Wgp Energy Final

8/2/2019 Wgp Energy Final

1/16

Energy as a Building Blockin Creating a Euro-AtlanticSecurity Community

Of the key issue areas where progress would help open the way to thecreation of a more cohesive and effective security collaboration among the states of the Euro-Atlantic region, enhanced energy security isparticularly important.

One dimension o this issue, the development o hydrocarbons in the oil- and gas-rich Arcticregion, represents a historic opportunity to make cooperation a critical building block in ashiona common Euro-Atlantic security space. Te other, ensuring stability and predictability in the gastrade between European Union members and Russia, constitutes both a challenge to be met, lest

ailure threaten progress toward the larger goal, and an opportunity to make energy a criticalelement advancing this goal. Te report o the Euro-Atlantic Security Initiatives distinguished

Working Group on Energy addresses both issues and makes concrete recommendations orachieving a positive outcome in each case.

Igor Ivanov Wol gang Ischinger Sam Nunn


2/162

C A R N E G I E E

N D O W M E N T f o r

I N T E R N A T I O N A L P E

A C E

Without economic security for its members there cannot be a fully functioning Euro-Atlantic Security Community, and without energy security for all, there cannotbe economic security. Whether governments are prepared to work seriously to promote economic and

energy security across the Euro-Atlantic region represents one o the sti est tests o their determination to mako this power ul set o countries a genuinely integral security community. I they pass the testi they woenergetically to trans orm this vast region into a common economic space in which all Euro-Atlantic countries

eel secure in meeting their energy needsthey will have done much to ashion the comprehensive, cooperativand indivisible security community, stretching rom Vancouver to Vladivostok to which they committedthemselves at the last Organization or Security and Cooperation in Europe heads-o -state summit in December2010. Te progress made will be on par with the headway that could be achieved by making missile de ense acommon undertaking, by overcoming the regional con icts that tear at the abric o European security, or by leaving to the past the grievances and mistrust that burden relations between too many countries.

o turn this great swath o countries ully one-hal o the world economyinto an optimally e cient

trading and investment sphere will require, frst, a level playing feld or all. Hence, it is important toincorporate Russia into the World rade Organization as well as into the Organization or EconomicCooperation and Development (OECD). Second, it will require a strenuous e ort to lower barriers andenhance cooperation among the North Atlantic Free rade Agreement (NAF A), the European Union(EU), and the Eurasian Economic Community. At its most elemental level, however, economic security means reedom rom crises threatening a nations undamental economic well-being. And as the recenttravail o Greece and other troubled EU countries demonstrates, e ective responses at this level are, inthe frst instance, likely to depend on institutions such as the EU and International Monetary Fund,although mutually reconciled national economic initiatives are also important.

Energy, in contrast, presents the entire region with both an opportunity and a challenge. Tought o as a

critical dimension o a Euro-Atlantic Security Community, securing the energy uture o supplier, consumerand transit countries by seizing this opportunity and meeting this challenge takes on a vastly greatersignifcance than do energy issues treated narrowly and in their own terms.

Te opportunity is new. As the Arctic ice cap recedes, the Arctic region, containing an estimated one-third o the mean estimate o the worlds undiscovered gas and 13 percent o undiscovered oil, opens the way to whacould be one o the most important cooperative projects in the Euro-Atlantic space. Te Arctic is where threeo the twenty-frst centurys greatest challenges intersect: the pressing need or hydrocarbon resources, climachange, and the tendency to securitize the areas containing these resources as well as the two critical passagesto them. Hence, the Arctic is in large part a microcosm: that is, within the Euro-Atlantic region, it is a test o these countries capacities to deal constructively not only with each o these three large challenges but withthe synergy among them.

As or the other hal o the picture, when thinking o energy security as a critical component o a Euro- Atlantic Security Community, the challenge is to mitigate the uncertainties that give rise to tensions betweenstates and to reduce the market ine ciencies that jeopardize the benefts o trade to both suppliers and consumers.Te states o the Euro-Atlantic region should strive jointly to oster an environment that ensures all consumerssecure and cleaner sources o energy and producers a predictable and relatively stable market, with an eco-nomically optimal distribution network, equitable access or investment in all aspects o the development,supply, processing, and sale o gas and oil, and standardized rules or all players. I they can achieve this,


3/163

E U R O - AT L A N T I C S E C U R I T Y I N I T I AT I V E| W O R K I N G G R O U P O N E N E R G Y

North America, the EU, Russia, and its neighbors will not only have provided a vital underpinning or the largercommon enterprise but also a power ul, stabilizing anchor in an increasingly unsettled global energy setting.

Not that achieving this level o energy cooperation will be easy. Many obstacles stand in the way, and a sizablenumber o them center on the Russian-EU energy partnership, the axis o energy relations within the largerEuro-Atlantic region. While the EU-Russian energy equation is complex and many sided, both the challengesand the opportunities surrounding the ow o gas rom Russia and the Caspian region to European marketsremain at its core. For that reason, we put the issue o gas ow at the center o this papers recommendations

when addressing the potential impediments energy issues may place on the e ort to build a Euro-AtlanticSecurity Community.

Most concerns over supply interruptions have beenabout gas. Gas has dominated the EUs and Russiasdi ering approaches to market liberalization. Gas hasembodied the EUs di culty in creating an internalenergy market and in developing backup measuresto deal with energy emergencies. Dueling pipeline projectssuch as South Stream and Nabucco eaturegas. And the sale and transport o gas remain largely nontransparent spheres in East-West energy trade, whichimpedes the emergence o an integrated and more e cient European gas market.

