EUCERS Newsletter No 20 January 2013 FINAL FULL … · Hurricane! Sandy! and! the ......

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New Year’s Greetings 2013 Prof. Dr. Friedbert Pflüger

We hope you had a wonderful holiday season and that your 2013 is off to a healthy and successful start. We are commencing the 3rd year of production of the EUCERS Newsletter and are pleased to announce Dr. Matthias Pickl as our new EUCERS Newsletter editor. With his support the EUCERS Newsletter will continue to serve as a bridge between academia and the business world and will include focus articles on energy resource-‐related subjects, an update on forthcoming and previous workshops and key conferences organized by EUCERS as well as some brief notes on our members’ research results.

In previous years, energy has clearly been a driving component of change; few other industries can claim to have had a more wide-‐ranging impact on business and society as a whole. Critical questions around the supply and demand of energy as well as its sustainability will continue to present one of the greatest and most important challenges in 2013. I see eight megatrends that will shape the global energy landscape and energy policy agenda in the coming years.

1. Diminishing Salience of Global Climate Change Policy: The topic of climate change has lost some of its salience worldwide and has taken a backseat to economic priorities. On the other hand, the frequency of more extreme weather catastrophes like Hurricane Sandy and the Australian wildfires continue unabated even as it is becoming increasingly difficult to achieve the two-‐degree climate target.

2. Rising Energy Demand: Population growth, economic expansion and urbanization are drivers of rising energy demand, which is expected to increase by about 30% by 2030

In this Month’s Edition:

New Year’s Greetings 2013 Prof. Dr. Friedbert Pflüger

Japan Challenging China’s Rare Earth Hegemony Ka-‐ho Yu

The Shah Deniz Gas to Europe: Emerging Challenges Gulmira Rzayeva

Activities

EUCERS on the Road

Publications

Announcements

Contact EUCERS

EUCERS Advisory Board

Acknowledgements

Issue 20, January 2013

Newsletter No.20

European Centre for Energy and Resource Security (EUCERS) Issue 20

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3. A “Green Revolution” is Underway – But Fossil Fuels Remain: An increasing share of energy stemming from renewable sources is expected made possible by the provision of significant subsidies, yet due to overall rising demand fossil fuels will remain.

4. Rising Energy Nationalism and Imperialism: The continued dependence on fossil fuels bears important political security implications. We are experiencing a precipitous rise in energy nationalism and imperialism of governments with substantial natural resource reserves.

5. The Shale Gas Revolution will Lead to a Re-‐industrialisation in the U.S.: Lower energy prices as a result of the shale gas boom will lead to an industrial Renaissance in the U.S. with a potentially profound geopolitical impact for the world economy.

6. A greater need for more Resilient Critical Infrastructures as a result of Heightened Risks: Political uprisings and targeted cyber-‐attacks are posing increased risks to critical energy infrastructure facilities, which necessitates the improvement of infrastructure resilience

7. Nuclear Power and its Legacy are here to stay for the foreseeable future: While there will be no global nuclear renaissance, deployment of nuclear power will continue even in the aftermath of Fukushima.

8. The Hope – Technological Innovation and a Well-‐Functioning Market Economy: More energy efficiency and smart grids are solutions for a more economic utilization of energy in the future.

These are the topics that will clearly dominate the EUCERS agenda during 2013.

We start the New Year with two new focus pieces on energy and resource security:

First, Ka-‐ho Yu, a Research Associate at EUCERS will elaborate on China’s rare earth hegemony and Japan’s strategies to increase its resource security in terms of diversifying supply.

Next, Gulmira Rzayeva, a Leading Research Fellow at the Center for Strategic Studies of Azerbaijan, is analysing the challenges of bringing Shah Deniz II gas to Europe with a special emphasis on comparing the competing projects TAP and Nabucco West.

The European Centre for Energy and Resource Security (EUCERS) at King’s College London wants to thank you for all your support and wishes you and your family a happy and successful New Year.

Yours Friedbert Pflüger

Prof. Dr. Friedbert Pflüger is Professor and Director of the European Centre for Energy and Resource Security (EUCERS) at King’s College London.


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Japan Challenging China’s Rare Earth Hegemony?1 By Ka-‐ho Yu

The intensified export restrictions outlined in China’s first White Paper on rare earth metals (REM) in 2012 have prompted Japan, the largest REM importer for China, to increase its resource security in terms of diversifying supply. Currently, China produces 97% of the world's REM and has a dominant role in the REM industry. Its unilateral restriction of REM exports has impacted the global supply of REM and raised concerns among importers. In March 2012, Japan, the United States (US) and the European Union (EU) jointly filed a World Trade Organization (WTO) dispute settlement case against China over its limits on rare earth exports, but failed to restore Chinese REM supply to a satisfying level. This REM tension creates a confluence between Japan’s urgent need for alternative REM suppliers and Asian countries’ desire for foreign investment. However, while Japan attempts to decrease REM dependency on China, it is confronted with numerous obstacles when dealing with new partners. This article examines the rationale behind China's REM policy and explores the challenges to Japan's new REM partnerships with Kazakhstan and Vietnam.

