courtesy Simon Robertshaw
Improving EU and UK energy security
Former NATO adviser, Paul Domjan, says the EU needs to use its competition powers to ensure that Russia's Gazprom does not lock out other potential suppliers. The EU must begin construction on the Nabucco pipeline, bypassing Russia, to ensure that it becomes the key gas corridor between Europe and Turkey, not the Gazprom-dominated South Stream
Today, the threat of politically motivated disruption of gas supplies from Russia and insecurity in key oil producing regions globally have led to a new concern about energy security in oil consuming industrialized nations. A confusion of roles, however, has prevented these risks from being effectively managed. In Europe, disparate organizations, including national governments, European intergovernmental institutions, and elements of the private sector, have all rightly touted themselves as key parts of the solution. However, uncertainties about how to define energy security, who should be responsible for it, and, most crucially, how these disparate organizations should work together have hamstrung these efforts.
To the extent that an energy security system exists today, it is more suited to the challenges of the 1970's than those of today. The oil consuming industrialized countries formed the International Energy Agency (IEA) to coordinate their response to the new market power of OPEC. From their adversarial beginnings in the 1970s, these two organizations have become increasing interdependent, with producers and consumers informally coordinating oil supply and price management from the mid 1980s. However, the bulk of governmental action on energy security still takes place at a national level. For example, while the IEA is responsible for coordination of strategic stocks, national governments take very different approaches to the size, uses, and management of these stocks. In the name of bolstering their domestic security, these states have in fact reduced the potential effectiveness of the international system of stocks.
Furthermore, the current framework does not facilitate cooperation between producers and consumers. This is particularly apparent in Europe, where dialogue between the EU and its key supplier and transit countries, like Russia and Ukraine, focuses on the four untenable pillars of transparency, reliability, cooperation on specific projects (especially infrastructure, and reciprocity. In the real world, we must recognize that many of our key energy suppliers will supply these four things, but this should not prevent useful cooperation. Rather, a dialogue as equals between a united EU and its energy partners could lead to a much more cooperative approach to energy security without insisting on changes to the domestic arrangements in these countries.
The limitation of this current system means that it fails to address many of the key energy security risks facing us today, including:
1) The risk of politically motivated gas supply disruptions from Russia to Europe.
2) Agreeing a framework between industry and government for short-term demand reduction to increase demand elasticity and cushion the impact of supply disruptions.
3) Insecurity in multiple oil producing countries (e.g. Iraq, Nigeria, Venezuela, etc.) leading to significant supply disruption and risk of future supply disruption, pushing the oil market into contango.
4) Coordinating a response to disruption of oil supplies resulting from an embargo of Iranian oil exports.
5) Coordination of major current and planned strategic oil and gas storage projects globally.
6) Sharing of intelligence and response planning for energy security threats among governments, companies, and other key actors.
7) Coordinating the security of key nodes in the energy system against potential terrorist attack.
The EU could provide a powerful regional coordination mechanism, providing for an efficient market inside the union and a common approach to suppliers outside the union. However, if the EU fails to force the creation of a single European energy market, it risks facilitating access into Europe for powerful external players, mostly notably Russia, while fragmenting Europe into separate national markets that are too small to ensure their own security successfully and yet unwilling to take the steps necessary to work together.
Britain today is a case study of this worst case scenario. Britain's has a liberal market that provides very low prices, but lacks the necessary incentives to build and maintain a security margin. As such, Britain's domestic gas storage is measured in weeks of demand, as opposed to months in France and Germany. In principle, however, high prices in Britain should provide a financial incentive for continental gas companies to release gas from their storage to Britain. In practice, however, national security concerns in continental Europe trump market mechanisms.
However, poor functioning of the EU energy market is not the only threat to Britain's energy security. The peaking of North Sea gas production means that Britain is now, like continental Europe, largely dependent on imports of gas both by pipeline from Russia and in liquefied form from West Africa and the Persian Gulf. Britain's relations with Russia clearly show the need for a unified European approach. Russia is pursuing an integrated strategy of trying to segment the European market through sweetheart deals with key countries. It is building a pipeline link directly with Germany, cooperating with Italy's ENI in Turkey, purchasing stakes in gas utilities in central Europe and the Baltic states, cooperating with Hungary to scupper admittedly feeble EU attempts to build the Nabucco pipeline—a connection to the Caucasus that bypasses Russia—and considering attempting to acquire Centrica in the UK. Russia has presented all of these deals as special relationships that will guarantee the particular country's energy security over and above the rest of Europe.
