This paper was written by Nastassia Sianko. Her bibliography is available on request.
INTRODUCTION
In recent years, many analysts have noted the dependence of many European countries on Russian energy grow because the global demand for energy is increasing.
The EU is the world’s largest energy importer. In the face of the EU’s growing dependency on imported energy resources, the Member States expressed their support for a Common External Energy Policy (CEEP) in order to be able to speak with one voice. This policy, according to the EU officials, would help to achieve a more stable and reliable relationship with the energy suppliers including Russia. It would help to create a ‘common regulatory space’ around Europe and develop ‘common trade, transit and environmental rules, market harmonization and integration’ politics, the EU is attempting to institutionalize the EU-Russia energy relationship, and to align it with market principles.
In spite of this desire to create CEEP, the dependence of the Member States is unequally distributed. Some EU countries, many of them in Central and Eastern Europe, are dependent on Russia for most or all of the oil and natural gas they consume. Because the European Commission has no formal legitimacy over the Member States’ energy policies, they pursue energy policies that best serve their national interests. Indeed, the extensive bilateral deals between these countries’ national energy champions (for example, Germany and Italy) and the Russian state controlled natural gas monopoly Gazprom are one of the main obstacles for a cohesive EU-wide energy security policy. Central and Eastern European members want the EU to take a stronger stance against dependence on Russia for energy.
Russian oil and gas industries play a very important role in the countries’ economy. Roughly two-thirds of Russia’s export revenues and half of its state budget comes from oil and gas exports. The EU and is Russia’s largest energy buyer and as a result, is an essential and equal partner in this relationship. New market dynamics in Europe are changing the nature of Russia’s gas relationship with the EU.The relationship needs to be improved. How can this happen?
This essay will start with examining the legal framework for the EU-Russia energy relationship. Then it will proceed to the energy infrastructure and influence of the international organizations on the relationship. Finally, the last chapter will look into the future dialogue and possibilities for further cooperation.
CHAPTER 1
Legal Framework
The EU dependency on energy imports increased from less than 40 % of gross energy consumption in the 1980s to 45.1 % in 1999 and then to 53.9 % by 2009.
The highest energy dependency rates were recorded for crude oil (84.1 %) and for natural gas (64.2 %) 7. For example, the domestic gas production of EU countries, which in 2005 covered 43% of demand, will satisfy less than 25% of demand by 2030. Therefore, the EU’s gas imports is expected to rise and reach 80% in 2030 9. The dependency for supplies of natural gas grew at a faster pace in the last decade than the dependency on crude oil, which stayed roughly the same. Analysts consider that natural gas is the fuel that will benefit the most from a switch away from nuclear power. Mounting worries over climate change are creating further opportunities for natural gas, which is called ‘fortunate fuel’.
The EU is strongly dependent on Russian energy imports. The dependency on imported gas from Russia is around 40% (though it should be noted that the Russian’s share of the EU imports of natural gas declined from 47.7 % to 34.2 % between 2001 and 2009
The EU Member States are less dependent on oil supplies from Russia, as they can draw on a more flexible global oil market with the oil delivered from tankers. Unlike oil, natural gas is a regional commodity, as by contrast to oil, gas is extremely difficult and costly to transport via tankers, making its supply dependent on pipeline infrastructure. Gas from Russia to the EU flows exclusively through the Russian state-owned energy company Gazprom’s pipelines.
In October 2000, the EU and Russia agreed to start an Energy Dialogue dealing with issues such as security of supply, energy efficiency, infrastructure (e.g. pipelines), investments and trade. Launched at the EU-Russia Summit in Paris in October 2000, this bilateral Energy Dialogue aimed at securing Europe’s access to Russia’s gas and oil reserves. The dialogue is based on the assumption that interdependence between the two regions will grow – from the EU for reasons of security of supply; on the part of Russia, to secure foreign investment and facilitate its own access to the EU and world markets. (As mentioned earlier, the EU is responsible for over half of Russia’s trade turnover.)
Although Russia and its predecessor the USSR had been reliable suppliers of energy to Europe for many years, the gained control over Gazprom by the government (the Russian government holds just over 50% of its shares) in 2005 and the resulting strong centralization of the energy sector in Russia led to worries in the EU that the Russian government was seeking state control of Russia’s energy resources to use as a political weapon.
