement and dialogue policy with Iran as long as the latter sticks to the basis provided by the JCPOA. This reflects the diametrically opposed views of the EU and the US regarding the agreement's success. In April 2018, the leaders of France and Germany visited Washington in order to convince Trump not to withdraw from the deal. Chancellor Angela Merkel underlined that Iran was geographically close to Europe and a future destabilisation of the country, as a result of a potential collapse of the nuclear accord, would impact the EU negatively. For his part, France’s President Emanuel Macron stated that the agreement could be further developed so that it addressed the US concerns about Iran's ballistic missile programme and support for terrorist organisations, on the condition that the US remained a party to the deal. Those efforts turned out to be insufficient, as the US exited the JCPOA. Thus, an important question had been raised — was the EU capable of saving the agreement with Tehran and how the imposition of sanctions by Washington would affect the European business in the country? After the informal summit of EU leaders in Sofia on 16 May 2018, it was revealed that the European Commission was taking some steps to protect European companies from the US secondary sanctions. These measures include:

- updating the Blocking Regulation258 to mitigate the impact of the sanctions on the interests of EU companies doing legitimate business in Iran;

256 Goldenberg, I., ‘Netanyahu’s “Iran Lied” Presentation Shows Why Trump Should Keep the Nuke Deal’, Foreign Policy, 2 May, 2018, available at: https://foreignpolicy.com/2018/05/02/netanyahus-iran-lied- presentation-shows-why-trump-should-keep-the-nuke-deal/ 257 More information, regarding the reports on Iran is available at https://www.iaea.org/newscenter/focus/iran/iaea-and-iran-iaea-reports 258Council Regulation (EC) №2271/96 of 22 November 1996 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom, Official Journal of the European Union, 29 November 1996, available at: https://eur-lex.europa.eu/legal- content/EN/TXT/HTML/?uri=CELEX:31996R2271&qid=1526649272258&from=EN 107

- enhancing the role of the European Investment Bank (EIB) in supporting trade deals between Iran and the EU, focusing primarily on small and medium-sized enterprises; - strengthening the ongoing sectoral co-operation with and assistance to Iran, including in the energy sector and with regard to small and medium-sized companies, through the Development Co-operation Instrument or the Partnership Instrument; - exploring the possibility of one-off bank transfers to the Central Bank of Iran designed to help Iranian authorities receive their oil-related revenues, particularly in case of US sanctions which could target EU entities active in oil transactions with Iran.259

Why is the European Commission adopting such measures and what is at stake? For Europe, Iran has always been of importance because of its geostrategic location, abundance of natural resources, and role in regional security matters. The EU regards the JCPOA as a guarantee that the Islamic republic would avoid a fate similar to Syria, Afghanistan, Libya, and Iraq and not turn into a ‘failed state’. The opposite scenario would create an ‘arc of crisis’, stretching from northern Africa all the way to central Asia. Open dialogue and effective multilateralism are a crucial part of the EU’s approach to defusing regional confrontation. Another important reason why the bloc stands by the deal is that none of the 13 consecutive reports (as of December 2018) by the IAEA – the independent body monitoring whether Tehran abides by the JCPOA – found any violation of the agreement. This circumstance gives the EU legitimate grounds to support the nuclear accord and show that, as the main interlocutor of the deal, it will continue to be part of it. Brussels regards the JCPOA as a significant diplomatic breakthrough, a product of long negotiations, and an example of successful multilateralism.

Development of EU-Iran bilateral relations — between co-operation and sanctions regime A graphic illustrating bilateral relations between the EU and Iran would represent a string of dramatic ups and downs, the result of different internal factors in the Islamic republic as well as external ones dictated by the foreign policies of the US and regional players. Iran is a country, in which both the EU and the US have their own, albeit sometimes quite diverging interests. The former Persian Empire is a geographical link between Europe, the Middle East and south-western Asia. It holds the world’s fourth largest reserves of oil behind Venezuela, Saudi Arabia, and Canada and the second largest reserves of natural gas behind Russia260. Iran has significant geopolitical influence in Middle Eastern countries such as Yemen, Iraq, Syria, and Lebanon, as well as the occupied Palestinian territories. Following the Islamic Revolution of 1979 and the fall of Shah Mohammad Reza Pahlavi from power, the relationship between Iran and the West, most notably the US, deteriorated to critical levels. The monarchist regime had enjoyed widespread support from the US and its European allies. During the 1970s, the Shah of Iran acted as the gendarme of the Persian Gulf with the military and political support of the US. The Gulf Cooperation Council (GCC) states reluctantly accepted the dominant role of Iran, but at the same time they received direct

259 European Commission, ‘European Commission acts to protect the interests of EU companies investing in Iran as part of the EU's continued commitment to the Joint Comprehensive Plan of Action’, press release, Brussels, 18 May 2018, available at http://europa.eu/rapid/press-release_IP-18-3861_en.htm 260 U.S. Energy Information Administration (EIA), Iran/Analysis, Last Updated: 9April 2018, available at: https://www.eia.gov/beta/international/analysis.php?iso=IRN 108 military protection and diplomatic support from the US and the UK.261 With the ayatollahs262 coming to power, the political landscape in the Middle East drastically changed, as the western democracies took a negative stance towards the new regime and that was best demonstrated by the support given to Iraq during the Iran-Iraq War of 1980–1988. In the beginning of the 1990s, relations between the EU and Iran were shaped by the engagement policy known as Critical Dialogue.263 After the revolutionary riots and the ensuing military actions, the newly elected president Akbar Hashemi Rafsanjani decided to take the country back to its normal functioning by gradually rebuilding relations with its foreign partners. Within the framework of the Critical Dialogue, the EU raised the most pressing issues of its relationship with Iran – its abysmal human rights record, support for terrorism, opposition to the Middle East peace process, and proliferation issues.264 The structured dialogue represented initial steps towards a positive development of bilateral relations between the two sides. The US and Israel, however, were very critical of the established contacts, perceiving the diplomatic dialogue as a cover-up for the European business interests in the energy-rich Middle Eastern country. Although the contacts between Iran and the EU turned strained again following terrorism accusations against Iranian officials by the German judiciary, a certain improvement in the internal situation in Iran was observed. The newly elected president Mohammad Khatami came up with a programme aimed at reforming the Iranian society and resolving the issue of human rights violations in the country. That motivated the EU to start the Comprehensive Dialogue (1997-2002), addressing areas of co-operation and mutual interest with a view to signing a trade and co-operation agreement265 in the long run. That period was the high-water mark of the two sides’ relationship — economic, social, academic, and cultural exchanges increased drastically. However, that progress evaporated with the 2002 revelations about undeclared nuclear reactors in Natanz and Arak with the capability to enrich plutonium and uranium, chemical elements essential for the creation of nuclear weapons. From that moment on, the controversial Iranian nuclear programme overshadowed all other topics in the communication between the two sides. The Comprehensive Dialogue was suspended and the overall relationship was badly damaged. Resolving the nuclear issue turned into a crucial test for the EU diplomacy, especially amid the highly turbulent situation in the Middle East following the US invasion of Iraq in 2003. To a large extent, the EU policy towards Iran became a function of the dynamics between Washington and Tehran. After the wars in Afghanistan and Iraq, the EU sought a diplomatic solution to the Iranian crisis in a bid to prevent yet another conflict in the regions of the Middle East and central Asia. Therefore, in the autumn of 2003, the Big Three of the EU — the UK, France, and Germany — formed the E3 Group, whose main goal was to ‘defuse’ the

261 Habibi, N., The Impact of Sanctions on Iran-GCC Economic Relations, Crown Center for Middle East Studies, Brandeis University, November 2010, p. 2, available at https://www.brandeis.edu/crown/publications/meb/MEB45.pdf 262 Ayatollah, or ‘Sign of God’, is a high-ranking clerical title in the Shia Islam, whose bearers are on top of the hierarchy of the state governance in the Islamic Republic of Iran. 263 European Parliament, Directorate-General for External Policies, An EU strategy for relations with Iran after the nuclear deal, June 2016, p. 5, available at: http://www.europarl.europa.eu/RegData/etudes/IDAN/2016/578005/EXPO_IDA(2016)578005_EN.pdf 264 Posh, W., ‘Iran and the European Union’, The Iran Primer, United States Institute of Peace, February 2016, available at http://iranprimer.usip.org/resource/iran-and-european-union 265European Parliament, Ibid. p. 5. 109

