GETTING EUROPE S ENERGY HOUSE IN ORDER

Transcription

1 GETTING EUROPE S ENERGY HOUSE IN ORDER SEPTEMBER :45 A.M. BRUSSELS, BELGIUM WELCOME/MODERATOR: Jan Techau Director Carnegie Europe SPEAKERS: Michael Koehler Head of Cabinet, Energy Commissioner Günther H. Oettinger European Commission Adnan Vatansever Senior Associate, Energy and Climate Program Carnegie Endowment for International Peace Transcript by Way With Words

2 JAN TECHAU: Welcome to Carnegie Europe once more. My name is Jan Techau and I m the director of Carnegie Europe. I know that we have a bit of a traffic problem in town, which is not the usual kind of Brussels traffic problem. I think people burned trash in the streets today, which clogged up the rest of the city. I m not sure that s the solution to the energy problems of the European Union, to burn trash, but it is certainly something that might have kept one or two people from coming here today. I think you re all very heroic for coming here over lunchtime, no matter how, to talk about this eminent issue. Those of you who follow Carnegie Europe a little bit know that we ve just started an essay series called Strategic Europe, looking at the strategic issues and the possibilities that Europe has to position itself not as a global player everywhere but as a strategic player in select areas and arenas. One of those arenas clearly is energy policy and we have two eminent experts here who can talk about this; one decisionmaker, mover and shaker and one analyst and observer. I m very glad that we have them both here to talk about the Commission communication on energy policy and energy security that came out on 7th September, which is a fairly new, fresh and hopeful attempt of the European Union to get its act together and unify its efforts in the energy arena. This Commission communication has attracted a lot of criticism but also a lot of praise. It is trying to tackle the big issue of unity, of the inability of the Europeans to stand as one in energy policy and have themselves played against one another in big negotiations in the strategically important field of energy security, and energy in general. Energy has so many business facets, environmental facets, security facets that it s a huge and amazingly intricate field. Seemingly, the European Union, with much promise and being in a very needy position, has not really ever managed to tackle this properly. Now maybe this is the end of that or the beginning of something else, something new. With us is Dr. Michael Koehler, who is the Chef de Cabinet of Energy Commissioner Oettinger. He has been in the job for one and a half years now and he s responsible, to a certain extent, I think, for the drive that has been taken on here. We re very glad to have him here. I ve known him for about 12 years now. He was the man who helped me a great deal when I wanted my stage in the European Commission in 1999 and I m very glad to host him here in Brussels. His secret or not so secret love is the Middle East. He speaks all kinds of weird languages from the region and so he was able to marry his two very strong interests in his new job and it s great that he is here. We also have Adnan Vatansever, who is a senior fellow at the Carnegie Endowment in Washington, one of our pre-eminent energy experts, who has been working on energy questions for the last ten years or so. He has advised the US administration, has travelled the region extensively, especially Eastern and Central Europe. He is not only familiar with questions of environmental issues and de-carbonisation but also with the larger strategic picture that looms behind all this, and that is exactly where we want to go today. Of course, we will talk about the Commission communication but also about the wider strategic idea that stands behind it. We want to make this a part of the Strategic Europe debate that Carnegie is very interested in. I hope that we can get to this and I hope all of you have brought plenty of questions because, of course, after the presentations, it s up to you. Thanks again for being here. We will start with Dr. Koehler, who will give us his introductory remarks, then Adnan will give us his observations and comments and then we ll open it to you. Thank you very much.

