01/02/2008, Brussels
Anatoly V.Torkunov
“Russia – EU energy dialogue: a wider approach deliberations”.
1.Introduction.
We perfectly understand, that Russia and the European Union are natural partners in the energy sector. Russia has been a reliable supplier of energy into the European Union for many years, despite periods of internal difficulties. Likewise, the European Union continues to be the dominant market for Russian energy exports[1].
Close links in the energy sector could serve an example of objective interdependence of these world players.
Though, I completely agree with Thierry de Montbrial – “energy should be only one of the foundations for complex and developed relations” between Russia and EU.
The energy sector in Russia represents a major opportunity both for foreign investment and for export revenues. The need for new capital in the sector has been estimated at about €600 billion over the period to 2020. Sure, a great part of it could be re-invested by Russian companies oil and gas revenues, but still the room for foreign investments is tremendous.
Paradoxically, but Russian economy has already used to high oil prices, which have brought high the prices and costs in other sectors, though spare money we have doesn’t look so excessive..
2.Re-thinking energy security.
Besides direct mutual links the EU and Russia have a mutual interest in enhancing the overall energy security of the continent.
In course of its G8 presidency in the year 2006 Russia presented its position as to the global energy development and its place in this process. Basic principles of global energy security were developed such as energy policies coordination; supplies, markets, as well as energy sources diversification; greater market transparency, energy efficiency and access to energy.
In following up the principles stated in the G8 Summit documents, Russian “energy community” started discussion and coordination of Russia’s Energy strategy with long-term policy documents of other world key players. It’s commonly known, that all major consumers, have publicized their revised energy strategies (USA, EU, Japan, China, etc).
At present Russia’s Governmental agencies and business community work to further specify Russian energy strategy. Without changing our basic positions, Russia is structuring its strategy for the period up to 2030, considering also new circumstances and challenges of the world today.
Basic principles of the Russian energy development, as they’ve been formulated recently by Energy Minister Viktor Khristenko, are as follows:
· Providing energy for the domestic market and fulfilment of our international obligations;
· Liberalization of the internal electric power market;
· Increasing investment potential and transparency of the Russian energy;
· Transport infrastructure development with a view to developing new oil and gas provinces and to diversify supply routes;
· Establishment of transparent long-term rules of interaction with customers and transit actors for Russian energy resources;
· Higher energy efficiency of the economy and development of alternative energy sources.
Now, how Russia is implementing these principles.
3. Gas market changes.
You, know that the Russian Government agreed on the need to focus on achieving equal profitability of domestic sales and exports of natural gas, which means that domestic prices should get closer to the prices paid by European consumers less transportation costs and customs duties. In the industrial consumers sector equal profitability is expected to be achieved by 2011. We are successfully experimenting with a gas exchange board. Now it is going to be converted to a real Gas Stock Exchange (Bourse), which is going to operate with gas market derivatives and not only quotas and short-term gas contracts.
I guess, that more transparent and public gas market will put away strategic doubts over Russia’s liability as a leading European gas supplier.
4. Electricity sector changes.
Along with the gas market reform the electricity sector reform is on process in Russia. Here, the Government intends to fully liberalize the electricity market also by 2011. You now that by mid-summer this year famous monopoly RAO “United energy systems” will stop its very existence. Nowadays, electricity sector meets world standards of liberalization and even overcomes some EU countries’ conditions. In spite strong criticism over social in-country impact of electricity reform, it brings absolutely new impetus to Russia’s energy sector developments. I mean, cross sub-sector investments, when gas, oil or carbon companies go to electricity regional producing companies. New coal and nuclear power generation capacities become are on agenda, as well as alternative energy, in particular to hydro generation.
This will mean attracting investment in the range of USD 500 billion by 2020. Investors come bidding already. Major European energy companies also take part in this process.
So, through the change within the electricity we gain new dynamics in Russia’s energy community as a whole, which seems to be still slightly underestimated by opticians and political experts in Europe.
Here I stress word “political”, sometimes politicians and political analytics go much behind businessmen in understanding things!
My strong believe is that re-novated electricity sector, because of its market-oriented character, would contribute to Russia’s better relations with EU.
Electricity reform has also its purely foreign dimension . Russian officials as well business strongly support the EU member-countries’ initiative on mutual electricity supply integration and urge for eventual synchronous connection of power transmission lines run by the CIS countries, EU new-comers and the rest of the European Union. A strong potential for this cooperation witnessed in the Black Sea and Baltic Sea regions.
5. Energy transport.
Now, let me move to a little bit more sensitive issues. I mean transportation.
The enhanced interconnection in a “wider Europe” (Europe- including Russia!) is clearly observed in the energy sector, as well. That is why development of the Russian transport infrastructure de facto means development of the infrastructure connecting of the whole of Europe, “EU and non-EU Europe”.
Within a paradigm where a consumer’s security supposes diversification of sources of supply, a supplier, inevitably diversifies routes of supply, routes to beneficiary markets.
Even transit countries tend to diversify, or at least, multiply a number of pipelines on their territory! Should we call this disease “politically provoked obsessed diversification”?
In this regard we note considerable progress in promotion by Russia of a number of infrastructure projects aimed at diversification of hydrocarbon export flows that affect, one way or another, all the European countries. I will mention but the main ones.
