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Future Transport, Pipelines and Future Transport, Pipelines and

EnergyEnergy SecuritySecurity

Public Hearing on Public Hearing on the Securitythe Security of of Energy SuppliesEnergy Suppliesorganized by the Committee organized by the Committee on on IndustryIndustry , Research and , Research and EnergyEnergy , ,

European European ParliamentParliament ,, BrusselsBrussels , 2 April 2009, 2 April 2009

Dr. Frank Umbach

Centre for European Security Strategies (CESS), Munich-Berlin

Tel.: ++49-(0)173/934.91.89

E-Mail: umbach@cess-net.eu

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Introduction Introduction IIII�� EU‘s EU‘s March Summit March Summit 2007: 2007:

�� Sustainable Integrated climate Sustainable Integrated climate and and energy policyenergy policy withwith threethree 20% 20% objectivesobjectives ((energyenergy efficiencyefficiency, , renewablesrenewables,, emissionsemissions););

�� Energy actionEnergy action plan (plan (diversificationdiversification of of resourcesresources and and importsimports););�� Common Common energy foreign policy energy foreign policy ((political solidarity political solidarity and and speaking with speaking with

one voiceone voice););

�� 22/06/2007: 22/06/2007: newnew EU Central EU Central Asia Strategy during the Asia Strategy during the German German presidencypresidency ((interestedinterested in a „in a „peacefulpeaceful, , democraticdemocraticand and economicallyeconomically prosperousprosperous CACA“):“):�� Defining Defining European European strategic interests strategic interests in CACR;in CACR;

�� FindingFinding and and offering new concrete prospective areas for cooperationoffering new concrete prospective areas for cooperation;;

�� Improving already existing aaproaches Improving already existing aaproaches and and instruments by making instruments by making them more efficientthem more efficient;;

�� 2nd2nd Strategic Energy ReviewStrategic Energy Review (13 November): (13 November): �� „EU„EU--EnergyEnergy SecuritySecurity and and SolidaritySolidarity Action Plan Action Plan

�� ForthcomingForthcoming PCA PCA negotiations with Russianegotiations with Russia--PerspectivesPerspectives

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Introduction Introduction IIIIII

�� Three recent events Three recent events and and developments enhancing developments enhancing CACR CACR strategic importance for strategic importance for EU:EU:�� 08/2008:08/2008: RussianRussian Georgian War Georgian War –– implications forimplications for

EuropeanEuropean energy securityenergy security;;

�� AutumnAutumn 2008: Global Financial 2008: Global Financial CrisisCrisis –– Impacts on:Impacts on:

�� world economyworld economy, ,

�� global global energy demandenergy demand and and pricesprices ((revenuesrevenues), and ), and

�� energyenergy,, foreign foreign and and domestic policiesdomestic policies of of producer producer statesstates..

�� 10/2008: GAS10/2008: GAS--OPECOPEC RussiaRussia, Iran and , Iran and Qatar Qatar ((controlling controlling 60% of global gas 60% of global gas reservesreserves)? )? –– Impacts in Impacts in midmid-- and longand long--term futureterm future..

4Source: G. Kemp (Nixon-Center)

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Geopolitical Factors IGeopolitical Factors I�� Geopolitical Security FactorsGeopolitical Security Factors::

�� 11 OPEC11 OPEC--members and Russia with only 6.5% of the worldmembers and Russia with only 6.5% of the world’’s nominal GDP s nominal GDP control more than 80% of the total global proven oil and gas rescontrol more than 80% of the total global proven oil and gas reserves;erves;

�� OECD, China and India, producing more than OECD, China and India, producing more than ¾¾ of the global GDP, but of the global GDP, but control only about 10% of the total proven oil and gas reserves;control only about 10% of the total proven oil and gas reserves;

�� Producers and exporters are either nonProducers and exporters are either non--democratic or becoming democratic or becoming increasingly authoritarian.increasingly authoritarian.

�� Global Global ““values conflictvalues conflict”” fuelled by fuelled by ““energy inequalityenergy inequality””..

�� Resource nationalism leads to counterResource nationalism leads to counter--protectionism;protectionism;

�� Geopolitical Importance of the Middle East: Geopolitical Importance of the Middle East:

�� 62% of all globally proved oil reserves; 62% of all globally proved oil reserves;

�� 34% of all proven natural gas reserves; 34% of all proven natural gas reserves;

�� until 2020, the world energy demand will rise by almost 50%, theuntil 2020, the world energy demand will rise by almost 50%, thePersian Gulf must expand its oil production by again almost 80% Persian Gulf must expand its oil production by again almost 80% in this in this timeframe;timeframe;

�� but only achievable if sufficient foreign investment is taking pbut only achievable if sufficient foreign investment is taking place, lace, if Iran and Iraq are free of sanctions and if the entire region if Iran and Iraq are free of sanctions and if the entire region remains politically stable!remains politically stable!

