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EUCERS Newsletter European Centre for Energy & Resource Security Department of War Studies, K ing’s Col lege London

Issue 40 November/ December 2014

Introduct ion Welcome to our anniversary and Christmas edition of the EUCERS Newsletter. In our 40th issue, which is also the last one for the year 2014, we are celebrating the 4th anniversary of EUCERS and would like to begin with an introduction by EUCERS’ Director, Prof Dr Friedbert Pflüger, followed by a review of the past four years. This month’s article section includes a piece by Frank Umbach, Research Director at EUCERS, on the pressing matter of the Ukraine Crisis for European energy security. Our second article is written by Slawomir Raszewski, Research Associate at EUCERS, which assesses the Turkish opportunities to become an important energy hub for Europe. Finally, Marina Petroleka, also a Research Associate at EUCERS and Head of Energy & Infrastructure Research at Business Monitor International in London, analyses the rationale and implications of the EU 2030 summit and the European Energy Security Strategy in light of the current energy climate in Europe. In our Activities section, we provide you our most recent report from our last workshop as part of Energy Talks Series, dealing with China's "energy hunger". We are happy to announce the publication of our 5th EUCERS Strategy Paper in December, titled “Fracking for Freedom – The Economic and Geopolitical Implications of the US Drive for Energy Independence in Light of the Shale Revolution”. In EUCERS on the Road we continue to inform you about conference participation and presentations of our members, as well as latest publications. I hope you enjoy the newsletter! Justus Andreas Research Associate and Newsletter Editor at EUCERS, King’s

College London

In this Month’s Edition:

! Introduct ion

! Dear Friends of EUCERS

! Four Years of EUCERS

! Newsletter art ic les Why Ukraine Is So very Interested in a Full Implementation of the EU’s Third Energy Package Across Europe By Frank Umbach

Turkey's energy policy and its impact on the European Union By Slawomir Raszewski

Changing Priorities In Europe's Energy Policy By Marina Petroleka

Russian gas supplies to South Korea: What lessons can be drawn from Germany? By Philipp Offenberg

! Activ it ies 5th EUCERS/ISD/KAS Talk – Report By Justus Andreas

! Announcement

5th EUCERS Strategy Paper in cooperation with KAS London

! EUCERS on the Road and Publ icat ions

! Contact EUCERS

! EUCERS Advisory Board

! Acknowledgements EUCERS Partners and Sponsors

Dear Fr iends of EUCERS,

Welcome to the fourth anniversary and Christmas edition of the EUCERS Newsletter. The past four years have been an exciting journey. In 2014 we were delighted to see our young institute be ranked it into the

top 20 energy and resource policy think tanks by The Think Tanks and Civil Societies Program (TTCSP) at the University of Pennsylvania. Our events offer a platform for academics and practitioners to exchange ideas and opinions. Already in 2010 we welcomed the then EU Commissioner for Energy Günther Oettinger, earlier in 2014 then Minister of State for Energy, Michael Fallon, gave a keynote at King’s. Since 2010 we organise annual energy talks. In the first year together with the European Commission and Konrad-Adenauer-Foundation (KAS) in London on EU Energy Policy, in the second year together with ACATECH and KAS on building resilient energy infrastructure and in 2014 together with ISD and KAS on changes and challenges in global energy flows and the effect on Europe. Our workshops are attended likewise by students, graduate students, researchers, also from other universities, as well as politicians such as Tim Yeo MP (who also spoke on our last workshop 2014 on China’s energy hunger and how it affects global and European energy supply) and business and media representatives. We are currently planning the 2015 series. In research, our annual KAS Energy Security Fellowship at EUCERS has proven so successful that KAS agreed to fund two scholars in 2014/15, Kalina Damianova from Bulgaria and Flavio Lira from Brazil, who work on (re-) emerging energy superpowers with a focus on Brazil and Iran. In December we will publish the study of our KAS Fellow 2013/14, Jan-Justus Andreas, on the economic and geopolitical implications of the U.S. drive for energy independence in light of the shale revolution. Shiraz Maher, our Fellow 2012/13,

published a study on the Arab Spring and its impact on supply and demand in global energy markets. EUCERS offers also training in form of the annual summer school on global energy politics and the executive energy seminar, a one-week training week for professionals from the energy industry. At EUCERS we are looking very forward to the years to come and exciting new projects. We hope you’ll keep in touch with us in person at our events and via social media on Twitter, Facebook and also since this year on our YouTube channel on www.youtube.com/EUCERS. We at EUCERS wish you all an enjoyable conclusion of this year, a peaceful festive season and all the best for the New Year! Yours

Four Years of EUCERS

The European Centre for Energy and Resource Security (EUCERS) was established in the Department of War Studies at King’s College London in October 2010 to focus on promoting an understanding of how our use of energy and resources affects International Relations. Our activities include events, which offer a platform for policy makers, experts, the general public and media to meet and exchange thoughts,

views, and criticism, our executive and undergraduate training as well as publications; the EUCERS Strategy Paper Series and our monthly newsletter. We are also hosting the annual KAS Energy Security Fellowship at EUCERS. In the past four years, the centre has welcomed high profile speakers, including the then EU Energy Commissioner, Günther Oettinger, as well as former UK Ministers for Energy, Charles Hendry MP and Michael Fallon MP and Kurdish Minister for Energy, Ashti Hawrami. EUCERS First Steps

In March 2010, seven months before its formal establishment, the European Centre for Energy and Resource Security hosted its first workshop in cooperation with the Konrad Adenauer Foundation in London. The International Centre for the Study of Radicalisation (ICSR) and its Director Dr Peter Neumann supported the event. The one-day workshop featured a panel discussion on “Future Conflicts over Energy and Resources – The Need for an European Energy Policy” and a keynote by Dr Jürgen Großmann, by the time CEO of RWE, by the time one of Germany’s leading energy supplier. After a few months of preparation of establishing EUCERS the workshop on 8th November 2010 officially inaugurated EUCERS as a research centre at King’s. The one-day workshop featured a panel on the Southern Gas Corridor and the perspectives for Europe and Turkey. The following panel on EU, NATO and Turkey and the geopolitics of

energy included lectures by General Armin Hasenpusch (former Vice President of the German Federal Information Service), Gareth Winrow (Turkey specialist) and Peter Mather (BP plc). Dr Wolfgang Schüssel, former Chancellor of Austria, held the keynote speech on “Turkey as an Energy Hub for Europe” at the Edmond J Safra Theatre at King’s with a subsequent question and answer session – EUCERS was officially established with a few words by the Head of Department at the time, Professor Mervyn Frost. EU Commissioner for Energy at EUCERS

Operations took off, when EUCERS hosted an event in February 2011 on “Energy Security for Europe: The EU Agenda until 2050” with the EU Commissioner for Energy, Günther Oettinger, whose speech at King’s was published on the official website of the European Union EUROPA (http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/11/98&format=HTML&aged=0&language=EN&guiLanguage=en). The keynote speech by the EU Commissioner for Energy was the highlight of a one-day workshop. High-profile speakers from a various backgrounds – academia, politics, banks and top energy companies considered a variety of scenarios which the European Union will have to deal with for the security of energy supplies. Following a welcome address and short intro by Professor Dr Friedbert Pflüger the first panel considered facts trends and scenarios of energy in Europe until 2050. Speakers included Andrew Bartlett (Global Head, Oil & Gas Project Finance, Standard Chartered UK), Dr Andreas Goldthau (Associate Professor at the Central European University in Budapest), Professor Dr Karl Rose (Senior Fellow, Scenarios, World Energy Council) and David Wells (Vice President, Global LNG Supply, Shell UK). The afternoon panel discussed the geopolitics of pipelines, with contributions by Andy Barrett (Senior Associate, IHS Cera), Ambassador (ret.) Joachim Bitterlich (Executive Vice President International, Veolia Environnement Paris),

