NS4054: Energy Security Routes to Energy Security: The Geopolitics of Gas Pipelines between the EU and Its Southeastern Neighbors Supplemental Text: Kalicki and Goldwyn’s, Energy and Security: Strategies for a World in Transition, Chapter 12: Sub-Saharan Africa by Phillip van Niekerk and Aaron Sayne By: LT Dan NeSmith

About the Author Angel Saz-Carranza Director of ESADEgeo Center for Global Economy and Geopolitics (Madrid) Lecturer of the Department of Strategy and General Management PhD Public Management New York University Public management research focused on inter-organizational relations and performance management Published in numerous journals regarding collaboration in network management, dynamics of public networks and governmental contracting.

Authors Thesis European Union is taking measures to further diversify suppliers, increase domestic extraction, and shift to alternative energy sources. One main focus has been to achieve a fourth supplier of Natural Gas through the construction of the Southern Gas Corridor.

EU’s Current Energy Breakdown EUROSTAT’s EU-27 Energy Mix (2011): Petroleum: 35% Natural Gas: 23% Solid Fuels: 17% Nuclear: 14% Renewables: 10% Forecast: Energy mix to shift gradually; increased natural gas use. Cleaner energy Backup to intermittent renewable sources Replace nuclear Fig. 2: Total primary energy consumption by energy source in 2009, EU-27 cleaner energy—where the EU has repeatedly asserted its will to play a leading role—and in the absence of effective and widespread carbon capture and storage, energy production through coal and liquids must decline. Natural gas, relatively abundant and easily transportable through an extensive and established pipeline network, is seen as a stable route to lowering greenhouse gas emissions. Moreover, in electricity provision, natural gas is fungible in its ability to fill the supply gaps left by newly installed intermittent renewable sources. Second, natural gas may again serve to seal electricity gaps in a number of EU member states that have revised their nuclear policies post-Fukushima (recall that in 2011, nearly 28 percent of the EU's electricity was produced by nuclear power).

EU’s Energy for the Future Europe 2020 Strategy (20-20-20) Established in 2010, three main energy & climate change targets: 20% reduction of Greenhouse emissions relative to 1990 Currently 18% 20% of energy use from renewable sources Currently 13% 20% energy efficiency target (reduction in energy intensity of EU economy) Currently 24% from 1995 to 2011 The EU's 2020 Strategy, set out in 2010, included three main energy and climate change targets for the union, often referred to as 20-20-20. The EU is “well on track” to meet these goals: greenhouse gas emissions decreased by 18 percent relative to emissions in 1990, 13 percent of final energy consumed now comes from renewable sources, and the energy efficiency target has made a reduction of 24 percent between 1995 and 2011. The EU's general aims for 2030 are to progress toward a low-carbon economy, while guaranteeing affordable energy for all consumers as well as regulatory certainty. Greenhouse gas emission reduction target for domestic EU emissions of 40 percent in 2030 relative to emissions in 1990, as well as a new renewables goal to increase the share of renewable energy to at least 27 percent by 2030.

EU’s Common Energy Market European Commission’s energy policy goal is creation of a common market. EU states governed energy through public monopolies Separate state energy providers from transport & supply organizations Desegregate state-owned energy companies of the past in order to allow for EU-wide integration. National governments set up independent regulatory authorities Settle contract disputes & access to electricity grids and gas pipelines Central broker of all EU national regulators (2009): The Agency for the Cooperation of Energy Regulators (ACER) sector Ever since the mid-nineties, the European Commission's main policy goal in the realm of energy has been the creation of a common market. In order to integrate the distinct national scenes, first markets had to be created, since most member states Governed energy through public monopolies. The goal was to desegregate the vertically integrated state-owned energy companies of the past in order to allow for EU-wide integration. Unbundling initiatives first focused on legal and functional aspects, with ownership unbundling added later in the EU's Third Energy Package, adopted in 2009.

