Geopolitics of Energy: A German and European View

Posted in Other | 13-Oct-06 | Author: Heinrich Kreft| Source: AICGS Advisor

Against the background of increasing (perceived) shortages throughout the world, energy security has become a key issue when it comes to national interests and agendas. Many states have ever-less confidence in market mechanisms and are increasingly opting for state inter-vention, both domestically and externally. Their main motive is the booming demand, in particular in Asia's dynamic economies – above all India and China – and the resulting con-tinued high prices for oil and gas. This has raised growing doubts as to whether it is possible to have energy security at affordable prices. What is more, energy is increasingly used by key states as a bargaining chip. It cannot be ruled out that this could lead to conflicts in future.

On coming to power in November 2005, the new German Government called for an energy security strategy in its coalition agreement. This strategy is to be integrated into an EU framework which is still to be discussed. The key to achieving our trio of goals, namely security of supply, efficiency and environmental compatibility, is to significantly reduce the need for energy imports – by making greater use of renewable energies, increasing energy efficiency as well as saving energy.

However, within the scope of our foreign and security policy we have to shape the depend-ence of Germany and Europe on imports of fossil energies, which will nevertheless continue to grow for the time being, in such a way that our energy security is guaranteed. This can only be done through the development of cooperative international structures. We will strive to achieve this goal through a comprehensive dialogue among energy producers, consumers, transit countries and the private sector in order to reduce the potential for conflict in the energy sphere. In keeping with our economic policy, our goal is to ensure fair competition and efficient pricing on a long-term basis by setting reliable international parameters.

1. Energy security in Germany and Europe

Imports of fossil sources of energy are expected to rise to 85% of overall energy requirements by 2030. The same applies to Europe as a whole, the US and the major consumers in Asia, including India. As the world's largest oil reserves are in the Middle East, dependence on this politically unstable region will increase worldwide, as will competition for access to these resources. The gas situation is not as critical as the world's reserves are spread wider and will last longer at the current annual rate of production. And in Norway we have a reliable major producer within Europe, which currently covers 15% of the EU's import requirements. Nevertheless, as they only have pipeline links with two other supplier countries (40% of the gas supplied to Europe comes from Russia, 25% from Algeria), countries in Eastern and Central Europe in particular are largely dependent on Russia. EU gas imports from Russia could rise to more than 60% of requirements by 2030.

The problem is not the lack of availability or depleted reserves in the medium term. The risks of the coming decades lie, above all, in geopolitical factors, in climate change and in other ecological problems. In this connection, the International Energy Agency (IEA) has pointed out the following growing risks to energy security:

  • increasing dependence for oil supplies on a decreasing number of producer countries;

  • ever greater risk of disruptions to supply due to the growing international trade with oil and gas;

  • danger of political instability in producer and transit countries.

2. Energy security and changes to the geopolitical landscape

The end of the Cold War and the rise of new political and economic powers have radically changed the geopolitical and economic landscape. These changes have had an impact on energy markets and on security of supply. Two trends are emerging in global energy security. One is towards economic efficiency based on the market economy. With some exceptions, the countries following this trend include the member states of the EU, Japan and the US. The other trend is the direct implementation of national interests. The latter group undoubtedly includes China, Russia, some states in the Middle East, and to some extent India. They are united, among other things, by their mistrust in US dominance and American demands for economic liberalization and political democratization.

For some time now, there have been clear signs that globalization of the energy markets has passed its zenith and that we will have to deal with a growing re-politicization of energy flows between exporting and importing nations. Some recent indications of this include:

  • The renationalization of the Russian energy industry, which has impacted on the CIS region (most recently the Russian-Ukrainian gas dispute);

  • China's neo-mercantilist energy policy and, to a lesser degree, that of India (development of privileged relations in the energy sphere with certain energy exporters);

  • The Polish proposal for a European Energy Security Treaty;

  • The US President's State of the Union Address last January (lessening dependence on Gulf oil);

  • The reactions of the Spanish Government to the attempt by the German company E.ON to take over ENDESA and that of the French Government to the campaign led by the Italian company ENEL to take over the French company Suez.