Janusz Luks (CEO, Central Europe Energy Partners), Dr Frank Umbach (Associate Director EUCERS, Senior Associate Centre for European Security Strategies Munich) and Stefan Schaible (Partner, Head of the International Civil Economics Competence Center, Roland Berger Strategy Consultants). After the reception held by invitation of Jonathan Scheele, Head of EC Representation in the UK, EUCERS, King’s College London welcomed over 200 guests to a keynote lecture by Günther Oettinger, EU Commissioner for Energy. Following the Commissioner’s speech, Charles Hendry (Minister of State for Energy and Climate Change), Marco Arcelli (Executive Vice President Enel), Volker Beckers (Group CEO RWE npower) and Peter Mather (Regional Vice President Europe and Head of Country UK at BP plc) discussed their standpoints on Energy Security for Europe and the EU Agenda until 2050. After hosting three large-scale events, the Foreign and

Commonwealth Office expressed its interest in organising a smaller, research focused roundtable event. Results of the roundtable held in February 2011 on the potential of unconventional gas for the European market

were incorporated in the first EUCERS study “EUCERS Strategy Paper No.1 – Strategic Perspectives of Unconventional Gas” published in May 2011. The first EUCERS Strategy paper did receive a lot of attention by academia, business and also media. The Financial Times discussed the findings on 6 May 2011 in its article “Europe told of potential shale gas bonanza”. The following months EUCERS organized various roundtables in partnership with institutes and organizations such as Conflict Prevention and Early Warning Centre

(CPEWC), Economic Forum in Krynica, the Atlantic Council of the U.S., Central Europe Energy Partners

(CEEP) in Brussels and Warsaw, the Russian and Eurasian Security Research Group at King’s and the Centre for European Reform (CER). EU Tender

After the successful application for a tender by the European Commission, EUCERS received a grant to organize a series of workshops on distinct aspects of EU energy policy. During the next couple of months EUCERS, in cooperation with the EU Commission Representation in the UK and Konrad Adenauer Foundation in London, organized six roundtables, the EUcers Energy Talks. Each of the six roundtables welcomed a speaker of the EU Commission and a Co-speaker from academia, business or other institutions. The two (or in case of the 5th EUcers Energy Talk, three keynote speakers) were given 15 minutes for an introductory statement, followed by a short intervention and an expert roundtable discussion. Our keynote speakers included Dr Stefan Tostmann, Head Financial Resources, DG Energy, EU Commission and Professor Paul Ekins, Professor of Energy ad Environment Policy at UCL Energy Institute, Dr Michael Köhler, DG Energy European Commission and Dr Louis Skyner, Commercial Manager, Statoil ASA, Paolo Caridi, DG Climate, International and Inter-institutional Relations, European Commission and Dr Benny Peiser, Director Global Warming Policy Foundation Mechthild Wörsdörfer, Head of Unit for Energy Policy & Monitoring of electricity, DG Energy, European Commission and Humphrey Douglas, Partner, SNR Denton Jean-Arnold Vinois, Acting Director Internal Energy Market, DG Energy, European Commission, Kjetil Tungland, Managing Director, Trans Adriatic Pipeline and John T Baldwin, Group Political Adviser, BP plc UK, Kai Tullius, Coordinator of CCS Policy, DG Energy at the European Commission, John Lyman, Director of the Energy and Environment Programme at the Atlantic Council of the U.S. and Dr Frank Umbach, Associate Director at EUCERS. We concluded the series successfully in July 2012 and published a report on the results, accessible on our website www.eucers.eu. EUCERS Energy Talks 2013 After the success of the energy talks of 2012, EUCERS together with KAS agreed to continue the series. In 2013 EUCERS, KAS and the German National Academy of Science and Engineering (ACATECH) agreed to organise five roundtable discussions on building resilient energy infrastructure. The philosophy behind this series was to help participants understand the challenges surrounding energy

resilience within an international context in two distinct ways. The first concerned the idea of energy independence or, at least, diversification. The topic was particularly timely given how much emphasis was placed on the issue during the 2012 US Presidential election by both candidates, and because of recent unrest across parts of North Africa and the Levant. The second issue concerned the growing threat from terrorism, cyber-attacks including both espionage and sabotage. It was felt this was particularly relevant given the ever-increasing interconnectedness of regional and national energy grids in the European Union. The series was hosted at King’s College London and consisted of five separate panel discussions on distinct aspects of energy resilience and vulnerability: “Europe’s Vulnerability to Energy Crises” (12.3.2013), “Building Resilient Energy Infrastructure Beyond Europe’s Borders” (8.4.2013), “The Danger of Blackouts – Electricity Security as the Achilles Heel of Resilient Energy Infrastructure?” (3.5.2013), “Challenges and Prospects for an Integrated Energy Infrastructure in Europe” (18.6.2013) and “Terror Attacks on Energy Infrastructure – A Growing Threat?” (31.10.2013). It attracted participation from members of the public, politicians, academics, students, and energy sector professionals. These talks operated in a ‘roundtable’ format with a moderator chairing the discussion between two or more speakers and an invited discussant. The majority of time was allocated to inviting questions and comments from the audience, underscoring the purpose of the series – which was to engage, inform, and promote innovating thinking among our participants. Each session attracted between 30-50 participants. The series concluded in October 2013 and the results of the workshop series were published in a report, which can be downloaded from our website www.eucers.eu. Energy Talks 2014

In 2014 EUCERS and KAS teamed up with the Institute for Strategic Dialogue to organise energy talks on changing political and economic dynamics of global energy flows. The workshop series aims at

exploring potential future scenarios, managing factors that may adversely impact energy markets as well as offer practical solutions to increasingly dynamic challenges. The workshop series pays particular attention to bridging the edges between politics and economics and thinking creatively about how changing global energy flows are likely to impact both importing and exporting countries. Topics include “Turkey and Mediterranean Gas: What does it mean for Europe and the world?” (10.3.2014), “Ukraine-Crimea - Is Shale Gas from the U.S. an Alternative?”

(30.4.2014), “Iraqi-Kurdistan: Capital of Oil and Gas Exploration - What does it mean for Europe?” (17.6.2014), “The Implications of Iran’s Re-integration in Global Energy Markets” (3.7.2014) and “How will China’s “energy hunger” affect the world?” (6.11.2014). Videos of all our workshops in the 2014 series can be found on

our YouTube channel www.youtube.com/eucers

KAS Fellowship on Energy Security at EUCERS

In 2012 EUCERS hosted the first KAS Fellow, fully funded one-year research stay on topics relating to energy security. Shiraz Maher was the first KAS Fellow. His research focused on “The Arab Spring and its Impact on Supply and Production in Global Markets” and was published jointly by KAS and EUCERS. In 2013 we welcomed Jan-Justus Andreas who worked on a study “Assessing the geopolitical and economic implications of the U.S.’ drive towards energy independence.” After the success of the first two years, KAS agreed to fund two research fellowships in 2014/15 for a research fellow from the EU and a research fellow from Brazil. The overall theme of this year’s fellowships is "(Re-) Emerging Energy Superpowers". Kalina Damianova is focusing on Iran and Flavio Lira on Brazil. EUCERS Executive Summer Seminar

Building a strong foundation and investing in the next generation of executives is a crucial task for energy companies to ensure long-term competitiveness in a rapidly changing market environment. To contribute to such an understanding, the European Centre for Energy and Resource Security, in cooperation with King’s Summer Institute organises the EUCERS Executive Energy Seminar (EEES) since 2012. The programme ‘Changes and Challenges in International Energy Markets’, welcomes executives from the energy industry both at the strategic and operational levels, to explore the central issues affecting energy companies and policy-making today, including geopolitics, risk management, technological developments, pricing mechanisms, different modes of governance and the impact of global climate change policies on various sources of energy.

The programme of the 5-day-long summer seminar includes presentations by senior-level energy executives and academics with different perspectives on how to deal with current challenges.

EUCERS Undergraduate Summer School

Since 2011 EUCERS collaborates with the Summer School Office at King’s on a summer programme on Global Energy Politics, currently taught by Aexandra Maria Bocse, PhD candidate in Politics and International Studies at the Department of Politics and International Studies, University of Cambridge. Global Energy Politics is a highly innovative and unique course, which looks at a range of issues such as energy security for importing countries, the geopolitics of energy, war for natural resources, the political economy of energy and the politics of climate change. The course aims to bridge the gap between academic theory and the logic of real-world politics through off-campus visits to energy companies and energy analysts and also features a simulation of international climate change negotiation, challenging the students to apply their knowledge to a real-world problem. Most importantly, this course provides a clear conceptual framework, which will make it easier to understand the energy challenges of the future.