Securing Energy Supply Three proposed energy policy tracks: Continue exploiting & increasing indigenous energy sources Renewables, domestic fossil fuel reserves, nuclear energy Diversify supply countries & routes for imported fuels Improve energy efficiency interconnections 10% of all installed production capacity As the EU currently relies on imports for 54 percent of its energy needs, securing supply is of vital interest. The EC proposes three main policy tracks to improve its security of supply. First, continue exploiting and increasing indigenous energy sources such as renewable energy sources, domestic reserves of conventional and unconventional fossil fuels, and nuclear energy. Second, diversify supply countries and routes for imported fossil fuels. Third, improve energy efficiency, including deploying smart grids and having all member states meet the previously agreed objective of ensuring electricity interconnections equivalent to 10 percent of installed production capacity. The focus of the rest of the article is primarily on the second policy, namely the diversification of sources and supply routes, particularly in the case of natural gas.

Natural Gas in Europe Centerpiece of an intricate geopolitical competition to the east Natural gas is produced, transported, and traded through regional, fragmented markets Traded good Long-term, oil-index contracts (take-or-pay clauses) Minimum, pre-set volume of gas/yr that buyer pays at contract price regardless of whether volume is taken or not Market reliability ensures infrastructure investments required for natural gas trade Downside: mature markets do not need the reliability Spot pricing based on hub pricing Fosters competition between regional hubs as supply increases Outside of North America, where deregulated hub pricing reigns, the majority of natural gas pricing in the world is long term and linked to oil prices. Long-term, oil-indexed contracts, which typically include take-or-pay clauses (specify a minimum, pre-set volume of gas per year that the buyer will pay for at a contract price, regardless of whether the volume is taken or not), provide a boost to immature markets, because their reliability ensures the infrastructure investments required for natural gas trade. When markets grow more mature, the arguments for other pricing mechanisms gain ground. Alternatives include government-regulated pricing, or spot pricing based on hub prices, reflecting the market's natural competition. It’s likely that the supply increase due to the flood of unconventional gas will foster growth of regional gas trading hubs, and thus competition between said hubs. Additionally, global (LNG) trade, which doubled over the last decade, facilitates spot market trading. Overall, it is estimated that 45 percent of gas sold in Europe in 2012 was based on hub prices rather than oil-linked prices, a trend set to increase, especially given the gradual movement toward a more hub-based, competitive global market.

Natural Gas in Europe Transit countries Natural gas demand ever increasing Production sourcing from landlocked countries Pipelines through transit countries: Prone to disruption Economic interests Diversify imports away from Russia Requires transport through additional transit countries A further particularity of natural gas as an energy source is the importance of transit countries. As demand for gas increases and production from landlocked countries grows, supply arrangements increasingly operate through transit countries. Of course, arrangements through transit countries are more prone to disruption than direct exporter-importer relations. In addition, the more middlemen there are in the equation, the larger the set of diverging economic interests. The EU's campaign to diversify its energy imports away from Russia must take this important factor into account at all times: its efforts inevitably involve transport through additional states.

EU’s N.G. Demand & Supply Natural Gas Middle East & Eurasia 23.4% of energy mix 22.2% electricity needs Middle East & Eurasia Accounts for ¾ world’s proven reserves Grown by 39% in past 20yrs Europe & Eurasia Account for 31% of world’s natural gas EU main producers: UK & Netherlands In the EU, natural gas currently makes up 23.4 percent of the energy mix and 22.2 percent of electricity needs. Nearly 3/4 of the world's proven reserves lie in the Middle East and Eurasia. Generally speaking, the world's reserves of natural gas are ample, and increasing: it is estimated that they have grown by 39 percent over the past twenty years. Together, Europe and Eurasia produce 31 percent of the world's natural gas. However, the EU countries’ share in that percentage is low and decreasing. The Netherlands and the United Kingdom are the EU's main indigenous producers. But the UK has seen a 50% drop in production over the past 10yrs, while Dutch production is essentially flat.

EU’s N.G. Demand & Supply Russia & Norway EU’s import forecast EU’s major suppliers Norway’s increasing production competing with Russia for top EU imports EU’s import forecast 67% in 2011 80% in 2030 EU holds 2/3 of world’s Int’l gas pipelines €500billion infrastructure €70billion more by 2020 Gas therefore flows into the union from abroad, mainly from Russia and Norway: a member of the European Economic Area (EEA) and the European Free Trade Area (EFTA), Norway continues to increase its production, flirting with Russia for the top spot in EU imports. Meanwhile, the EU's import dependency is expected to increase, from 67 percent in 2011 to 80 percent or more in 2030. Given this equation of supply and demand, natural gas trade in the region is very intense. In 2011 Europe and Eurasia accounted for the trade of 469.7 bcm of the total 694.6 bcm of international pipeline-supplied natural gas. The infrastructure matches the trend: two-thirds of the world's international natural gas pipelines operate in Europe. The EU already holds some €500 billion of sunk costs in natural gas infrastructure; the EC estimates some €70 billion more will be necessary in the period up to 2020.