Since 2005 Russia had numerous gas conflicts with neighboring countries. This can be illustrated, for example, by the Russian-Ukrainian gas relationship. Russia cut off natural gas supplies to Ukraine on December 31, 2006 due to refusal of the Ukrainian government to pay for the gas with market prices. (Ukraine and other former Soviet Union countries receive gas from Russia far below market prices. This is subsidized by the revenues from the higher-priced sales of gas to the EU, which also permits Russia to benefit domestic households and manufacturers). Many analysts point out that the reason for gas prices’ increase to Ukraine was the ‘Orange Revolution’ and the fact that pro-Western leader Viktor Yushchenko was elected President of Ukraine. It should be noted that the main oil and natural gas pipelines to Central and Western Europe transit Ukraine’s territory. In 2006 84% of Russian’s natural gas exports and 14% of Russian oil exports passed through the country. As a result of the above-mentioned cut off, Ukraine diverted to its own use some of the gas that Gazprom intended for European customers. Western European governments protested sharply, especially because they were not part of the conflict and they were paying market prices for their supplies. The conflict was settled on January 2, 2007 and deliveries of gas resumed.
This event of January 2007 awakened the EU in respect of its excessive dependence on Russia and resulted in energy security being strongly put on the table in Brussels. The EU responded to the gas crisis with the March 2006 Green Paper on a European Strategy for Sustainable, Competitive and Secure Energy. The document’s opening line “Europe has entered into a new energy era and infrastructure including third party access to pipelines (one could assume that the Paper implicitly referred to the monopoly of Gazprom over pipelines). The Paper pointed out that the EU, as Russia’s largest energy buyer, is an essential and equal partner in the relationship. The document strongly recommended the legalization and institutionalization of the relationship through the increased efforts of the EU to get Russia to ratify the Energy Charter Treaty (ECT) and its Transit Protocol on Energy Efficiency and Related Environmental Aspects (PEEREA). (The ECT and the PEEREA of 1994 provide a multilateral framework for energy cooperation. They are designed to promote energy security through the operation of more open and competitive energy markets. The Russian position towards the Treaty will be discussed later in the Chapter). Paper also mentioned EU-Russia Partnership and Cooperation agreement (PCA) of 2007 and the creation of new framework due to replace the PCA.
On the whole, the majority of the policy recommendations in the Green paper were internal rather than external. It mainly focused on the completion of internal energy market between the Member States, its unification and the main objectives that should be pursued such as sustainability, competitiveness and security of supply. The Paper, being an internal document of the EU, does not form part of EURussia dialogue.
The PCA, which came into force in 1997 for an initial duration of 10 years and is now being renewed annually since 2007, forms the legal basis for the EU relations with Russia and remains such until replaced by a new agreement.
The PCA covers a wide range of policy areas including political dialogue; trade in goods and services; business and investment; financial and legislative cooperation; science and technology; education and training; energy, cooperation in nuclear and space technology; environment, transport; culture; and the prevention of illegal activities
As we can see it is very broad in nature and is not specific to the energy relationship. Nevertheless, there is the Article 65 of Title VII ‘Economic Cooperation’, which spells out the principles of cooperation in relation to energy between the EU Member States and Russia. According to the Article, the shows that cooperation shall include among others the following areas: improvement of the quality and security of energy supply, in an economic and environmentally sound manner; formulation of energy policy; improvement in management and regulation of the energy sector in line with a market economy; modernization of energy infrastructure including interconnection of gas supply and electricity networks; the environmental impact of energy production, supply and consumption, in order to prevent or minimize the environmental damage and some others.
Further Russian-Ukrainian gas crisis of January 2009, similar to the crisis of 2006, led to both parties bringing the question of energy security again into the open. During the 2009 EU-Russia Summit both parties looked for ways to improve prevention and management in case of an energy crisis. They strengthened the dispositions under the EU-Russia Energy Dialogue with an enhanced Early Warning Mechanism. As a result of the talks the Memorandum on an Early Warning Mechanism was signed that included a clear definition of the circumstances that would trigger the activation of the mechanism, in terms of what constituted a “significant disruption of supplies”, be it due to maintenance of relevant infrastructure, accidents, or commercial disputes.