Iranian nuclear programme. Javier Solana, the EU’s high representative for foreign affairs at the time, had an active role in the negotiation team, together with the Е3 foreign ministers. While the US demanded that the case be brought before the UN Security Council, the negotiations between Iran and the E3 produced concrete results in managing the critical situation. During the Paris talks, the ayatollahs agreed to halt the enrichment of heavy metals, accept the EU’s assistance in building a light-water reactor (used only for civil purposes), and renew the negotiations for a trade and co-operation agreement, which had been suspended in 2002.266 What was accomplished in the French capital created a better framework for the continued negotiations between E3/EU and Iran. The Paris Agreement was a major turning point proving the effectiveness of joint EU diplomacy, while the EU-3 initiative became the bloc's main modus operandi for transatlantic diplomacy with the US as well as for nuclear diplomacy with Iran. 267 As already mentioned, the political climate in Iran was an important factor in the deterioration or improvement of the country’s relationship with the EU. The end of the reformist government of Khatami and the election of the conservative politician Mahmoud Ahmadinejad in July 2005 marked yet another power shift in Tehran. The new leadership took a hard stance against the West and the US in particular. Ahmadinejad’s inflammatory remarks on Israel and denial of the Holocaust, two particularly sensitive issues for Europe, poisoned the diplomatic climate and hampered the negotiation process.268 With Iran’s refusal to abandon all enrichment-related activities, the talks reached an impasse. While the EU insisted that Iran agreed to a permanent suspension to all enrichment activities, Iran countered that it was only willing to provide objective guarantees that its fuel cycle would not be diverted to make nuclear weapons269. The government, supported by the reformist circles as well, asserted that the enrichment activities were a sovereign right of the country and should not be infringed upon by external powers. The EU, backed by the US, presented an incentive package to the Iranians, which included lifting of the US ban on Iran’s membership in the World Trade Organization (WTO) and on sales of spare parts to Iranian civilian airlines. These inducements failed to convince Iran to abandon the enrichment process. The EU was not ready to compromise on that matter and risk an abrupt withdrawal of the US support. Indeed, on several occasions during the negotiations, Germany attempted to table proposals that would have left Iran with a limited enrichment capacity, only to be severely reprimanded by the US and its European partners — the UK and France. 270 The EU’s inability to resolve the issue on its own forced Brussels to bring the case to the UN Security Council, as a means to increase the pressure on Tehran. However, the move had backfired — the Iranian government ceased its voluntary co-operation with the International Atomic Energy Agency (IAEA) and accelerated the uranium enrichment programme. The EU made one last attempt to reach a compromise, convincing the US, Russia, and China (the other permanent members of the UN Security Council) to agree on a new package of incentives, which was proposed to the Iranians in June 2006. After Iran’s subsequent refusal

266 Network of European Union Centres of Excellence (EUCE), Europe’s Iran Diplomacy, European Union Center of North Carolina, EU Briefings, March 2008, p. 3 available at https://europe.unc.edu/files/2016/11/Brief_Europe_Iran_Diplomacy_2008.pdf 267 Posh, W., Ibid. 268 Posh, W., Ibid. 269 EUCE, Ibid. p. 4. 270 EUCE, Ibid. p. 4. 110 to follow the recommendations made by the international community, represented by the UN Security Council and Germany (P5+1), a process to impose and enforce sanctions was launched, which lasted for several years and severely damaged relations between Iran and the EU. From 2006 to 2010, the UN Security Council passed seven resolutions, encompassing four rounds of sanctions, the most comprehensive of which was adopted in June 2010. Resolution 1929, passed in 2010, expanded an arms embargo and tightened restrictions on Iran’s financial and shipping sectors related to proliferation-sensitive activities.271 Since the sanctions endorsed by the UN Security Council were watered down to secure the support of Russia and China, their impact on the Iranian economy was limited. Therefore, the EU envisioned implementing its own, separate and stricter, sanctions, which were to accomplish the desired effect — pressuring Iran to put an end to its enrichment programme. In 2007, the initiative to impose separate EU sanctions against Iran came from the new French administration, headed by President Nicolas Sarkozy. Keen to shake off the anti-American reputation of the Chirac era, the new French government distinguished itself from its predecessor with harsh rhetoric. Foreign minister Bernard Kouchner even argued in the summer of 2007 that it was necessary to be prepared for war against Iran to round condemnation. 272 He later defended his statements, clarifying that the worst-case scenario of war could come to fruition if there were no credible sanctions. Nevertheless, unlike the situation in Iraq, where France and Germany had clearly shown that they did not support the US invasion, when it came to ‘the Iranian question’, France’s position was more aligned with that of the US. Until July 2010, the British and French politicians had failed to defend their argument that there was need for separate EU sanctions against Iran. The coalition of France and the UK was opposed by that of Italy, Austria, and Germany, which believed that additional sanctions would only undermine the negotiating role of the EU and would not be effective. Ultimately, however, the UK and France, supported by the US, managed to secure enough approval for the concept of enforcing individual EU sanctions. The bloc imposed six rounds of sanctions (2010–2012), gradually expanding the list of individuals and countries whose assets in European banks were frozen. Moreover, Iran’s financial, transport, and energy sectors were also targeted by the sanctions. In January 2012, the EU adopted the fourth package of sanctions and it hit Iran’s economy the hardest — effective 1 July, an oil embargo was imposed as well as a ban on EU-regulated insurers from covering any ship transporting Iranian oil or petrochemicals.273 As a result, China overtook the EU as Iran’s main trading partner, and yet Tehran’s stance on its enrichment activities remained unchanged. But the focus on the nuclear issue had two other negative effects: first, it prevented the EU from formulating a cohesive Iran strategy that would also factor in human rights, regional issues, energy, etc. and second, sanctions ceased to be a tool because they became both the EU's strategy and policy on Iran.274 That way, the EU diplomacy towards Iran became a de-facto containment policy.

271 Posh, W., Ibid. 272 EUCE, Ibid. p. 5. 273 Posh, W., Ibid. 274 Posh, W., Ibid. 111

Reaching the Joint and Comprehensive Plan of Action (JCPOA) and the EU’s perspectives for deepening energy co-operation with Iran Two key events were instrumental in improving the pespectives for resolution of the Iranian nuclear issue: - the launch of unofficial talks between Washington and Tehran in the Omani capital Muscat in 2009 following the election of Barack Obama as president of the US; - the coming into power of the new reformist wave in Iran with Hassan Rouhani elected as president in 2013.

The US administration recognised that hoping to persuade Tehran to fully abandon its heavy metals enrichment programme would be unrealistic. After the appointment of US-educated Dr Javad Zarif as foreign minister, the negotiations marked significant progress. In November 2013, the format E3/EU+3, headed by High Representative of the European Union for Foreign Affairs Catherine Ashton, agreed to the Joint Plan of Action (JPA), which outlined the future negotiation process and a possible end goal of reaching a comprehensive agreement on Iran's nuclear activities. In July 2015, the intensive negotiations culminated in the Joint Comprehensive Plan of Action, which reduced and capped the Iranian nuclear programme in exchange for relief of sanctions by the UN, the EU, and eventually the US (in 2023 according to the stipulations of the JCPOA).275 In return for the sanctions relief, Iran agreed to limit its nuclear programme, i.e. to keep the enrichment of uranium to a level that would not allow the production of nuclear weapons. Tehran also agreed to renew its co-operation with the IAEA as a means to improve transparency in the development of its nuclear industry. On 20 July 2015, the UN Security Council passed Resolution 2231, which endorsed the JCPOA. Ninety days after its endorsement, the JCPOA officially came into effect on 18 October 2015. The EU adopted legal acts providing for the lifting of all nuclear-related economic and financial EU sanctions as specified in the JCPOA and taking effect as of Implementation Day, i.e. simultaneously with the IAEA-verified implementation of agreed nuclear-related measures by Iran.276 On 16 January 2016 (Implementation Day), once the IAEA verified that Iran had implemented all nuclear-related measures, most EU and UN sanctions were lifted. While the EU lifted all nuclear-related economic and financial sanctions, some restrictions still remained in force, including restrictions on the transfer of proliferation-sensitive goods, the arms and ballistic missiles embargoes, and the restrictive measures against some of the listed persons and entities.277 Iran re-established its connection to the international financial system, most notably to the Society for Worldwide Interbank Financial Telecommunication (SWIFT). The platform connects more than 11 000 banking and securities organisations, market infrastructures, and corporate customers in more than 200 countries and territories.278 The country also regained its access to the billions of US dollars frozen in foreign banks during the sanctions regime. Maybe the most important consequence of the lifted sanctions was the