Rationale behind China’s REM export restrictions In its White Paper Situation and Policies of China's Rare Earth Industry, China claims that excessive mining with no significant regulation results in depleted REM reserves and serious environmental problems. Thus, restrictive policies on the REE industry are needed. This includes measures that strictly control the volume of rare earth mining, production and exportation, reinforce supervision over REM enterprises, tighten customs control and enhance compliance of enterprises with industrial regulation. The White Paper additionally emphasized the need for an annual export quota – the most controversial part of the Paper. Rationalization of export quota as an environmental remedy is unconvincing as long as China has not imposed a domestic consumption restriction at the same level. Exported REM and domestically consumed REM are both produced in Chinese mines and contribute to the same environmental problems. Therefore, limiting exports for environmental reasons but forgoing domestic restrictions creates a double standard. The Chinese government has attempted to ensure the industry is running for the benefit of the country.

Firstly, the White Paper conveys China’s previous export restriction on REE. It also outlined the disorganized governmental regulation of the REM industry. Beginning in the early 2000s, China gradually 1 Please note that this article is a slight modification of a publication that first appeared in the Journal of Energy Security. The original article can be retrieved from http://www.ensec.org/index.php.

Ka-‐ho Yu is a Doctoral Researcher at the Department of European and International Studies, King's College London and a Research Associate at the European Centre for Energy and Resource Security (EUCERS), King's College London.


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imposed various export restrictive policies—export quotas and export tariffs being the key policies of restriction. According to a US Geological Survey, export quotas for Chinese REM were not formerly stringent in the past. From 2005 to 2009 there was a slight drop from 65,680 tons to 50,145 tons in REM. Yet 2010 showed a reduction to 30,258 tons representing a rapid drop of almost 40%. In 2011 and 2012, REM remains approximately at the same level upsetting the international market. Increasing export tariffs is another burden for REM importers. The Chinese government added a 10% export tariff on certain REM in 2006 and further raised the export tariff for light and heavy REM to 15% and 25% respectively in 2008. These changes prompted an international dispute on rare earth elements which reached its climax in October 2010 when a Chinese fishing boat crashed into two Japanese guard boats after a Sino-‐Japanese territorial conflict. Major REM importers such as Japan and the US complained to the World Trade Organization (WTO) that China failed to comply with the General Agreement on Tariffs and Trade (GATT) on free trade and that China’s restriction on exporting rare earth metals distorted the global market. Despite these criticisms, China did not give in. China’s White Paper has defended the imposition of export quotas in the past few years as necessary to protect the environment and safeguard a scarce resource.

Secondly, although China’s White Paper addresses international cooperation, REM can still be a means of both economic and political leverage as long as China retains a monopoly over the market. Critics contend that limiting exports of REM creates pressuring on non-‐Chinese rare earth producers to relocate their operations, technologies and jobs to China, to get rid of the added costs associated with export quotas. In order to obtain the ore, a foreign company would have to invest in China by moving their production line to China and by employing Chinese laborers. China has also reinstalled the Value-‐Added Tax (VAT) rebate to attract foreign investments. The Chinese government is also interested in foreign companies because of their capacity to introduce advanced mining technology in China. Although China is the most advanced in rare earth extraction and smelting technologies, and has two large-‐scale national laboratories conducting rare earth research, Prof Xu Guang-‐xian, well-‐known as the Father of Chinese Rare Earth, criticized the country for not investing enough in researching the technology for rare earth functional materials and industrial development. Compared to the US and Japan, China lacks advanced rare earth products, such as neodymium magnets. From this perspective, REM could be traded for advanced technology. Politically, although the Chinese government has indicated it will not use REMs for diplomatic bargaining, in the summer of 2010 the Chinese government suspended rare earth exports to Japan after a territorial dispute regarding claims to the Senkaku Islands. Additionally, there was a similar economic sanction in the summer of 2012. Taking a lesson from Japan, it is possible for China to impose psychological threats by way of REM export restrictions on other rival countries during disputes, although it has not yet brought this to the negotiation table.

Thirdly, China has a growing domestic demand of REE totaling around 70-‐80% of the world’s supply. Other than merely mining the ore, China aims to develop its own production line of rare earth products. The demand for REE is driven by the production of high technological and green products in sectors such as light industry, agriculture, the oil industry and metallurgy. Among them, the production of fluorescent and magnetic materials consumes over half of China's REM with a high increasing growth rate (almost 40,000 tons in 2007). Lots of green facilities, such as wind turbines, require rare earth components in their designs. China’s 12th Five Year Plan (2011 – 2015) aims to increase the use of non-‐fossil energy to 11.4% of major energy consumption. Wind power is also identified as a key component of China's sustainable development. Therefore, it is expected that there will be an increase in the production level of wind turbines as well as for the demand for REM. Similarly, REM is crucial to the design of environmentally friendly electric motor cars. As the world's largest car market, China might require tons of REM if demand for electric vehicles increases.


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Shifts in the REM market Major REM importers such as Japan and the US remain doubtful about whether China is a reliable REM supplier. There are a number of clues that reveal the potential for future shortages. China’s White Paper is just another form of confirmation in terms of future reductions, unilaterally and officially informing the world that they should look toward domestic supplies for their own needs. The worldwide demand for REM was around 137,890 tons in 2010 and is expected to reach 248,020 tons by 2015. The gap between these numbers and the export quotas of Chinese REM would disrupt the Western market and interrupt technological advancement in terms of green energy. Jack Lifton, the Director of Technology Metals Research LLC, argues that the West would have to choose between “guns and butter”.