Commissioner Piebalgs after the signature of the Memorandum said: “An energy crisis like the one the EU suffered in January [2009] is harmful for supply, transit and consuming countries alike. As a consequence, the document was foreseen for the EU or Russia to notify any likely oil, gas or electricity supply interruption, including an exchange of the assessments of the situation.
Among different legal documents, forming part of the EU-Russia legal framework for energy security, the ECT of 1994 stands out as a stumbling block between two parties. Russia to date did not ratify the Treaty. The Russian refusal to ratify the ECT is mainly due to the Treaty’s Transit Protocol – PEEREA. Russia the EU entered a new phase in respect of energy security in Europe.
The Paper put forward suggestions and options in order to form the basis for a new comprehensive European energy policy. It identified six key areas where action was necessary to address the challenges that the EU faced. Among those areas were completing the internal European electricity and gas markets, solidarity between the Member States, diversification of energy mix, tackling climate change, innovation and coherent external energy policy.
The external energy policy, according to the Green Paper, included dialogue with major energy producers/suppliers especially Russia, which was acknowledged as the EU’s most important energy supplier. Drawing on the centrality of the EU’s energy relationship with Russia, the Paper called for a fundamental transformation of the relationship into a true partnership, which would offer security and predictability for both sides. It stated that the partnership should offer reciprocal access to markets signed the ECT in 1994 and accepted provisional application of the Treaty pending ratification. This meant that Russia agreed to apply the provisions of the Treaty to the extent consistent with Russia’s constitution, laws and regulations. The absence of ratification did not present an obstacle to the practical and technical work of the Energy Charter process, in which Russia was an active participant. It did, however, leave ambiguity about the extent of Russia’s legal rights and obligations under the Treaty. On August 20, 2009 Russia officially informed the Depository of the Treaty that it did not intend to become a Contracting Party to the ECT and the PEEREA.
By agreeing to the principles of the Protocol, Russia would commit itself to the plementation of the principles of freedom and transit without distinction of the origin, destination, or ownership of energy, and non-discriminatory pricing. In reality, Gazprom would have to give up its monopoly position over the gas deliveries to Europe. By opening up its pipelines to third party access, Russia would give up its pricing monopoly and its leverage-producing position as the main seller and supplier of natural gas to the EU. By demonopolising its pipeline networks, Russia would also put under pressure its own energy security, which is based on its strategic position as the chief supplier of gas to Europe. The Russian refusal to ratify the ECT must be seen in the light of protection of national interests by nationalizing resources of the country. Such resource nationalism, which has become a trend among energyrich nations, with state-owned companies controlling up 85-90% of the world’s oil and gas reserves, contradicts the ECT, upon which the EU is trying to build its energy relations with Russia. It seems unlikely that Russia would consider ratifying such an agreement in the nearest future.
Legal framework of the EU-Russia energy relationship is based on a number of documents. The most important of them are those, which form part of the Energy Dialogue such as, for example, the Memorandum on an Early Warning Mechanism, and the PCA. The works are now in progress in order to replace the PCA by a new agreement.
CHAPTER 2
Infrastructure. Influence of International Organizations
There are different ways to deliver gas and oil from Russia to the EU. As noted before, many European countries are less dependant on oil supplies from Russia, as they can draw on a more flexible global oil market, with the oil delivered from tankers.
Gas is being delivered to the EU through gas pipelines, which run through neighboring countries – Ukraine, Belarus and Moldova – to Central and Eastern Europe and then from there to Western Europe.
Russia seeks to control pipeline infrastructure of neighboring countries by purchasing a controlling stake in their pipelines. For example, Gazprom holds 63,4% of MoldovaGaz’s shares and as a result controls Moldova’s domestic gas infrastructure. Ukrgaz-Energo is owned on a parity basis by Gazprom and Centragas Holding AG. In 2011 it was agreed that Gazprom would acquire the entire 100% stake in Beltransgaz—the gas transport system of Belarus.
Recently, however, Russia in cooperation with other countries (including some of the EU Member States) sought a range of alternative routes through the region in order to reduce the leverage that transit countries have. Gazprom started work on the North European Gas Pipeline, also known as Nord Stream, which would transport natural gas from Russia to Germany via a pipeline under the Baltic Sea starting as early as 2012. Gazprom also signed an agreement with the Italian firm ENI to build a South Stream gas pipeline that would run from Russia under the Black Sea through the Balkans, with branches to Austria and Italy. Gazprom hopes to finish South Stream by 2015. Both pipelines would bypass Belarus, Ukraine, Poland, and other Central European countries.