ARTICLES

Why Ukraine is so very interested in a fu l l implementat ion of the EU’s Third Energy Package across Europe

Frank Umbach

The trilateral gas deal between Russia, Ukraine and the EU as a broker in October has been welcomed in Europe as a gas disruption risk has been reduced or even eliminated. But neither all gas dispute issues between Russia and Ukraine have been solved nor is the trilateral gas deal a finally agreed and durable gas dispute solution; the Arbitration Court in Stockholm on Ukraine’s initiative will make a final decision regarding the relevant gas prices Ukraine has to pay for both its gas debts as well as for newly contracted gas supplies from Gazprom only in the spring or summer of 2015 . Naftogaz is also still seeking compensation for shortfalls in gas transit volumes since 2009 as Gazprom transported only 94 bcm annually on average during the last five years instead of the 110-112 bcm, stipulated in their bilateral gas transit contract. Furthermore, the trilateral agreement will only last until the end of March 2015 and is dependent on the overall future bilateral relationship between Russia and Ukraine. But the agreement settled Ukraine’s gas debts to Gazprom and agreed for new Russian gas supplies at two different gas prices until March 2015. Ukraine wants to purchase up to 4 bcm until the end of 2014 (US$1.5bn). Ukraine is free and flexible to order as much as gas it needs and is not subject to any take-or-pay obligations as in the past when it had to pay for imports it doesn’t need and want. Between 2011 and 2013, Ukraine was already able to reduce its gas imports from 41 bcm in 2011 to 32.9 bcm in 2012 and just 28 bcm in 2013. But the gas deal looks much less positive from the Ukrainian perspective than from the EU-side. Ukraine and its new pro-Western government certainly have a clear strategic interest in building trust in Ukraine’s new coalition government and its main gas company Naftogaz as a reliable partner for the EU’s energy supply security. In pre-countering any Russian manipulation of a gas disruption by accusing Ukraine of siphoning off Russian gas transiting Ukrainian territory and discrediting Ukraine as a notoriously unreliable partner of the EU, Ukraine has invited EU experts to permanently monitor and control its metering stations at its borders to both Russia and Poland. In the view of Ukraine’s new pro-Western coalition government and Naftogaz with its new management, the most important priority is to fully integrate Ukraine in the EU’s common and integrated European energy market. This

would allow Ukraine to undertake fundamental energy reforms and to reduce its gas dependence on Russia by diversifying its gas imports from EU countries. Under the leadership of President Poroshenko and Naftogaz’s new management, the country has now enacted an unprecedented reform of its energy sector. Ukraine’s Short-Term Priority and Major Gas Challenge: Increasing Reverse-Flow Imports from Europe In November 2012, Ukraine already began to import gas from Hungary, followed by another diversification of its gas imports from Poland in April 2013. Although these European gas supplies were at least partially Russian gas in origin, these (Russian) gas imports to Ukraine were cheaper than Russia’s directly supplied gas exports to Ukraine. Kiev imported 2 bcm of gas from Poland and Hungary in 2013, purchased from the German company RWE. In addition, Ukraine wants to expand its imports from Europe primarily via the much larger pipeline capacities of Slovakia. In September 2014, Slovakia begun to export 3 bcm annually to Ukraine. Between October 2014 and March 2015, Naftogaz expects to get a total of 5.7 bcm in reverse flows from Europe. Ukraine believes that it can replace all Russian gas imports, up to 30 bcm, through Europe. Reportedly, some 20 companies have expressed an interest in supplying gas to Ukraine through Slovakia, whose gas interconnector to Ukraine alone has a capacity of 27 bcm per year. Against the changing geopolitical background of Europe and Ukraine’s gas prices and gas diversification projects, Russia has tried to block any gas reverse-flow supplies by using spare pipeline capacities from the EU to Ukraine. Moscow has argued that the existing bilateral long-term gas contracts with Gazprom would not allow any reverse gas supplies. But in the view of the European Commission and the new pro-Western Ukrainian government as well as Naftogaz, the long-term contracts do not contradict reverse-flow exports to Ukraine or other countries. As Gazprom has recently announced that it would work out amendments to the existing long-term contracts in order to prevent any legal doubts, it has confirmed indirectly that most of its existing long-term contracts may not (explicitly) prevent reverse-flow gas supplies from western to eastern European countries. According to the European Commission, Russia’s aim (not to sell Russian gas imports to third parties) and

Frank Umbach is the Research Director at EUCERS and had been a member of the new Ukraine 2020 Task Force, an initiative of the US-Ukraine Foundation in Washington and the Pylyp Orlyk Institute for Democracy in Kyiv, since 2010.

take-or-pay clauses (paying for minimum Russian gas supplies regardless whether the gas customer needs and imports Russian gas supplies) contradict the EU’s third Energy Package and liberalisation efforts for a common, integrated European gas market and the EU’s crisis supply mechanism to supply each other by reverse-flow options in times of a gas supply disruption. Russia has temporarily disrupted its contracted gas supplies during the summer to Poland, Slovakia and Hungary without providing any explanation in advance. The Russian move has been explained by putting pressure particularly on those countries offering reverse-flow of gas supplies to Ukraine. Hungary stopped its gas exports to Ukraine suddenly at the end of September and explained its step later by the need to fill up its own gas storage units before restoring gas flows to Ukraine. The resumption of these reverse-flows has already been postponed to December or January 2015, despite Hungary’s storages being 72.2 per cent full, at 4.5 bcm. Hungary’s stop of reverse-flows to Ukraine has largely been explained by the Orban government being the strongest supporter of South Stream and by seeking closer ties to Russia at the expense of the EU’s common energy policies. Characteristically, Hungary’s Foreign Minister stated that the new 111 km-long Hungarian-Slovak gas interconnector as part of the wider planned North-South Gas Corridor from Poland to Croatia, starting its commercial operation early next year, will offer Ukraine gas supplies from non-Russian sources. But Hungary has also been accused to slow the progress to finish the gas interconnector to Slovakia. Hungary for its part blamed the situation that its bordering neighbours Croatia and Romania have also failed to implement new reverse-flow capacities towards Hungary. Nonetheless, Naftogaz recalled the fact that it never received a clarification from Hungary on the reason why the supply stopped at the end of September. Those policies contradict the EU’s Third Energy Package and the need for providing transparency and information in advance. Hungary has been accused to be at the forefront of undermining a unified EU policy on reverse-flow deliveries to Ukraine. Strategic Perspectives Ukraine’s state oil and gas company Naftogaz Ukrainy hopes that the Stockholm arbitration court will cancel its ‘take-or-pay’ contracts with Gazprom and make an interim decision already by the end of this year. In the short-term, Ukraine’s gas supply security depends on increasing gas reverse-flows from Europe. But the old European gas-pipeline network is still very much controlled and influenced by Gazprom, even in the EU member states, as it has the codes of the used capacities that allow estimating and managing the actual transport of gas. The current Slovakian gas infrastructure with transit volumes from east to west

