Europe’s Energy Dilemmas: The New Security Dimensions

Catherine M. KelleherThe Watson Institute for International Studies

Brown University

49th Annual ISA Convention

San Francisco, CAMarch 29, 2008

“Bridging Multiple Divides”

2

Danger of Dependence

• Europe’s energy dependency was first revealed in the oil shocks of the 1970s.

• Europe’s dependency on energy imports is again rising.

• Unless Europe can make domestic energy more competitive, in the next 20 to 30 years around 70% of the Union’s energy requirements, compared to 50% today, will be met by imported products – most from regions threatened by instability.

• Reserves are concentrated in a few countries. Today, roughly half of the EU’s gas consumption comes from only three countries (Russia, Norway, Algeria).

3

EU Dependence on Foreign Energy

• EU’s primary energy demand will probably grow 0.7% per year over the next 20 years.

• Oil and gas will continue to be the dominant fuel sources with gas as the largest growth market of any fuel.

• EU’s natural gas production will decrease in the future but consumption will double in the next two decades.

• Russia currently provides 25% of that imported gas. Its share will rise to over 30% by 2015 and drop to about 27% by 2030.

Source: Director-General for Research, Sustainable Energy Systems. “Energy corridors: European Union and Neighboring countries.” EUR 22581, 2007. http://bookshop.europa.eu/eubookshop/FileCache/PUBPDF/KINA22581ENC/KINA22581ENC_002.pdf

4

EU Dependence on Foreign Energy

• By 2030 EU’s total energy consumption is expected to be 34% oil and 27% gas … a two-thirds jump in imports.

• By 2030, the EU will be– 90% - 93% dependent on oil imports– 80% - 84% dependent on gas imports

• EU countries currently buy around 40 percent of their natural gas -- primarily for electricity -- from Russia, that is the state-controlled gas monopoly Gazprom.

• States in central and eastern Europe are particularly dependent on Russian-supplied gas.

Source: European Commission, Directorate-General for Energy and Transport. “Energy for a Changing World.” 2007. http://ec.europa.eu/energy/demand/index_en.htm.

5

0

5

10

15

20

25

30

35

40

45

1990 2000 2010 2020 2030

Oil

Solid fuels

Gas

Nuclear

Renewables

Source: Commission Staff Working Document. Annex to the Green Paper. A European Strategy for Sustainable, Competitive and Secure Energy. What is at stake - Background document. 2006. http://ec.europa.eu/energy/green-paper-energy/doc/2006_03_08_gp_working_document_en.pdf

Europe's share of energy sources in total energy consumption (in %)

6

OECD North America

101118 121 131 139 147 154 163

0.0

50.0

100.0

150.0

200.0

1990 2003 2004 2010 2015 2020 2025 2030

Nuclear

Other

Coal

Natural Gas

Liquids

Total

OECD Europe

70 80 81 85 88 88 90 92

0.0

50.0

100.0

150.0

200.0

1990 2003 2004 2010 2015 2020 2025 2030

OECD Total Energy Consumption by Region and Fuel, Low World Oil Price Case, 1990-2030, Quadrillion Btu (British

thermal unit)

Source: European Commission, Directorate-General for Energy and Transport. “EU Energy in Figures.” http://ec.europa.eu/dgs/energy_transport/figures/pocketbook/doc/2007/2007_energy_en.xls.

7Source: European Commission, Directorate-General for Energy and Transport. “EU Energy in Figures.” http://ec.europa.eu/dgs/energy_transport/figures/pocketbook/doc/2007/2007_energy_en.xls.

2005 Share of Crude Oil Imports into EU-27

8

117.7 114.9

65.145.5

35.554.7

9.921.4

137.1

188.0

97.5

60.750.6

35.4 30.0 26.4 22.8

117.5

0.020.040.060.080.0

100.0120.0140.0160.0180.0200.0

2000

2005

Source: European Commission, Directorate-General for Energy and Transport. “EU Energy in Figures.” http://ec.europa.eu/dgs/energy_transport/figures/pocketbook/doc/2007/2007_energy_en.xls.