However, not all of these countries can be Russia's special partner in Europe, and, by pursuing partnership deals with Russia, they are undermining the best option for securing gas flows from Russia: a common European approach to Russia that faces Russia to negotiate with the EU as a block.
Rather than courting Russia individually, the EU needs to present a strong and sensible common energy policy. The EU should first assess whether a country's energy producers compete freely and export on the basis of market conditions and not political concerns. Effectively implementation of the terms of the Energy Charter Treaty would be a key component of this test. In the event that a country fails this test, as Russia surely would with respect to gas transportation, it should be banned from selling gas directly to EU customers. These non-market suppliers should be forced to deal with a single EU gas purchasing board, staffed by senior European civil servants and gas buyers seconded from major European utilities. This will enable Europe to exploit Russia's need for security of demand effectively by matching strength with strength rather than blithely waiting for Russia to begin to abide by European norms that do not serve Russian self-interest.
Finally, the UK has repeatedly seen the threat of insecurity of key energy nodes. The IRA sought to exploit the vulnerability of these key nodes during Operation Airliner, when the IRA came very close to blowing up key nodes in the London electricity system. More recently last winter, Britain came within days of running out of gas after a fire at the Rough gas storage facility incapacitated most of Britain's gas storage. Looking farther overseas, British companies are exposed to the possibility of disruption of energy production and transport due to political instability, international terrorism, or violent conflict in the Caucasus, the Turkish Straits, Nigeria, Georgia, Iran, and Bolivia, among others. Disruption in any of these geographies would directly impact British and European energy security through oil and gas price movements and, potentially, actual shortage of supplies to Europe.
Effective international coordination could go a long way to reduce Europe's exposures to these risks. Just as a common European energy foreign policy is critical in dealing with Russia, a strengthened IEA, with expanded membership and powers, could play a key role in preparing for disruption of supplies, whether due to politics, violent conflict, or, as in the case of the fire at the Rough gas storage facility, simply accidents.
While the IEA coordinates the market response to a potential disruption, NATO needs to take a role in ensuring the physical security of key energy nodes in and around Europe. This security approach should be based not on vulnerability, which would lead to a massive militarization of the entire energy system, but on sensible intelligence-driven threat assessments. While these threat assessments may point to the need for physical hardening at a very small number of key facilities, it will also show that, in most cases, the threat justifies no military security action beyond security cooperation and training.
NATO is the only institution with an explicit security role that includes both European consumers and, through the Mediterranean Dialogue and Partnership for Peace Initiatives, Europe's main suppliers in the former Soviet Union and North Africa. Furthermore, NATO already has the necessary institutions to play a role in energy security. It has established mechanisms for intelligence sharing. Through its Centres of Excellence in Defence against Terrorism and in Special Policing Units, it has the necessary capability to train host country gendarmerie-type forces to conduct energy security operations. Given the key role that the EU and NATO should play in energy security, it is bitterly disappointing that NATO has done little to move in this direction, that the EU is only now beginning to think about a common foreign energy policy, and that the two institutions have no coordination in this area.
While this is a broad agenda, there are concrete steps that can be easily taken today to begin to move it forward. As Russian and Ukraine are still in the midst of renegotiating their opaque gas arrangements, this is the right time for Europe to use the stick of forcing a European Gas Purchasing Board as a mean of pushing for greater transparency in the energy system. Similarly, Europe needs to use, and perhaps even extend, the Commission's competition powers to ensure that Gazprom does not use its assets in Europe to lock out other potential suppliers. In terms of transit, Europe needs to continue to reach out to Ukraine and Turkey to develop close relationships with these key transit countries. This means showing both of them that they do have a European vocation and should continue to work towards EU membership, however long the accession process may be.
Finally, and specifically, the EU must aggressively move to finance and begin construction on Nabucco. Not only is it crucial that Nabucco, and not the Gazprom-dominated South Stream, be the key gas transit corridor between Europe and Turkey, but successfully delivering Nabucco will greatly bolster Europe's credibility on the world stage.
Paul Domjan (paul.domjan@jh-co.com) is the former energy security advisor to the US Military's European Command. He is a director of John Howell and Company Ltd, the energy fellow at the Stockholm Network, and a British Marshall Scholar at Wolfson College, University of Oxford.