reaching 56.5 bcm in 2012 (compared with just 5.2 bcm of Slovakia’s total gas consumption) only allows some 8 bcm per year for reverse-flows, which Gazprom tries to block. But it is not so much the commercial and political strength of Gazprom and the Kremlin that matters here but rather the failing implementation of the EU’s Third Energy Package as it is crucial for some of its member states, such as Slovakia and Hungary, to endorse the legal rules of the market as soon as possible, also in their own interest. In this context, ENTSO needs to play a more active role in monitoring the reluctant implementation of the network codes. A full implementation of the EU-Third Energy package across Europe is a pre-condition for creating a single common, integrated and liberalised gas market in Europe, to enhance gas supply security and to foster political solidarity in the face of crises. According the European Commission, a completed internal energy market may generate net economic benefits between 16-40 bcm each year. Integrating Ukraine into the EU’s single gas market will strengthen energy supply security on both sides, as Ukraine has the largest underground gas storage network with an overall capacity of 31 bcm in Europe, located in its the western regions, and the second highest level of stored gas after Germany. In October 2014, Ukraine had 16.4 bcm of gas stored, whose levels are published daily on the website of ‘Gas Infrastructure Europe’ (GIE), being the first European country offering an unprecedented transparency of its gas storage volumes. Ukraine can also play a strategic role as a transit hub with its interconnectors for transporting gas supplies from central Europe to South Eastern Europe, which is the region most exposed to the Russian gas monopoly. In the mid-term perspective, as the Lithuanian example teaches, the EU needs to fasten the building of the planned gas interconnectors as part of the North-South Gas Corridor and create a gas network between the Lithuanian, Polish and the much postponed Croatian LNG terminal. It would not only diversify the EU’s gas imports, but also those of Ukraine. Lithuania has already offered Ukraine its support by providing its imported LNG via its planned gas interconnector with Poland to Ukraine. In addition, Ukraine needs to fasten the implementation of its wider energy market reforms by improving its energy efficiency and conservation as well as by diversifying both its energy mix and its own gas supplies in order to reduce its gas dependence. This includes the expansion of its own gas production (i.e. shale gas and conventional offshore gas) and the increase of its import capacities (i.e. LNG-terminal near Odessa).

Turkey's energy pol icy and its impact on the

European Union

Slawomir Raszewski

The future of energy competitiveness and supply security in the European Union (EU) depend on external and internal policy developments. With internal energy market reform continuing, dynamics external to the EU, both in supply and transit, will continue to play the key role in the years to come. With hydrocarbons at the helm of the Community’s energy demand and good sources of supply in its immediate vicinity, the EU bloc needs a forward-looking strategy encompassing Turkey. While the fundamentals of the external energy policy – fair pricing and uninterrupted supply – remain the same, the changing factor is the environment in which Turkish ascent as a regional energy power that needs acknowledging by the Community.

1. Energy in Turkey Turkish energy policy strategy is directly linked with its economic and foreign policy and aims at ensuring energy security. While renewable energy is increasingly promoted, the primary sources of Turkey’s energy mix are hydrocarbons (oil and gas) and fossil (coal). The most tragic accident in the mining history of Turkey, the recent Soma mine disaster, has now brought about debate on the role of coal and security of mining in the energy sector of Turkey. Despite the country’s sizable proven reserves of coal, negative 13.5 percent change in coal production in 2013 over 2012, aging infrastructure and the security of mining coupled with the energy policy prerogatives are likely to favour natural gas as the substitute. Overall, with an insignificant hydrocarbon base of their own, the Turkish economy is dependent on energy from imports. Rather than aiming at reducing gross energy import dependence, Ankara’s hydrocarbon policy is oriented towards diversification of sources of supply. In line with the policy objectives, diversification is being fostered through increasing liquidity of hydrocarbon trade between the Middle East (ME) and Caspian regions and the international and European energy markets. The country’s favourable geographical location between Europe and Asia results in energy transit being the backbone of Ankara’s energy security policy.

2. Ankara’s Gas Hub Strategy Turkey’s foreign policy aspiration of becoming one of the World’s top ten largest economies by 2023 (the ‘2023 Policy’) hinges heavily on energy supply demand to sustain the growth its economy has enjoyed since the early 2000s. The energy demand forecast, together with the economic growth so far, have been the two single factors informing

Turkish energy policy’s transformation to meet foreign, trade and development policy goals. The existing physical gas import infrastructure is well diversified and covers five routes with four sources of gas Turkey depends on. The Trans-Balkan pipeline, carrying Russian gas through Ukraine, Moldova, Romania and Bulgaria, is of 6 billion cubic meters (bcm) capacity and operational since 1987. Direct interconnection with Russia exists through the Blue Stream pipeline carrying gas from the Krasnodar Krai’s Beregovaya Compression Station to the Durusu Terminal near Samsun on the Black Sea coast. The Blue Stream interconnector, operational since 2005 and providing for 16 bcm capacity, makes Russia number one gas supplier to Turkey meeting 57 percent of its demand for the fuel. From the East, the Iran-Turkey interconnector, which has been operational since 2001, has a capacity of 11 bcm adding up to 18 percent of Turkey’s gas needs. From the North-East the Baku-Tbilisi-Erzurum (also known as the South Caucasus Pipeline) gas pipeline carries Azeri gas supplies (up to 20 bcm capacity) and has been operational since 2006, meeting 9 percent of Turkey’s gas imports. High saturation of Russian gas on the Turkish market, resulting in energy ratio of imports to consumption at 57 percent, is considered the weakest link of Ankara’s energy policy. Existing take-or-pay contractual obligations provide for a diverse price netback for gas sold to Turkey. It is estimated that one thousand cubic meter of gas costs Turkey US$330 (Azerbaijan), US$400 (Russia) and US$505 (Iran). Negotiations between Ankara and Tehran are underway and relate to the price of gas imports from Iran. The contractual obligation with Iran rests on the 25 years take-or-pay contract signed by Turkey in August 1996. With current imports at 10 bcm, Tehran has offered Turkey price reduction should Ankara double its gas imports. The current infrastructure facilities however, are of 14 bcm capacity which would require a new pipeline to facilitate the sale, should the parties agree on the gas import increase and the price discount. Even in the presence of US-led Iran Sanctions, Ankara has enjoyed a unique trade relation with Tehran. Lifting of the Sanctions regime is likely to further strengthen Ankara’s role in the region’s gas trade. The natural gas infrastructure is supplemented by two existing liquefied natural gas (LNG) terminals, the Marmara Ereğlisi managed by BOTAŞ at Tekirdağ and the Izmir

Slawomir Raszewski is a Research Associate at EUCERS. Previously a Research Associate at Queensland (Australia) and a Research Fellow at Ankara (Turkey), Slawomir holds a Ph.D in International Energy Politics and Governance from the University of Leeds (UK).

Aliağa LNG terminal operated by EgeGaz. These two terminals service imports from Algeria and Nigeria, incurring respectively 9 and 3 percent dependence on Turkey. Ankara is currently seeking to attract investment from Qatar, the World’s biggest LNG producer, into a third LNG terminal to be located in the vicinity to Turkey’s borders with Greece and Bulgaria with a capacity of 5-6 bcm. The operationalisation of the gas hub will depend on its market liquidity which, at present, is low due to exposure to supplies of large volumes of long-term contracted gas mainly from Russia and Iran. The relatively high cost of supplies from these two countries which is estimated at about US$400 and US$500 respectively is expected to be offset by new supplies (pipelines and LNG) such as from Qatar and, in particular, the Kurdish Regional Government by the end of this decade. Materialising its gas hub policy, Ankara also seeks to increase its natural gas storage capacity from currently 2.6 bcm to 5 bcm and Russia expressed interest in investing in Turkey’s storage. The recently announced US$400 million of additional funding from World Bank towards construction of the Turkey’s first gas storage at Tuz Gölü (Salt Lake) in the Central Anatolia Region is the centrepiece of Ankara’s energy diversification and trade policy.

3. Turkey’s energy policy and the EU Contrary to the EU energy policy context, Ankara’s strategy does not explicitly identify liberalisation of energy markets as a policy area to enhance energy security. Yet, Turkey’s explicit policy objective to contribute to Europe’s energy security sets out a clear external dimension of the policy. The forward-looking nature of the policy should be viewed as an effort to attract foreign direct investment into Turkey’s energy sector. These policy objectives coincide with Ankara’s unfinished institutionalisation of energy stock exchange and continued diplomatic effort to increase future supplies of oil and gas to address the energy demand growth. With the country’s annual energy consumption rising at 6 percent, Turkey’s economic powerhouse is expected to require nearly twice as much energy in 2023 as it did in 2011 with additional private sector investment needed to address its demand estimated at US$120-130 billion. Turkish energy sector circumstances and prerogatives should be taken into account in crafting the EU energy policy. The Nabucco gas pipeline has been at the forefront of EU-led diversification policy and a centre piece of the broader strategy of the Southern Energy Corridor (SEC). From its inception in 2002, the Nabucco project received support within both energy industry and policy circles in Turkey. In particular, the broader objectives of the SEC strategy have been viewed as plausible in addressing the domestic energy needs of Turkey while strengthening Ankara’s external policy standing in Europe as its ‘energy security guarantor’.