In 2010, over 80% of Japan’s imported REM came from China. Japan is the largest REM consumer. The high-‐tech industry in Japan relies on these metals and also, in turn, exports these high-‐tech products to the US and throughout the rest of the world. Without raw materials, a lot of Japanese industries, from multinationals to tiny factories, will be forced to suspend activity. Since Japan is prominent in the production of certain high-‐tech products, a disruption of REM supply to Japan would not only upsets the country, but would disrupt the entire market. Therefore, Japan has responded swiftly to address potential shortages. In 2010, Japan planned to stockpile REM as a buffer against future supply disruptions. The plan works in a way that mimics the stockpiling of rice to prevent famine. The government had also considered recycling programs as well. Yet, these are not long term solutions because, without new imports, stockpiled REM could be exhausted even within a single day time-‐frame. The core of the problem is essentially China’s monopoly, therefore, Japan has moved ahead with alternative suppliers. Although China is producing over 95% of the world’s REM, it holds only 35% of the world’s reserves. Additionally, there are REM deposits in other countries. Japanese companies have developed ties with REM reserve holders such as Vietnam, Kazakhstan, Australia, Brazil and Serbia. These countries supply Japan with alternative sources so that the Japanese are not reliant solely upon China. Gradually, the REM market has shifted from being China-‐centric to non-‐China-‐centric.

Japanese-‐Kazakhstan REE industry Following China, Kazakhstan is one of the biggest producers of REM, especially uranium. Although uranium is not a REM, its tailing, a byproduct in uranium mining, is rich in dysprosium and neodymium, two indispensable REM to high-‐tech industry. While Kazakhstan is a new player in the REM industry, Japanese companies are helping it become a significant competitor to the Chinese. In 2010, in order to lower dependence on China, Japan’s Sumitomo and Japan Oil, Gas and Metals National Corp (JOGMEC) partnered with Kazatomprom—the most influential actor in the Kazakh REM industry—for the extraction of REM. Large-‐scale projects are already being implemented by the Japanese in Kazakhstan to develop deposits. At the moment, Kazakhstan is producing only 4.5% of the world’s REM supply and can provide approximately 1,200 tons of REM per year to Japan. Japan expects that the Kazakhstan REM venture will undergo rapid growth and they plan to increase the total production to 15,000 tons per year by 2015, this would account for 10% of the current entire world supply. In 2012, the Japanese and Kazakh governments signed an agreement to jointly develop REM critical to electronic applications, weaving a path for partnership between Japanese and Kazakh companies. In this joint development, a REM plant will be built in Stepnogorsk—located in northern Kazakhstan—to produce dysprosium which is crucial to the production of the motors of electric and hybrid vehicles. The agreement ensures Japan will receive 55 tons of dysprosium per year from the plant. This number makes up around 10% of the Japanese annual demand for dysprosium and is expected to increase yearly.


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Japanese-‐Vietnamese REE industry Vietnam holds one of the largest REM reserves in the world. Many of the Vietnamese reserves are untapped and are located in the northwestern part of the country, such as in the Province of Lai Chau. In order to decrease its dependence on REM supply from China, Japan plans to have Vietnam as a partner for mining, separation and the production of REM. Both governments signed an agreement in 2010 to exploit REM in the Province of Lai Chau. Meanwhile, Toyota Tsusho Corp., a Japanese rare earth importer, teamed up with several Vietnamese companies in a rare earth mining project. This venture is followed by preparations for a refinery plant focusing on the production of cerium, lanthanum and neodymium. Through these projects, Japan could ensure receiving a stable annual supply of REM from Vietnam of 3,300 tons by 2013 and around 7,700 tons by the flowing year. This supply would comprise about one-‐forth of the Japanese total demand. In 2012, Japan and Vietnam launched a joint rare earth research and technology transfer center in Hanoi to carry out research on the production of the materials utilized in the technology industry. Japan funds the equipment for the center and Vietnam pays the construction costs. There are Japanese scientists who stay in the center and collaborate with Vietnamese researchers from the Institute for Technology of Radioactive and Rare Elements.

Challenges faced by Japanese overseas REM projects Japan has made huge investments in the REM sectors of both Kazakhstan and Vietnam and remains confident about their profitability, yet there remain five notable challenges. These challenges include: lack of experience and lack of technology, potential competitors, legislative gaps and environmental problems.

Experience and Technology

Although both Kazakhstan and Vietnam are rich in REM—particularly in the REM that are crucial to alternative energy, military technology and the aerospace industry— they are not key players in the sector presently. For example, Kazakhstan did have several REM plants during Soviet times which supplied strategic materials to the USSR’s defense industry but these plants were closed or reconstructed after 1991. Additionally, Kazakhstan lacks the advanced technology necessary for extracting REM and, furthermore the industry is reluctant to make massive investments. Kazakh companies prefer to focus on the production of traditional metals, such as gold, cooper or iron as these have lower manufacturing costs. Similarly, Vietnam lacks the advanced technology required for REM production. It would be a waste of resources if Vietnam were to merely tap and export resources because the profit made from refined mineral products is much higher than the profit made from raw materials. The Vietnamese government needs to upgrade its REM sector either to become a new player in the global market or simply for the future good of the country. In any case, the Vietnamese REM industry needs the technology. As a result, Vietnam should not just ship the minerals away.