2000 and 2005 Crude Oil Imports into the EU-27 (in Mio tonnes)

9

0

2,000

4,000

6,000

8,000

10,000

12,000

1992 1997 2002 2007F

Production

EXPORTS

Consumption

Russian Total Liquids, thousand bbl/d (barrels per day)

Source: Energy Information Agency, International Energy Annual. “Russia Energy Data.” http://www.eia.doe.gov/emeu/cabs/Russia/images/RF_data.xls.

10

EU Dependence on Russian Gas

• Russian energy sector contribution to GDP: approx 25%.

• Russian gas exports to the EU-25: 65% of gas exported.

• By 2010 about 70% of Russia’s gas supply will come from Gazprom. But, increasingly Gazprom will be selling increasingly expensive gas and oil from Central Asia.

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Russia44%

Norway24%

Nigeria4%

Libya2%

Egypt2% Oman

1%Other Origin

0%

Qatar2%

Algeria21%

Source: European Commission, Directorate-General for Energy and Transport. “EU Energy in Figures.” http://ec.europa.eu/dgs/energy_transport/figures/pocketbook/doc/2007/2007_energy_en.xls.

2005 Share of Crude Gas Imports into the EU-27, in TJ, terajoules

12

Europe: Addicted to Gazprom

Source: Business Week. http://www.businessweek.com/magazine/content/06_31/b3995065.htm.

13

Rank CountryImports

(bcf/year)Pct of Domestic

NG Consumption1 Germany 1,291 43%2 Italy 824 30%3 Turkey 630 65%4 France 406 26%5 Hungary 294 62%6 Czech Republic 252 84%7 Austria 246 70%8 Poland 226 47%9 Slovakia 226 108%

10 Finland 148 105%11 Romania #N/A #N/A12 Fmr Yugoslavia 134 57%13 Bulgaria #N/A #N/A14 Greece 85 96%15 Switzerland 13 12%

Ukraine 2,113 79%Belarus 710 100%Baltic States 205 100%Azerbaijan 120 36%Georgia 46 100%

*Includes some re-exports of Central Asian gas. Source: EIA, BP (2006), CIS and E. European Energy Databook, 2006. Cedigaz 2006.

Sales to Baltic & CIS States, 2005*

Source: Energy Information Energy. http://www.eia.doe.gov/cabs/Russia/NaturalGas.html.

Major Recipients of Russian Natural Gas Exports, 2005

14

Forecast of Gas Supply of Europe for EU-25, Balkan States, Switzerland (billion m3)

2005

211

78

126

5631

42% 16% 25% 11% 6%0

50

100

150

200

250

IndigenousProduction

Import Norway Import GUS Import Algeria Import Others

2030

163

100

221

115

217

20% 12% 27% 14% 27%0

50

100

150

200

250

IndigenousProduction

Import Norway Import GUS Import Algeria Import Others

Source: Nabucco, Markets / Sources for Nabucco, http://www.nabucco-pipeline.com/company/markets-sources-for-nabucco/markets-sources-for-nabucco.html.

15

20000

20500

21000

21500

22000

22500

23000

23500

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Source: Energy Information Agency, International Energy Annual. “Russia Energy Data.” http://www.eia.doe.gov/emeu/cabs/Russia/images/RF_data.xls.

Total Russia Natural Gas Production, Dry natural gas (Billion Cubic Feet)

16

Russia’s Projected Gas Balance, 2010, Bcm (billions cubic meters)

Source: Institute of Energy Policy and BP

17

0.3 0.82.3

3.1

10.3

0

10

20

2002 2003 2004 2005 2006

Source: Vladimir Milov, “Global Energy Security: The Role of Russia and Central Asia” and Gazprom IFRS financial reports

Gazprom’s oil & gas purchase costs in 2002-2006, billion USD (money of the day)

18

0.5

2.0

2.0

2.0

15.0

16.2

30.0

Yareyskaya area ofYamsovey field

Gubkinskoye field(Northern cap)

Nydinskaya area ofMedvezhe field

West Pestsovayaarea of Urengoy field

Neocomian strata ofZapolyarnoye field

Achimov strata ofUrengoy field

Kharvutinskoye

Potential of new gas output in the current gas production area, that would be relatively easy to launch in the coming years, bcm/year

Launching new gas production at remote green fields will require 5-7 years, enormous investment and unique technologies currently untested. We are on the edge of severe Russian gas production decline

New Russian Gas Fields – What is left?