275 European Parliament, Ibid., p. 6. 276 Council of the European Union,’ Joint Comprehensive Plan of Action and restrictive measures’, 2 August 2016, available at http://www.consilium.europa.eu/bg/policies/sanctions/iran/jcpoa-restrictive-measures/ 277 Council of the European Union, Ibid. 278 https://www.swift.com/about-us/discover-swift?AKredir=true 112 re-emergence of Iran on the energy markets in the EU —oil trade with the EU increased rapidly and regained its levels of 2012, right before the oil embargo took effect. As a result of scrapping the economic and financial sanctions, approximately half of the 140 economic delegations that visited Iran between March and December 2015 were from the EU.279 Weeks after the signing of the JCPOA, High Representative for Foreign Affairs Federica Mogherini visited Tehran, where she underlined the importance of the negotiated deal and its future role as an essential foundation for wider co-operation between the EU and Iran. President of the European Parliament Martin Schultz, during the first visit of such a high-ranking official to Tehran, emphasised that the Islamic republic was ‘an element of stability in a region, full of instability’.280 The JCPOA was seen as a passed test for the functioning of the EU diplomacy after the changes constituted in the Lisbon Treaty in 2009. Those changes included the establishment of the European External Action Service (EEAS), which essentially acts as the EU's ‘foreign ministry’, and an increased role of the high representative of the European Union for foreign affairs and security policy, both as a mediator and facilitator within EU institutions and with relations with third countries. The work of the EEAS and the capacity for a flexible and effective diplomacy were under scrutiny. The JCPOA provided the necessary level of trust between the EU and Iran, to a large extent eroded in the previous 15 years, as well as the possibility of establishing a strategic and structural dialogue. Strategic in the sense that it must go beyond the list of specific (usually contentious) issues, look at the larger picture, and set more long-term goals for the kind of relationship the two parties want to have.281 Structured in the sense that it is underpinned by regular interaction at civil servant and technical levels, addressing a variety of sectors; thus, establishing an institutionalised process for pursuing a wide range of solutions and exchanges.282 That is why the visit of High Representative Mogherini to Tehran in April 2016 was of the utmost importance. The two sides welcomed the Implementation Day of the JCPOA and reiterated their commitment to opening a new chapter in their bilateral relations. Special attention was given to the following main spheres of co-operation, vital for boosting the relationship between the two actors:

 ensuring and supporting the full implementation of the JCPOA in order to further improve and deepen bilateral cooperation;  developing cooperative relations in areas of mutual interest to benefit the economic development, human rights, prosperity and well-being of the people of Iran and the EU;  promoting regional peace, security and stability as well as peaceful settlement of regional conflicts through dialogue and engagement. 283

279 Posh, W., Ibid. 280 ‘EU Parliament chief Schulz: Iran-EU relations at “key stage”’, Deutsche Welle, 7 November 2015, available at http://www.dw.com/en/eu-parliament-chief-schulz-iran-eu-relations-at-key-stage/a-18834646 281 European Parliament, Ibid., p. 20. 282 Ibid., p. 20. 283 European Union External Action Service (EEAS), Joint statement by the High Representative/Vice President of the European Union, Federica Mogherini and the Minister of Foreign Affairs of the Islamic Republic of Iran, Javad Zariff, 16 April 2016, available at https://eeas.europa.eu/headquarters/headquarters-homepage/2877/joint- statement-high-representativevice-president-european-union-federica-mogherini-and_en 113

Development of economic and energy relations between EU and Iran after the signing of the JCPOA The removal of the sanctions created a new potential for bilateral trade relations. Resumption of the negotiations for a comprehensive trade agreement with the Islamic republic looked set to benefit both sides in efforts to strengthen trade, investments, and the overall economic co- operation. The EU even sent a liaison team in Tehran in May 2016, accommodated in the Dutch embassy, whose main task was to make preparations for the future EU Delegation in the Iranian capital. Along with the co-operation at EU level, after the signing of the JCPOA, certain EU Member States visited the Iranian capital in an attempt to resume bilateral relations. President of Iran Hassan Rouhani also paid visits to several European capitals. The UK and Iran reopened their respective diplomatic missions in the other country. The Iranian president’s visits to Rome and Paris held great significance, as deals with combined estimated value in the billions were signed. The Italian oil giant Saipem announced a memorandum of understanding signed with the Iranian Parsian Oil and Gas Development Company, which included the revamping and upgrading the Pars Shiraz and Tabriz refineries.284 The deal was reached alongside 13 other agreements between the two countries following meetings between President Rouhani and Italy’s then-Prime Minister Matteo Renzi. The deals signed in Italy had a combined value of over $18 billion and encompassed co-operation in the energy, infrastructure, and mining industries as well as in shipbuilding. Despite its strong position during the negotiation process surrounding the nuclear programme, France was one of the first Member States to seek an advancement of its economic relations with Iran. The French oil company Total affirmed the signing of a deal for the purchase of 200 000 barrels of oil per day, while the automobile giant Peugeot signed a $400 million deal with the Iranian Khodro for the production of 200 000 cars a year in Iran. The European companies were literally competing with each other in order to re-establish their presence on the Iranian markets. In promoting closer economic ties, Iran should be considered a partner on multiple levels — a key player on the international energy market; a diversified economy, which relies a lot less on income from the sale of hydrocarbons compared to other Middle East countries; a country with a relatively young population; and a potential partner for mutual investments in the region of the Caspian Sea and in the Middle East. Iran has the most diverse GDP composition in the entire region and also has the resources (natural and human) to expand each of these sectors — from agriculture to mining, industry, and petroleum285. Looking at Iran-EU bilateral trade, its overall volume has increased almost three times since the signing of the nuclear deal (see Annex VI, Figure 1). Thus, the EU companies and governments consider this diverse economic base and the availability of resources a huge potential for enhanced economic and investment relations. While during the most stringent trade sanctions, connected to the oil import, total trade was around €6-7 billion, following their elimination in 2016, it increased to €13 billion in that same year and €20 billion in 2017. In 2016, Iranian oil reached the European markets again

284 ‘Iran, Italy Sign Up Giant Oil, Gas Agreement, 13 MoUs’, PetroEnergy Information Network, 26 January 2016, available at http://www.shana.ir/en/newsagency/254130/Iran-Italy-Sign-Up-Giant-Oil-Gas-Agreement-13- MoUs 285 European Parliament, Directorate-General for External Policies, Ibid., p. 13. 114 and that was reflected by the trends in the two sides’ bilateral trade. In 2016, imports from Iran increased by 346% compared to those in 2015, reaching €5 billion, whilst in 2017 they doubled to €10 billion. Prior to the oil embargo, Iran was the sixth largest source of oil imports for the EU. Imports of Iranian oil in 2017 neared their pre-sanctions levels, i.e. before 2012. However, Iran's share in the overall EU trade with third countries was still only 0.6%, while the US accounted for 17%, or €632 billion. Therefore, it came as no surprise that many EU companies decided to gradually exit the Iranian market after the US withdrew from the JCPOA. Their economically driven decision was prompted by a politically motivated one of the US administration. Energy co-operation between the EU and Iran still lacks its own legal basis: there is no concrete mechanism to promote the energy links between the two parties. Many Iranian and EU officials have repeatedly expressed their willingness to deepen the energy dialogue. Foreign investments in the Iranian energy sector sharply decreased as a result of the sanctions imposed in 2012. Struggling to attract more foreign capital investments in the country, the new reformist government decided to change its model of concluding agreements with international energy companies for the development of its oil and natural gas deposits by offering them better terms for participation in all stages of an upstream project — exploration, development, and production.286 In this regard, the government welcomed many international oil companies ready to invest in the Iranian energy sector. In 2016, several companies entered that market by signing memorandums of understanding (MoUs), including Schlumberger (Netherlands/US), Shell (Netherlands/UK), CNPC (China), Total (France), Wintershall (Germany), Saipem (Italy), Impex (Japan), DNO (Norway), and Gazprom (Russia)287. These MoUs were to a large extent connected to preliminary studies of the respective oil and gas fields only and were not conclusive. Only one consortium, comprised of the National Iranian Oil Company (NIOC), Total, and CNPC, signed a heads of agreement in 2016, which is one step closer to a Final Investment Decision (FID). The heads of agreement was signed in relation to the development of Phase 11 of the biggest natural gas field in the world — South Pars — which makes up 40% of the Iranian natural gas deposits. Iran shares this gigantic field with Qatar, whose share of 2/3 of this deposit is called North Dome (see Annex VI, Figure 2). In July 2017 that Framework Agreement turned into an FID worth $4.8 billion. The signing of the FID formed a consortium of NIOC’s subsidiary Petropars (19.9%), CNPC (30%), and Total (50.1%). The contract with Total was the first one to feature a western company in over a decade. However, no such contracts have been signed with other western energy companies; the case with Total is rather the exception to the rule and has its own explanation. Total has a rich and long history, which is very much related to the imprint left by international politics on the Iranian energy. Before the EU imposed its own sanctions in 2010, which forced the company to pull out of Iran, Total had developed Phase 2 and 3 of the South

286 Slusarska, D & Orlando, F., Shifting Geopolitics of Energy, Winners and Losers – Iran's Energy Comeback, Friends of Europe Research Center, March 2016, p. 6, available at http://www.friendsofeurope.org/media/uploads/2016/03/IRAN-booklet-ONLINE.pdf 287 Jalilvand, D.R., Iranian Energy: a comeback with hurdles, The Oxford Institute for Energy Studies, January 2017, p. 3, available at https://www.oxfordenergy.org/wpcms/wp-content/uploads/2017/01/Iranian-Energy-a- comeback-with-hurdles.pdf 115