Central and Eastern European countries fear that close relationship between Russia and some Western European countries will jeopardize their energy security. Some analysts consider that the EU is split between two opposing approaches to Russia: there are those who view Russia as a potential partner while at the other extreme are those member states who see and treat Russia as a threat. Indeed, influential countries such as France, Germany and Italy have formed close links with Moscow in order to secure access to Russian energy supplies and opportunities to invest in Russian energy projects. The German E.ON Ruhrgas’, the French EDF and the Italian’s ENI, all signed bilateral deals with Gazprom on future energy supplies.
Central and Eastern Member States such as the Baltic States, Czech Republic, and Poland worry that they will not be able to counter Russian energy pressures. If Nord Stream and South Stream are built, gas will be directly delivered to Western countries bypassing their territories, through which the main current pipelines run.
It should be noted that the Article 175 of the 1992 Maastricht Treaty on the EU explicitly specifies that the Member States retain sovereignty in the energy field. This is the central weak-point in the EU’s efforts to construct CEEP and to speak with one voice in energy matters. The EU and the Commission lack formal authority and legitimacy over energy security issues. Some see German, French and Italian desire to retain monopoly positions as opposition to create common external policy in respect of energy.
It should be mentioned that European countries started projects, which are aimed at the building of multiple pipelines to supply energy from Central Asia and Azerbaijan to Europe. These projects include the Baku-Tbilisi-Ceyhan pipeline and the South Caucasus Gas pipeline. There is also very important Nabucco pipeline, an EU-sponsored project that would supply natural gas from Central Asia and Azerbaijan to Europe through Georgia, Turkey, Bulgaria, Romania, Hungary and Austria
These projects are being discussed at the moment and if completed they would allow the EU to be less dependant on Russian supplies. The European Commission pledged 250 million Euros, the European Investment Bank 2 billion Euros, and the European Bank for Reconstruction and Development said it would provide an undetermined amount of financing.
International Organizations play significant role in influencing and meditating the EU-Russia energy relationship. They have economic, financial, political as well as environmental impact on shaping the policies of the parties.
The International Energy Agency (IEA), based in Paris, is the world’s most important intergovernmental body dealing with energy. The IEA’s major role is the security of oil supply through oil stockholding and emergency measures in case of supply disruptions. The IEA is mainly a consultative body. Its activities include the exchange of information on energy policies including the rational use of energy, the environment, energy technologies and advice to non-member countries.
As far as the EU is concerned, the European Commission and the IEA are developing a fruitful cooperation. The Commission participates in the IEA Governing Board meetings and in its different committees. Among the IEA’s 28 member countries, 19 are the EU Member States. The EU rules on strategic oil stocks were brought closer in line with those of the IEA with the recent adoption of the Directive on oil stocks.
Russia is not a member of the IEA. Nevertheless, the organization is now looking to initiate Russia into its energy regime. In a statement made in the Observer Weekly, IEA Executive Director Nobuo Tanaka said: “We all really have a common interest. […] The issues of energy security and climate change need to be tackled collectively and we think Russia and other key producers can learn a lot from (the IEA’s) experience.
The other international organization, which can influence the EU-Russia energy relationship, is the World Trade Organization (WTO). Notwithstanding the actual absence of specific rules dealing with energy and natural resource-related matters, the WTO provisions apply to trade and investment in general and thus could be applied to energy products and services. After 18 years negotiating its membership, Russia has finally become a member of the WTO in December 2011; the EU (until November 30, 2009 known officially in the WTO as the European Communities) has been a WTO member since January 1, 1995; the 27 member states of the EU are also WTO members in their own right.
Notably, energy issues were a thorny subject of the bilateral agenda for the EU and Russia in the context of Russian accession to the WTO. In fact, that bilateral agenda was closely linked with the Russia‘s ratification of the ECT. In 2006 Russia indicated that the ratification of the ECT was unlikely due to the provisions requiring third-party access to Russia‘s pipelines. Nevertheless, Russia and the EU reached agreement on the terms of Russian WTO accession. As part of the accession accord, Russia has agreed to undertake a series of important commitments to further open its trade regime and accelerate its integration in the world economy. The deal offers a transparent and predictable environment for trade and foreign investment, including in the field of energy.