But gas, which is expected to occupy a growing share o Europes energy consumption over the next twodecades, also represents an area o opportunitya critical arena testing the will and capacity o governments

to make energy cooperation a key dimension o their e orts to create an integral Euro-Atlantic Security Community able to lead in meeting the new centurys major challenges.

In saying this we are mind ul o two important realities. First, energy relationships within the Euro-Atlanticregion are not sel -contained but instead deeply enmeshed in a global energy environment whose contoursare ever more complex. Indeed, energy security in the Euro-Atlantic region can only exist in a sustainableglobal energy system. Tis is a system in which leadership rom the Euro-Atlantic states will be essential, butin which the crucial trends shaping it will un old in regions ar beyond these countries borders. Second, gas,central as it is within the EU-Russian context, is also part o a complex Euro-Atlantic energy picture withconsiderable uncertainty surrounding the role o alternative energy sources and the evolving character o both the North American and European energy markets.

As or the second reality, the ambiguity among key Euro-Atlantic energy trends creates a mix o imprecisechallenges and promising but elusive opportunities. On the one hand, the uncertain uture o nuclear power,the growing impact o unconventional gas, and the emergence o increasingly interconnected regional gasmarkets, along with a rising global demand or gas, cloud the precise issue the policies o the Euro-Atlanticstates should be designed to address. Tese uncertainties magni y the challenge o fnding a compromisethat will meet the needs o the parties throughout the energy value chain. On the other hand, hydrocarbons,

whether the opportunity they represent in the Arctic or the di culty posed by their o shore exploitation,o er a historic basis or cooperationi the states o the Euro-Atlantic can locate the will to act on it.

Energy presents the entire region witboth an opportunity and a challenge.


4/164

C A R N E G I E E



A C E

The Arctic: A Euro-Atlantic Security Opportunity Te Arctic should be thought o as an auspicious chance to begin building the groundwork or a Euro-

Atlantic Security Community. In an energy uture plagued by uncertainty, the enormous hydrocarbon wealth

o the Arctic presents a critical cohort o countries within the Euro-Atlantic region with a grand opportunityGiven both the technical challenges in recovering the oil and gas and the extraordinarily delicate environmentthat contains them, these states have power ul reasons to cooperate in opening this new rontier.

o do so, however, the countries o the Euro-Atlantic region, and frst among them the Arctic littoral states(Canada, Denmark, Norway, Russia, and the United States) and other members o the Arctic Council(Finland, Iceland, and Sweden), must fnd ways to collaborate in addressing fve core challenges:

First, to achieve peace ul, legal resolution o claims to the hydrocarbon resources

Second, to meet the technological challenges in procuring and transporting the hydrocarbon resources

Third,to protect the Arctics ragile ecology Fourth, to create the institutional wherewithal by which to e ect these goals

Fifth, to ensure that the Arctic does not become a new arena o military competition

In raming these challenges, it is importantas it is in the larger area o gas and oil tradenot to exaggeratethe dangers or underestimate the opportunities. Neither the risk that competing claims to hydrocarbonresources will be a major source o tension nor the risk that the military preparations currently undertakenby many o the Arctic states need lead to a security competition should be overdrawn. Nor, by the sametoken, should the opportunity to cooperate in overcoming the technical obstacles to developing the hydro-carbon resources, protecting the Arctics ragile ecology, building e ective institutions to advance thesegoals, or sa eguarding the indigenous people in the region be overlooked.

Achieving the frst objective,ensuring an equitable and noncontentious resolution of claims to theresources, should not be di cult. Estimates are that the bulk o the oil and gas is distributed one-third onland, one-third on the continental shel , and one-third on the open ocean seabed. Hence, title to roughly two-thirds o these resources is uncontested. For those in areas where continental shel defnitions remain unresolvedthe UN Commission on the Limits o the Continental Shel serves as the commonly accepted arbiter, and theprocess or asserting claims under the UN Convention on the Law o the Sea (UNCLOS) remains the commonlyaccepted norm. Moreover, where boundaries overlap, countries have demonstrated an ability to reach bilateralagreements on sharing, such as the accords between Norway and Iceland over the Dreki feld and recently between Russia and Norway over the Barents Sea. Te challenge will be to ensure that these mechanismsand the spirit o accommodation continue to prevail as development o the region intensifes.

Overcoming technological and cost obstacles to the exploitation of Arctic hydrocarbonsposes a arlarger challenge. Power ul ice ows, damage to the seabed scraped by deeper ice structures, the icing o rigsand ships, and violent stormsall o which will be accentuated by ongoing climate changecreate obstacleto the exploitation o the Arctic. Tese roadblocks argue against attempts at exclusive national developmentand or pooling resources aimed at cooperative development. Te engineering and construction advancesthat will be needed to operate in much o the Arctic exceed the existing capabilities o most companies and


5/165


countries, and suggest that, without an open regime that encourages joint e orts, getting these resources tomarket will be very slow. And this is be ore considering the urther importance o cooperation in dealing witheither the onshore damage to pipelines and in rastructure rom melting perma rost or the potential costs o addressing the as-o -yet-unknown actor o the quality o the gas and oil o shore in the Arctic.