3 MICHAEL KOEHLER: Thank you, Jan, and, ladies and gentlemen, thank you for having made it here to Carnegie this morning despite the particular transport problems. Once again it s a good argument to take public transport. That s what I did twice today and there was not the slightest problem with that. Thanks also, Jan, for elevating me to the rank of a mover and shaker. I m not quite sure if that s how I would really see myself. If you are in the position I m in, you feel a little more shaken and moved than shaking and moving other people. Anyway, one tries to survive. Let me try to be relatively brief because, having looked at the list of attendees and invitees, I m pretty sure there are lots of very knowledgeable people here in the room and I think we would like to be a little bit more interactive. Also, my wife always tells me I m much too talkative and I don t want to talk all the oxygen out of the room this morning. Let me try to set the scene for the package and the challenges that we face in our communication of 7th September. You re going to get a little paper, I understand, which summarises the main contents of this package. It also contains a hyperlink where you can find out much more about it, including all the background documents which I recommend you read if you re interested in the subject. That is also already part of the message. What did we endeavour to do on the occasion? I will give you the formal reasons and the political setting of why and how we came up with this package. What did we do? We definitely tried to reach higher than just to come out with a new strategy paper on the external dimension of energy policy. When we started in our little working group that prepared this paper, I basically gave out the advice that, at the end of this exercise, we need to have something more than a nice and elegantly-worded paper that says, basically, Russia is important and Norway s in the north and don t forget about Algeria in the south and Qatar has an LNG terminal. We need to be a little more precise. We need to do a little bit more than even the best think-tank can do because if we want to be movers and shakers, we need to shape a new perspective, a new possibility, a new reality for securing our energy interests in the international domain. Therefore, the package that we came up with is composed of a variety of documents. One important document which I think will mainly keep us busy here this lunchtime is the communication in which we set out a strategy, where we set out 42 concrete actions that we want to implement in the coming months and years. It s a mid-term agenda that starts now and could easily lead us up to 2020 but all these things, all these actions, all the activities and initiatives mentioned there are concrete. They re not from the other side of the moon. These are things that we re already working on, that we have already identified as priorities, for which we have a certain level of support already, either among member states or with certain third countries. More importantly, in addition to the strategy paper, you have a draft decision by the European Council and by the European Parliament, which would empower the European Commission, from the day of entry into force of the decision onwards, to take a certain road in bilateral negotiations of EU member states with third countries on energy agreements. I ll come back to that in a couple of minutes. Then we also have a couple of so-called Commission staff working documents, which I would recommend you to read. One is something that Adnan, at least, found interesting to look at, something which basically sets out facts and figures about international energy relations. It s quite striking how dependent the European continent is on energy imports, of whatever form; oil and gas, obviously; coal and uranium; but perhaps, in the future, to a certain extent, even the import of electricity from renewable sources.

4 We are a continent that is relatively scarce in energy resources, despite the possibilities that we have, despite the hype on shale gas and so forth. Structurally, during our lifetimes at least, we will remain a country that either needs to import primary energy or at least, certain products, certain technologies, certain rare earths that we need, for example, to produce the devices we need for the production of electricity from renewables. We are in a situation of dependence and therefore the big question is, how do we diversify this dependence so we re not dependent on just one big part? Of course, when you speak about energy, the higher you go in the political layers, if you speak to the Merkels, Sarkozys, Van Rompuys, Berlusconis and the like, when they hear the words energy and security of supply, they think of this one big elephant in the room, which is called Russia. Indeed, Russia is a very important strategic partner for us in energy because if you take whatever commodity you want oil, gas, but also coal and uranium it is Europe s biggest supplier. There is, however, a little difference between these commodities, of course. For certain of them let s take oil there s a world market. On the day when Russia will stop providing oil to the European market, we ll certainly have a major problem but you can buy it elsewhere, as we were able to offset the shortfall of oil exports from Libya, for example. When the crisis broke out, Libya was providing about 10% of European oil imports and it was possible, of course, to offset this shortfall through imports from other sources. The whole situation is different when you look at gas, simply because, on the one hand, we have a growing gas market. On the other hand, LNG has traditionally been more expensive than pipeline gas. This is lowering, this is coming together now but still, this is a relatively recent development. Thirdly, we don t have the same kind of infrastructure that we have for oil in the European Union. We have a much smaller number of LNG terminals, much fewer possibilities still, unfortunately, to provide gas from one EU member state to another and vice versa because traditionally, the pipeline infrastructure goes from east to west and we re only now working on making it reversible, to compress the gas in such a way that it can be pumped the other way. All the crises we had in the past year showed how dependent and how vulnerable a couple of member states especially new ones but not only new member states are in that respect. I ll come back to this, but therefore the EU would probably play a certain role in the negotiations in order to add more weight. You also have a paper that gives the main results of the consultation that we conducted. I m relatively proud of this consultation because we did much more than we usually do. We did not simply bring together a couple of experts in the European Commission, put our heads together and after a couple of months the baby was born. We consulted publicly. I guess that some of you may have participated in the internet consultation, the conferences. We brought think-tanks together from the energy side but also from foreign affairs. We had all kinds of meetings. Of course, we consulted our governments. The paper that you have now does raise a certain degree of nervousness in certain circles but I think it also summarises, to a decent degree, the needs that have been collectively identified. Why is it interesting, why is it perhaps time to come out with such a strategy? I don t want to give you the history of energy policy in the European Union. You know that energy has been part of the European integration process ever since the 50s but, of course, we have game-changers, I think, since the middle of the last decade.