Following the signature of the EU-endorsed Nabucco Intergovernmental Agreement in July 2009, Ankara’s pursuit of its energy policy has been gradually diverging from the EU’s key objectives. The EU security strategy will continue in a changed form and is likely to be led by regional actors, in particular Ankara and Baku in partnership with International Oil Companies (IOC). Previous attempts to animate the SEC strategy by means of the Nabucco project have largely overlooked the role International Oil Companies and upstream energy producers play in the making of large scale projects of this kind. The EU should ensure convergence of Ankara’s and Brussels’s energy transit objectives relying on the powerhouse of energy companies representing all the energy value chain, in particular up- and midstream.

4. Ankara’s influence on the future of the Southern Energy Corridor

The influence over the SEC Ankara enjoyed peaked between 2009 and 2013 has been used as leverage in its EU accession negotiations with Brussels. Turkey has refrained from giving preference to any single energy project earmarked to pass through Anatolia. Out of three key competing projects – the ‘energy consumer-led’ Nabucco, ‘industry-preferred’ Trans-Adriatic Pipeline (TAP) and Russia-championed South Stream, Turkey opted for signing up all three projects and, effectively, postponing a decision on the future of the SEC strategy. Ankara was careful to in moving forward with the Nabucco project as it felt it would have converted the geopolitical status of Turkey as the SEC project’s key transit country, a change that would have affected future options at Ankara’s disposal in its bid to become the regional energy hub. The demise of consumer-led project Nabucco opened up a way for the Trans-Anatolian Gas Pipeline (TANAP) led by Azerbaijan’s and Turkey’s state-owned companies SOCAR (80 percent stake), BOTAŞ (15 percent stake) and TPAO (5 percent). The TANAP project comes with a strong backing by the respective state-owned energy companies of Azerbaijan and Turkey. As the sole non-Russian supplier to the revamped SEC concept, with the TANAP as its centre piece, Azerbaijan as an energy producer has increased its influence over the future of the project. The fact that Azeri gas is being sold to Turkey at preferential rates is not without significance for Ankara’s own energy needs in light of the 2023 policy. It should be noted that following the Shah Deniz Consortium’s decision in June 2013 to opt for the alternative TAP project as the preferred mode of transportation of phase II Shah Deniz gas changed political dynamics of the SEC. These developments put the two regional energy actors in a strong position vis-à-vis the SEC concept. If materialised, Baku and Ankara will likely become the key influencers in the SEC.

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As for Turkey, Ankara’s diplomatic influence within the ME/Caspian region places it in advantageous position. Turkey’s energy interests coincide with those of the ‘new’ EU Member States. With Ankara’s explicit external policy goal of contributing to Europe’s energy security, the EU energy policy should build a policy platform to accommodate interests of its Member States while taking into account opportunities Ankara’s multi-level energy diplomacy offers in the regions. Turkey’s role in the energy security of the EU stretches beyond the ME/Caspian region. The discovery of Leviathan and Tamar gas fields in the Eastern Mediterranean (EM), offshore Israel, has opened up new realities on the ground with future gas transit via Turkey offering the most feasible option economically. Yet, due to strained relations between Ankara and Jerusalem, alternative gas export destinations and modes have been sought after and included LNG and offshore pipeline via Cyprus and Greece. With its explicit and forward-looking external energy policy encompassing energy consuming block of the EU and the energy producing regions in the ME, EM and Caspian regions, Turkey is poised to build a strong supply-demand aggregate to justify its claim to become regional energy hub. Conclusion Over the last decade Turkey’s energy policy and diplomacy in the EU-Russia-Caspian triangle has been enhanced, moving beyond the initial EU enlargement bid focus. Strengthening its internal energy markets to ensure their proper functioning will enhance Europe’s energy safety. However, after trial and error of the past decade or so, it is unlikely that the EU’s liberal market reform will take hold in the region. With the key fundamentals of energy security unchanged, the EU should continue pursuing its SEC strategy through building of a policy platform capable of accommodating interests of its Member States with opportunities Ankara’s multi-level energy diplomacy offers in the EM/Caspian regions. Turkey’s drive towards the creation of a state-led energy hub is supported by its own energy demand and emerging institutionalisation of trade in energy commodities. Driven by states rather than markets, the TAP and TANAP projects which are now the centrepieces of SEC strategy, provide further opportunities for Turkish energy companies to play in the premier league among energy companies internationally. This influence is shared with the existing and prospective energy producing nations in the region. Turkish focus on energy diversification to balance energy trade relations with Russia is shared with the EU as a whole and some of the EU Member States. The EU should streamline its energy policy to continue attracting industry players into the regional projects. The quality of future partnerships will also depend of the size and market power of respective incumbents. The past experience of the

Nabucco project, however, clearly demonstrates that the market strength of the players is key. Changing Prior it ies In Europe's Energy Pol icy

Marina Petroleka

Two key events have marked Europe's new era in energy policy (in this context meaning EU-28) in recent months: the EU 2030 summit and the European Energy Security Strategy publication. What is clear from both of these documents is that the realities on the ground, economic and geopolitical, have ushered in a new chapter on the priorities of the European energy policy on a supra-national level and policies on a national levels. The trinity of the past decade of 'low cost, low carbon, secure' energy supplies is proving very difficult to attain on all three levels simultaneously and new dynamics are dictating priorities and directing markets ahead of policy making. Germany's energy transformation, or Energiewende, came into full force in March 2011 following the Fukushima nuclear accident. It has produced unanticipated results, primarily a destabilisation in the wholesale electricity market, exacerbating the revival of coal powered generation as the country's largest utilities turn to coal as the only profitable way of providing base-load. Levies to sustain renewables have produced one of the most expensive electricity household bills in Europe, while the rise of coal power generation has increased Germany's CO2 emissions when the EU-28 emissions have been declining. Electricity Prices - EUR/KWh

CO2 Emissions from Energy Production, 000s tonnes/yr

700,000"

720,000"

740,000"

760,000"

780,000"

3,000,000"3,200,000"3,400,000"3,600,000"3,800,000"4,000,000"

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Source: Eurostat In the case of Germany, the current technological phase, energy security and low carbon cannot be low cost, while low cost and energy secure cannot also be low carbon. Amongst the three parameters in the European energy trinity, it therefore seems as though low carbon is losing the most traction (if not in rhetoric, then in practice) as the European economies are grappling with stagnation and an intensified geopolitical situation on Europe's eastern frontier. European Energy Security Strategy - Revived Priorities The European Energy Security Strategy (EESS) adoption can be seen as a watershed moment for the European energy policy as it provides the impetus for a renewed focus on European energy security priorities. Priorities on which the European community paid lip service to before, but seems to have gained new momentum since May 2014 when the document was first published. From the eight pillars outlined in the EESS and their various sub-components the ones that will have the greatest, most tangible impact over the coming decade will be the ones anchored in economic pragmatism and commercial considerations, which will be achievable in an environment of slower economic growth and tighter fiscal conditions. These are:

• Energy efficiency initiatives

• Strengthening the internal gas and electricity markets

• US LNG imports

• Exploration for unconventional resources

The Low Hanging Fruit

Energy efficiency and internal infrastructure

Energy efficiency measures and a better interconnected internal infrastructure are the low hanging fruit for Europe's energy market. Investments in these two areas can still produce significant multiplier effects for the energy market and broader economic performance. Promotion of energy efficiency initiatives, from transportation to smart metering and crucially less energy waste in buildings will reduce the overall consumption of energy. The EU's goal of 20% reduction of energy demand by 2020 projects that energy efficiency measures will reduce primary energy demand by 371million tonnes of oil equivalent (mn toe) by 2020.1 A re-alignment and expansion of the internal gas and electricity transmission infrastructures is also a crucial priority with reverse flow gas pipeline projects already underway. From the EU's Projects of Common Interest (PCIs), a list of 248 energy projects to strengthen the internal energy networks, thirty-four have been identified in the EESS as critical for the short and medium term ramp-up of the internal energy network for which funding will be prioritised.2 Both areas of action can provide tangible gains for energy security. On the infrastructure side, a better connected internal market - as well as one that can enable energy flows

1 Point 3 "Moderating Energy Demand", COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL European Energy Security Strategy / COM/2014/0330 final , http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:52014DC0330&qid=1407855611566 2 Point 4.2 "Accelerating the construction of key interconnectors", COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL European Energy Security Strategy / COM/2014/0330 final, http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:52014DC0330&qid=1407855611566

Marina Petroleka is a Research Associate at EUCERS and Head of Energy & Infrastructure Research at Business Monitor International in London, where she leads a team of 13 analysts in London, New York and Singapore across the Oil & Gas, Power, Renewables and Infrastructure sectors.