Te ecology of the Arcticis among the most ragile anywhere on the globe. Te production and transporto oil and gas rom the region require e orts and protocols or protecting the environment beyond anythingyet achieved by the members o the Arctic Council. Several o the working groups under the Arctic Councilare carrying out important research on and monitoring o the rates o organic pollution in the region, strato-spheric ozone depletion, and other threats to Arctic biodiversity, but neither the littoral states nor the ArcticCouncil have yet begun to develop a regime and mechanisms adequate to the looming challenge. One o the

worlds most important commonsand one o its mostvulnerablethe Arctic should be among the Euro-

Atlantic regions most important joint projects. Techallenge is already upon the countries o the region,and will only grow when Arctic oil and gas begin to ow.

Severalinstitutions addressing di erent dimensions o Arctic development exist, including the Arctic Council, with six expert working groups tasked with assessingthreats to the environment and the li e o indigenouspeoples; the Barents Euro-Arctic Council that deals with the economic and social development o the region;the EUs northern dimension that touches on some Arctic aspects; and UNCLOS. All, however, are stillrudimentary and weak when dealing with issues in this area. Article 298 o UNCLOS allows each o the 150parties (the United States is not one) to decline to accept any method or resolving disputes to which it objects.Te Arctic Council has no binding decisionmaking power in any area, nor do members have to participate inprograms created by the body. Te Barents Euro-Arctic Council also has no en orceable decisionmaking power.

At the Arctic Council ministerial meeting in Nuuk, Greenland, in May 2011, the eight countries did agree toestablish a standing Arctic Council secretariat and accepted the frst legally binding agreement negotiatedunder council auspices, an agreement on cooperation in air and sea search and rescue. Tis is a start, butmuch remains to be done.

Finally, avoiding military competitionin the Arctic warrants attention now, in the early stages, as many o the Arctic states take military steps to protect their interests in the region. Tere is already a tendency inthe media to treat the ormation o military units or Arctic contingencies, naval exercises in the area, andstatements rom Russian, Canadian, Norwegian, and North Atlantic reaty Organization (NA O) military o cials on potential regional threats as signaling an incipient military competition. Tus, while mostde ense-related initiatives on the part o the Arctic states are precautionary and normal measures to protectlegitimate national economic and security interests, these states should consciously ocus on ensuring thatthese initiatives contribute to mutual security in the Arctic, not to military rivalry.

The Arctic should be thought of as an auspicious chance to beginbuilding the groundwork for aEuro-Atlantic Security Community


6/166

C A R N E G I E E



A C E

EU-Russian Gas Relations in Perspective:Challenges and Opportunities

While the Arctic region represents a seminal opportunity to move closer to a Euro-Atlantic Security Community,other aspects o the energy equation are more open-ended. Given the elaborate interdependence o Europeangas and oil consumers and Russian and Caspian gas and oil suppliers, i these issues are addressed constructivela basis should exist or cooperation here as well. Still, in contrast to the our decades be ore, over the last teyears, the tension stirred by gas cuto s and the jousting over pipeline routes demonstrate energys potentialrole to impede e orts to draw the countries o the Euro-Atlantic region together. Hence, in contemplatinga path to the larger goal, a minimum, frst-order objective must be to minimize the possibility o energy relations adding obstacles to what inevitably will be a di cult road.

Te energy ties among the countries o the Euro-Atlantic region are many and complex, and none more so thanbetween the members o the EU and Russia. Russia supplies 31 percent o EU gas imports, 27 percent o crudeoil imports, 24 percent o EU coal imports, 30 percent o total EU uranium imports, and is the EUs third-largest supplier o electricity. In turn, the EU is not only easily Russias largest trading partner, but it is themarket or 88 percent o Russias oil exports, 70 percent o its gas exports, and 50 percent o its coal exportoday, 40 percent o the Russian budget derives rom the export o raw materials to the EU.1 Tus, to character-

ize the EU-Russian energy relationship as already one o dense interdependence is a mild understatement.

Over the decade since Russian president Vladimir Putin, French president Jacques Chirac, and Italian primeminister Romano Prodi proposed the EU-Russia Energy Dialogue, the two sides have done much to developand address an elaborate agenda dealing with the long-term orecasting o alternative energy utures, actorsaiding or hindering the reconciliation o their energy markets, and e orts to collaborate in promoting enhancedenergy e ciency. Mechanisms are in place that permit the two sides to explore issues a ecting the gas and oilsectors, coal trade, electricity systems, and nuclear power, with each presenting di erent challenges. And a widevariety o cooperative e orts are under way, ranging rom joint clean coal improvements in Russian utility plants to the exploration o steps needed to create synchronous or, be ore that, asynchronous interconnectionsthat allow electricity trade between Russia and the broader European market; rom cooperative nuclear sa ety projects to energy bridges comparing management experiences in Kaliningrad, Lithuania, and Italy. Workinggroups exist that are ocused on in rastructure projectsincluding pipelines, high-voltage lines, underground gstorage, liquefed natural gas terminals, and lique action plantsand on methods, instruments, and models ordeveloping more precise long-term scenarios predicting energy supply and consumption.