Competition

Japan is not the only partner of Kazakhstan and Vietnam who have both been linked with a number of foreign companies in REM cooperation in last three years. Other than Japan, China also may be interested in cooperating with the two countries. There are three possible benefits for the Chinese. Firstly, importing REM could help to reduce the pressure from domestic demand for REM. Secondly, importing can also work as leverage in terms of increasing China’s bargaining power in the market.


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Thirdly, increasing the production of REM in the two countries could serve to ease international pressure against export restrictions. Other than official competitors, there are unofficial ones. For example, China is buying REM from Vietnam via unofficial channels, including illegal mining and shipping of REM. It was reported in 2012 that thousands of tons of rare earth ore in Province of Lai Chau disappeared. This rare earth ore was believed to be illegally exploited and exported out the country to China. In any case, Japan has to be aware of these official and unofficial potential competitors.

Legislative gaps

The REE industry in Kazakhstan is controlled by Kazatomprom, a state-‐owned company. It was originally a nuclear holding company which mainly mines uranium. It is also involved in the production of other precious metals such as dysprosium, neodymium, tantalum, and niobium. In 2006, it was appointed as the official producer of REM in Kazakhstan and became the only company authorized to trade the metals in international markets. Additionally, there are other market players with close connections to the Kazakhstan government such as Kazakhmys, KazZinc and the Eurasian Natural Resource Corporation (ENRC). Although the Kazakh government considers REM strategic material—material to be used carefully for the sake of national security—its regulation over production remains undeveloped. There is no legislative norm for mining, extracting or producing REM, yet the government is entitled to terminate contracts of REM deals with third parties. This legislative gap implies that there is a lack of transparency in the REM industry in Kazakhstan.

Environmental problems

Mining and producing REM cause serious environmental problems. Without significant regulation, illegal mining of REM often leads to the destruction of land, farms, and water supplies. Its production is also a radiational and unhygienic process. Miners and local residents suffer most and seem unwilling to support REM projects because of health reasons. Perhaps Japan could learn a lesson from Australian-‐Malaysian cooperation. The Australian mining company Lynas has constructed a plant in Malaysia to treat REM extracted from mines in Western Australia but, although Lynas stressed that the government will strengthen monitoring of the plant and will close the plant if it fails to meet environmental standards, Malaysian environmentalists are still worried the foreign business could pollute their region. The situation is reminiscent of a Mitsubishi Chemical owned rare earth refinery in Malaysia, which was closed in 1992 because of environmental and social problems. After local residents blamed the refinery for birth defects and eight leukemia cases in their community, Japanese politicians and environmentalists persuaded Mitsubishi Chemical to fix the problem. Conscious of its image, the Japanese company agreed to close the refinery and clean up the site without a legal order, while simultaneously denying any responsibility for the health problems. The case resulted in environmental protests by thousands of anti-‐Lynas activists. Japan must be aware of local sensitivity and must also prepare a comprehensive waste management plan and a dismantling plan for the potential future termination of any REM plants.

Conclusion Since China reduced the availability of REM, Japan has been prompted to act. Although there is no specific target for reducing its dependency on China, Japan aims to control 50% of its own REM needs by 2030. Kazakhstan and Vietnam are two of the key partners in Japan’s supply diversify strategy. These


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two countries teamed with Japan mainly because of Japan’s advanced technology and the country’s long experience in the REM market. Japanese companies have a precious marketing network and maintain direct contacts with end users. In spite of these advantages obstacles remain for Japan. Although they are manageable in nature, Japan is still aware that it is difficult for its new REM partners to fill the gap left by China’s export restrictions all at once. As a matter of fact, it will take a few years for Japan to run its new plants to their fullest capacity.

The Shah Deniz Gas to Europe: Emerging Challenges By Gulmira Rzayeva

Introduction The EU’s Southern Gas Corridor aimed to bring gas from alternative sources primarily from the Caspian to the Southern and South-‐East European market which are heavily reliant on Russian gas monopolist and detrimental to sovereign independence of policymaking. Energy for these countries is the economic lifeblood and such reliance is fraught with putting at risk the national security of those nations and their economic development. The EU-‐led Southern Corridor, most importantly, is directed to curtail Russian energy leverage over those countries and open up the access of Caspian states, primarily Azerbaijan, Kazakhstan and Turkmenistan, to the Western markets.

Azerbaijan is not only the pivotal and the only realistic gas supplier for the Southern Gas Corridor projects at this stage but also is an initiator of the transportation infrastructures along the value chain of these mega projects. It has been expanding the South Caucasus Pipeline (SCP) for transportation of Shah Deniz II (SD II) gas as well as gas from the relatively recently discovered smaller fields of the Azerbaijani sector of Caspian from 2025 when those fields are estimated to come on line and Turkmen and possibly Kazakh gas in long run.

It has initiated the strategically important dedicated pipeline, which will transport Azerbaijani gas on the Turkish territory to the European border, TANAP, where Azerbaijani State Oil Company SOCAR will hold the majority stake -‐ 51 percent. SOCAR will invest the majority of capital required, will keep the ability to control the pipeline and will be Azerbaijan who will hold the last word in critical decision-‐making.