Pars gas field. When the sanctions were enacted, former CEO of Total Christophe de Margerie described the policy as an ‘error’. Even before that, in 1996, Total played an important role in opposing the US sanctions against Iran. That same year, the United States Congress passed the Iran and Libya Sanctions Act (ILSA), which penalised any company in Iran with over $40 billion investments in the energy sector. That put at risk Total’s operations in developing South Pars, Phase 2 and 3, the same gas field it aspires to further work on today. In response, the EU introduced what is known as the Blocking Regulation, aimed at safeguarding EU companies from the extra-territorial effect of the US sanctions. The EU also opened an arbitration case against the US within the WTO. While the dispute was filed over sanctions on Cuba, the EU's charges occurred in the broader context of US extra-territorial sanctions affecting European trade with Cuba, Iran, and Libya288. The adoption of the Blocking Regulation and the WTO lawsuit forced Bill Clinton's administration to abandon the sanctions' enforcement, which enabled Total to continue its business activities in Iran. However, the current situation is markedly different compared to 22 years ago. In early 2018, the incumbent CEO of Total Patrick Pouyanné stated that if the US were to withdraw from the JCPOA, the company would have to ‘reconsider’ its engagement in Iran. A week after President Trump announced that the US was exiting the nuclear agreement, a press release of the enterprise specified that ‘Total will not be in a position to continue the South Pars 11 project and will have to unwind all related operations before 4 November 2018 unless Total is granted a specific project waiver, which should include protection of the Company from any secondary sanction as per US legislation’.289 In response, the EU has re-introduced the Blocking Regulation as part of its strategy to counter the extra-territorial effects of the US sanctions. However, the US financial system has a formidable influence on the global economic order and cannot be easily circumvented. Total cannot afford to be exposed to any secondary sanction, which might include the loss of financing in dollars by US banks for its worldwide operations (US banks are involved in more than 90% of Total’s financing operations), the loss of its US shareholders (US shareholders represent more than 30% of Total’s shareholding), or the inability to continue its US operations (US assets represent more than $10 billion of capital employed).290 Up until April 2018, Total had invested less than $40 million which is a small bit compared to its total overseas investments. In this regard, the EU would face enormous challenges in persuading big European corporations with vast assets in the US to continue making business with Tehran. The case with Total is fairly telling. As President Macron said, ‘The French president is not the CEO of Total’.291

288 Jalilvand, D.R., Progress, challenges, uncertainty: ambivalent times for Iran’s energy sector, The Oxford Institute for Energy Studies, April 2018, p. 6, available at https://www.oxfordenergy.org/wpcms/wp- content/uploads/2018/04/Progress-challenges-uncertainty-ambivalent-times-for-Iran%E2%80%99s-energy- sector-Insight-34.pdf 289 ‘US withdrawal from the JCPOA: Total’s position related to the South Pars 11 project in Iran’, Total official website, 16 May 2018, available at https://www.total.com/en/media/news/press-releases/us-withdrawal-jcpoa- totals-position-related-south-pars-11-project-iran 290 Total official website, Ibid. 291 ‘Macron rules out trade war over Iran deal as firms head for exit’, Reuters World News, May 17, 2018, available at https://www.reuters.com/article/us-iran-nuclear-europe/macron-rules-out-trade-war-over-iran-deal- as-firms-head-for-exit-idUSKCN1II2H2 116

Iranian gas as an alternative source of energy for the EU Together with its influence on the international oil markets, Iran has the ambition to become a key player on the gas markets as well. The country has the second largest proven reserves of natural gas behind Russia, amounting to 30-35 trillion cubic meters. Nonetheless, its energy infrastructure is in dire need of modernisation, while the investments required are estimated at more than $200 billion. Currently, despite its huge gas reserves, Iran holds less than 1% of the global gas trade and even imports gas from Turkmenistan.292 The Islamic republic is both an importer and exporter of natural gas. Iran’s imports of natural gas from Turkmenistan began in 1997 in response to lack of domestic infrastructure that would deliver natural gas from the south to the major consuming centers in northern Iran.293 The gas imported from Turkmenistan was crucial for residential areas, especially in the winter period, when demand for heating is high. In January 2017, Turkmenistan suspended its gas deliveries to Iran due to a payment dispute. In response, Iran built a pipeline between the cities of Damghan and Neka in the north, reducing the need for Turkmen natural gas.294 As far as export is concerned, in 2017 total exports were 12.4 bcm, of which 73%, or 9.01 bcm went to Turkey via the Tabriz-Dogubayazit pipeline, connecting north-western Iran with south-eastern Turkey. Armenia utilises the gas delivered from Iran to supply the Hrazdan Thermal Power Plant, while the surplus quantities are returned to Iran. When it comes to Azerbaijan, although the country is rich in hydrocarbons, authorities are unable to supply natural gas to the exclave of Nakhchivan because of tensions with Armenia. That is why Iran supplies gas to Nakhchivan, whose quantities are compensated through deliveries of Azerbaijani natural gas to the northern Iranian provinces via the Astara-Kazi-Magomed pipeline. Iran began exporting natural gas to Iraq in June 2017 to fuel power plants near Baghdad, including the Al-Besmaya, Al-Quds, Al-Mansuriyah, and Al-Sadr stations.295 In 2017, Iran exported 1.3 bcm of gas to Iraq despite the US newly triggered animosity towards Tehran. Washington granted Iraq a 45-day waiver to continue its energy purchases. Although Iraq is OPEC's second largest producer of oil, the country is dependent on Iranian natural gas for up to 45% of its electricity — a setup potentially in jeopardy now amid re-imposed US sanctions.296 However, it is expected that the US will keep providing Iraq with sanctions waivers, considering the importance of the Iranian gas deliveries for the Iraqi economy. Presently, Iran is able to export natural gas to its neighbours only, and the country's resources will not be able to reach the European markets in the short to medium term due to its obsolete gas infrastructure and inability to attract essential foreign investments as a result of the re- imposed US sanctions. Regardless of these developments, gas output has been prioritised as part of the Iran's 20-Year Outlook Document, issued in 2003 and augmented by Iran's Energy Outlook on the Horizon of 2025 and Iran's 20-year Energy Grand Strategy Document.297

292 Slusarska, D., Orlando, F., Ibid., p. 7. 293 U.S. Energy Information Administration (EIA), Ibid. 294 Ibid. 295 Ibid. 296 Turak, N., ‘US likely to continue Iran sanctions waivers for Iraq, but neutering Tehran's influence is long- term goal’, CNBC, 5 December 2018, available at https://www.cnbc.com/2018/12/05/us-likely-to-continue-iran- sanctions-waivers-for-iraq.html 297 Ehteshami, A., ‘Energy Cooperation between EU and Iran’, EU-Iran Relations after the Nuclear Deal, Center for European Policy Studies (CEPS), 2016, p. 49, available at https://www.ceps.eu/system/files/CEPS%20ebook%20EU-Iran.pdf 117

According to these documents, Iran plans to increase its share in the global gas market from 1% to 8-19% and have Europe as one of the main destinations for Iranian gas exports. In this context, the Rouhani government has repeatedly reminded the EU leadership that the bloc is considered a strategic partner and could once again be Iran's number one trade partner. On the other hand, the EU could seize that opportunity to diversify its gas supplies and decrease its dependency on Russian gas. This is one of the main priorities of the EU in the context of its energy security — namely diversification of energy sources and routes. The EU strategy to attract natural gas deliveries from the Caspian region with the construction of the Southern Gas Corridor involves countries such as Azerbaijan, Turkmenistan, and Iran. Although the Islamic republic exported around 12 bcm of gas in 2017, with Turkey as its main destination, when the conditions are right, the existing pipeline, which connects Iran with Turkey, could be upgraded in capacity and connected with the Southern Gas Corridor. The Turkish section of the Southern Gas Corridor — the Trans-Anatolian Natural Gas Pipeline (TANAP) — was inaugurated in June 2018. Gas volumes will be supplied to Turkey gradually, starting with 2 bcm a year, rising to 6 bcm. Furthermore, the capacity of the pipeline could be boosted to up to 31 bcm by 2026. Even before the launch of TANAP, EU Commissioner for Climate Action and Energy Miguel Arias Cañete specified during a meeting between EU energy ministers in Latvia that Europe would be interested in importing Iranian gas via Turkey.298 Turkey is also interested in strengthening its role as a key gas transit country in the region, since not only Caspian, but also Russian gas is going to be transported through its territory thanks to the construction of TurkStream. Before the US re- introduced sanctions, Iran had been ready to buy shares in TANAP, but now these plans have been put aside. Supplementing TANAP with Iranian gas will be essential for the EU, as the Southern Gas Corridor, expected to be completed by 2020,299 will be able to carry only 10 bcm of Azerbaijani gas to Europe annually. Such small amount is not enough to curb the role of the Russian gas on the EU energy market. Moreover, with its much richer deposits compared to Azerbaijan's proven gas reserves of 2.8 trillion cubic meters, Iran is a more reliable supplier of energy in the long run. Additionally, Iran's importance is not limited only to its huge gas reserves. Tehran also has aspirations to become a key transit country for Turkmen gas supplies to Europe. Although there have been some positive dynamics surrounding the negotiation of the legal status of the Caspian Sea, the construction of the Trans-Caspian Gas Pipeline is still a distant prospect. That is why Iran remains a viable option for the transportation of Kazakh and, most importantly, Turkmen gas via onshore pipeline. In this way, the Islamic republic is an amalgamation of several constant factors, which the EU should take into consideration — its unique geographic location, the abundance of hydrocarbons, and the characteristics of its political system. Meanwhile, we should not forget that Russia and Iran continue to maintain their strategic relations. The two countries are deeply involved in the Syrian crisis and, together with Turkey, launched the Astana peace process at the end of 2016. While Russia and Iran support the government of President Bashar al-Assad, Turkey represents the interests of the moderate opposition forces. Apart from Syria, Russia and Iran have mutual interests in the Caspian region and that was demonstrated by their objection to the construction of an offshore gas