Tus, at the core o Euro-Atlantic energy relations, the EU and Russia are ashioning a solid oundation orpromoting what the recent Russian proposal or a Convention on Ensuring International Energy Security urgesa commitment to ensure a predictable and stable joint energy balance by coordinating . . . energy strategies and policies, including projections and planned measures relating to the prospects o supply anddemand, the development o energy in rastructure, the legal ramework in the energy sector, as well as thetransparent, predictable and e cient organization o energy markets.

rade in gas, more than any other area o EU-Russian energy cooperation, is suggestive o the distance still tbe traveled be ore energy becomes a buttress or a Euro-Atlantic Security Community rather than a barrier.During the Cold War, when the frst pipelines or Soviet gas were laid, the resource played a signifcant role inalleviating Europes dependence on Middle East oil. As an important component in Europes energy balance,


7/167


Soviet gas served as a bridge between two divided blocs and a tangible mani estation o their interdependence.Subsequently, during the energy shortages o the 1990s, Russia remained a reliable energy supplier or theEuropean continent.

oday, as Europe continues to search or a cost-e ective response to climate change, Russias abundant gasreserves may well provide the best available answer. Financial constraints in the a termath o the globalrecession together with limited commercial attractiveness cloud the prospect o a rapid transition torenewable sources o energy. Te nuclear disaster at Japans Fukushima plant and Germanys recently announced plan or a nuclear phaseout by 2022, have only magnifed the ambiguities surrounding Europes

uture energy balance. Meanwhile, the political upheaval in the Middle East adds to the uncertainty over gas(and oil) supplies as vividly illustrated by disruptions in Libyan gas and oil exports, making Russia stillmore important as a reliable alternative supplier.

More recently, however, most o the tensions in a highly complex energy relationship have eaturedgas rather than other ossil uels, despite the EUs rapidly increased demand or Russian oil and coal overthe last ten years. Te likely explanation begins with the lack of ef cient markets in the case o gas. Putsimply, unlike the case o oil and coal, a truly global market does not exist or trade in natural gas. Instead,regional markets dominate and they come with signifcant imper ections. Tey also vary in terms o theirmaturity, organization, and market structures. In 2010, only 31 percent o the gas produced worldwide

was traded across borders, compared with 66 percent o oil.2 Tis re ects the relative di culty inherentin moving natural gas rom one point to another.

Europes own slow progress in building an e cient and integrated gas market constitutes another challenge.

Its current in rastructure is ar rom allowing the optimal distribution o gas across borders. Central andEastern Europe, in particular, lack anything approaching a competitive market. Teir supply sources remainlimited and regulatory institutions are underdeveloped. A pan-European regulatory oversight arrangementis still at an early stage o development. It remains to be seen whether the EUs third energy package willsuccess ully address these remaining obstacles to the creation o a single European gas market.

o a degree, disagreements between Russia and the European Union are an outcome o these market im-per ections. Nevertheless, this is only one part o the story. Four additional actors contribute to tensions inRussian-EU gas relations and inhibit progress toward a more e cient gas market across Europe as a whole.

First, on both sides there has been a tendency to politicize the gas relationship. On the one hand, Gazprom

has understandably stepped up pressure on its clients in the ormer Soviet space to pay market prices. Com-mercial considerations have been a signifcant part o this decision, but the absence o clear criteria justi yingthe pace and extent o the price increases has bred a suspicion that Moscow utilizes gas as a political tool.On the other hand, Gazprom has received mixed signals rom the Europeans when it seeks to operate in thedownstream European market, something it sees as essential in minimizing its long-term risks as Europes gassupplier. Europes resistance is viewed by the Russian side as a case o a political phobia on Europes partabout Russia. Competing pipeline projects in southern Europe have constituted another source o tensionin EU-Russian energy relations.


8/168

C A R N E G I E E



A C E

Second, Russia and the European Union conceive o an e cient continental gas market di erently. In thethird energy package, the European Commission has insisted that market rules should apply equally to allcompanies. From Moscows perspective, however, this is legislation aimed at limiting Russias urther penetrtion into the European gas market. Russian o cials argue that exemptions are considered or Nabucco, a

competing pipeline project, and have requested a similar treatment or Gazprom-led projects.

Tird, with the demise o the European Energy Charter reaty as a potential mechanism or resolving disputesbetween the EU and Russia, the continuing lack o an alternative mechanism makes disagreements harder toresolve. European capitals have criticized Moscow (along with others) or ailing to rati y the Energy ChartRussia, meanwhile, has blamed its European partners or ignoring its numerous proposals or an alternativesolution. Given the magnitude o the Russian-European energy trade, commercial disagreements areinevitable, but their e ects will be more damaging in the absence o a suitable mechanism or resolving them

Finally, the EU and Russia would probably have had ewer disagreements i the competitive structure andtransparency o their respective gas markets were more alike. Gazproms monopoly position in transportation

and exports remains unchallenged. With limited competition, Russias gas sector will continue to be burdenedby ine cient contracting practices and high transaction costs. Questions remain about Gazproms ability todevelop its resources e ciently and in a transparent manner, exacerbating Europes energy security concerns.Tat said, Russias gas market is changing: independents account or a growing share o gas output, whiledomestic prices are being gradually elevated to meet marginal cost. Tese changes promise to help easeEuropean concerns over the noncompetitive aspects o the Russian gas market, while creating majoropportunities or both the Russian gas sector and partners abroad.