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Europe‘s Achilles Europe‘s Achilles HeelHeel II

�� Increased Use of Natural Gas (Forecast until March 2007):Increased Use of Natural Gas (Forecast until March 2007):

�� Gas Gas shareshare ofof thethe EU‘s totalEU‘s total primary energy demand is increasing primary energy demand is increasing fromfrom 24% to 2924% to 29--32% in 203032% in 2030 as the resultas the result ofof thethe EU‘sEU‘s climate climate policiespolicies andand phasingphasing outout nuclearnuclear power (power (likelike in Germany);in Germany);

�� GasGas imports todayimports today to 93% just to 93% just from from 3 3 countriescountries ((RussiaRussia,, NorwayNorway andandAlgeriaAlgeria););

�� GasGas supply interruptions cannot be compensatedsupply interruptions cannot be compensated ((oil tankers can beoil tankers can berere--routedrouted) ) →→ need forneed for EU gasEU gas storagestorage system andsystem and managementmanagement..

�� GasGas import dependency rising fromimport dependency rising from 50% in 2000 to <80% in 2020;50% in 2000 to <80% in 2020;

�� EUEU--Import Import demanddemand in 2030: in 2030: riserise fromfrom presentpresent 315 315 bcmbcm to 488 to 488 bcm bcm (North America: > 200 (North America: > 200 bcmbcm and China/India > 100 and China/India > 100 bcmbcm ).).

�� ButBut ::

�� IEA IEA had already decreased had already decreased gasgas demand fromdemand from 530 to 488 in 2005/2006;530 to 488 in 2005/2006;

�� Renaissance of Renaissance of nuclear nuclear power and power and coalcoal duringduring thethe last last yearsyears;;

�� Price Price explosion explosion of of oiloil and gas and gas makes other resources cheapermakes other resources cheaper;;

�� OneOne--third third of of demand highly uncertaindemand highly uncertain!!

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Natural Gas Imports from Russia 2003 in Percent

100 100 100 100 100 100 10091

79 78

61 61

44

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74

Finnl

and

Estlan

d

Latvi

a

Lithua

nia

Ruman

ia

Bulga

ria

Slov

akia

Hun

gary

Polan

d

Austria

Czech

Rep

ublic

Turke

y

Slov

enia

Ger

man

y

Frank

reich

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Europe‘s AchillesEurope‘s Achilles HeelHeel IIII

�� Key Key QuestionQuestion: : �� Can GazpromCan Gazprom //Russia provide simultaneously enoughRussia provide simultaneously enough gas gas

�� (1) to (1) to meetmeet its commitmentsits commitments to Europe, to Europe, �� (2)(2) satisfy its growing demandsatisfy its growing demand, and, and�� (3)(3) supplysupply China and China and othersothers??

�� Forthcoming Russian Forthcoming Russian Gas Gas CrisisCrisis::

�� failing investment in the exploration of new gas fi elds:failing investment in the exploration of new gas fi elds:

⇒⇒ a deficit of gas supplies is expected to Russia and Europe of a deficit of gas supplies is expected to Russia and Europe of more than 100 more than 100 bcmbcm per year in 2010per year in 2010--2015 compared to actual 2015 compared to actual demand;demand;

�� Russian exportsRussian exports 2030: 2030: 275275--280 280 bcm bcm (Russia(Russia--RES 2003) RES 2003)

249249 bcmbcm (IEA(IEA--WEO 2004)WEO 2004)

�� EU EU demanddemand 2030: 488 2030: 488 bcmbcm.(IEA .(IEA projections until projections until 2007)2007)

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Implications Implications of of RussiaRussia ‘s ‘s EconomicEconomic --Financial Financial Crisis Crisis on on its Energy Policies its Energy Policies II

�� need for vast direct foreign investment of more than US$need for vast direct foreign investment of more than US$ 900900 billion billion in Russiain Russia’’s energy sector by 2025/2030s energy sector by 2025/2030;;

�� YamalYamal--Peninsula region: total investment up to US$200;Peninsula region: total investment up to US$200; ShtokmanShtokmanup to US$70up to US$70 bnbn

�� Pipeline Pipeline investment needinvestment need ::�� 60% of Russia60% of Russia’’s gas pipelines are older than 25 years (nearly twos gas pipelines are older than 25 years (nearly two--thirds thirds

of their projected lifeline). Pipeline capacity is already limitof their projected lifeline). Pipeline capacity is already limited;ed;�� GazpromGazprom need to spend US$5need to spend US$5--10 per year on pipeline replacement and 10 per year on pipeline replacement and

modernization for many years aheadmodernization for many years ahead;;