Further down to the European market there are two competing pipelines and two competing destination routes along the value chain -‐ Nabucco West (NW) and TAP. The BP-‐SOCAR-‐led Shah Deniz

Gulmira Rzayeva is a Leading Research Fellow at the Center for Strategic Studies of Azerbaijan.


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Consortium is expected to make a final decision on the selection of the destination route by mid 2013, which will be followed by the final investment decision on the SD II project by the end of 2013.

The SD II consortium has signed a Cooperation Agreement and equity share agreement with the TAP project and according to those agreements between SD and TAP, SOCAR and BP jointly will get 50% equity. An Equity Funding Agreement has been signed by all four partners: SOCAR, BP, Statoil and Total. Statoil is both a SD shareholder and a direct investor in TAP because it holds a separate stake in TAP as well. However, indirectly SD would be funding TAP up to 75%: SOCAR+BP 50% + Statoil's presence in the TAP as shareholder.

It still has been not possible to sign the same agreements with the Nabucco West consortium and in this regard the project is slightly behind TAP. The reason being, Nabucco West consortium, specifically OMV is reluctant to grant more than a 50 percent stake to the SD consortium to give with that the ability to control. SOCAR and BP in return demands 51 percent.

Nabucco West vs. TAP The overall strategic value of the Southern Gas Corridor will be determined once the SD consortium decides the ultimate destination of the SD gas scheduled by June 2013. The market destination of the Azerbaijani gas, which will penetrate Europe from 2018 when SD II field will come on stream, is critically important given the emerging new sources of gas including unconventional gas that potentially can cause the market to be oversupplied.

By geographic virtue countries such as Spain have already signed a sale-‐purchase agreement with the USA to import 6 bcm of LNG per annum from 2016 onward. Italy has been developing the LNG infrastructures with the additional capacity of 85 bcm of gas in Trieste, Molcanfone, Livorno, Rosignano in the north of Italy and the LNG projects with additional import capacity of 30 bcm per annum in Brindisi, Rovigo etc. All those projects and infrastructures will increase potential import capacity of Italy up to 200 bcm per annum, whereas the country’s current gas demand is about 85 bcm.

Despite the fact that the Italian market can be oversupplied in midterm perspective, there are no doubts TAP has advantages and strengths. With initial capacity of 10 bcm the pipeline will be less costly than Nabucco West and the shareholders of the consortium including SD partners are financially solid companies to cover all the investment capital required. However, from a technical viewpoint most of its length will lie under the Adriatic Sea requiring more complex engineering. Most importantly, compared to Nabucco West, TAP has a less complex governance structure, now including SD partners as well, that cause many problems to Nabucco West thus far.

The question is would SD partners want to depend on merely a few markets namely Italian, Greek and Albanian if they have an option to market their gas in multiple country markets that are heavily in need of diversification that NW suggests? Technically TAP is capable to offer an opportunity to access the Balkans with the Ionian Adriatic Pipeline and even to the countries bordering with Italy on the North. However these additional regional connections are not part of TAP’s current proposal and have no ready sources of financing. The Balkan market is of strategic interest to SOCAR given the higher gas price and great diversification potential of the market.

The TAP pipeline itself can be financially attractive to SD partners, however the market that it is targeting is risky and has no strategic value in comparison to NW that offer more value in term of diversification of the market that almost completely reliant on one supplier. For this reason alone, NW benefits from accumulation of political support from Brussels and Washington. For latter, most critically,


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diversifying the Central European market with the help of already existing interconnectors linking the countries along the NW route will give those states an ability to improve negotiating posture with Russia as a result of introducing international competition in the region, “reduce the potency of supply disruption threats, and bolster internal stability of NATO allies and friends”.

Washington even went further in its support of NW and the Congress of the United States in its “Energy and Security from the Caspian to Europe” report, prepared for the use of the Committee on Foreign Relations of the United States Senates warning SD partners and recommends to the State Department that if the project of the US preference that “must substantially contribute to the Europe’s energy security” is not selected by the SD consortium, SD II might not enjoy the same sanction exception that SD I does due to 10 percent of Iranian stake in the project. SD II and ancillary projects sanctions exception “will be based on compelling benefits for U.S. national security interests”.

Washington that mostly have geopolitical interest in the Southern Corridor not commercial as no US company is represented in the project, intervenes in the market when national security interests of US is at stake.

For the United States “Nabucco West offers the most meaningful advance in two key objectives: prompt delivery of gas to multiple allies in desperate need of diversification and scalability to accommodate larger gas supplies to the region in the future”. Putting to an end the “coercive pressure brought by Russia against its allies in Central and South Eastern Europe are of an order of magnitude greater”.

Nabucco West and its partners In December 2012 German RWE – one of the main drivers of the Nabucco West project officially announced that it is pulling out from the Consortium. This fact once more demonstrates that the governance structure of the consortium is extremely complex and the partners, specifically another driver of the project, Austrian OMV, must realize that such a structure is putting the realization of the project at risk. Given the fact that the SD consortium has not been able to sign the Cooperation Agreement and equity share agreement since June last year one can conclude that the opinion on share allocation between NW and SD consortium among the partners of the former is split. This might be one of the main reasons why RWE has suddenly decided to quit.