Managing short-term disruptionshas constituted another major challenge in the European-Russian gasrelationship. Russian-Ukrainian disputes on gas transit during the winters o 2006 and 2009 severely damageEuropes perception o the security o gas supply rom Russia. Te damage was limited to a ew countries in

Eastern Europe, but the sense o insecurity spread widely.In seeking a solution, however, neither the magnitude o the challenge nor the cost o addressing it should beoverstated. Building new links and storage acilities among EU member states will enhance their ability to

withstand uture potential short-term disruptions, though at the cost o maintaining sometimes unnecessarilylarge spare capacity. E orts in this direction are under way, and some o them have already borne ruit. Wereanother crisis to occur today, Bulgaria or instance, one o the countries most a ected by the cut-o in 2009,could receive shipments through an interconnector with Greece. Additionally, with the advent o the NordStream pipeline at the end o this year, Europes ability to deal with supply disruptions will be urther enhancedCentral and eastern European countries, however, will need to be better connected to their western neighborsin order to beneft rom these measures, ensuring that Nord Stream does not provide energy security to some

while bypassing them. Finally, ollowing the 2009 crisis, Russia and the EU decided to establish an early warning mechanism to prevent and better handle uture crises. Its e ectiveness in easing the impact o theBelarus gas transit crisis in June 2010 shows that this new tool is a signifcant step in the right direction.

Ensuring long-term investmentsis critical in building a secure Euro-Atlantic energy environment. Whileshort-term disruptions can be managed at limited costs, it is long-term shortages that will most pro oundly threaten both the energy balance and economic development in the Euro-Atlantic region. In this context,long-term underinvestment in Russias gas sector remains a major energy security concern in the minds o many, but to what extent is the problem real and, i real, which o its sources need to be addressed?


9/169


Underinvestment in Russias gas sector does constitute a challenge. Although lately it has been stressed lessbecause the recent economic crisis has le t global energy markets with a surplus o gas, only a ew years agoRussias ability to meet its growing domestic demand and external commitments was widely questioned.For years, Russia covered the gap between its commitments and its actual output through gas imports

rom Central Asia. Now, Russias ability to generate adequate investments in its gas resources has becomeincreasingly important as Soviet legacy felds, particularly in West Siberia, are in decline and the country must develop a new generation o gas felds.

wo principal challenges must be aced to avoid a short all in Russian investment in its gas sector. First,Russia might well consider improving the investment environment. In the past two decades, the absence o competition in the Russian gas market has inhibited its growth and raised the cost o investments. Gazprom

has lagged behind most independent producers and oil companies in ramping up production, a unction o its lower e ciency. Gazproms transport monopoly has urther constrained the growth in gas production by complicating contractual arrangements between the monopolist and independents. Russias legislation on

oreign investment in its strategic sectors constitutes another obstacle to a more competitive domestic gasmarket and an impediment to the timely in ow o oreign capital and technology.

Second, investment in Russian gas development is also a unction o security o demand. In the past, thishas been less o a reason or underinvestment, as long-term contracts continued to ensure upstream andin rastructure development. However, Russian gas industry representatives now see a greater cause orconcern. Even though most baseline projections envision growing demand or gas imports in Europe

or the next two decades, increasingly, leading institutions, including the European Commission, have

o ered alternative scenarios. Te EUs Energy E ciency Plan 2011, or instance, projects that gas imports will stabilize by 2020, and gradually start declining a ter 2025.3 Boldly defned targets about renewableenergy use and improved energy e ciency in Europe naturally raise questions about the amount o gasneeded rom Russia. o this might be added the longer-term uncertainties surrounding Europes uturedemand or conventional gas i the development o shale gas accelerates. Recent di erences in Europesand Russias approaches to gas market liberalization have urther aggravated Russian concerns or security o demand, prompting Gazprom to warn that this may contribute to an investment short all.

Still, long into the uture Europe will continue to be Russias principal gas export market. Slow progress onan export deal with China and Beijings increasingly diverse base or gas imports have limited Russias ability to redirect a signifcant volume o its gas in this new direction. Furthermore, Gazprom entered the liquefed

natural gas (LNG) business only recently and its ability to compete in this niche market will remain modestor some time. As a result, Russia fnds itsel in the delicate position o watching a new wave o liberalizationin Europes gas market, while it remains slow to adapt to it and unable to fnd comparable alternative markets.Tis will continue to complicate long-term investment decisions in Russias gas sector.

Long-term investment also o ers potential or better integrating the EUs and Russias energy markets andeasing the transition to a common energy market. In this respect, the EU states might consider creating amore avorable environment or Russian investment in oil, gas, power, and other energy assets on their territo-ries. Many Russian energy companies, when seeking to invest in these countries, particularly in Eastern Eu-


10/1610

C A R N E G I E E



A C E

rope, still ace practical and political obstacles. Whatever the merit underlying the reasons or this resistancethe simple act is that, unless these misgivings are set aside, advancing the energy security agenda by developing integrated, well- unctioning energy sectors in the Euro-Atlantic region will not be possible.Facilitating the broader integration o the European and Russian power grids would also be a power ul

step toward creating a common energy market.

Ensuring secure transit or natural gas has presented two major challenges. In the short term, disruptionsassociated with transit countries, Ukraine in particular, have illustrated that energy security or both suppliersand consumers could be easily jeopardized. Te longer-term problem arises when too little investment goesinto existing and aging in rastructure while new transit pipelines are being delayed in part due to disagree-ments with host transit countries. Energy security on the European continent will beneft rom investment inupgrading old in rastructure and building new transit pipelines or Caspian and Middle East gas. ransitcountries are more likely to play a constructive role i their interests, and in the case o LNG shipmentsthrough territorial waters, their environmental concerns, are also taken into consideration. It is important,however, to ensure that a reasonable economic return and sa ety remain their ultimate and only objectives.