Yet in the year 2006 we Russia completed a major project to increase deliveries of oil to Western Europe: the capacity of the Baltic pipeline system (BPS) was increased up to 74 million tons a year. Now a BPS-2 project with a capacity of 75 Mt is been carefully and positively considered.
Burgas-Alexandropoulos pipeline project was launched in the South. It will help to solve the traffic problem of the Black Sea Straits. Russia works over infrastructure to increase gas supplies to Turkey and to more distant Southern regions. The Blue Stream Gas Pipeline has already reached its full capacity (16 bcm per year).
In general, latest growing energy presence of Russia in the Balkans and Southern Europe creates new ties of interdependency, which compete with old fashioned Slavonic entity idea. Though some experts prefer to say about energy “underpinning”.
When it comes to ‘famous” Yamal-Europe and the North Stream Gas Pipeline projects, certainly they will allow for increased export supplies and diversification of the export routes. These projects will cover additional gas demand at markets of the Central Europe, traditional for Russia, and forward Russian gas to new Nordic and, probably, UK markets.
Objections to the project have centered on concerns about the impact of construction work in the Baltic Sea, about increasing Russian leverage on some individual European countries, and about the political implications of Russia’s preeminent role as a gas exporter to Europe. These concerns are counterbalanced, however, by the strategic and environmental interests of the European Union in a successful and timely completion of the project. Commercial logic and energy policy objectives combine to motivate each of the sponsoring investors: Dutch, German, and Russian.
Paradoxically, but North Stream, seen by some as “imperial blackmail of European common energy policy” is needed to help the European Union meet its ambitious environmental and energy goals for 2020.
As the Nord Stream pipeline is completed, famous CERA concludes:
· “It will contribute directly to the European Union’s ability to reduce greenhouse gas emissions by 20 percent—one of the EU’s key “20:20:20” goals—by making available quantities of gas that substitute for higher carbon fuels[2].
· The project will improve the physical security of European natural gas supply.
· Gas supplied through the pipe will enhance future competition between pipeline and liquefied natural gas (LNG) supply in European markets. This will benefit European consumers, contributing to the competitiveness of European economies.
· It will also contribute to the balance of gas in the Atlantic Basin, reducing European pressure on available LNG, benefiting Asian and American consumers as well.”
Apparently, Political tensions, provoked by North Stream at the initial stage, comes down with a growing number or potential beneficiaries, those who get taste for it.[3].
Now Russian energy community carefully observes changes in the Polish position, which will be eventually discussed during forthcoming visit of the prime minister Tusk to Moscow.
6. Energy efficiency.
Let’s move to a more conciliating and consensus issue – energy efficiency.
The potential of new energy efficient technologies is comparable to the potential of new fields and new power units. So, it is no surprise that energy efficiency is a key issue of the sustainable energy development for European countries as well as Russia.
Evidently, Russia being a major energy producing and transit country is at the same time a major and unfortunately not the most efficient energy consumer! The glaring fact is that only 10% of households in our country have water and gas meters.
Sometimes in Russia even very simple administrative steps could bring upper energy efficiency, such as recent elimination of import duties for the equipment, which is not produced within Russia, including equipment for the oil, gas, and coal industries or a zero rate extraction tax for associated petroleum gas from the oil fields.
The Russian economy has considerable growth potential via energy efficiency.
Our country energy saving potential of 360-400 t.o.e. is equal to 30 to 40 % of present annual energy consumption. Russia’s Energy Ministry has stated the goal to save annually up to 100 M t.o.e by 2015.
Enhancing energy efficiency of our economies we increase the "safety margin" of the European and global energy system and make it more stable.
7. Conclusion
Such are some of the aspects, which are directly or indirectly related to Russia – EU energy interaction. Within the trends indicated you could see contradictory or encouraging ones, but nothing dramatically negative for our relations. At the same time complexity and multifaceted character of our energy interactions is evident, which imperatively urges us to find institutional and legal framework for dealing with contemporary agenda.
Here I refer back to the idea of negations of without any protractions over a new Russia – EU PCA. Certainly, we wont succeed soon, but we “discipline” beurocracy, security and business community’s discussions over energy by canalizing them to result-oriented activities
1
[1] Some figures illustrate the interdependence of the EU and Russia in the energy sector. 50% of Russian oil exports goes to the EU. This represented 37% of the EU’s oil imports. Russia’s gas export covers 24% of EU supplies and 60% of EU gas imports.
[2] In March 2007, the European Council approved the basic principles of energy policy for Europe and Action Plan for its implementation. Its main objectives are: 1) Saving 20% of the EU’s energy consumption compared to projections for 2020; 2)Reaching a 20% share of renewable energies in the overall EU energy consumption by 2020; 3)20% reduction in greenhouse gas emissions compared to 1990.
[3] In an interview with the “Vremya novostey”, a reputable Russian newspaper, Gernot Ehrler, Minister of State at the Federal Foreign Office, gave a convincing rejoinder to the critics and opponents of the project: "As to the trans-Baltic Russia-Germany gas pipeline construction project, it's in a class by itself. This is a commercial project, a private enterprise even though in a political context. Germany's only mistake was, perhaps, that it provided insufficient information about the project to the Baltic states and Poland. But we are making up for it. The gas pipeline project is in line with the EU's energy policy principles because it provides another route for energy resources transportation. The German government is determined to carry through the work on the project and reckons on fruitful cooperation with Russia."