0"20"40"60"80"100"120"

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south to north, west to east - reduces the impact from supply disruptions and better allocates existing resources. Medium Term New Suppliers

US LNG

Imports of LNG from the United States will certainly help with the diversification of supplies (along with new sources from the Caspian Sea), but their effect should not be overstated. Under the contracted volumes for US export terminals that have received regulatory approvals, a total of 7.5billion cubic meters (bcm) have been contracted to European clients, less than 10%.3 This will meet approximately 2% of projected European gas consumption in 2020.4 With the pricing differentials in the global gas markets, Asia has attracted the vast majority of contracted volumes where natural gas prices are nearly 60% higher compared to European prices. US LNG Contracted Volumes By Destination And Uncontracted Volumes (bcm)

Source: BMI Forecasts, Company Statements, US Department of Energy, Bloomberg While US LNG will therefore have a modest impact on volumes of new gas in Europe, its greatest contribution may be on breaking the rigidity of prices from existing suppliers. Russia will remain an important source of natural gas for Europe, but Russia's pricing power could be diminished as new sources of supplies at lower prices offer more leverage to European consumers. In an effort to maintain market share, it is likely that Gazprom will seek to lower prices to

3 These figures are based on company statements and announcements of contracted volumes. Research provided by Business Monitor International. "US LNG No Game-Changer for Europe", 13 November 2014, Business Monitor International. 4 Forecast for European gas demand in 2020 from Business Monitor International.

European consumers in coming years, making this leverage the greatest benefit of European LNG to Europe.5 Long Term Game Changer?

European shale gas

Indigenous supplies from Europe could change the dynamics in the European energy landscape over the long term. The technological advances that have enabled natural gas production from shale formations in the United States are being implemented in Europe: in Poland, the UK, Denmark, Lithuania, Romania and Spain where exploration is planned or underway. While Europe remains on the whole sceptical on hydraulic fracturing and shale gas extraction, the most recent geopolitical tensions with Russia have provided new impetus in the European shale gas debate. The EESS mentions, inter

alia, shale gas as an option for increasing indigenous European production of hydrocarbons; the first mention of shale gas in a major European policy document.6 This reflects a slow, but evolving change in the perception and

receptiveness of shale gas as an option for future European energy production. Until appraisals from ongoing exploration are established and more exploratory wells are drilled and tested, the commercial viability of the unconventional resources in Europe remains to a large extent unknown. However, as relations with Russia deteriorate the opposition to exploration and deployment of hydraulic fracturing will continue to thaw, increasing the understanding of the prospects for shale gas production in Europe. Where to for Renewables?

The EU 2030 Summit highlighted in stark terms the policy slippage in Europe on renewables and it has revealed the fault lines between member-states on the issue. The lack of an agreement on binding targets for renewbles on national levels underscores that the low carbon priority of the

5 "US LNG No Game-Changer for Europe", 13 November 2014, Business Monitor International, and, EUCERS Strategy Paper, "Strategic Perspectives of Unconventional Shale Gas: A Game-changer with Implications for the EU's Energy Security, Volume 1, 1 May 2011. 6 Point 5.1 "Hydrocarbons and Clean Coal", COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL European Energy Security Strategy / COM/2014/0330 final , http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:52014DC0330&qid=1407855611566

previous decade is no longer an absolute one-way street for several members of the European Union. This is particularly evident in the Central and Eastern European states, where vulnerability to Russian energy supply disruptions is greatest and therefore energy security (now in the form of insisting on coal power generation) is a higher priority. In addition, feed-in-tariffs (FiTs) are expensive to sustain in an environment of lower economic growth and strict fiscal rules. South European countries have implemented steep retroactive cuts to FiTs, prompting a sharp slowdown in their renewables industries. Even in Germany, home to the largest renewables market in Europe by installed capacity, the government is seeking to slow the growth in renewables that has destabilised the grid and the wholesale electricity market, with costs cascading downstream into the manufacturing and mittelstand (SMEs) parts of the economy. There is still a big role for renewables to play in the EU's future energy mix, albeit at a much slower pace of growth than was envisaged in the previous decade (assuming no major breakthroughs in battery and storage technology). According to forecasts from Business Monitor International, (non-hydropower) renewables in Western Europe will grow by an annual average of 4.3% between 2014 and 2023, compared to an annual average of 16% between 2000 and 2010.7

Last but not least, the ETS will be crucial in the development and viability, not just of the renewables industry, but also in the resurgence of the dormant European gas market. Getting the mechanism working towards reducing carbon emissions, as opposed to enabling them as it

7 Data and forecasts from Business Monitor International

is now the case, will create a chain reaction, not only making renewables more cost competitive but will also enable natural gas back into the power mix as the base-load and back-up, thus reducing CO2 emissions from power generation.

Russian gas suppl ies to South Korea: What

lessons can be drawn from Germany?

Philipp Offenberg

After the breakthrough of the Sino-Russian gas deal and

improving relations between Russia and North Korea, South

Korea is evaluating its options to import Russian gas either

through China and the Yellow Sea or from Vladivostok through

North Korea. The prospects of these plans were discussed at the

conference “Natural Gas Cooperation for the Unified Korean

Peninsula and the Lessons from Germany” in Seoul on 21

November. One of the key questions: What can South Korea

learn from the way Germany – the largest buyer of Russian

natural gas – is managing its import dependence on Russian

gas?

South Korea’s President Park Geun-hye has launched a “Eurasia Initiative”, an ambitious plan that aims at the economic integration of Northeast Asia, China, Russia and the EU. By means of incentives for North Korea or economic coercion, the denuclearization and reunification of the Korean Peninsula shall also be achieved with this strategy. One central component of Park’s initiative is energy cooperation. According to Park, the region’s electric power networks, gas, and oil pipelines should be connected. While plans of the former South Korean government under President Lee Myung-bak to build a pipeline from Vladivostok through North Korea to South Korea are still considered an interesting – though not currently a politically viable option – the breakthrough of the Sino-Russian gas deal has shifted the focus on building a pipeline through the Yellow Sea. This pipeline would then connect the Chinese Shandong province to the South Korean Kyonggi province, and eventually could be extended to North Korea. In that case, Russia, China, South Korea, and North Korea would be connected by a circular gas pipeline. On 21 November an international energy conference in Seoul, co-organized by Yonsei University, the Oxford Institute for Energy Studies, Konrad Adenauer Foundation in Korea, Korea Energy Economics Institute, U.S.-Korea Institute at SAIS, John Hopkins University and Korea Gas Corporation discussed what lessons South Korea can learn from Germany’s approach to natural gas cooperation with Russia. As the largest buyer of Russian natural gas, Germany is an interesting case study for South Korea in its aims to

establish energy cooperation with Russia. This is even more so the case, since Western Germany’s natural gas cooperation with the Soviet Union was an important pillar of Western Germany’s rapprochement policy towards Eastern Germany which eventually enabled German reunification.