5 One of the big game-changers is the emergence of a real single market, not only in goods but, increasingly, also in services and in energy commodities. The second big game-changer is European climate policy. Another game-changer is an increased focus on energy in our research policy, from grand demonstration projects such as ETR, for example, to the SET-plan which is, of course, a major facility to promote the emergence of renewable energies in Europe. The really big game-changer, of course, is the experience of dependence in the gas area. Ukraine; January, February 2009; cold weather and no longer safety and security on our side with respect to the certainty that Russian gas would reach the European Union without any consequences. There has been a lot of talk going on and a lot of countries have tried to change their strategies in recognition of this big gamechanger. Sometimes, jokingly but please don t quote me I say that I sometimes have problems, on a very personal level, understanding the decisions of the jury that awards the Charlemagne Prize for European Integration in Aachen, 130 kilometres from here, but one guy should definitely get this prize and that is Vladimir Putin because he really did something for European integration, through the crisis that emerged. It s very much on people s minds these days, as we await the verdict against Yulia Timoshenko to be announced next Tuesday. The fact that a relationship for the delivery of gas to the European Union which had worked even during the coldest days of the Cold War was suddenly questioned in terms of its reliability, of course, sent shockwaves everywhere. It sent shock-waves to the member states of the European Union that we were suddenly sitting in the cold and in the dark. It also sent shock-waves to Russia. The entire strategy that is linked to names like North Stream and South Stream, which is based on the assumption that the pipelines should reach the European Union without touching third countries soils is, of course, a strategy that stems from the experience of that time. At the same time, you have countries such as Ukraine, Belarus and so forth, which also draw the consequences. How big these shock-waves were you can measure from the very fact that we have in the Lisbon Treaty an article on energy, Article 194. The European constitutionalists among you will remember that when the two referenda went wrong in the Netherlands and in France and the European Constitutional Treaty was rejected, the talk of the town here in Brussels was, let s see what we can save from the Constitutional Treaty and find some sort of lighter treaty that would basically bring the same content without the same kind of hassle in terms of democratic ratification and justification of it. The way our leaders and policymakers and the parliaments and the European member states tried to organise this was to say, okay, let s keep what we have, or most of what we have in the Constitution Treaty but certainly not invent anything else to add on top because that would hamper the ratification process of the Treaty which has become the Lisbon Treaty. I think this is what has been done but there s this one exception; energy. If you go back to the draft Constitutional Treaty of 2004/5, you will not find an article on energy. Today we have an Energy Article, 194 and the only reason, I reckon, that we have this is that when the Lisbon Treaty was drafted and submitted to policymakers for approval, two things were very much on everybody s mind; first, the experience of early 2009, of a vital dependence in terms of energy supplies, and secondly, of course, very much also the climate agenda and the fact that if we wanted to influence the world s climate, we would have to do this on the basis of an energy policy which is conducive to our climate targets and that, in a way, sets the pace for other countries to follow.

6 Therefore, we have a couple of things now. We have a feeling of political need. We have a new legal basis to operate the international part of energy policy and we have, of course, a very strong political push, as expressed by a variety of mandates that the Commission received in this respect. The clearest and most blatant one was the conclusions of the European Council for February this year which asked the commission to submit a strategy for June 2011; June, because the Polish Presidency had said very early on that they wanted to take this topic as one of the major priorities of the Presidency. I m just back from the informal meeting of the Energy Ministers in Wroclaw in Poland where, indeed, a full day of discussions was dedicated to the international side of energy policy. We did not wait to start international energy policy with this paper. To a certain extent, the paper summarises things that are already underway and we are in the very lucky situation that a couple of member states were able to report for example, to the European Council in February but also at the Wroclaw meeting right now the good experience that they have had with a more joined-up approach in energy policy. First and foremost in this context are the Poles, who hold the Presidency at this moment in time. Prime Minister Tusk and Deputy Prime Minster Pawlak, who chaired the meeting in Wroclaw, were able to share with their colleagues the good experience that they had in last year s gas negotiations with Russia, where they d felt a bit left alone until about summer last year, when they asked the Commission to be part of the negotiations and to join in, almost in the function of a legal advisor. Of course, the setting of these negotiations was not a setting whereby the European Commission would replace Poland as a negotiating partner for Russia but we came in basically as an advisor for both sides on the legality of the terms that they would be agreeing upon. In the background of this, of course, is the long-standing conflict, which many of you may be aware of, between Russia and the European Union on the applicability of the third energy package on international gas agreements; the question, for example, whether a Russian-owned gas pipeline on EU soil should be open to third-country access, where Russia says, we have an agreement that this is our pipeline and we determine how it s going to be used. The European Union says, very well, we now have legislation on the basis of competition law that forces every owner of infrastructure to tender the use of the infrastructure out and to allow in other competitors, to a certain extent, and there are a variety of different models. In these negotiations and also in negotiations which Bulgaria conducted with Russia, all these member states had the experience that it enhanced their negotiating position with Russia to have some EU officials in their delegation, and the fact that the EU officials did not basically become the advocate of just one side but also tried to explain to the Russian side in these negotiations why it would be useful and helpful to them if they would agree to certain terms that would be possible under European law. This is just the Russian example but there are lots of other examples, such as the prospects for the import of solar energy or wind energy from Northern Africa. The Commission has come out in spring with two documents where we said, we want to offer the transformation countries in Northern Africa a prospect of exporting energy to the European Union as one of the measures that would help them to build up a new industrial potential. Just imagine a situation where, for example, Spain concludes an agreement with Morocco; France one with Algeria; Italy one with Tunisia; Belgium, Holland and Germany, perhaps, also one with Algeria and one with Tunisia; different agreements, not standardised, on the basis of different financing systems for renewable energy; feed-in tariffs here, subsidies there, other forms and grants there, and so forth. You would very quickly end up with some sort of very strange spaghetti dish where everything is intermingled with everything, a Gordian knot. You wouldn t have a consolidated approach. You would