Key N.G. Infrastructure European Commission’s Infrastructure Priorities Diversify Expand southern corridor Increase flexibility LNG terminals Storage capacity Increase production Eastern Med The EC at the end of 2013 published its strategy for long-term energy infrastructure in Europe, defining the following priorities for gas: - first, diversify the gas infrastructure second, expand the Southern Gas Corridor in order to import about 10 percent of European demand from the Caspian region and the Middle East third, increase flexibility by developing more LNG terminals and storage facilities increase indigenous production from the Eastern Mediterranean, from biogas or unconventional sources

Key N.G. Infrastructure The strategy identifies as key the following gas infrastructure: —North-South gas interconnections in Western Europe (NSI West Gas) —North-South gas interconnections in Central Eastern and Southeastern Europe (NSI East Gas): gas infrastructure for regional connections between and in the Baltic Sea region, the Adriatic and Aegean Seas, the Eastern Mediterranean Sea, and the Black Sea. —Southern Gas Corridor (SGC): infrastructure for the transmission of gas from the Caspian Basin, Central Asia, the Middle East, and the Eastern Mediterranean Basin to the EU to enhance diversification of gas supply. —Baltic Energy Market Interconnection Plan in gas (BEMIP Gas): gas infrastructure to end the isolation of the three Baltic states and Finland and their dependency on a single supplier.

N.G. Imported from Russia Dependence on Russian Gas among the EU-28 Member States Percent of natural gas imported from Russia, 2012 Austria 52% Italy 20% Belgium 43% Latvia 100% Bulgaria Lithuania Croatia 37% Luxembourg 28% Cyprus 0% Malta Czech Republic 81% Netherlands 6% Denmark Poland 54% Estonia Portugal Finland Romania 24% France 17% Slovakia 63% Germany 40% Slovenia 57% Greece 55% Spain Hungary 50% Sweden Ireland United Kingdom One-third of the union's natural gas needs are met by one single supplier: Russia. The long-standing EU-Russian gas relation is symbiotic and delicate: the EU relies on Russian gas to keep its households warm, yet Russia's Gazprom too is dependent on the EU as the market for more than half of its exports. The Ukraine gas cutoffs in 2006 and 2009, culminations of Ukraine-Russia (Gazprom) disputes on issues such as payments and pricing, as well as the supply glitches during the 2012 cold snap, heightened the unease about Russia's energy policy. Following the collapse of the Soviet Union, Russia's material power was reduced to its energy reserves. Moreover, energy and the Russian state are tightly interwoven: Gazprom is state-controlled, and Moscow depends on energy revenue for half or more of its budget. For Gazprom, in turn, maintaining exports is vital, especially given the low prices it fetches for gas domestically because of government price regulation. In addition, recent global gas developments may threaten Russia's power source. The shale revolution in the United States has upped the ante. Russia's focus has been on conventional sources with few or no plans for shale development. The country is stuck in an old model of production, and the global panorama might just leave Russia stranded. If the United States continues on its path of approval for LNG exports, Russia will face new competition from LNG trade and may see its power to set the conditions for gas export diminish. The global gas revolution only adds to Russia's fear of loss of leverage over the EU.