The Russo-German model of natural gas cooperation:

Interdependence through cooperation along the value chain

Russo-German gas relations kicked off in the 1970’s with the natural gas-pipe deals, commonly known as the “Mannesmann Röhren Geschäfte’ or the “Deutsch-sowjetische Röhren-Erdgas-Geschäfte” between Germany and the USSR. This deal, which has its roots in the early 1950’s, sparked a fruitful economic relationship between Russia and Germany. Delivery of pipes from the Mannesmann Corporation for the building of Soviet gas pipelines was financed by the Deutsche Bank. In return, Ruhrgas AG, Germany’s biggest natural gas trading company, has since 1973 received 3bcm of natural gas per year via the Sojus and the Transgas pipelines. The project was underpinned by an oil-indexed long-term supply contract. By linking the German Federal Republic’s interest with the interests of the supplier, the USSR, this cooperation became an important pillar of Germany’s policy of détente in the 1970’s. The next important joint project was the Brotherhood pipeline which was commissioned in 1984, despite the US embargo against the project. With the end of the Cold War, economic relations between Russia and Germany have further developed, and in particular their gas relations have turned into a strategic partnership. In the late 1980’s, Germany’s largest chemical company BASF was no longer willing to accept the gas prices of wholesale monopolist Ruhrgas AG. In 1993 BASF’s oil and gas subsidiary, Wintershall established a joint venture with Gazprom, the gas distribution company, Wingas. In 1994, Wingas started building the German section of the Yamal pipeline, connecting natural gas fields in Western Siberia with Germany and the monopoly of Ruhrgas AG on the German wholesale market was broken. Since then, several other joint ventures of German companies with Gazprom along the entire value chain have built up trust and interdependence. While Gazprom entered the European downstream sector, European companies were able to acquire upstream assets in Russia. The next large pipeline project from Russia to Europe, the Nord Stream pipeline, was a European project: Shareholders of the pipeline besides Gazprom are Wintershall and E.ON from Germany, Gasunie from the Netherlands and GDF Suez from France. In the year 2000 Nord Stream was granted the status of a Trans-European Network (TEN) project by the EU, to help to meet the increasing gas demand in Europe. The pipeline was commissioned in 2011.

Changing conditions in Europe putting the Russo-German

model of natural gas cooperation under pressure

The economic cooperation between German utilities and Russian state-owned export monopolist Gazprom has in the past been backed by strong political support by both countries. In recent years this strategic partnership has however come under pressure by developments on the domestic German and European level. The new EU member states from Central and Eastern European which take a critical stance on Russian gas supplies and Gazprom’s role on the European market have gained more influence on European energy policy, a development that might lead to a more centralized approach in external energy relations. The gas dispute between Russia and Ukraine in 2009, which led to supply disruptions for some EU Member States, has damaged Gazprom’s reputation as a dependable supplier. The EU reacted with a variety of measures to the “gas crisis”. After the Russian annexation of Crimea, these measures culminated in the Commission’s EU Energy Security Strategy on 28 May 2014. The strategy’s main aim is to achieve energy independence from Russia for the EU. Among others, this independence is to be achieved by suspending the Russian-led South Stream project and diversifying the EU’s gas supplies. The Commission has shown resolve on the matter of South Stream and urged the Bulgarian government to stop building the pipeline until it meets with the EU’s unbundling requirements for gas infrastructure. Russia’s President, Vladimir Putin, as a consequence, recently declared to abandon the project. The failure of South Stream – a project driven by Gazprom in cooperation with several European partner companies – is a setback for the model of business cooperation that originated from the Russo-German gas relations. At the St. Petersburg International Gas Forum on 7 October, Gazprom’s CEO, Alexey Miller, had already said that the company was considering whether its current strategy to create value chains from geological exploration and production to the end consumer in Europe does still work.

The idea of a joint gas purchase in the EU Energy Union

Philipp Offenberg is a Research Associate at

the European Centre for Energy and

Resource Security (EUCERS) King’s

College London. On 21 November he gave a

presentation on “The EU’s energy policy and

the Russo-German gas relations” at the

conference “Natural Gas Cooperation for the

Unified Korean Peninsula and the Lessons

from Germany” in Seoul.

Meanwhile, it is especially the EU member states in Central and Eastern Europe that are pushing for an Energy Union with a joint gas purchase. The proposal of Poland’s former Prime Minister and current President of the European Council, Donald Tusk, to collectively purchase gas to increase the EU’s bargaining power is currently further elaborated by Maroš Šefčovič, the new EC Vice President, and the first Commissioner with responsibility for the Energy Union. Gazprom’s customers in Germany benefit from comparatively cheap prices for Russian gas and are skeptical of the idea of a joint gas purchase, which might put them in a commercial disadvantage. However, their influence in German politics is shrinking and the question of whether the German government will take action on European level against the plans for an obligatory joint gas purchase in order to protect the cooperation of German energy companies with Gazprom is currently not clear. German utilities buying gas from Gazprom have come under economic pressure due to the German energy transition and nuclear phase out. Only recently has Germany’s largest utility E.ON announced to split in two to focus on renewables, distribution networks and tailor-made energy efficiency services, while its business segments for natural gas, nuclear and coal would be transferred to a new company. The loss of economic power of Gazprom’s German partners translates into a loss of political influence on the German government. Economic cooperation of German companies with Gazprom still works well, but these partnerships are gradually losing their political backing as the German government has adopted a more distanced attitude towards Russia in the confrontation over Ukraine.

The lesson from Germany: The model of linking economic

interests with Russia in the natural gas sector has created

interdependence and contributed to security of gas supply

The future of the Russo-German natural gas cooperation is uncertain as political circumstances and the German energy market have changed dramatically. No matter what this future will look like, insightful conclusions can be drawn from Germany’s decades-long cooperation with Russia in the natural gas sector. Even during the Cold War, Russia has shown a history of uninterrupted gas deliveries to Germany. The linking of economic interests with Russia by cooperating along the value chain has created a valuable interdependence, and the fact that Gazprom itself has stakes on the German wholesale market (which it now even increases with the full acquisition of Wingas and German gas storages) is of particular importance for the security of gas supply to Germany.

ACTIVITIES

5 th EUCERS/ISD/KAS Energy Talk – Report

Jan-Justus Andreas

The final workshop of the Energy Talk Series on "Changing Political and Economic Dynamics of Global Energy Flows", conducted by the European Centre for Energy Resource Security's (EUCERS) together with the Institute for Strategic Dialogue and the Konrad Adenauer Foundation (KAS) in the UK dealt with the topic of "How will China’s Energy Hunger Affect the World?". The event took place on November 6th, 2014 at King's College London and was attended by members of academia, the media, state governments and relevant businesses. In his welcome address, Prof Dr Friedbert Pflüger, director of EUCERS, described the topic of Chinese economic growth and the consequent growth in energy demand as one of hope and fear. The trend entailed both chances and challenges for businesses and increasingly so when considering that the IEA expects 80% of global energy demand growth by 2030 to come from developing Asia alone. Further stressing the magnitude of this outlook, Hans Hartwig Blomeier, director of the KAS Office in the UK, also reiterated the geopolitical and –strategic dimensions of these developments, going beyond mere technicalities. As such, the workshop represented an important final piece of this year’s Energy Talk Series that had already covered global energy developments in the Mediterranean, the U.S., Kurdistan and Iran. As the first speaker of the panel, Tim Yeo MP, Chairman of the Energy and Climate Change Committee of the UK Parliament, outlined five important drivers of contemporary Chinese energy policy. Firstly, Chinese energy demand is slowing down, although still high by Western standards. Secondly, Chinese policy makers are increasingly concerned with climate change as a threat to water security and the economy, represented in the 13th Five Year Plan and the initiation of an Emissions Trading System. This was also related with, thirdly, rising air pollution levels and a growing and vocal middle class. Fourthly, energy and carbon intensity remains high in China, yet growing at a decreasing pace. Finally, from a security perspective, China is eager to cut energy imports and utilise own indigenous resources. This has also shown that despite its political system, public opinion is not neglected,