7 have endless legal problems. You wouldn t have a system that was mutually reinforcing. You would definitely end up with something which would not be compatible with our ambition for the creation of a real internal energy market for renewables. What would be more meaningful than to have an EU approach, a joint EU agreement with, say, the three most concerned countries in Northern Africa, creating certainty for investment and a solid legal basis not only for the export of this kind of energy to the European continent but also for their domestic needs, maybe even on a cross-border level, allowing, for example, Algerian solar power to be exported to Tunisia and so forth? All those of you who have ever tried to study the history of Northern Africa and the Middle East will see what a revolutionary change this would be because borders between many of these countries are still closed so it would be a real peace-making element. All these considerations and many more made us think it was timely to come out with this paper. I won t spend much more time on this because two of the authors of the paper have just entered the room and are much better-placed than I am to give you the detail, but I just wanted to hint at two things. Firstly, what do you find in the strategy paper and the decision? I think the strategy paper not only limits itself to giving a rationale and some actions on why we need to have this external dimension of the internal market in energy. Security of supply is definitely the most important notion and therefore you ll find it in the title of the paper. We also say that we want to create real energy partnerships for secure, safe, sustainable and competitive energy. This becomes ever more important because very quickly, the kind of relationship that traditional importers of energy, such as the European member states, have with traditional providers of energy is changing. Whereas, in the old days, the whole thing was a commercial deal you would say, okay, I need gas, I need oil, I need coal so I go to countries x and y, I present my offer and I pay if I get the contract, today these countries say, listen, fine, we re going to sell you the gas but you have technology, we want to go for solar energy; or, you know how to manage the market, you can give us advice on how to reform our legislation, our oil ministry [unclear] and so forth, but we have a real problem because we have 20% youth unemployment among the well-trained technicians, for example, can you bring us investment or a service industry, for example, around the energy sector that will help us in our development objectives? This is true for almost every country. Just take the situation of Saudi Arabia. I don t need to explain to you how important Saudi Arabia is as an exporter of oil but today they think beyond this because they have found out that, with their demographic growth, the moment is coming, not far away, when they will need about 30 or 40% of their oil just to serve their domestic needs so they will have much less to export. They re thinking, how could we generate the energy that we need at home from other sources? At present, they use gas for electricity generation in Saudi Arabia but they say, okay, other people are also exporting gas, why don t we export our gas, so we could export oil as we do already but we could also export gas and generate the power that we need from other sources we have lots of sunshine or we could build a nuclear power plant. Saudi Arabia is just one example of many. Then the countries come and say, listen, can you work with us on nuclear safety, can you work with us on solar power, can you work with us not only on demonstration plants but on the systemic approach that we need for this? It s the same thing in Nigeria. In a couple of months, here in Brussels, we re going to organise an investment conference for investment in renewable power in Nigeria.