Finally, despite increased attention to the issue in the EU-Russia Energy Dialogue, across the broaderEuro-Atlantic region, too little has been done to generate the advances inenergy ef ciency necessary tomeet urgent carbon dioxide emission standards. Europe itsel has yet to fnd a cost-e ective approach by

which to cut greenhouse gas emissions by 20 percent below 1990 levels by 2020. Improving energy e ciency constitutes its least expensive option, although that alone will not be su cient to meet the2020 target. Promoting the increased use o gas (liquefed and compressed natural gas) not only in powergeneration but also in the transportation sector (automobile, rail, waterborne) o ers both one o the mostcost-e ective options or lowering carbon (and hard particle) emissions and an opportunity to enhancecooperation between European and Russian gas companies. It would entail creating required in rastructure,including collaboration in the European Blue Corridor initiative, and European and Russian cooperation in

manu acturing natural gas ueled means o transportation.

wenty years a ter the collapse o the Soviet system, Russias economy remains among the worlds least energye cient. Realizing the enormous opportunities associated with saving energy, President Dmitry Medvedev hasset the goal o reducing the energy intensity o the Russian economy by 40 percent by 2020. Should Russiasucceed, it can save annually 240 billion cubic meters o gas, 89 million tons o coal, and 43 million tons o oilaccording to a World Bank study.4 Both Europe and North America have a stake in Russias success. For Europein particular, its energy security would be considerably enhanced i through improved energy e ciency Russia

were able to reduce domestic gas consumption and release some portion o the incremental saving or export.

In short, the challenges in European-Russian gas relations need not overshadow the large opportunities also

present. As was the case during the Cold War, Russian gas can and should play a similarly positive role in theuture. I the Euro-Atlantic region moves toward an increasingly integrated gas market and enhanced energye ciency, while Europe and Russia success ully manage potential risks with regard to short-term disruptionsand longer-term investments, energy cooperation can become an important component in building aEuro-Atlantic Security Community.

Add to this the large potentially positive e ects o the August 2011 Exxon-Rosne t deal to develop jointly oand gas felds in the Arctics Kara Sea and to share stakes in deepwater Gul o Mexico and onshore exas oilfelds. Cooperation in this orm and on this scale contains in microcosm the essence o Euro-Atlantic energy


11/1611


security. It should lead to extensive practical and technical bilateral cooperation in developing Arctichydrocarbons. It creates reciprocity when pursuing access to resources. It embeds Russias expansion intoglobal resource markets in a partnership. And, i this cooperation deepens, it should encourage the partnersto enhance the conditions allowing partnerships o this kind to ourish.

RecommendationsPlaced in a larger Euro-Atlantic context, all o the challenges discussed above put the stakes in a di erentlight. I the goal is to trans orm the vast and vital Euro-Atlantic region into a genuinely common security space, and energy plays a critical role in that, then the balance between the benefts o compromise andthe price that has to be paid to get it shi ts markedly. Even undamental, long-term adjustments thatappear improbable today take on a di erent coloration when viewed rom this broader perspective.

In contemplating what might be done to enhance energy security in the Euro-Atlantic region, it is important tobegin with a realistic notion o the task at handone that does justice to its complexity but without exaggeratingthe obstacles to cooperation, the threats to national security, or the relevance o past shortcomings and con icts.Te barriers to making energy and, in particular, the gas trade a building block in a more integral Euro-AtlanticSecurity Community are not small, but neither are they, given adequate political will, insurmountable.

In pursuit o this larger goal, we divide our recommendations into two undamental categories: (1) orms o cooperation essential in advancing the larger goal o building a Euro-Atlantic Security Community, and (2)

steps to create a level o trust permitting progress toward the larger goal.

Forms of Cooperation to Advance the Larger Goal

While there are a number o cooperative steps that would be use ul in acilitating energy trade between theEU and Russia and other supplier countries, two areas o cooperation are particularly relevant to promotingthe larger objective o a Euro-Atlantic Security Community: joint e orts in the Arctic and in promoting energy e ciency and lower carbon emissions.

The Arctic

I the Arctic is recognized as a potentially crucial opportunity to ashion a collective approach advancing theEuro-Atlantic region toward a more e ective and integral security community, several bold steps are needed.

First, the nations o the Arctic Council need to go beyond the monitoring unction carried out by the bodys existing working groups and develop e ective protocols regulating the development o hydrocarbons commensurate with the level o environmental vulnerability in the Arctic. At the sametime, they must strengthen existing institutions, including the Arctic Council, by giving them greaterauthority to e ect comprehensive participation in collaborative undertakings, create an action agenda,and en orce agreed-upon regulations.


12/1612

C A R N E G I E E



A C E

Second, the nations with claims to the hydrocarbons in the Arctic should begin now collaboratingon technologies that would be adequate to deal with oil spills in the region. (Current methods areinadequate in Arctic conditions, including in the presence o ice.)

Third,the nations o the Arctic Council should launch a dialogue about the military measures eachis taking to protect its interests in the region, including protection o the North and NorthwestPassages, with the aim o achieving mutual security and avoiding military competition. Tisdialogue might well be under the ultimate auspices o the NA O-Russia Council.

Fourth, the Obama administration should proceed with its stated intention to secure ratifcation o the UN Convention on the Law o the Sea. Apart rom U.S. sel -interest, it is important that all

Arctic nations, o which the United States is one, operate under the rules o this convention.