3. Energy security through diversification

Diversification is an important key to energy security. This applies firstly to the energy mix but, above all, with a view to the supply areas and the transit countries, it requires prioritiza-tion for

- safe producer and transit countries,

- those with manageable security risks as opposed to

- critical producer and transit countries.

  • Today Europe has a balanced energy mix from largely secure sources. However, the share of imports of oil/gas from unstable regions is set to rise considerably as North Sea reserves are almost exhausted.

  • In contrast to North America and East Asia, Europe has a favourable location for expanding its supply of gas: 80% of the world's reserves lie within a 4,000 km European radius, which makes possible a pipeline-based supply. Iran and Qatar together have greater gas reserves than Russia. There are also considerable reserves in the Caspian region. The South Caspian region is not further away than Western Siberia and, what is more, can produce gas at a lower price. However, there is no transport link at present.

  • Although the construction of the Nabucco pipeline has been discussed for some time now, a final decision has not yet been made. It is in Europe's interests to create the infrastructure for gas imports from the Kaspi and Gulf regions as additional sources of energy.

  • Another additional option lies in diversification in the direction of liquefied natural gas (LNG), possibly from Qatar from 2014 onwards.

4. Cooperative energy security throughout Europe

The Russian-Ukrainian gas dispute has increased fears, particularly in Eastern Europe, that Russia will use energy as a means of exerting political pressure. The proposal circulated by Poland in early 2006 for a "European Energy Security Treaty" (EEST) with a mutual assistance commitment ("energy NATO pact"), which would include not just the EU but also NATO states, cannot, however, create energy security in Europe as it is directed against Russia, the main producer, and excludes transit countries such as Ukraine. The current situation – Europe needs Russian gas (and oil), Russia needs Europe's markets, capital and above all energy know-how – suggests, indeed makes imperative, a cooperative approach in future.

At all events, a cooperative energy security strategy would have to include the two following elements:

  • Enhanced Energy Charter process (basis: Energy Charter Treaty of 1994): The Energy Charter brings together the EU member states, other Western European states, as well as the states of the Eurasian region. The aim of the Treaty is to establish a legal framework to promote long-term cooperation in the energy field. The most important Treaty provisions deal with investment protection, the trade in primary sources of energy and energy products, transit and dispute settlement. Although it has not been ratified by Russia to date, the EU and its member states can use this political instrument to try and influence Russia. In the run-up to the G8 summit in St. Petersburg, various EU member states and the EU Commission have – unsuccessfully - called upon Russia to ratify the Energy Charter.

  • Development and political reinforcement of the EU's energy dialogue with Russia. On the EU side, the dialogue includes member states, as well as the European energy industry and International Financial Institutions. Four working groups comprising 100 European and Russian experts are discussing issues relating to infrastructure, trade, investments as well as energy efficiency and are drawing up proposals for the energy dialogue.
  • 5. Developing the energy dialogue with producer countries

    An enhanced dialogue between consumers and producers would require an intelligent mix of bilateral, European and multilateral instruments, as well as the close involvement of our energy industry. According to the Commission's Green Paper, there is a trend towards making greater use of the EU's market and negotiating power. At international level, it is crucial that we strengthen the International Energy Forum, which is still a relatively informal body, for the dialogue between producers and consumers.

    • The EU's dialogue on energy with Russia is especially important. The new member states in particular are pressing for the EU-Russian dialogue on energy to be used to a greater extent to push through the EU's goals. The success of an EU energy partnership with Russia will ultimately stand and fall with the option of mutual access to markets in the energy sector (EU investments upstream in Russia, Russian investments downstream in the EU).

      Together with Norway, the EU wants to give a new focus to its diversification strategy, particularly in the gas sphere. Basically, this is about opening up new fields in the far north and in the Barents Sea and two possible pipeline feeds from there to Germany, among other countries. Trilateral cooperation in the far north including Russia is also being considered. Norway is an integral part of the EU's internal energy market due to the EEA Agreement.