8 It s the same even with some central Asian countries. All the traditional providers of one or two sources of energy want more so you need to offer them an energy partnership if you want to play ball according to the rules. Then, of course, there is a very important energy dimension in development policy, addressing the domestic needs of sub-saharan African countries, for example. Those of you who are interested in development policy will have seen that the Green Paper of October last year declared that energy should become one of the two or three main priorities of European development policy in the future. When you have no energy, you can forget about the rest of development. You can, of course, do some village-level developments or some basic healthcare but there will be no real economic development, no market integration. Energy will play an increasingly important role but there also, we have to drive forward our sustainability targets. We cannot simply say to 500, 600, 700 million Africans, just burn the oil that you find in Nigeria. We have to also bring them on board for climate targets and see whether the alternatives may be more climate-friendly ways of using energy and spreading the available tier of powers all over the continent. The development part of the paper is very important and, of course, we also have a very important industrial policy part because energy policy is much more than the EU and its suppliers. Energy policy for us also means strategic partnerships with countries such as the United States and China, for example, on technology development, clean coal technologies, but also the standards, norms and so forth that you need to develop for the future generation of our lifestyle; e-mobility, smart houses, smart meters, smart grids and so forth. This is also very much an area of foreign policy today. If you look at the papers, you will see all these chapters and then there s the decision which basically offers members states that they could call the Commission into their negotiations with third countries. Our proposal also foresees that the Commission could, on its part, request to be made part of the negotiations and there s at least scrutiny whereby a bilateral energy agreement that a country of the European Union say, Italy wants to conclude with a third country has to be submitted to the European Commission in order to be checked for its legal viability. We do not want to say, this or that agreement is a good or a bad idea maybe we are going to say that, in part; maybe we are going to say, listen, it s perhaps a little bit more in the European interest if you do it slightly differently but where we are really entitled to intervene is to say, this conduct agreement would contradict European law and if you conclude this agreement, you re going to be in trouble, we ll see you in court and you ll be forced to cancel and annul this kind of agreement, which will leave you in a lot of trouble. Just to summarise, what is new in this package? We say, in certain cases, one, the EU should conclude agreements as a whole not always. We will not always replace energy agreements of member states. In certain cases where you have, for example, a large number of partners on the other side the Maghreb, as I said, is just one example let s better negotiate as the EU as a whole. The second thing is the exchange and participation mechanism between the European level and member states in negotiations where we would create transparency, we would share the agreements with the other member states and, while protecting commercial information, we would give our advice on the legal compatibility of energy agreements.

9 The third big element, of course, is the offer of concluding energy partnerships and these, as chapter four of the communication shows very clearly, have to be tailor-made. We ll certainly not offer the same partnership to Norway that we offer, for example, to Nigeria. It has to look at the needs of these countries. The whole thing, of course, cannot be done without the means. Therefore, there s also a small chapter on finance. The finance; we are in a fortunate situation as DG energy doesn t really come from our own sources. We have to tap into the facilities that the European Union has created in the area of external relations, like the Nabod [unclear] investment facility and also the European Development Fund and so forth. I m very glad to report to you that generally, we have very open doors there with the other Commissioners and Directors-General, who have recognised the importance of international energy relations. We therefore have a couple of projects where we are able to mobilise EU budget funds in addition to loans from the European investment bank, other development banks, the World Bank and so forth, for demonstration projects or for basic services and energy projects in developing countries. This paper, in my view, is a game-changer but, at the same time, one shouldn t overrate its importance. In a way, it s a rolling document. It needs to be reviewed from time to time. We probably have to look at it again after two or three years, to update it and refine the political targets that are expressed in it but, in my view, one thing is for sure; the central philosophy is there to stay. The central philosophy is that we need to diversify our supplies and join up in order to represent our energy interests in a very competitive world where markets like China, the US and Russia can speak with one voice and we still endeavour to speak with one voice. Therefore, the first echoes that we get from member states are not that bad. I would say, they differ from country to country. Those countries which already have experienced support at the European level are quite enthusiastic about it. There are other countries which say, hmm, maybe from time to time but we also want to hide away some of our little secrets and therefore let s not rush into it too much. There I think we have to do a decent degree of convincing work. There are other countries and that s also an interesting development who say, okay, fine, I like the idea, however we really rely on exclusively on the private sector, when it comes to securing oil/gas imports to country x or y, this is not a government matter, it s a matter for our big providers, big utilities and so forth. That s fine. However, then these big utilities must be able to compete with big utilities in China which represent half a billion consumers or so and when this reflection comes in, sometimes they are quite willing for a little bit of European [unclear] support as well. Thank you. JAN TECHAU: Thank you very much. That was a fascinating tour de force; diversifying supply, unifying political will; the big story of energy policy in the European Union. Now let s widen the scope a little bit further and go even deeper into the strategic considerations. Adnan, what are we to make of this and what are the things you would like to add to this? Maybe you could actually put some water into the wine. ADNAN VATANSEVER: I ll try. Thank you, Jan, and thanks to Carnegie Europe for organising an event. It s a real honour to speak with Dr. Koehler on the same subject. What I d like to do is, as the communication is about security of energy supply, I d like to attempt to define security of energy and in doing that, I ll try to draw upon my recent experience as a member of an energy working group for an initiative which has been hosted by the Carnegie Endowment. It s called the Euro-Atlantic Security Initiative.