Energy Ef ciency and New Energy Technologies

Enhancing energy e ciency and new energy technologies is an important goal or all countries in the Euro- Atlantic region. It is an objective directly related to meeting the imperatives created by the rapid increase inglobal energy requirements, climate change, and energy security. And it is a goal indisputably best served by international cooperation. For that purpose:

Cooperation on improving energy e ciency should be, as urged in the EU-Russia Energy Dialogue, ahigh-priority component in the EU-Russian Partnership or Modernization as well as a major priority in the U.S.-Russia Bilateral Presidential Commission.

Te Euro-Atlantic states should also proceed to establish the EU-Russian Center or Energy Innovation and Energy E ciency recommended in the 20002010 EU-Russia Energy Dialogue

joint report, but this center should be expanded to become an all-Euro-Atlantic project.

Building Trust

o acilitate this new level o cooperation, rebuilding ull trust between Russia as an energy supplier andEurope as a major consumer is key. Re-creating confdence in the regions ability to work together to meetthe energy and climate challenges that lie ahead should be addressed rom several directions. First come themeasures intended to demonstrate that all partiesas all have o ten proclaimedare genuinely committedto creating e cient markets as a way o ensuring predictable supply at competitive prices. o this end:

As EU members set about integrating their national markets through investment in in rastructure andadopting common regulations, serious e ort should also be put into working with the Russian side to

fnd creative and mutually acceptable measures that surmount or reduce specifc discrepancies betweenthe two energy markets. In short, the objective should be to bring the rules governing the two marketsas much into line as possible, not simply to integrate one market into the other.

Despite positive moves by both Russia and the EU in the recent years, mistrust remains a reality. It shouldbe addressed directly, realizing that progress will take time and will only come rom positive experience. Allparties should consider concrete steps to con ront and dispel the impression that they perceive energy as apolitical instrument. Tese might include:


13/1613


Undertaking mutual obligations and a detailed backup plan as a part o the new early warning mechanism.

High-level political support in both the EU and Russia should be given to the many concrete, specifcideas or improving the energy investment climate generated by thebilateral business-led Subgroup onInvestment under the Tematic Group on Market Developments that has been an important part o the EU-Russia Energy Dialogue.

Full commercialization o Russian oil and gas exports to ormer Soviet republics, not least as a steptoward easing tensions with Russias European partners.

1 European Commission Directorate-General or Energy,EU-Russia Energy Dialogue: Te First en Years: 20002010

(Brussels, Belgium: European Union, 2011).2 BP, Statistical Review o World Energy June 2011(London: BP, 2011).

3 Energy Efciency Plan 2011, Impact Assessment Annex II , Commission Sta Working Document (Brussels: EuropeanCommission, March 8, 2011).

4 World Bank Group, Energy Efciency in Russia: Untapped Reserves (Washington, D.C.: World Bank Group, 2008).

EASI WORKING GROUP ON ENERGY

Alexander Dynkin (co-chair, Russia).Director, Institute o World Economy and International Relations.Richard Matzke (co-chair, United States). President, NESW Solutions. Retired vice chairman, Chevron Corporation.

Armen Sarkissian (co-chair, Armenia).Chair, Knightsbridge Group. Founder and director, EurasiaCenter, University o Cambridge. Former Armenian prime minister.

Robert H. Legvold (executive director, United States).Marshall D. Shulman Pro essor Emeritus, ColumbiaUniversity. Director, Euro-Atlantic Security Initiative.

Adnan Vatansever (assistant director, United States). Senior associate, Energy and Climate Program,Carnegie Endowment or International Peace.

MEMBERSHIP

Fatih Birol (Turkey).Chie economist, International Energy Agency.

Simon Blakey (United Kingdom).Special envoy, Eurogas. Former senior associate, IHS CambridgeEnergy Research Associates.

Hikmet etin (Turkey).Former urkish minister o oreign a airs.


14/1614

C A R N E G I E E



A C E

Vladimir Drebentsov (Russia).Chie economist and vice president or external a airs, BP Russia.

Donald J. Johnston (Canada).Former secretary-general o the Organization or Economic Cooperationand Development.

John Kerr (United Kingdom).Deputy chair, Royal Dutch Shell PLC. Former diplomat.

Klaus Mangold (Germany).Chairman, Supervisory Board o Rothschild GmbH (Frank urt). Formermember o the board, DaimlerChrysler AG.

Julia Nanay (United States).Senior director, Markets and Country Strategies Group, PFC Energy.

Nina Poussenkova (Russia).Senior research ellow, Institute o World Economy and International Relations

Matthew Sagers (United States). Senior director, IHS Cambridge Energy Research Associates.

Niki Tzavela (Greece).Member o European Parliament.

ABOUT THE EURO-ATLANTIC SECURITY INITIATIVE

o move toward the goal o an inclusive Euro-Atlantic Security Community, a unique process was created in2009 called the Euro-Atlantic Security Initiative (EASI) by the Carnegie Endowment or International Peace.

For the frst time, ormer policymakers, diplomats, generals, and business leaders rom Russia, the United StatesCanada, Central Europe, and European Union nations came together to chart a roadmap o practical actionthat would allow the region to leave its past behind and to start to build a more secure uture based on mutuatrust and cooperation.