    • As EU energy imports from politically unstable regions of the world are expected to rise despite successful diversification, Europe will have to bolster its political strategy vis-à-vis unstable export and transit countries. It must foster good governance and rule-of-law structures in these countries, improve investment conditions for German companies, help resolve regional conflicts and build up regional security structures (inter alia, Iraq, Iran, Central Asia, Southern Caucasus, North and West Africa), for example through EU cooperation with the states of the Gulf Cooperation Council (GCC). Due to its impact on the entire Arab region, this also includes the Middle East conflict.

    6. Developing the dialogue on energy with non-European consumers

    A consumer-consumer dialogue on energy security between the Western energy importers is currently taking place within the International Energy Agency. This group should be extended to include all large-scale consumers, for instance India.

    Accepting that our interests (energy security, energy efficiency, etc.) are partially identical, the aim of these dialogues (not only with India, also with the US, China, Japan and others) must be to lessen economic competition in adherence to market-based principles and, if necessary, also politically.

    • India: India, too, is ever more dependent on imports of fossil raw materials. While domestic oil production is falling, economic growth during the last few years has resulted in a large increase in oil imports. It is expected that India's dependency on oil imports will rise from the current 40% to more than 90% in 2030. Energy security is now one of the key features of India's foreign policy. Since 2001 Indian companies have been investing in oil and gas projects abroad, including problem states such as the Sudan and Iran. Within the framework of the EU-India Joint Action Plan of September 2005, the EU also initiated a dialogue on energy with New Delhi. The EU-India Energy Panel launched in the summer of 2005 last met in New Delhi on 6 and 7 April 2006. (An Indo-German Energy Forum was also founded on 26 April 2006 during the visit to Germany by Prime Minister Singh.) At present another session of the Energy Panel (or a separate energy conference) during the German EU Presidency in the first half of 2007 is being planned. With the conclusion of the US-Indian nuclear agreement, which is currently being debated in the US Senate and in which the conflict between NPT principles and energy security has become apparent, the EU is also now forced to rethink its cooperation with India on the civilian use of nuclear energy.

    • China: The EU is cooperating successfully with China in the field of energy efficiency and environmental technology. However, there is a danger that a dispute will develop with China over its aims. In its hunger for resources, the country is pursuing a neo-mercantilist approach (among other things, it is buying up oil and gas fields) in its efforts to export the Chinese development model. This will have far-reaching consequences for our foreign and security policy. In particular, China's relations with numerous pariah states, including the Sudan, Zimbabwe and Iran, in connection with its energy policy runs counter to everything the international community is doing to promote respect for human rights and good governance, as well as the fight against corruption, etc. The EU's aim is to conduct an intensive bilateral strategic dialogue with China to encourage Beijing to assume more responsibility on the international stage.1

      Furthermore, we should consider whether to gradually integrate India and China into the G8 and to strengthen cooperation with the IEA.

    • US: Both sides would like to extend the underdeveloped EU-US dialogue on energy, as was decided at the recent American-European summit in Vienna. At that meeting, a proposal put forward last year by Commission President Barroso to begin a strategic dialogue between the EU and the US on energy security was taken up. Just like our own, US energy security policy is principally aimed at ensuring a functioning world market. The US is potentially both a partner, e.g. in issues relating to China's actions in Africa and Latin America, and a rival, e.g. with regard to the Norwegian reserves in the Barents Sea. A change on a global scale in the energy sector is inconceivable without the world's biggest consumer of energy (25% of oil and gas consumption) and CO2 emitter (rejection of the Kyoto Protocol). On the other hand, the US as a global power is of central importance, especially for securing sea lanes, as well as for the stability of many oil producing countries.

    7. Energy infrastructure security

    The existing global energy infrastructure is very vulnerable from the source to the consumer as it was created when terrorism was not yet a global threat. Nuclear power stations, refineries and choke points in the maritime transport network are especially critical. Roughly 80% of the oil from the Gulf states passes through the Straits of Hormuz. Some 75 or 80% of Chinese and Japanese oil imports cross the Straits of Malacca. A terrorist attack on the world's largest oil refinery in Saudi Arabia was only just prevented earlier this year.