10 One of the goals of that initiative was to bring together academics and people from the industry from North America the US and Canada from the EU and also from Russia so that they can find a way to think about energy security. I ll try to bring some of the perspectives from there but the views I ll express are certainly mine and should not bind the group itself. What I would also like to do is particularly focus on one subject which Dr. Koehler mentioned as the driver in issuing this communication note. It is basically gas relations with Russia. They are perhaps still the most important subject to consider when you think about energy security in Europe or, at least, they have been so far and will most likely remain very significant, partly because Russia will remain the most important energy supplier for Europe in the foreseeable future and also because gas is an area where most of the conflicts lie. As Dr. Koehler described, it is really different compared to other energy sources. Most of the issues have been related to gas rather than any other types of energy. After trying to provide a definition, I ve also tried to give the bigger picture of what would constitute the ideal case of establishing energy security from the perspective of the European Union and then look at what the reality is when it comes to relations with Russia, especially gas relations. While examining this, I ll also try to say a few things about how this communication is addressing this. Starting with defining energy security, the concept itself has been very widely discussed for over a decade probably decades but it s worth going back to the basics; what exactly is insecurity, where does the insecurity come from? My personal sense is that it s basically about two things. Firstly, it s about the physical access or the assurance that you have physical access to energy. The second thing is, you may have the physical access but it may be at such a high cost that it becomes destabilising. In each of these cases you may have some significant welfare effects for any given country or for the EU as a whole, such as if physical access is interrupted for whatever reason, whether because of a transit country or because a supplier shuts down the pipe, or because of insufficient investment in the long run, there will be welfare implications in the receiving country, for several reasons. Basically, a lot of the factories will need to be shut down. It will affect your GDP and also, quite a few people may not get heat when they need it. The same goes when energy prices are exorbitantly high. Even if you have the access, if the prices are excessively high, you may need to shut down some of the factories because they will not be internationally competitive, at some point, operating at such high prices. Also, a lot of households may not be able to pay for the energy even if they have the ability to get it so basically, this is about energy security, about the physical access and the price you pay. My underlying assumption in finding a solution for that is that the solution needs to involve everybody who is part of the value chain that is, not just the importer but also the transit countries and the suppliers in some way. You will have a sustainable solution for your energy security problem as long as you address, in a sustainable manner, the concerns of every side involved in the value chain. Of course, that is the more difficult part. What will that mean in an ideal case where Europe is dealing with Russia on gas issues? What will be the ideal case when the energy security question is more or less resolved? I have five areas where improvement could be made or where things need to look much better. First, it needs to be ensured that energy markets function efficiently; that is, markets need to be based on transparency and competition and there should be the primacy of commercial relations rather than pure politics.

11 The second thing is, the sides need to be able to manage short-term disruptions. Sometimes such disruptions could occur because of external events earthquakes or some other events but there needs to be a mechanism to manage that. The third thing is, there needs to be a mechanism that manages long-term investment so that the EU side ends up with enough energy, enough oil and gas in the long run because there is sufficient investment for this at the right time. The fourth point is, it needs to be ensured that transit will be secure because a lot of the problems could occur because of transit countries, because of insufficient investment there or because of delay in investing in these transit countries. Finally, enhancing energy efficiency and sustainable development should also be part of this ideal case that I describe, partly because it has quite significant implications on the energy balances of countries and that needs to be coordinated pretty well. Starting with what the reality is; it s certainly quite short of what I describe as the ideal case, in every single area. Starting with efficient markets, if you look at gas markets or EU/Russian gas relations, there are such significant problems that you cannot really talk about efficiently-functioning gas relations. There have been quite a few problems. There is significant non-transparency involved in certain deals. There is also quite often the primacy of politics, I would say, but it is really important to ask to what extent the problem or this lack of efficient gas markets in EU/Russian relations is a function of the specifics of these relations basically, the inability of these two sides to reach some common ground and to what extent it is because of broader systemic problems. I strongly agree with Dr. Koehler that it has a lot to do with the systemic problems as well so this is part of the reason. You really do not have a global market for gas, as you do in the case of oil. If you look at most of the problems and conflicts that have arisen in the past decade with regard to the EU s relations with Russia, they are related to gas even though the EU s dependence on other energy resources is almost as significant as in the case of gas. If you look at the EU s dependence on Russian oil and coal, it s pretty close to its dependence on gas but these are never as explosive issues as the gas issue has been. Moreover, if you look at the past decades only, the EU s import dependence on Russian gas has been decreasing whereas its import dependence on Russian coal has tripled from about 8% to 24% from 2000 to 2010, and in the case of oil it has gone up from 19% to 31%. We have seen the reverse trend in gas and despite that, gas has actually been the main issue so it raises the question, why gas? As I ve said, it has to do with the specifics of the market, the lack of a single integrated global gas market is a big problem. Apart from that, the lack of a single EU gas market is another problem which the EU Commission and other related institutions here are working hard to handle. Whether through infrastructure investment or regulatory changes, this is a major area for future development. Having said this, a lot of the problems actually have to do with the specifics of EU/Russian negotiations or how the two sides have handled these negotiations. One of the problems has obviously been politicisation, I would say, and I try to bring Moscow s perspective on the subject in order not to appear biased towards one side. Moscow s perspective is that they have received some mixed signals when it comes to their wish to become bigger investors in European gas downstream.