Source: Vladimir Milov, “Global Energy Security: The Role of Russia and Central Asia,” [presentation by Gazprom’s deputy CEO A.Ananenkov, Moscow, June 14th, 2007]

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Russian Actions 2006/2007/2008

• Ukraine: January ‘06 / Winter ‘07/’08• Georgia: Present• Belarus: Deal 2007 • Algeria: Cartel? • Putin

– Sell to others if Europe not cooperative– Guarantee existing contracts at “market

prices (Merkel)

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Russia: Commercial Motives

• Old-style: Money• New-style: « downstream investments »• Pressure from others

– Kyrgstan, Turkmenistan: fair share– Poland, Belarus: transit fee

• Foreign « exploitation » in Russia: – Sakhalin – Shell– Pressure on TNK/BP

21

South Stream Pipeline

Source: Gazprom, http://www.gazprom.com/eng/articles/article27150.shtml

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Northern European Gas Pipeline

Ariel Cohen, Ph.D., “The North European Gas Pipeline Threatens Europe’s Energy Security,” October 26, 2006, Backgrounder #1980. http://www.heritage.org/Research/Europe/images/figure2_large.gif.

[“Germany: Schroeder’s New Gig Causes Trouble at Home,” Stratfor, March 30, 2006, www.stratfor.com/products/premium/read_article.php?id=264178 (August 3, 2006)]

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What’s Next?

• The EU is especially alarmed by the several disruptions of supplies to Europe, in the pricing rows between Russia, Ukraine, Georgia, and Belarus.

• More upsetting have been successful moves by Gazprom to renege on or block foreign partners in new gas fields and emerging oil exploration.

• EU so far has failed to develop countervailing policy strategy – on imports, pipelines, distribution, or diversification.

24

Possible Solutions

• EU Conservation Plan

• Diversification

• Special Deals

• EU Common Policy and Capabilities

• Globalization

• ?????

25

EU Conservation Plan

• The European Commission in 2006 approved a plan to cut EU energy use by 20% by 2020, a day before European leaders raised their concerns about oil and gas supplies with Russia’s Vladimir Putin.

• The energy saving plan will be introduced over six years. The cost of EU energy consumption may be reduced by more than 100 billion euros a year ($150 billion) by 2020 and CO2 emissions cut by 780 millions tonnes annually.

26

Diversification

• New sources in Africa (oil and gas). But, competition with Chinese and Indians.

• Reconsideration of nuclear energy. But, popular opposition, especially from Germany.

• Return to coal. But, environmental risks and increasing costs.

27

Special Deals

• Bilateral. Large nations have a financial advantage. For example, German, Italian, and French deals with the Russians.

• Disadvantaged– Small states– CEE states – “legacy”– Poor states

28

EU Common Policy and Capabilities

• EU Energy Charter• US interest and help – Baku-Ceyhan• Some initiatives

– Naucco pipeline

• No agreement on – Pooling– Equitable distribution– Future price caps– Reserves/storage

29

Great Caspian Oil Pipeline

Source: BP, http://www.bp.com/liveassets/bp_internet/globalbp/STAGING/global_assets/images/locations/caspian/map_pipeline_caspian_594x370.gif

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Nabucco Gas Pipeline

Construction will begin in 2010 and the first gas deliveries will arrive in Austria in 2013.

Source: Nabucco, http://www.nabucco-pipeline.com/project/project-description-pipeline-route/project-desription.html and “Nabucco official: pipeline project on track, ” The Messenger, March 18, 2007, http://www.messenger.com.ge/issues/1568_march_18_2008/1568_econ_two.html

31

South Stream and Nabucco pipelines

Source: David Wood, “Russia’s Gas Power Play,” Energy Tribune, August 17, 2007, http://www.energytribune.com/articles.cfm?aid=590

32

Globalize

• Nationalized EU policy?

• Transatlantic solution?

• Global multilateral?

And…???