298 Serdaroglu, O., After the Deal: The EU and Iran’s Energy Promise, Policy Brief, Institute for Security & Development Policy, No. 177, 8 May, 2015, p. 2, available at https://www.files.ethz.ch/isn/191039/2015- serdaroglu-after-the-deal-the-eu-and-irans-energy-promise.pdf 299 Ibid., p. 2. 118 pipeline in the Caspian Sea, citing environmental concerns. In reality, the Trans-Caspian Gas Pipeline could bring Turkmen natural gas directly to Azerbaijan, circumventing both Russia to the north and Iran to the south. Following the signing of the JCPOA, Russia also delivered its S-300 anti-aircraft missiles, providing Tehran with an advanced defence system. The sale was designed to help ensure the protection of the Iranian nuclear facilities against a potential attack. All this confirms that Russia remains Iran's most reliable backer. Furthermore, it would be in Moscow's interest for Iran to pursue an energy policy aimed at controlling and manipulating the European market and its supply system through cartelisation, where the conditions for commercialising Iran's natural gas would be set according to the immediate Russo-Iranian interests.300 Therefore, the EU should strive to create proper and transparent conditions for its energy relations with its energy suppliers, be it Iran, Russia, Azerbaijan, etc. Such ‘energy dialogue’ should include thematic roundtables and constant exchange of expertise and viewpoints, which would allow reliable scenarios and analyses to be prepared regarding the legal, economic, and infrastructural conditions for the production and transportation of Iranian natural gas.

The US withdrawal from the JCPOA - consequences for the EU The EU, together with China and Russia, has, on several occasions, expressed its support for keeping the nuclear deal. According to the EU leadership, the JCPOA provides the basis for continued dialogue with Iran and is an example of constructive and delivering EU energy diplomacy. Following the Foreign Affairs Council meeting in Brussels at the end of May 2018, High Representative Federica Mogherini underlined: ‘[safeguarding the JCPOA] is not about an economic interest, this is about a security interest for the European Union — because in the absence of the nuclear deal with Iran, we believe the security of the region and of Europe would be at stake’.301 It would be far-fetched to say that the EU's commitment to the JCPOA is just wishful thinking. Strengthening the role of the EIB in order to secure financing and re-introducing the Blocking Regulation are moves that show the EU has the political will to preserve what has already been accomplished. On the other hand, it is questionable whether these measures would be economically effective to keep the EU companies in Iran. ‘Once in force, the updated Blocking Regulation will make it illegal for EU companies or banks to comply with these US sanctions and any natural or legal person that violates this prohibition can be sanctioned by the authority of the Member State,’302 notes a 2018 paper by Beatrix Immenkamp. In relation to effects of the US legislation on the EU, she observes that when EU persons or entities decide not to engage in certain activities, the Commission needs to establish whether or not this is due to commercial considerations or whether this may be done pursuant to the US legislation. By the Commission’s own admission, it is not usually possible to establish whether the decision is a direct result of the US legislation or of

300 Ibid., p 2. 301 European Union External Action Service (EEAS), ‘Iran deal: EU united on keeping Iran nuclear deal in place for European Security’, available at https://eeas.europa.eu/headquarters/headquarters-homepage/45352/iran-deal- eu-united-keeping-iran-nuclear-deal-place-european-security_en 302 Immenkamp, B., Updating the Blocking Regulation The EU’s answer to US extraterritorial sanctions, European Parliament Think Tank, 7 June 2018, p. 6, available at http://www.europarl.europa.eu/RegData/etudes/BRIE/2018/623535/EPRS_BRI(2018)623535_EN.pdf 119 commercial considerations.303 Thus, there is serious skepticism, regarding the Blocking Regulation’s effectiveness. For example, it would be very challenging for the companies doing business in Iran to stop using the dollar, which is responsible for 43% of all cross- border transactions and holds 61% of the global foreign currency reserves. 304 In pursuit of the EU's external objectives, the EIB provides long-term funding, guarantees, and advice to support economic and infrastructure development projects — inter alia via the External Lending Mandate (ELM). Some 9% of the bank's portfolio are subject to the terms of the ELM and backed by an EU budget guarantee against losses on projects carried out within the mandate. By amendment to Decision No 466/2014/EU305, which provided for this budget guarantee, its ceiling was increased to €32.3 billion and Iran was added to the list of ‘potentially eligible regions and countries’, to which the EIB could secure financing. Annex I of the Decision divides the ELM into regional ceilings, and the Asia region, which in the Decision includes Iran, is subject to a 2014–2020 regional ceiling of €1.2 billion.306 The Asia region is comprised of 21 countries (including Iran), which means that this amount of funding will not be sufficient for vital investments in the country's energy sector. By comparison, the contract for the development of Phase 11 of the South Pars gas field amounts to €4.19 billion, half of which had to be invested by Total. In other words, these measures would have impact on the small and medium-sized EU companies in Iran rather than on the big corporations. Without significant capital investments in the country, the JCPOA could crumble under the pressure of the US sanctions. Independent of the question about Total's engagement in Iran, the US withdrawal will massively complicate, if not prevent, any further major financing by European companies because of the worsened risks for investments in the country.307 And in the event that individual companies decided to take the risks, financial and insurance-related challenges would remain, as most banks and insurance companies capable of financing multimillion-euro projects are heavily dependent on the US financial system. Even the head of the EIB Werner Hoyer threw into doubt whether the EU can deliver on its pledge to save the Iranian nuclear deal, saying on 18 July 2018 that ‘the bank cannot invest in Iran as the EU has envisioned’.308 The main concern is that the EIB's dealings with Iran would jeopardise its ability to raise money on US markets, and if it were cut off by the US, that would have far-reaching consequences for the bank's operations, as well as on its outstanding debt, totaling €500 billion in bond issues. With all these challenges, it would be extremely difficult for a ‘critical mass’ of companies to remain in Iran so that the economy does not collapse, which could bring back the years under the

303 Parliamentary questions, Answer given by Vice-President Mogherini on behalf of the Commission, European Parliament, 1 April 2015, available at: http://www.europarl.europa.eu/doceo/document/E-8-2014-007804- ASW_EN.html?redirect 304 Amadeo, K., ‘When Will the U.S. Dollar Collapse?’, The Balance, 28 October 2018, available at https://www.thebalance.com/when-will-the-u-s-dollar-collapse-3305691 305 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:02014D0466-20180408 306 Parry, M., ‘Extending the European Investment Bank's External Lending Mandate to Iran’, European Parliament Think Tank, 15 June 2018, available at http://www.europarl.europa.eu/RegData/etudes/ATAG/2018/623544/EPRS_ATA(2018)623544_EN.pdf 307 Jalilvand, D.R., The US Exit from the JCPOA: What Consequences for Iranian Energy?, The Oxford Institute for Energy Studies, June 2018, p. 6, available at https://www.oxfordenergy.org/wpcms/wp- content/uploads/2018/06/The-US-Exit-from-the-JCPOA-What-Consequences-for-Iranian-Energy-Comment.pdf 308 ‘European Bank Throws Doubt on EU Plan To Salvage Iran Nuclear Deal’, Radio Free Europe, 19 July 2018, available at https://www.rferl.org/a/european-investment-bank-hoyer-president-throws-doubt-eu-plan-salvage- iran-nuclear-deal/29375330.html 120 leadership of President Ahmadinejad, when the country's nuclear enrichment activities reached extreme heights and were strongly supported by the government. The US pull-out from the JCPOA has provoked the conservative circles in Iran, gathered around the Supreme Leader Ayatollah Ali Khamenei, to draw some ‘red lines’, which include the following key elements:  Protecting the Iranian oil sales from the US sanctions and continuing to buy Iranian crude. This will be a central request by Tehran, and the EU alongside Russia and China need to devise mechanisms that can guarantee the sale of Iranian crude, condensate, and petroleum products. Assuming that some of the large European refinery owners stop purchasing Iranian crude, the EU will need to shore up international buyers who are not exposed to US sanctions and incentivise and protect them to be able to guarantee the continuation of Iran’s petroleum exports. The key role in this process may fall to Russia, as Tehran and Moscow already have trade patterns that rely on the export of Iranian oil in return for Russian imports.  European banks should guarantee the trade with Iran.  The UK, France, and Germany ought to guarantee they will not be seeking negotiations in relation to Iran's ballistic missile programme and regional activities in the Middle East. For Tehran, this is an important precondition, having in mind that its regional security strategy is directly tied to its regional policies. Nevertheless, it is possible that on a certain stage of the preserved dialogue between Iran and the EU/E3+2 the regional issues could be addressed through genuine multilateral negotiations, which should include the concerns of the other regional players — Israel and Saudi Arabia. Currently, this perspective is hardly possible, considering the confrontational position between the stakeholders in the region — Saudi Arabia and Israel, on one side, and Iran and potentially Turkey, on the other. The region’s dynamics in recent years have substantially changed. These shifts include: the renewed relevance of the ‘Kurdish issue’ following the defeat of Islamic State; Russia's reasserted geopolitical influence in the Middle East and the start of the Astana peace process; the boycott of Qatar led by Saudi Arabia; the recent decision of President Trump to pull out of Syria, etc. These developments are happening chaotically, intensively and in parallel. They are hard to predict and therefore, the EU is struggling with how to devise a coherent, comprehensive, and at least mid-term strategy for the Middle East, which should also address its energy interests in the region.