12 That is their perspective but, at the same time, there is sufficient reason to claim that Moscow has quite often perceived natural gas as a political tool. If you look at how gas contracts have been managed, you do not see a very clear pattern or very clear criteria about how these contracts are set. It s the Government that imposes export tax but Gazprom could be dealing with an export tax when it exports to a particular country and it could actually be exempting another country from the export tax, which is a very significant difference because it s 30% of the cost. Another thing is about the price of the contracts; you see very different prices with different contracts and especially when exactly these prices are increased has been another question mark. Doing this right before quite significant elections in Ukraine or elsewhere does raise questions that it has been used as a political tool. Another problem in the relations between the two sides has been that there have been completely different understandings of what should constitute efficient markets. Europe does have its understanding about that and wants to create a single market based on the Third Directive. Russia has obviously had a very different view on the subject, opposing this Third Directive and considering it as basically an attempt to constrain its involvement in Europe. Another problem is, there has been a lack of a mechanism for resolving disputes when it comes to energy. This is partly because of the demise of the Energy Charter and the inability to find an alternative between the EU and Russia. This communiqué is actually proposing to find a solution as soon as possible, a new agreement with Russia, something that would replace the 1994 agreement. This has been a major gap and this is certainly a positive proposal, I would say. Finally, another problem that has contributed, in my view, to this lack of efficiently-functioning gas flow between the two sides of the trade has been the lack of a competitively-structured Russian gas market. If the European Union was dealing with countries like Norway, I would say that most of these questionmarks about energy security wouldn t be there. There would probably still be some in terms of some long-term physical access or long-term investment but generally, a lot of the questions would not be there. To a large extent, these questions have arisen because of concerns that Russia may not be able to invest enough in its infrastructure and also because investment has been, to a large extent, quite inefficient, at least the portion that has been done by Gazprom. Certainly, you do have concerns or questions at least raised in Europe; why should Europe pay more for gas because of one company that is operating at relatively inefficient levels, at relatively high costs? That is Russia s side of the problem but then you also have, from Moscow s perspective, a European side of the problem. What has been considered as a problem is the mixed signals that the Russian gas industry has been getting from Europe. You do have different energy scenarios here which actually indicate that, in about a decade, the demand for gas imports will decline. The baseline scenarios do not indicate that but if you look, for example, at the EU s energy efficiency plan for 2020, that indicates that, after 2025, there will be a decline in imports. Also, you have the IEA s 450 scenario, which indicates much smaller growth rates for gas so these give quite mixed signals to the Russian side and this is complicating their investment decisions, which could have long-term implications. This was about the functioning of efficient gas markets, which was the first area that I touched upon.