The negotiations on equity share funding agreement with NW consortium are conducted with only BP and SOCAR from the SD consortium. Other partners are not involved in these negotiations. Cooperation agreement negotiations between the two consortia conduct all the partners of the SD consortium.

SOCAR is demanding a 51 percent stake of the NW consortium, which is in line with its energy strategy holding the majority of stake in the midstream projects, since they have the same holding in the TAP consortium. The reason that SOCAR wants to get a majority share might be that the company is not confident whether NW shareholders including OMV will be capable of making the project happen, to invest the capital required and to make the necessary commercial and strategic decisions.

All the NW consortium partners agree for such a share allocation. RWE was also ready to sign such an agreement with SD shareholders. However OMV is reluctant to lose an opportunity to control and make decisions. The position of OMV is understandable, because once you have equity share funding then your position is weak, other partners can block your decisions and you cannot control the pipeline. This issue splits opinions within the consortium. Thus, the outlook for Nabucco West is increasingly difficult. RWE pulled out and Hungary's MOL is looking to drop its share of the project, while a third (Bulgaria's BHE) has hinted it may sell a significant part of its stake to SOCAR.


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Another reason why RWE decided to pull out is the financial situation that the company faces. The company currently suffers financially because of a number of reasons:

Firstly, nuclear power stations that the company owned phased out starting from last year and RWE as a result, has been losing its main income. Two plants have been immediately forced to shut down and as a result the company’s net loss was 1 billion Euros.

Secondly, Nuclear fuel taxes that the company must pay according to the law that was introduced a couple of years ago, hits the company financially.

Thirdly, as a result of demand decrease in Germany and Europe because of financial downturn and because of new law, which demands that German energy company has to buy certain percentage of wind and solar energy, RWE’s coal and gas power plants are not demanded.

Fourthly, according to German law every energy company has to financially contribute into Renewable Fund in Germany. The contribution is significant enough so that also other big energy majors in Germany are suffering.

Fifthly, because of long-‐term oil indexed gas contracts RWE has to buy expensive gas, whereas there is plenty of cheap gas elsewhere in European gas hubs.

Moreover, because of the above mentioned financial difficulties RWE is now selling its asset for the sum of 7 billion euro and doing headcount reduction.

This is another reason why the company is not as much interested in NW as before. RWE owns 100 percent of gas network system in Czech Republic. Before it was planning to buy gas from SD via NW and sell it to Czech Republic via its own network. However, now when it sells all the assets in the network the company does not have any incentive to buy gas from NW. Contrary to that, NW was a financial burden for the company.

One more problem for NW to be realized without giving out majority stake to the SD consortium is the financing of the project. The NW consortium will not be able to finance the half of the project on its own because according to new directive adopted by energy commission if a project has third party exemption, the project is not eligible for the EU funding. The companies in NW consortium are not financially capable to finance 50 percent of the project. Thus, it is another reason to grant majority of stake to the SD consortium.

The negotiations between NW and SD partners are continuing. The sooner OMV realizes the threat it puts on the project with delaying the agreement to be reached the greater a chance of the project to be realized. Time is ticking and the late agreement will affect the final investment decision of SD II, which was initially scheduled for June 2013 and has been already shifted to the end of 2013.

Conclusion Each of the stakeholders in the Southern Corridor is acting according to its strategic interest in the project and how it can benefit. For Brussels and Washington “to reorient the Alliance to address energy security, that is most likely to spur conflict and threaten the well-‐being of alliance members” is the priority issue in the project. These mega projects give both of them the historic opportunity to change the energy geopolitics in the US-‐allies dominated region.

The position of the stakeholders on two major market destinations and the midstream projects that will transport the gas to the market is split and commercial attractiveness and strategic value of the market


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is set to be the main criteria. Both projects must be commercially attractive to SD consortium to gain financing and both projects can certainly meet this requirement.

Some SD partners are more in favour of TAP mainly referring to the commerciality of the project and do not give specific details. Other SD partners are favoring NW referring to the strategic value of the market and relatively higher gas price. Brussels and Washington also implicitly supporting NW due to the reasons mentioned above. However because of the complex governance structure of the consortium, it may cause the biggest threat to the project and might terminate it if the equity share agreement with SOCAR and BP is not signed any time soon. Having said that, Brussels and Washington must be aligned to prevent all the impediments that NW partners cause to the project and make it happen.

The gas demand is expected to rise beyond Baumgarten (e.g. Germany and France; also there are swap options for Benelux countries and even to reach UK), where new gas could be absorbed along with the new Caspian volumes. However, as RWE exited and SOCAR lost this opportunity to deliver gas directly to German market; with all kind of advantages of having Germany as a political friend), none of current potential gas buyers (for Azerbaijan/Caspian gas) are interested in bringing that new gas beyond Baumgarten. Still for now the market that NW is targeting (all the country markets and Baumgarten) is considered to be the most reliable at the moment.


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EUCERS ACTIVITIES 20th EUCERS WORKSHOP ON “MEDIATION METHODS IN ENERGY BUSIENSS LAW”

The 20th EUCERS workshop took place on Monday, 14 January 2013 in Winterthur, Switzerland in cooperation with the Energy Arbitration Center Switzerland (EACS) at the Zurich University of Applied Sciences (ZHAW) on “Mediation Methods in Energy Business Law”.