Co-operation between EU and Russia in the field of environmental protection and energy is organized through various local organizations. The Russian Regional Environmental Centre, for example, an independent Russian European Organization, strengthens EU-Russia cooperation in this area. The official website of the organization states that ‘environmental issues has been always one of the inarguable common values of Russia and the EU, as protection of environment requires joint efforts and coordinated efforts regardless policy differences. The works in the organization are arranged within the framework of the dialogue aimed at implementation of provisions of the EU-Russia Dialogue on Environment of the Road Map for the Common Economic Space.
As part of the Organization’s activities, the Joint Meeting of EU-Russia Climate Change Subgroup and Thematic Group on Energy Efficiency was held on 28th February 2008 in Moscow. The event was focused on the best practices of the EU and Russia related to technological solutions, policy and financial tools aimed at improvement of energy efficiency and climate change mitigation. As a result of the meeting, the priority areas for cooperation were identified and outlined in the joint statement, which was signed by the Co-Chairs of the Working groups.
Finally, financial help with various projects in relation to energy use is being given by the international financial organizations such as the World Bank and the European Bank for Reconstruction and Development (EBRD). Energy efficiency is among the key priorities of the EBRD’s activities in Russia. In 2010 alone, the Bank provided €404 million for new sustainable energy projects in Russia, bringing cumulative investments in this area in the country to over €1.6 billion since the launch of the Bank’s Sustainable Energy Initiative.
CHAPTER 3.
Future Dialogue
Russia and the EU are natural partners in the energy sector. Russia has been a reliable supplier of energy into the EU for many years, despite periods of internal difficulties. Likewise, the EU continues to be the dominant market for Russian energy exports. This strong mutual interest and interdependence means that energy is an ideal sector in which relations can be progressed significantly – a kind of test case –for the further development of an EU-Russia strategic partnership. Success in the energy sector could then serve as a model for other areas of common interest.
The Energy Dialogue with Russia has rapidly become one of the key issues in bi-lateral EU-Russia relations and one in which the format of frank, open discussions have already permitted substantial progress to be made. What is the objective? The overall objective of the energy partnership is to enhance the energy security of the European continent by binding Russia and the EU into a closer relationship in which all issues of mutual concern in the energy sector can be addressed while, at the same time, ensuring that the policies of opening and integrating energy markets are pursued.
The structure of the Energy Dialogue aims to ensure the close involvement of the EU Member States, the European energy industry and the International Financial institutions. Since 2012, four Thematic Working Groups (the Energy Markets and Strategies Group, the Group on Electricity, the Group on Nuclear Energy, the Energy Efficiency and Innovations Group) are bringing together more than 100 European and Russian experts from the private sector and from the administrations to discuss investments, infrastructures, trade and energy efficiency issues and to prepare further proposals for the Energy Dialogue.
What is more, negotiations on a New EU-Russia Agreement were launched at the Khanty-Mansyisk Summit in June 2008. The New Agreement should update and replace the existing PCA. It should provide a comprehensive framework for EU/Russia relations, and include substantive, legally binding commitments in all areas of the partnership, including political dialogue, economic cooperation, research, education and culture, as well as solid provisions on trade, investment and energy.
The negotiations were started in July 2008, and by the end of 2010, 12 full negotiating rounds would have taken place. As we can see, the EU gives central importance to the institutionalization of the EU-Russia energy relationship. Nevertheless, before the relationship can be institutionalized, the EU needs to develop a CEEP in order to be able to speak with one voice. As noted before, the EU Member States and Russia conclude a significant number of agreements in the field of energy on a bilateral basis. The preference for bilateralism is one of the most underlying structural problems of the EU-Russia energy relationship. As a result of the EU’s inability to construct a common energy security policy, there is a strong Russian preference to enter into agreements with individual Member States rather than the EU on the whole. The Green Paper of 2006 acknowledges that the energy challenges need a coherent external policy to enable Europe to play a more effective international role in tackling common problems; it would show Member States’ commitment to common solutions to shared problems.