In this regard, it is possible that the authorities in Iran react to the US exit from the JCPOA in a way that does not violate its rules but still has a negative impact on the regional stability, for example, by further increasing the support for militant groups or boosting the country’s ballistic missile programme, etc. If these activities rise to an unprecedented level, the EU will have serious difficulties promoting the nuclear deal as ‘productive’. On the other hand, the Iranian government is still comprised of the country’s more moderate and reformist politicians and will try to keep the communication line with the EU open as long as it sees its economic interest being secured by the nuclear deal. In August 2018, the US imposed the first round of sanctions on Iran's automotive industry, banking sector, and imports of precious metals. As a result, big European corporations such as the French Peugeot Société Anonyme (PSA) and the German Daimler pulled out of the Iranian market for fear of asset seizures or even criminal charges in the US. This is why the Blocking Regulation came into force in the

121 same month. Days after the US sanctions took effect, the foreign ministers of the E3 Group (the UK, France, and Germany), together with High Representative Federica Mogherini, came up with a joint statement, in which they described the nuclear accord as ‘working’ and delivering on its goal, namely to ensure that the Iranian programme remains exclusively peaceful.309 At the end of the day, however, the decision to stay or pull out of the Iranian market remains entirely in the hands of the CEOs of the international companies. There is a noticeable disconnect between the EU leadership’s actions and the European multinationals’ final decision, dictated by economic logic, as the latter do not want to risk losing billions of dollars in fines and asset freezes. Iran’s economy was affected the most in early November 2018, when the US re-imposed sanctions on the country’s insurance services, shipping, and energy industry. The EU/E3 Joint Ministerial Statement underlined that the EU was committed to work on the maintenance of effective trade channels with Tehran and the preservation of import of Iranian oil. On that score, Beijing’s policy towards Tehran could play a significant role, as China is the main importer of Iran’s crude oil, followed by South Korea, and Turkey. China’s oil imports from Iran increased by 4.1% year-on-year to average 631 556 bpd between January and September 2018, and Tehran was the fifth largest oil supplier to the world’s top oil importer310, behind Russia, Saudi Arabia, Angola, and Iraq311. It is also worth mentioning that the US granted waivers to eight countries — South Korea, Taiwan, Turkey, Greece, Japan, China, India, and Italy — which permit them to continue buying Iranian oil for a six-month period. Therefore, China will be allowed to buy around 360 000 bpd, which is about half of what the country imported over the past two years.312 The main reason behind the US decision to give these waivers is to prevent a shock to the oil market, driving the prices up. The biggest European refineries that buy Iranian oil are: Total (France), Eni and Caras (Italy), CEPSA and Repsol (Spain), and Hellenic Petroleum (Greece). Another important waiver was given to Naftiran Intertrade Company (NICO), a Swiss-based subsidiary of the (NIOC), for its participation in the development of Azerbaijan’s offshore Shah Deniz gas condensate field, or Shah Deniz Phase 2. Operator and main shareholder of the project is British Petroleum (BP) with 28.83%. This is the main source of gas for the above-mentioned Southern Gas Corridor designed to deliver 10 bcm of Caspian gas to southern Europe annually, while bypassing Russia. NICO holds 10% in Shah Deniz 2 and this could have potentially triggered US sanctions against Iran oil and gas sector investment. However, an executive order313, signed by the US president on 6 August 2018, exempted the

309 European Union External Action Service (EEAS), ‘Joint statement by High Representative Federica Mogherini and Foreign Ministers of E3 (Jean-Yves Le Drian of France, Heiko Maas of Germany, Jeremy Hunt of the United Kingdom) on the re-imposition of US sanctions due to its withdrawal from the Joint Comprehensive Plan of Action (JCPOA)’, 6 August 2018, available at https://eeas.europa.eu/headquarters/headquarters-homepage/49141/joint-statement-re-imposition-us-sanctions- due-its-withdrawal-joint-comprehensive-plan-action_en 310 Paraskova, T., ‘U.S. Sanction Waivers Boost China’s Demand For Iranian Oil’, oilprice.com, 21 November 2018, available at https://oilprice.com/Energy/Crude-Oil/US-Sanction-Waivers-Boost-Chinas-Demand-for- Iranian-Oil 311 Workman, D., ‘Top 15 Crude Oil Suppliers to China’, World’s Top Exports, 1 April 2018, available at http://www.worldstopexports.com/top-15-crude-oil-suppliers-to-china/ 312 Cunningham, N., ‘The Truth About Iran Oil Sanction Waivers’, oilprice.com, Nov 06, 2018, available at https://oilprice.com/Energy/Crude-Oil/The-Truth-About-Iran-Oil-Sanction-Waivers 313 Executive Order Reimposing Certain Sanctions with Respect to Iran, 6 August 2018, available at https://www.whitehouse.gov/presidential-actions/executive-order-reimposing-certain-sanctions-respect-iran/ 122

Southern Gas Corridor, without explicitly naming it, under Section 10 ‘Natural Gas Project Exception’. The order refers to the Iran Threat Reduction and Syria Human Rights Act of 2012314, which specifies that ‘a project for the development of natural gas and the construction and operation of a pipeline to transport natural gas from Azerbaijan to Turkey and Europe’, which ‘provides to Turkey and countries in Europe energy security and energy independence’ will not be affected by US sanctions on Iran. The US administration puts a high priority on the Southern Gas Corridor as an integral part of its overall energy diplomacy in the Caspian region, dating back to the 1990s with the construction of the oil pipeline Baku- Tbilisi-Ceyhan. On the other hand, the EU was not given the authorisation to continue purchasing oil from Iran and this was expected by the European leadership. That is why, together with the Blocking Regulation and the new mandate given to the EIB — measures that have their weaknesses — the parties to the JCPOA decided to establish a special purpose vehicle (SPV) intended to facilitate payments related to Iran's exports (including oil) and imports. The creation of this payment mechanism was announced by High Representative Federica Mogherini during the annual UN General Assembly meeting in September 2018. The SPV would operate as a barter system, allowing Iran to supply, for instance, oil and then purchase the goods or technologies it needs, using a credit account.315 However, bartering can only save a relatively small portion of Iran's trade because exports would always have to be equal to imports for it to be the sole solution. For the SPV to be able to process all payments between trading partners, it would need a banking licence. Thus, it could potentially come under US sanctions. There are some serious obstacles, related to its scope and hosting country. For example, Luxembourg and Austria refused to host the SPV for fear of incurring US sanctions and damaging their place as major financial centers hosting many international investment funds. Therefore, Paris and Berlin will take joint control of the SPV in the hope that that might deter Trump's administration from directly confronting two major US allies.316 At the same time, Washington officials have indicated that in case there are transactions that go through the SPV with the intent of evading US secondary sanctions, the respective remedies will be pursued. And that applies mainly to Iranian oil. Many critics believe the SPV will have a negligible impact on Iran’s economy, not least because it is unlikely that the mechanism will be used to facilitate European purchases of Iranian oil. It is more likely to be used for less sensitive goods, such as food products and medicines — humanitarian in their nature. Creating a humanitarian SPV would help pharmaceutical and agricultural companies such as Nestle, Sanofi, and Unilever rather than energy companies. Despite the US exemptions for trade in food, medicine, and many consumer products, Iran’s trade in these goods is restricted by the limited number of European banks willing to receive payments from