CO-CHAIRS

Wolfgang Ischinger (Germany).Chair o the Munich Security Con erence and global head o government

relations at Allianz SE in Munich. Former German ambassador to the United Kingdom and the UnitedStates, and state secretary (deputy oreign minister) o the Federal Foreign O ce.

Igor Ivanov (Russia).President, Russian International A airs Council and pro essor at the Moscow StateInstitute o International Relations. Former Russian minister o oreign a airs.

Sam Nunn (United States).Co-chairman and chie executive o cer o the Nuclear Treat Initiative anddistinguished pro essor in the Sam Nunn School o International A airs at the Georgia Institute o echnology.Former senator rom the state o Georgia, including service as chairman o the Senate Armed Services Committ


15/1615


DIRECTORRobert H. Legvold (United States).Marshall D. Shulman Pro essor Emeritus, Columbia University.

MEMBERS OF THE COMMISSION

Charles Boyd (United States).Starr Distinguished National Security Fellow, Center or the National Interest.Retired general and ormer deputy commander in chie , U.S. orces in Europe.

Desmond Browne (United Kingdom).Convenor, op Level Group o UK Parliamentarians or MultilateralNuclear Disarmament and Non-Proli eration. Convenor, European Leadership Network or MultilateralNuclear Disarmament and Non-Proli eration. Former British secretary o de ense.

Hikmet etin (Turkey).Former urkish minister o oreign a airs.

Oleksandr Chalyi (Ukraine).Ambassador Extraordinary and Plenipotentiary o Ukraine. Former frst deputy oreign minister o Ukraine.

Alexander Dynkin (Russia).Director, Institute o World Economy and International Relations.

Viktor Esin (Russia).Former chie o sta , Strategic Rocket Forces.

Herman Gref (Russia).President and chairman o the board, Sberbank. Former Russian minister o economicdevelopment and trade.

Istvn Gyarmati (Hungary).President and chie executive o cer o the International Center or Democraticransition and the om Lantos Institute. Former diplomat.

Stephen Hadley (United States). Senior adviser or international a airs, United States Institute o Peace.Former national security adviser.

Tedo Japaridze (Georgia).Director o the Center or Energy and Environmental Security, AzerbaijanDiplomatic Academy. Former Georgian minister o oreign a airs.

Donald J. Johnston (Canada).Former secretary-general o the Organization or Economic Cooperationand Development.

Catherine Kelleher (United States). Senior ellow, Watson Institute or International Studies, BrownUniversity, and pro essor, School o Public Policy, University o Maryland. Former U.S. deputy assistantsecretary o de ense or Russia, Ukraine, and Eurasia, and representative o the secretary o de ense to NA O.

John Kerr (United Kingdom).Deputy chair, Royal Dutch Shell PLC. Former diplomat.

John C. Kornblum (United States).Senior counsel, Nrr Stie enho er Lutz, Berlin. Former chair, Lazard andCompany, Germany. Former ambassador to Germany and special envoy or the Dayton Peace Agreement.


16/16

C A R N E G I E E



A C E

Jacques Lanxade (France).Chairman, Acadmie de Marine, and president, Mediterranean Foundation orStrategic Research. Former chie o the De ense Sta o the Armed Forces o France.

Vladimir Lukin (Russia).Human rights ombudsman o the Russian president. Former ambassador to Washington.

Klaus Mangold (Germany).Chairman, Supervisory Board o Rothschild GmbH (Frank urt). Former member

o the board, DaimlerChrysler AG.Richard Matzke (United States).President, NESW Solutions. Retired vice chairman, Chevron Corporation.

Ren Nyberg (Finland).Chie executive o cer, East O ce o Finnish Industries. Former ambassador.

Adam Daniel Rotfeld (Poland).Former Polish minister o oreign a airs. Co-chairman, Polish-RussianGroup on Di cult Matters.

Volker Rhe (Germany).Former German de ense minister. Former member o the Bundestag.

Armen Sarkissian (Armenia).Chair o Knightsbridge Group. Founder and director, Eurasia Center,University o Cambridge. Former Armenian prime minister.

Vyacheslav Trubnikov (Russia).Former deputy oreign minister and director o the Foreign IntelligenceService o Russia. Retired general and ormer ambassador.

ABOUT THE CARNEGIE ENDOWMENT FOR INTERNATIONTe Carnegie Endowment for International Peace is a private, nonproft organization dedicated toadvancing cooperation between nations and promoting active international engagement by the UnitedStates. Founded in 1910, its work is nonpartisan and dedicated to achieving practical results.

As it celebrates its Centennial, the Carnegie Endowment is pioneering the frst global think tank, withourishing o ces now in Washington, Moscow, Beijing, Beirut, and Brussels. Tese fve locations

include the centers o world governance and the places whose political evolution and internationalpolicies will most determine the near-term possibilities or international peace and economic advance.

2012 Carnegie Endowment or International Peace. All rights reserved.

Te Euro-Atlantic Security Initiative has been made possible by unding rom the Robert Bosch Sti tung, the CalousteGulbenkian Foundation, the Carnegie Corporation o New York, the Hur ord Foundation, the Robert & Ardis JamesFoundation, the Nuclear Treat Initiative, and the Starr Foundation, and by support rom the Institute o WorldEconomy and International Relations o the Russian Academy o Sciences and the United World International Foundation.

Te statements made and views expressed in this paper are solely the responsibility o its authors.

Wgp Energy Final

Documents

Transcript of Wgp Energy Final