Russia in its turn has to liberalize its trade in energy products and services. With the nationalization of the gas and oil industry it seems unlikely that Russia would consider ratifying the ECT and the PEEREA in the nearest future. Nevertheless, the admittance of Russia to the WTO represents a crucial step for liberalizing the energy sector. In addition, the WTO Dispute Settlement Mechanism is virtually the sole international dispute resolution system, which does not require the respondent‘s consent for the procedure. This means that under the WTO rules the EU could, for example, hold Russia responsible if another gas war between Russia and its neighboring country occurs.
The further positive step in developing the EU-Russia energy relationship is an invitation for Russia to join the IEA. Russia has been viewed by the IEA as a “key non-member” for years and its admittance to the IEA as a full-member would be a positive addition. The official IEA website states: “Russia is and will remain an energy superpower. It has been a reliable supplier of oil and especially of natural gas over decades through politically turbulent times.”
Maria van der Hoeven, the Executive Director of the IEA, in her presentation ‘Factors shaping energy markets and implications for EU-Russia relations’ on February 12, 2012 pointed out that the recent developments have given a new impetus to EU-Russia relations. She acknowledged that while the nature of the energy relationship between the EU and Russia may be changing, the potential for a productive, beneficial relationship in the future remains very strong. She referred to the difficulties that Russia faced with some of its transit-state neighbors and stated that neither gas nor oil should ever be used as a political tool in bilateral relations and that the commercial discussions on transport should be settled through legal procedures, without putting at risk the supply security of end-consumers. [The recent projects for upgrading transit infrastructure, such as Nord Stream, South Stream and Nabucco, if finished, would be able to greatly diminish the risk of unpredicted gas cuts to Europe. These projects, however, should be beneficial for all the Member States without jeopardizing the energy security of Central and Eastern European countries.]
All in all, the Energy Dialogue, the negotiations on a New EU-Russia Agreement, the admittance of Russia to the WTO and the invitation to join IEA unleash the great potential for mutually beneficial EU-Russia energy relations.
Development of CEEP by the EU and liberalization of the energy sector by Russia will further improve cooperation and development in the energy sector.
CONCLUSION
Russia and the EU are natural partners in the energy sector. They are mutually dependent on each other. The EU, being the largest energy importer, is strongly dependent on Russian energy imports. Russia in its turn is dependant on the EU buying its gas and oil as roughly two-thirds of Russia’s export revenues comes from oil and gas exports.
In 2000, the EU and Russia agreed to start an Energy Dialogue dealing with issues such as security of supply, energy efficiency, infrastructure, investments and trade. The events of 2006 between Russia and Ukraine resulted in energy security being strongly put on the table in Brussels. The Green Paper of 2006 called for a fundamental transformation of the relationship into a true partnership, which would offer security and predictability for both sides.
The development of the EU-Russia Energy Dialogue led to the signing Memorandum on an Early Warning Mechanism, which included a clear definition of the circumstances that would trigger the activation of the mechanism, be it due to maintenance of relevant infrastructure, accidents, or commercial disputes.
The stumbling block between the EU and Russia was the ECT and its Protocol. By agreeing to the principles of the Protocol, Russia would commit itself to the implementation of the principles of freedom and transit without distinction of the origin, which Russia did not want to adhere to due nationalization of the energy sector and monopolization of its pipelines.
Gas is being delivered to the EU through gas pipelines, which run through neighboring countries – Ukraine, Belarus and Moldova – to Central and Eastern Europe and then from there to Western Europe. Russia tries to control these pipelines by purchasing controlling stakes in neighboring countries energy firms.
Recently, Russia in cooperation with other countries (including some of the EU Member States) sought a range of alternative routes through the region in order to reduce the leverage that transit countries have. These pipelines, if built, would bypass Belarus, Ukraine, Poland, and other Central European countries. This creates tension between the EU Member States and calls for the development of a CEEP, so the Member States could speak with one voice and have secure energy for all.
International Organizations play an important role in shaping the energy relationship between the EU and Russia. At the end of 2011, Russia was admitted to the WTO, which will help to liberalize its energy sector. Now Russia has been invited to join the IEA, which is viewed by the organization as positive addition to existing members. Maria van der Hoeven, the Executive Director of the IEA, points out that while the nature of the energy relationship between the EU and Russia may be changing, the potential for a productive, beneficial relationship in the future remains very strong with mutual benefits for both parties.
BIBLIOGRAPHY available on request.