314 https://www.congress.gov/112/plaws/publ158/PLAW-112publ158.pdf 315 Binder, K., Special purpose vehicle for trade with Iran, European Parliament Think Tank, 13 November 2018, available at http://www.europarl.europa.eu/RegData/etudes/ATAG/2018/630273/EPRS_ATA(2018)630273_EN.pdf 316 Irish, J., Emmott, R. & Murphy, F., ‘France, Germany taking charge of EU-Iran trade move but oil sales in doubt’, Reuters World News, 28 November 2018, available at https://www.reuters.com/article/us-iran-nuclear- eu/france-germany-taking-charge-of-eu-iran-trade-move-but-oil-sales-in-doubt 123

Iranian importers.317 The humanitarian dimensions of the SPV serve as a guarantor that the US will not be able to sanction it. In time, the SPV could be further developed so that it includes other economic sectors rather than the above-mentioned. The long-awaited announcement of the establishment of this essential payment mechanism came during the informal meeting of the EU foreign ministers in Bucharest at the end of January 2019. The top diplomats of France, Germany, and the UK reaffirmed their support for the preservation of the nuclear deal and introduced the Instrument for the Support of Trade Exchange (INSTEX). The headquarters of the new entity will be located in Paris, while its governor will be German — the former manager at Commerzbank Per Fischer. For its part, the UK will host the supervisory board. Separating the different components of the mechanism is intended to show that the burden of accommodating it is equally shared by the three countries and, at the same time, represents their united stance towards the US. It signals readiness by the European leadership to make a stand against the US extra-territorial sanctions. Berlin, Paris, and London are the initial shareholders in this trading scheme, with the expectation that more Member States will join. Tehran would also need to establish the necessary ‘mirror’ structure for the trade scheme to work. However, as previously described, this trading house will be used primarily for humanitarian products (food and medicines) rather than industrial and energy goods. Thus, it has strong political symbolism with a modest economic value. It is even hard to say that INSTEX would circumvent US coercive measures, because trade in food and medicines is permitted under US sanctions. The real effect INSTEX would deliver is that it will facilitate such humanitarian transactions, for which most banks refuse to process payments even from non-sanctioned Iranian firms out of fear of US penalties. In other words, INSTEX is far from facilitating any energy-related transactions, most notably oil trade, but is a necessary step forward, demonstrating that the EU, with Germany and France at the forefront, considers the JCPOA as one of the main pillars of its Middle East policy.

Conclusion Irrespective of which of the above-examined scenarios comes to fruition, after the US withdrawal from the JCPOA, the EU finds itself in a complex situation, where it is simultaneously committed to maintaining constructive relations with Iran and to preserving and upholding the transatlantic unity. The US exit from the Iranian nuclear deal and the Paris Agreement outlining measures to combat climate change, both reached in 2015, has significantly clouded the EU agenda in terms of its energy security and sustainable development policies — two major pillars of its overall energy policy. On the other hand, the results of the EU response following Washington’s violation of the Iranian nuclear accord will show whether the bloc has created the necessary coherence and flexibility of its external policy and, most importantly, the effective tools for its implementation. Even tough Iran is a huge market with almost 80 million people, its trade with the EU is dwarfed by that of the US with the EU. The pure economic logic driving Europe’s global corporations triumphs over the political statements of the EU leadership. The package of incentives — triggering the

317 Batmanghelidj, E. & Hellman, A., ‘How Europe Could Blunt U.S. Iran Sanctions Without Washington Lifting A Finger’, Foreign Policy, 3 December 2018, available at https://foreignpolicy.com/2018/12/03/how- europe-can-blunt-u-s-iran-sanctions-without-washington-raising-a-finger-humanitarian-spv/ 124

Blocking Regulation, expanding the mandate of the EIB, devising a special financial mechanism designed to secure and protect the flow of European capital to Iran and vice-versa — faces enormous challenges in convincing the EU business to keep trading with Tehran. Conversely, Iran is a regional player in the Middle East and south-western Asia, and the EU cannot afford yet another major political crisis in its neighbourhood, especially in a country with regional status. Moreover, Iran has huge reserves of hydrocarbons, and the EU still needs a transitional energy source in order to achieve its strategic goal of a zero-carbon economy. In this regard, natural gas is considered as the transitional fuel, the fuel of the 21st century even. That is why, the JCPOA represents the foundation for the establishment of constructive and mutually beneficial relations between Iran and the EU, where it could also address the concerns about Tehran’s regional security activities, ballistic programme development, and human rights record.

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More about the Bulgarian Diplomatic Institute

The DIPLOMATIC INSTITUTE (DI) was created on 23 September, 2003, pursuant to a Decree of the Council of Ministers. Its status and functions were regulated by the Diplomatic Service Act adopted by the National Assembly on 13 September, 2007. Its work meets the high demands and professional expectations pursuant to Bulgaria’s membership in EU and NATO, and displays continuity that allows the Bulgarian diplomatic profession to have the place it deserves in the large Euro-Atlantic family.

Our mission is to:  Guarantee the high-level expertise and skills of the diplomatic staff and the public administration by applying up-to-date professional standards of training  Enhance continuity in the Bulgarian Foreign Service by promoting exchange of experience and good practices among generations of diplomats  Promote the diplomatic profession and Bulgaria’s foreign policy by reaching out to the general public  Provoke exchange of expertise on foreign policy issues by providing a platform for debate among government and non-government actors  Support the diplomatic profession and the foreign policy debate by research and publications  Develop national and international cooperation by implementing joint projects

TRAINING PROGRAMMES

The DI is a leading diplomatic training provider on both national and regional level. We provide training programmes for both Bulgarian and foreign diplomats and government officials, as well as experts from the NGO and private sector. They meet all demands of modern diplomacy and use the good practices of our counterparts from all over the world. To respond to the need of high-quality training, we focus on innovative techniques and inter-active sessions, which have been assessed by the trainees as exceptionally useful for their future career. Bulgarian and foreign diplomats, university lecturers and other highly qualified experts teach at the DI, which provides the benefit of a broad range of opinions and approaches.

Our major training programmes include:

 Diplomacy Course for MFA trainee attachés  Consular Diplomacy Course for Bulgarian consular staff in diplomatic missions abroad and in the MFA  Intensive Course in Diplomacy for representatives of the state administration, as well as non-government professionals or students interested in the subject-matter

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 Diplomacy and Regional Security Courses for diplomatic staff whose tasks are directly related to the military aspect of international relations  Energy Diplomacy Course for representatives of the Bulgarian Foreign Service and state administration and diplomats and state officials from Southeast Europe, the Black Sea- and Caucuses Region, EU Member States, as well as for representatives of the business and NGO sectors dealing with energy-related issues  Economic Diplomacy Course for diplomats, state officials and representatives of the private sector  Public diplomacy course for diplomats, as well as state officials working with the public, and PR experts  Training of foreign diplomats covering a range of topics to meet the needs of the respective state  Winter School of Diplomacy for junior diplomats from Southeast Europe and the Black Sea region, as well as EU Member States and EU institutions  Foreign language training

As an active member of the Executive Academic Board of the European Security and Defence College, the DI has organised two orientation courses (2010 and 2015) and two 3rd modules of the High Level Course (2012 and 2018). In 2016 the DI became a member of the International Consortium of Europe's New Training Initiative for Civilian Crisis Management (ENTRi) and co-organised the 5th specialised course 'Negotiation and Mediation' in Georgia (Tbilisi) in 2017. During 2017-2018, the DI has been one of the two Bulgarian institutions to carry out the preparation of the Bulgarian team of the Presidency of the Council of the EU.

PUBLIC POLICY AND COOPERATION

To provoke public interest and debate on current foreign policy issues, the Diplomatic Institute holds public lectures by prominent public figures, leading politicians and diplomats. It also organizes conferences and round-table discussions with Bulgarian and foreign experts, to contribute to the exchange of expertise and to the foreign policy theory and practice. It interacts actively with the young public by organizing essay competitions on foreign policy topics, visits of school and university students within its “Open Doors” programme, and by implementing a coherent internship programme. To enhance its public outreach, the DI aims at strong media and digital presence, and maintains its own radio broadcast, a webpage in Bulgarian, English and French, Facebook and Twitter account. The Institute’s national and international partnerships with government, research, NGO and academic institutions is visible in the implementation of joint projects and exchange in the field of training, research and public activities and EU policies.