The Southern Gas Corridor Supply Diversification: North Sea Algeria Russia Ukraine – Instability South Stream Caspian, Central Asia, Middle East (Southern Gas Corridor) TAP TANAP NABUCCO Supply diversification and secure transit routes are key ingredients for EU’s energy security. Adding a fourth external supplier to the three established sources—the North Sea, Algeria, and Russia—is a priority. Seeking alternative supplies of gas, away from Russia, as well as more secure supply routes (avoiding the unstable transit country of Ukraine, for example), the EU aims to construct a fourth energy corridor, the so called Southern Gas Corridor in order to better access supplies from southeastern Europe and the Caspian. This corridor, a network of gas pipelines reaching from the gas lands of the southeast (the Caspian, Central Asia, and even potentially the Middle East) has no pre-established route. Instead, over the course of the past dozen years, a number of competing and interconnecting pipelines have been proposed to form the corridor: Nabucco, TAP, TANAP, as well as Russia's South Stream. While Nabucco has stalled, TAP has just recently secured the gas supply and investment it needs, and is now starting construction. Meanwhile, TANAP is also under construction and Russia has initiated work on its end of South Stream. Geopolitics, geo-economics, and commercial interests all converge in matters concerning these pipelines. Each represents a crossroads where states, the EU, and business meet, with each entity defending its interests from a variety of perspectives— supplier, transit country, or consumer. The geopolitical competition over the Southern Corridor essentially played out in a recent episode between two EU sponsored pipelines—TAP and Nabucco West—and intensified with a Russian counter-project, South Stream. TAP is the more modest proposal, which essentially involves connecting existing Italian and Turkish pipelines to pipe gas from Turkey's western border to Austria via Italy and Greece. Nabucco West, a much more ambitious project, would connect Turkey and Austria via Bulgaria, Romania, and Hungary.

The Southern Gas Corridor NABUCCO 1st proposed Southern Corridor 3300-3900km pipeline Eastern Turkey to Austria 13bcm initial capacity 31bcm expansion Austria, Turkey, Hungary, Romania, Bulgaria Possible gas sources Iran 33.8tcm Russia 31.3tcm Turkmenistan 17.5tcm Iraq 3.6tcm Kazakhstan 1.5tcm Uzbekistan 1.1tcm Azerbaijan 1.9tcm Nabucco project, started in 2002. Problems: obtaining firm commitments from suppliers. Iraq doesn’t have the infrastructure, Iran under sanctions due to its nuclear program, other Caspian nations running into Russian and Iranian resistance. With Turkmenistan's supplies unattainable and Kazakhstan still more concentrated on oil than gas production, the Nabucco partners turned to Azerbaijan, whose giant offshore Shah Deniz gas field lies just 70 km from the capital, Baku, on the South Caspian Sea. More important, however, Shah Deniz gas could easily be transported directly to Europe (via Turkey) without having to traverse countries such as Russia or Iran. Both the European Commission and the United States, therefore, pushed hard to secure Azeri gas supplies for the EU and Nabucco—all of this while Russia's Gazprom eyed the same final markets.

The Southern Gas Corridor NABUCCO’s competition The Southern Stream Russian pipeline project TANAP Georgia to Greece TAP Connects TANAP Greece to Italy Cheaper 20% supplier ownership Bypasses competition with Russia As the Nabucco partners developed detailed engineering plans for the pipeline and attempted to secure diversified supply, Russia launched in 2007 a pipeline project of its own: South Stream. This pipeline was designed, depending on interpretation, either to bypass troublesome transit states along its transport route, such as Ukraine or Belarus, or to thwart the EU's attempts to diversify its gas imports away from Russian dominance. After much speculation and fierce competition with other pipeline projects, Nabucco suffered a second blow in the form of the Trans Anatolian Pipeline (TANAP), running from Georgia to Greece (see Box 6-3). This route would essentially make Nabucco's eastern section unviable due its ownership structure by int’l companies in consuming countries. So, NABUCCO proposals were shortened to attach to TANAP in Turkey. With the Trans Adriatic Pipeline Proposal (TAP), NABUCCO was scrapped. The reasons, TAP was 4 times cheaper; Nabucco West didn’t include a single entity from a supply country—in particular Azerbaijan's SOCAR. In contrast, SOCAR holds 20 percent in TAP. Moreover, SOCAR recently acquired Greece's privatized natural gas distribution company, DESFA, a necessary piece to connect TAP to the Balkans; and TAP is less of a competitor given that the planned interconnections to the Baltic and the southeastern countries—through the Ionian Adriatic Pipeline, which will go from Albania to Croatia, and the Interconnection Greece-Bulgaria,

Conclusions EU expected to increase imports from 67% to 80% by 2030. EU looking to decrease reliance on Russia for 1/3 of Natural Gas imports. Increase energy security, efficiency, and construct regasification plants Policy option of diversification of supply and transit routes TANAP / TAP Southern Gas Corridor