13 The other areas are briefer so I ll be quicker on them. The second area I wanted to mention was the managing of short-term disruptions. This, again, has not been an area where the sides have been very successful. The biggest example was the crisis in Ukraine about two years ago but when saying that, I would also like to remind you that, to a large extent, the media especially has tended to overestimate the threat and also to overestimate the cost of resolving that problem. Through infrastructure investment like pipelines which go in both directions or through new connections with Eastern European countries and also through storage facilities, a lot of the problem could be alleviated to a large extent so it is useful not to overestimate how much it would cost to resolve at least a portion of that problem. I see the third area, of long-term investment, as the bigger problem rather than short-term disruptions because it is in the longer run that Europe could be faced with exorbitantly high prices if not enough investment is done in time. This is an area which does raise a concern when you look at Europe s main energy partner, Russia. Underinvestment in Russia s gas sector has been quite significant. It is not currently discussed because, due to the recent recession, there was some excess capacity in Russia and it still exists but if you look at the past 20 years, Russian gas reserves have almost remained flat whereas global reserves have been climbing quite significantly. At the same time, about 20 years ago, Russia was producing almost the same amount as it is producing today. Today it s producing only slightly more. 20 years ago, its share in global production was 29%. Right now, it s 18% and this has a lot to do with underinvestment which has occurred in their sector so it does raise questions about, in the future, how much Russia could invest in the longer run, especially because the older fields are declining quite rapidly. Russia needs to create one new Gazprom in the next 20 years, in terms of how much new capacity needs to be added from new fields so it is a major task that needs to be accomplished. In this respect, the issues about import security are quite significant, from Russia s perspective. What would happen to Europe s gas demand is an important question and this is an area where the two sides could probably work together. It would probably be desirable, for Europe especially, to define a much clearer picture of the future of natural gas in its energy balance overall in order to provide the right incentives for investment in this field. The next point is my fourth point, which is about ensuring secure transit. This has been an issue about Ukraine in past years but again, I would say, the bigger issue is the long-term issue, when you do not have investment in infrastructure, as in the case of Ukraine. The other possible failure is constant delays in reaching a decision relating to a transit country. Ukraine is the current transit country for the EU when it comes to gas. Turkey could be a very significant country to bring gas from the southern corridor. There has been a substantial delay in reaching a decision on engaging Turkey on this subject, partly because of not opening the energy chapter in those negotiations but also because of other reasons such as how much gas Turkey will be getting from the Caspian for its own needs, and so on. It has been a very complicated decision and this is an area which requires a lot more coordination between different parts of the value chain, especially between the EU and transit countries. The last point is about enhancing energy efficiency and sustainable development. This is primarily about demand-side management and the best thing about this area is that, at this point, it is probably the least controversial area. When the EU deals with Russia on this subject, this is one of the only areas where they can find a common language, or at least it s much easier. This is an area which, I would say, needs to be

14 coordinated in terms of longer-term energy balances, especially on the European side, because it does have implications for the longer-term energy balances. I d like to conclude by saying that the European Commission communication has done a great job by recognising several things; firstly, that developing an effective external energy policy has been considered crucial for completing its internal energy market. That s actually a very important recognition because the two are extremely interrelated. The second important recognition is that the EU s policy so far, especially with external suppliers, has been very fragmented and the recognition that Europe should find a single voice on the subject is certainly very important. I would say, it is extremely timely that this communication has come from the European Commission. I would suggest three reasons why it is timely, if you look at the longer-term perspective, especially when it comes to its relations with Russia, its main supplier. The first reason is that most energy experts today look at energy prices for the future and they do not foresee any good scenario in terms of the low energy prices that were witnessed in the 90s, I would say. Energy prices, as I and most others agree, will remain extremely high and when energy prices are high, it is much harder to negotiate with the energy suppliers. Simply, their interests are very different. The second thing is, if you look at gas, if natural gas became a less and less important commodity in the next decade for Russia itself, that would probably be to Europe s advantage but that s not the case just the opposite, actually. The Russian economy currently has two engines. One of them is oil actually, it s still the bigger one at this point but the other one is gas. The interesting point is that the oil engine is slowing down. According to most expectations, oil production will stabilise very soon, in a year or two, and probably start to gradually decline. There are different scenarios for that but quite the opposite is true for gas so gas exports will become even more important for Russia s own budget and Russia s economy overall. That explains why Russia has been so negative in terms of its reaction to the EU s decisions on some of the recent issues, such as to give EC mandates to negotiate with Turkmenistan and Azerbaijan, and also for the EC to have a role in negotiations on different international, intergovernmental agreements. That is because gas will become an even more strategic commodity for Russia in the upcoming decade. The third area that I would like to mention is Russian/Chinese relations. China was not in the picture of European energy security until recently but it now is, partly because when Europe tries to bring gas from central Asia, China s already a big player there, the biggest player in terms of Turkmen gas currently. In the future, it s very likely that Russia and China may be able to strike a deal and this will have quite significant repercussions for how the EU negotiates with Russia. If there is time and there are questions about that, I can go into the maths and the figures behind an EU/China gas deal and why it has been so difficult to reach such a deal, but it s not out of the question that the two sides might be able to reach a deal. As a final note, what I would like to say is that the communication does a great job of addressing a lot of the issues. What I would suggest is that for successful management of its relations with supplier countries, all five of these areas need to be examined very comprehensively. My final sentence on this would be, it s not that these areas have not been examined so far there has been a dialogue with Russia for ten years now but there have been some missing parts of it but, most