Professor Dr Nicole Conrad, Director of the EACS, welcomed participants and introduced the in September 2012 established centre at the ZHAW. The EACS is the first and only one of its kind. It is the newest addition to the dispute resolution services offered in Zurich. The EACS concentrates on alternative dispute resolution, namely arbitration and mediation, in the field of energy and resources disputes. The primary aim is to provide disputing parties with an alternative dispute resolution “one-‐stop shop”.

The EACS offers administrated arbitral proceedings. The EACS also offers seminars and conferences and publishes various publications on international commercial arbitration. The major aim of the EACS is the promotion of national and international arbitration in the field of energy law.

A welcome by Professor Dr Friedbert Pflüger, Director EUCERS, followed. He stated EUCERS academic interest in the research field of EACS and stressed the importance of mediators in energy conflicts. Pflüger then referred to a few examples of energy projects and highlighted potential conflict stages. He concluded that the EACS based in Switzerland, with its history of neutrality, can make a difference in the energy mediation landscape.

Three keynote speeches were held over the afternoon. Dr Jürgen Klowait, Head of Law, E.ON Kernkraft GmbH (nuclear energy) presented on “Dispute-‐Wise-‐Management” and explained round table mediation and conflict management in the German industry as well as highlighted strengths and weaknesses of different forms of conflict management.

Afterwards Christian Held, Partner at Becker Büttner Held law firm, held his keynote on “Energy-‐Law Mandate, Dispute Prevention and Settlement of Disputes”. Held talked participants through dispute cases in detail and described the everyday work of lawyers specialised on dispute management in the energy field.

In the third keynote, Professor Dr Franz Baumgartner of the School of Engineering, ZHAW presented “New Challenges in a Changing Landscape of the Energy Industry” with a special focus on the role of renewables.

The afternoon was concluded with a discussion and a reception hosted by the EACS.


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January 2013

EUCERS ON THE ROAD Our team represents EUCERS at various conferences and events all over the world. This section gives a regular update and overview of conferences and contributions by EUCERS Director Professor Dr Friedbert Pflüger, Associate Director Dr Frank Umbach and Research Director Dr Petra Dolata.

Wunstorf, Germany 6 December 2012

Dr Frank Umbach participated in the Panel Discussion “Iran, Pakistan, North Korea: Chances of a Peaceful Rapprochement and the Risks for International Security” (“Iran, Pakistan, Nordkorea: Chancen friedlicher Annäherung und Gefahren für die internationale Sicherheit”), Konrad-‐Adenauer-‐Foundation and the German Air Force/Bundeswehr.

Santiago, Chile 10-‐14 December 2012

Dr Frank Umbach took part in the Presentation tour in Chile with six presentations on International, European and German Energy Policies on invitation of the Konrad-‐Adenauer-‐Foundation.

Ingolstadt, Germany 19 December 2012

Dr Frank Umbach presented on “Japan – a Stumbling Giant?” (“Japan – ein gestrauchelter Riese?”) at the Gesellschaft für Wehr-‐ und Sicherheitspolitik und Verband der Reservisten der Deutschen Bundeswehr e.V..

Abu Dhabi, United Arab Emirates

15-‐16 January 2013

Dr Petra Dolata has attended the World Future Energy Summit in Abu Dhabi on 15 & 16 January.

Tromsø, Norway 20-‐25 January 2013

Dr Petra Dolata has been invited to deliver a keynote at the Arctic Frontiers Conference (http://www.arcticfrontiers.com).

PUBLICATIONS Dr Frank Umbach shares with us his most recent publications:

§ “The Intersection of Climate Protection Policies and Energy Security”, Journal of Transatlantic Studies, Vol. 10, N. 4, December 2012, S. 374-‐387.

§ “China Moves Closer to a Monopoly in Rare Earths”, Geopolitical Information Service (GIS -‐ www.geopolitical-‐info.com), 14 December 2012, 3 S. (First article of a series of total 10 articles on China's Rare Earths Policies and the Impacts on the U.S., Japanese, German and the EU Raw Materials Policies").

§ “How China’s Strict Rare Earths Policies Sparked a Backlash”, Geopolitical Information Service (GIS -‐ www.geopolitical-‐info.com), 19 December 2012, 3 S.

§ “Islands Dispute Puts Spotlight on China’s Rare Earths Strategy”, Geopolitical Information Service (GIS -‐ www.geopolitical-‐info.com), 29 December 2012, 4 S.


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January 2013

EUCERS ANNOUNCEMENTS “New EUCERS Newsletter Editor”

We are delighted to welcome Dr. Matthias Pickl as our new EUCERS Newsletter editor. Matthias is an energy markets researcher and energy industry manager.

He holds a PhD in Energy Economics from the University of Vienna, Austria with a number of peer-‐reviewed journal publications. Throughout his PhD studies he has received two research grants and the PhD Dissertation Price from the Austrian Economic Chamber.

Since April 2009, Matthias is a Lecturer for Energy Business and Economics at the University of Applied Sciences in Kufstein, Austria. In addition, Matthias is a reviewer for the renowned Elsevier Energy Policy Journal.

Furthermore, Matthias has gathered 10 years of valuable international energy industry management experience with such renowned companies as Siemens Power, GE Energy, and Nabucco Gas Pipeline International.