    In future the EU will be forced to address many more critical issues concerning the physical and political security of energy infrastructure (in particular of the pipelines), as well as neces-sary redundancies should there be a stoppage. Energy infrastructure and transport security issues are being discussed in NATO, too. Close cooperation among producers, consumers and transit countries at international level is of key importance here.

    8. Energy security and non-proliferation

    In working out an energy security concept, the link to proliferation-related issues should not be underestimated. A number of emerging economies with growing energy requirements are now considering making greater civilian use of nuclear energy (among others, Ukraine, Malaysia, Myanmar, Thailand, Indonesia). Thus, countries in other parts of the world could arouse the same fear as Iran (where an unpredictable regime could succeed in producing the fissile material needed for nuclear weapons by mastering the fuel cycle and using it for another purpose).

    In order to prevent the further dissemination of technologies which could be used for pro-liferation (in particular for uranium enrichment and the reprocessing of spent nuclear fuel), the head of the IAEA, El Baradei, favours multilateral approaches for these elements of the fuel cycle as they involve multilateral "co-ownership" (if possible without technology trans-fer) which could also prevent critical states from acquiring sensitive technologies. This debate has gained a new level of topicality as a result of the Russian proposals on establishing regional centres for fuel services and the US Global Nuclear Energy Partnership.

    9. Energy security and development policy

    High energy prices hit developing countries particularly hard, drive them out of the market and widen the North-South gap. For example, the soaring price of oil from $30 to $50 per barrel has burdened Kenya with an annual rise in foreign exchange expenditure of $400 million, the equivalent of the country's entire development aid in 2004. Development cooperation should focus to a much greater extent than hitherto on renewable energies, energy conservation, increased energy efficiency, as well as technology transfer.

    In those developing countries with abundant sources of energy, the high energy prices have led to additional revenue which fuels systematic corruption and opaque systems of patronage and, in some cases, hinders development ("resources curse"). With a view to stabilizing many key producer countries, the EU supports, among other things, the enhanced British Extractive Industries Transparency Initiative (EITI) which aims to make revenue from energy more transparent in budgets.

    10. Energy security and climate protection

    Energy security and climate protection are inextricably linked. To the extent that the con-sumption of fossil energies is rising worldwide, efforts to reduce in particular CO2 emissions are necessary in order to avoid further increasing the already considerable burden on the

    environment. The question as what will happen in 2012 after the first commitment period of the Kyoto Protocol has ended is of global importance. It will be virtually impossible to prevent the impending climatic disaster without the cooperation of the US, Russia and the major emerging economies, especially India and China.

    11. Energy security policy is peace policy

    Energy security policy which goes beyond energy security, similar to the extended security concept, is stability and conflict prevention policy and thus a peace policy. In addition to the energy security of all concerned, conflict prevention is to the fore:

    • Enhanced energy efficiency, the further development of renewable energies and the export of such innovative concepts and technologies reduce undesired dependence in foreign and security policy throughout the world and, at the same time, potential tensions (e.g. relating to the use of energy as a political weapon).

    • A sustainable energy and environmental policy reduces the burden on the climate and the sources of life on our planet and thus the danger of conflicts about natural resources, such as water, wood, arable and pasture land, etc.

    • Cooperative energy policy on a regional and global scale aimed at reconciling interests creates win-win situations, has a preventative effect against unregulated conflicts over the distribution of resources and increases long-term security of supply for all concerned as well as their ability to make long-term calculations.

    Dr. Heinrich Kreft
    Senior Foreign Policy Advisor
    CDU/CSU Parliamentary Group in the German Bundestag
    Former Deputy Head of Policy Planning and Senior Strategic Analyst of the German Foreign Ministry Berlin, Germany

    1 Heinrich Kreft, China’s Energy Conundrum, in: The Korean Journal of Defense Analysis, Vol.XVIII, No. 3, Fall 2006, S. 1-14.