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RESEARCH AND PUBLICATIONS

A strategic task of the DI is to provide comprehensive analyses by internal and outside experts on international topics to meet the needs of the MFA and to enhance the expertise in foreign policy theory and practice. As of 2013 the Institute also conducts annual national contests for applied research projects. Among the DI’s publications, in Bulgarian and/or English, are the Foreign Policy Research Papers series, the Energy Diplomacy collection, books and textbooks on EU matters, security and environment issues, diplomatic skills and practice, as well as the long-established Diplomacy Journal which has already grown into an online platform for foreign policy analysis and research. To assist its activities and programmes, the DI manages a library of over 65 000 titles in over 20 languages, in the field of international relations, European Studies, security, international organizations, diplomacy, law, history, sociology, political sciences, economy, etc.

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More about the Hanns Seidel Foundation

The Bulgarian Diplomatic Institute works in close partnership with the Hanns Seidel Foundation in Bulgaria. There are many joint projects, which the DI organises with the support of the foundation. “In the service of democracy, peace and development” – this motto is present in the work and mission of the Hanns Seidel Foundation. This motto applies both to its domestic activities – especially Bavaria – as well as its engagements abroad. Former German President Roman Herzog once described “education on democracy” as a “permanent and intrinsic duty of political foundations”. It contributes to “citizens of an open society being able to participate in the democratic development process with as much knowledge as possible”. Understanding of democracy must be secured again with each generation. Political contexts must be made clear, especially to young people. Only then can they be motivated to get involved themselves and take on responsibility. To put it briefly: Democracy needs political education. Lobbying like this for our democracy and our social order that celebrates freedom and the rule of law also involves reassuring our citizens of this and anchoring in their consciousness the tenets and standards of our polity. The profound and rapid shift our country is currently experiencing reinforces the need for value orientation and rooting ourselves in reliable structures and straightforward regulatory frameworks. To put it another way: The growing pressure to innovate facing the State, society, the economy, science and technology makes returning to our historical roots and our intellectual and cultural foundations all the more necessary. Since its founding on 11 April 1967, the Hanns Seidel Foundation has been engaged in political education with the aim of promoting the “democratic and civic education of the German people on a Christian basis”, to quote its statutes. The foundation, which is politically aligned with the CSU, is named after the former Bavarian prime minister and CSU chairman, Hanns Seidel. Political foundations are financially, legally and organisationally independent of each party, although they do operate within the bounds of their respective party’s ideology. The Hanns Seidel Foundation embodies Christian-social values, which influence our work both domestically and abroad. The Hanns Seidel Foundation’s political education work is based on an idea of man that incorporates the free development of personality and personal responsibility just as much as social responsibility and solidarity. Particularly in our own era, a time in which we need greater individual responsibility, our mission is to do even more to bring about a new “culture of independence” and an “active civil society”, now more than ever. The conceptual and operational work of the Hanns Seidel Foundation is concentrated primarily in four departments. Whilst the Academy for Politics and Current Affairs focuses on current trends and scholarly research, the Institute for Political Education offers seminars on a number of different topics. The Institute for Scholarship Programmes fosters up-and-coming researchers with programmes that benefit talented academics who are socially committed. The Institute for International Cooperation operates and evaluates development cooperation

129 projects. The main focus here is good governance, poverty reduction and sustainable development. The Central Services division provides these four departments with support as a service provider. The Banz Monastery Educational Centre and the Conference Centre at the foundation’s headquarters in Munich represent places to meet and engage in dialogue. The overarching guidelines governing the foundation’s work include the relationship between citizens and the state and the tension between globalisation and regionalisation. Here too, the focus is on the new role of Germany and Europe in light of international conflicts and migration, the impact of the increasing individualisation of society and questions of responsibility for future generations. Hanns Seidel (1901–1961) was born in the Bavarian town of Aschaffenburg and earned his law degree in 1929. He became a member of the Bayerische Volkspartei (BVP) in 1932 and the next year ran in the city council elections in his home town. After the Nazis took power, Seidel was taken into “protective custody” because he had been protecting a large number of Jews. Hanns Seidel served in the military from 1940–1945. Once the war was over, the American military government appointed politically respectable Seidel District Administrator of Aschaffenburg. In 1946, he successfully ran for election as a CSU candidate for the Constituent Assembly and the Bavarian Landtag (state parliament). In September 1947, Prime Minister Hans Ehard appointed the expert Hanns Seidel Bavarian State Minister of Economics. The CSU parliamentary group elected him their spokesperson in 1954, making him the opposition leader to the Coalition of Four (SPD, Bayernpartei, FDP, GB/BHE). In 1955, as the new party chairman, along with his Secretary General, Friedrich Zimmerman, he began a fundamental modernisation and reorganisation of the CSU.

When the Coalition of Four collapsed in 1957, the CSU once again formed a government and the Landtag appointed Hanns Seidel Minister President of the State of Bavaria by a majority. The population rewarded Seidel’s expertise and gave the CSU its best outcome since 1946 in the 1958 regional elections with nearly 50 % of the vote. It was with great regret that Seidel was forced to resign as Minister President in 1960 and CSU party chair the following year due to a back injury he suffered in an accident. Hanns Seidel died as a result of his injuries on 5 August 1961. A few months later, planning began for a foundation affiliated with the party and was named after Hanns Seidel.

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Notes

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ANNEXES

Annex I — Energy security as a global policy concern — Historical development and evolution of the concept

Figure 1: History of oil prices

Source: The Purnomo Yusgiantoro Center (PYC)

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Annex II — The Black Sea region — Energy security and connectivity Figure 1: Southern Gas Corridor and Interconnector Greece-Bulgaria

Source: Gastechinsights.com, author’s own estimate

Figure 2: TurkStream (offshore section)

Source: Gazprom (official website)

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Figure 3: Turk Stream and its possible offshoots – South Stream Lite, Trans-Adriatic Pipeline and Poseidon

Source: Bruegel Think Tank

Figure 4: Trans-Adriatic pipeline and its possible connection with the BRUA pipeline

Source: Ramona-Manescu.ro

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Figure 5: The North-South gas corridor, connecting the LNG terminal in Świnoujście (Poland) with the planned for construction LNG terminal on the island of Krk (Croatia).

Source: BiznesAlert.pl

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Figure 6: Gas infrastructure in Bulgaria, with the planned gas hub “Balkan”

Source: Capital.bg

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Figure 5: Khan Asparuh block

Source: SeaJobs.bg

Figure 6: Khan Kubrat block

Source: Offshoreenergytoday.com

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Figure 7: Black Sea Pan-European Transport Network

Source: Geopolitica.eu

Figure 8: Trans-European Transport Network (TEN-T)

Source: European Commission (official website)

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Annex III — Political and policy aspects of preferential energy prices at EU and national levels and Bulgaria’s approach

Figure 1: Average electricity price for households on the regulated market and levies paid by consumers, BGN/MWh

Source: EWRC price decisions, author’s calculations *No data for RES component between August 2013 and July 2015 **Including power prices, grid prices, OTS price, excluding excise duties and VAT, and calculated with 70% day consumption and 30% night consumption

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Figure 2: Average electricity price on the day-ahead market and levies paid by consumers, BGN/MWh

Source: Independent Bulgarian Energy Exchange, EWRC price decisions, author’s calculations *Including power prices, grid prices, OTS price, excluding excise duties and VAT, and calculated with 70% day consumption and 30% night consumption

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Annex IV — Caspian aspects of the Bulgarian energy strategy — How Azerbaijani gas can contribute to the Balkan Gas Hub?

Figure 1: Azerbaijan gas production projection (2010-2040), including SOCAR/Azneft gas production portfolio, probable reserves and excluding technical resources; and gas demand projection (2017-2040)

Source: SOCAR, Azneft; for Absheron stage 2 and Shahfag-Asiman – author’s projection

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Figure 2: Azerbaijan — gas production and gas export projection, Mcm (2010-2040)

Source: SOCAR, author’s estimate (2030-2040)

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Figure 3: Gas supply surplus & shortage, including ACG re-injected associated gas, Mcm (2010-2040)

Source: State Statistical Committee, SOCAR, author’s estimate.

Figure 4: Gas supply surplus & shortage, excluding ACG associated gas, Mcm (2010-2040)

Source: State Statistical Committee, SOCAR, author’s estimate

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Annex V — The energy component of modern-day conflicts in the Eastern Mediterranean Figure 1: Exclusive Economic Zone of Greece

Source: Philenews.com Figure 2: Natural gas export routes from Iran to the Mediterranean Sea

Source: The Guardian

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Annex VI — Energy co-operation between the EU and Iran - Future challenges and the way forward

Figure 1: EU Trade with Iran — Trade flows and balance, annual data 2007 –2017

Source: Eurostat

Figure 2: The biggest gas field in the world, co-owned by Iran and Qatar

Source: KallanishEnergy.com

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Figure 3

Source: European Council on Foreign Relations Figure 4

Source: Al-Monitor

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Figure 5

Source: The Atlantic Council

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Republic of Bulgaria Ministry of Foreign A airs N DOCENDO DIPLOMATIC DISCIMUS INSTITUTE

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FOREIGN AFFAIRS RESEARCH PAPERS March 2019