EUCERS would also like to take the opportunity to thank Lorena Gutierrez for her outstanding work over the past year with the newsletter. Lorena has now started a career as an Intelligence Analyst for AKE, a security and political risk consulting firm that works for Lloyd's of London. We wish her all the best for her new career but will also see her again at King’s, as Lorena will remain a Research Associate with EUCERS.

THE KAS ENERGY SECURITY FELLOWSHIP PROGRAMME AT

EUCERS KING’S COLLEGE LONDON

The Konrad-‐Adenauer-‐Foundation funds a 12 months research stay for a European Union (EU) resident research Fellow at the European Centre for Energy and Resource Security (EUCERS) at King's College London. The Fellowship includes a stipend of €25,200 (€2,100 per month) for the fellow, a conference subsistence of €1,257 and will pay for University fees.

The topic of this year’s Fellowship is “Assessing the geopolitical and economic implications of the U.S.’ drive towards energy independence.”

Application deadline is on 15 March 2013. After reviewing applications, several candidates will be invited for interviews. The location may vary depending on availability of members of the selection committee and are either held in Berlin or London. The decision of the committee will be communicated to the successful applicant in writing by 1 June 2013. The scholarship starts on 23 September 2013.

The Fellow will be expected to draft a confidential report, available to KAS and EUCERS. Furthermore, the Fellow will be required to write a 35-‐50 page research paper (in German or English), for which KAS


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January 2013

and EUCERS get the (publishing) rights. A publication can be in print or online. The opportunity to present the results of the research in conferences by KAS or EUCERS may develop within this framework. Cooperation beyond this between the scholar, KAS and EUCERS are subject to mutual agreement and encouraged.

To apply please send your application to [email protected] and cc’d to kas-‐[email protected] including:

a) A cover letter b) A description of the research project together with a time schedule c) A motivation letter explaining why a research stay in London is suitable for the candidate’s

research project as well as key areas of the planned research d) A curriculum vitae with detailed explanations regarding personal and academic background,

dated and signed e) A short personal data sheet f) A copy of transcript of record (a certified copy will have to be brought to the interview) g) At least one reference from a Professor h) Proof of very good knowledge of English (TOEFL, IELTS)

For further information please contact Carola Gegenbauer on +44 (0)20 7848 1912 or email [email protected].

EUCERS on Twitter

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CONTACT EUCERS If you have found or Newsletter interesting, wish to hear more about our activities, or, indeed, contribute with ideas or essays, please contact our team at [email protected].


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January 2013

EUCERS ADVISORY BOARD The Advisory Board supports the activities of the European Centre for Energy and Resource Security (EUCERS) King’s College London. We would like to thank and proudly present the members of the board.

Professor Mervyn Frost, Chairman of the Board, Head Department of War Studies, King's College London

Marco Arcelli, Executive Vice President, Upstream Gas, Enel, Rom

Professor Dr Hüseyin Bagci, Department Chair of International Relations, Middle East Technical University Inonu Bulvari, Ankara

Andrew Bartlett, Head Oil & Gas, Helios Investment Partners, London

Volker Beckers, CEO RWE npower

Professor Dr Frank Behrendt, Director of the Institute for Energytechnology at the Technische Universität Berlin

Professor Dr Albert Bressand, Director of the Center for Energy, Marine Transportation and Public Policy (CEMTPP), School of International and Public Affairs, Columbia University

Professor Dr Iulian Chifu, Advisor to the Romanian President for Strategic Affairs, Security and Foreign Policy and President of the Center for Conflict Prevention and Early Warning, Bucharest

Dr John Chipman, Director of the International Institute for Strategic Studies (IISS), London

Professor Dr Dieter Helm, University of Oxford

Professor Dr Karl Kaiser, Director of the Program on Transatlantic Relations of the Weatherhead Center for International Affairs, Harvard Kennedy School, Cambridge, USA

Frederick Kempe, President and CEO, Atlantic Council, Washington, D.C., USA

Ilya Kochevrin, Executive Director of Gazprom Export Ltd

Janusz Luks, CEO Central Europe Energy Partners (CEEP), Brussels/Warsaw

Thierry de Montbrial, Founder and President of the Institute Français des Relations Internationales (IFRI), Paris

Chris Mottershead, Vice Principal, King's College London

Hildegard Müller, Chair of the Executive Board of the German Association of Energy and Water Industry (BDEW) and member of the Executive Committee

Dr Pierre Noël, Director Energy Policy Forum, Judge Business School, University of Cambridge

Dr Ligia Noronha, Director Resources, Regulation and Global Security, TERI, New Delhi

Deepak Puri, Chairman & Managing Director, Moser Baer India Ltd., Delhi

Janusz Reiter, Center for International Relations, Warsaw

Professor Dr Karl Rose, Senior Fellow Scenarios, World Energy Council, Vienna/London

Professor Dr Burkhard Schwenker, Chairman of the Supervisory Board, Roland Berger Strategy Consultants GmbH, Hamburg


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January 2013

ACKNOWLEDGEMENTS We would like to thank our Partners and Supporters 2011-‐2013:


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January 2013

And our Media Partners:

DISCLAIMER The views expressed in this Newsletter are strictly those of the authors and do not necessarily reflect those of the European Centre for Energy and Resource Security

(EUCERS), its affiliates or King’s College London.

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