with renewables the main beneficiary. There remain, however, high inefficiencies of the economy due to a lack of a competitive market and high corruption levels. Regarding the Chinese coal demand, Mr Yeo raised several influential factors that would lead to its decline in relative terms. Gas demand is growing, however faster than its production, resulting in increasing import levels via LNG. He also referred to the recent pipeline deal with Russia. At the same time, Chinese investments in renewable energies are increasing with benefits for the global renewables market as prices of solar are decreasing. A similar effect for wind power could be next. Considering the Chinese issue of air pollution levels, Mr Yeo forecasted China to be at the centre of the automobile industry’s shift towards electrical cars. Overall, Mr Yeo therefore considered coal demand in decline and saw great potential in China becoming a leader in climate change action. He stressed that the key for success was adaptability, a point also important for Europe, which he encouraged to make use of all its indigenous energy resource potentials. Professor Dr Keun-Wook Paik, associate fellow of the Energy, Environment and Resources department at Chatham House and senior research fellow at the Oxford Institute for Energy Studies, continued the discussion by coming back to several already raised points. He pointed out that the LNG hub at Singapore would not reach anticipated levels due to lower Chinese LNG demand. This stands in relation to Chinese gas projects in Thailand, imports from Turkmenistan as well as the mentioned Sino-Russian pipeline deal. The shift from coal to gas in China was therefore primarily a matter of prices rather than climate change ambitions. Professor Paik stressed that observed gas prices of $18 per Million btu in Japan would not be acceptable in China, where natural gas, although having seen massive expansion over the past two decades, still only accounted for 5% of the energy mix. Nonetheless, the Asian gas market was bound to see growing geopolitical and economic competition as increased gas from Australia and new gas from the U.S., Canada and Eastern Africa enter the market. The Sino-Russian gas deal, according to Professor Paik, was in part a consequence of the Ukrainian crisis which pressured Russia to look for new export markets. China, in this respect, has been the great winner, as he assumed that it was primarily Russian concessions that enabled the deal following years of intense negotiations.

Finally, Dr Frank Umbach, Research Director at EUCERS, also picked up on already mentioned points of the discussion by stressing that from his point of view climate change was not considered a main issue for China, despite the fact that without China, no successful actions tackling global emissions could be taken. China remains the largest CO2 emitter and has recently even surpassed the EU’s in per capita emission. In this respect, he stressed that this trend is likely to continue as China will be fuelled by coal for years to come. Current plans to reduce coal’s share in the energy mix from 70% to 50% by 2030 were firstly highly optimistic, and secondly, would still mean two times today’s consumption levels. Hence, Dr Umbach reiterated the importance of clean coal technologies. Referring also to the Sino-Russian gas deal, he added that another important factor is the steadily declining demand for natural gas in Europe that could be observed in all recent IEA World Energy Outlooks. Although the gas price agreed in the deal with Russia had not been published, analysts expect prices to be below those of the European market, while building costs of the “biggest deal ever”, according to Dr Umbach, have not been included yet. This would beg the question whether the Russians are truly willing to subsidise the Chinese consumer. However, Dr Umbach pointed out that China had the greater leverage in this respect, aiming at a high degree of diversification from various pipelines and through spot priced LNG. From a geopolitical perspective on China’s energy hunger, maritime chokepoints and conflict with Japan and Vietnam in the South and East China Sea continue to be important issues. Also Chinese relations with Iran and its involvement in African energy projects had to be taken into consideration. The latter have been directly undermining Western policies. To stress the point of the interdependence of issues, Dr Umbach finally also raised the matter of Chinese investments in European critical infrastructures, such as the electricity grid and telecommunications, and the consequent vulnerability of Europe to cyber-attacks. Following the panel discussion, as always, attendees had the chance to comment, ask questions and debate

Justus Andreas is a PhD candidate in Environmental Economics and Environmental Management at the University of York. He is also a Research Associate at EUCERS and the Editor of the monthly Newsletter.

the matters at hand further. Going back to the earlier breakfast buffet also provided ample opportunity to network. Overall, the workshop once again proved to be very insightful, raising many points and perspectives and giving everyone present an in-depth overview of the connected issues. It was therefore a befitting closing of the 2014 Energy Talks Series on the important topic of shifting global energy flows, as well as an excellent preparation for next year’s Series on (re)emerging energy super powers.

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.

ANNOUNCEMENT

We are happy to announce the publication of our 5th EUCERS Strategy Paper in December this year. The study is titled “Fracking for Freedom – The Economic and Geopolitical Implications of the US Drive for Energy Independence in Light of the Shale Revolution” and is the product of the 2013-14 KAS Energy Security Fellowship at EUCERS. It will be available in hard copy and online on www.eucers.eu.

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 interview contributions by EUCERS Director Professor Dr Friedbert Pflüger, Associate Director Dr Adnan Vantansever and Research Director Dr Frank Umbach.

18.11.2014 Berlin, Germany

Friedbert moderated the presentation of "The Energy Outlook" by Fatih Birol at Atlantik Brücke in Berlin

18.11.2014 Paris, France

Frank gave a presentation titled “The United States and Russia-EU Energy Interdependence” at the international conference “Germany, France and the United States: Towards a Renewed Transatlantic Dialog?”. A closed seminar organized by Comité d’études des relations franco-allemandes (Cerfa), IFRI.


Friedbert moderated the Ghorfa Energy Roundtable of the 5th Arab German Energy Forum.

06.11.2014 London, UK

EUCERS held its 5th energy talk on changes and challenges of global energy flows together with ISD and KAS in London and Friedbert chaired the discussion on “How will China’s Energy Hunger Affect the World”, while Frank was part of the panel.


Friedbert spoke at the 20th EUROFOURM on “Global Gas Market: Tendencies, Development of Prices and Implications for Germany and co-moderated the event.

29.-30.10.2014 Santiago-de-Chile, Chile

Friedbert spoke at the German-Latin American Energy Conference on the topic of Energy Security and European Integration.

27.10.2014 Sofia, Bulgaria

Frank spoke “Good Governance and the Example of the South Stream Gas Pipeline Project” at the International Conference: “Energy Security and State Capture Risks in Europe”, Center for the Study of Democracy/NATO.

07.10.2014 Warsaw, Poland

Frank presented on the “Baltic and EU Energy Security at the Wake of the Russian-Ukrainian Conflict”, at the College of Europe, Natolin Campus.

PUBLICATIONS

Dr Frank Umbach shares with us his most recent publications and interviews:

Frank wrote on „The Geopolitical Impact of Falling Oil Prices“, for the Geopolitical Information Service (GIS - www.geopolitical-info.com), on 19 November 2014.

Frank published on “Tusks Energieunion - Ein Plan zur Befreiung der EU aus der Abhängigkeit von Russland“ ("Tusks energy union – a plan to free the EU from its dependency on Russia"), World Review (http://www.worldreview.info/de/content/tusks-energieunion-ein-plan-zur-befreiung-der-eu-aus-der-abhaengigkeit-von-russland) and Open Europe Berlin (http://blog.openeuropeberlin.de/2014/10/tusks-energieunion-ein-plan-zur.html), on 15 October 2014.

Frank wrote on “Europe’s Challenge to Build an Energy Union Dealing with Supplies and Prices”, in the Geopolitical Information Service (GIS - www.geopolitical-info.com), 10 October 2014, 4 pp.

SOCIAL MEDIA

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CONTACT EUCERS

If you have found our Newsletter interesting, wish to hear more about our activities, or, indeed, contribute with ideas or essays, please contact Carola Gegenbauer, Operations Coordinator EUCERS on [email protected] or call 020 7848 1912.

EUCERS ADVISORY BOARD

The EUCERS Advisory Board supports the activities of EUCERS King’s College London. We would like to thank and present the members of the board.

Professor Theo Farrel l , Chairman of the Board, Head of War Studies Department and Professor of War in the Modern World, King’s College London

Marco Arcel l i , Executive Vice President, Upstream Gas, Enel, Rom

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

Andrew Bart lett , Managing Director, Bartlett Energy Advisers

Volker Beckers, Chairman, Spenceram Limited

Professor Dr Albert Bressand, Professor in International Strategic Management in Energy, University of Groningen

Professor Dr Iu l ian 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

I lya Kochevrin, Executive Director of Gazprom Export Ltd

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

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

Chris Mottershead, Vice-Principal (Research & Development), King's College London

Hi ldegard Mül ler, Chair of the Executive Board of the German Association of Energy and Water Industry (BDEW) and member of the Executive Committee

Dr Pierre Noël, Sultan Hassanal Bolkiah Senior Fellow for Economic and Energy Security, IISS Asia

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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