�� RussiaRussia ‘‘s/s/Gazprom Gazprom strategy appears highly contradictory:strategy appears highly contradictory:�� While domestic gas production is stagnating, dependence on CentrWhile domestic gas production is stagnating, dependence on Central al

Asian gas imports has been growing and the delayed investment inAsian gas imports has been growing and the delayed investment in the the development of new fields have increased the risk of a forthcomidevelopment of new fields have increased the risk of a forthcoming gas ng gas crisiscrisis;;

�� RussiaRussia ’’s gas shortage:s gas shortage: compensate the dilemma by decreasing compensate the dilemma by decreasing domestic gas consumption (through the expansion of nuclear powerdomestic gas consumption (through the expansion of nuclear power and and coal consumption) and higher gas imports from Central Asia is hicoal consumption) and higher gas imports from Central Asia is highly ghly uncertain, if not unrealistic uncertain, if not unrealistic -- at least for a timely and adequate response at least for a timely and adequate response strategy for coping with the gas crisis arising in 2010.strategy for coping with the gas crisis arising in 2010.

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Implications Implications of of RussiaRussia ‘s ‘s EconomicEconomic --Financial Financial Crisis Crisis on on its Energy Policies its Energy Policies IIII

�� global economic slowdown and the falling of oil pri ces from global economic slowdown and the falling of oil pri ces from US$147 in July 2008 to less than US$50:US$147 in July 2008 to less than US$50:�� RussiaRussia’’s economic and social stability is at stake. The states economic and social stability is at stake. The state--budget for 2009 budget for 2009

was originally based on an oilwas originally based on an oil--price of US$95 price of US$95 state budget income for state budget income for 2009 some 42% lower than the target figure last November. 2009 some 42% lower than the target figure last November.

�� The current high gas price of US450 to US$500 for 1,000 The current high gas price of US450 to US$500 for 1,000 bcmbcm is predicted to is predicted to decrease to about US200decrease to about US200--250 or even less in the second half of 2009. 250 or even less in the second half of 2009.

�� Currency reserves declined from US$600bn to >US$400bn;Currency reserves declined from US$600bn to >US$400bn;

�� Stabilization fund might be totally absorbed until the end of 20Stabilization fund might be totally absorbed until the end of 2009;09;

�� Russian companies have to pay some US$160bn to foreign creditorsRussian companies have to pay some US$160bn to foreign creditors in in 2009.2009.

�� OPECOPEC--decisions:decisions:�� December 17 to cuts its production by 2.2 December 17 to cuts its production by 2.2 mbmb/d, whilst Russia as a non/d, whilst Russia as a non--

OPECOPEC--member but interested to coordinate old oil policies more closelmember but interested to coordinate old oil policies more closely with y with OPEC, announced to cut its oil production by about 300,000 b/d. OPEC, announced to cut its oil production by about 300,000 b/d.

�� further OPECfurther OPEC--cuts possible;cuts possible;

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Implications Implications of of RussiaRussia ‘s ‘s EconomicEconomic --Financial Financial Crisis Crisis on on its Energy Policies its Energy Policies IIIIII

�� GazpromGazprom ::�� Having debts of US$55Having debts of US$55 bnbn;;

�� The third largest energy company in the world dropped to the 35The third largest energy company in the world dropped to the 35thth

until the beginning of 2009;until the beginning of 2009;

�� Losing almost US$2bn during the 18 daysLosing almost US$2bn during the 18 days--long gas conflict with long gas conflict with Ukraine;Ukraine;

�� In 2009, profit will drop by at least US$20 billion (based on anIn 2009, profit will drop by at least US$20 billion (based on an gas gas price of US$360price of US$360--400);400);

�� increase of domestic gas prices, still just 15increase of domestic gas prices, still just 15--20% of what Germany 20% of what Germany pays for Russian gas, alongside with higher electricity bills fopays for Russian gas, alongside with higher electricity bills for r Russian citizen may provoke mass discontent;Russian citizen may provoke mass discontent;

�� natural gas production could be at least 3%, or 15natural gas production could be at least 3%, or 15--18 18 bcmbcm lower than lower than previously forecasted.previously forecasted.

�� Investment Investment programme programme of US$26 of US$26 bn reducedbn reduced;;

�� Shtokman naturalShtokman natural gas gas project only economically viable project only economically viable at at oil prioces oil prioces of <US$60.of <US$60.

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2nd 2nd Strategic Energy Review Strategic Energy Review (11(11--2008) I2008) I

�� EUEU--Energy Security Energy Security and and Solidarity Solidarity Action Plan:Action Plan:� identified major weaknesses and problems;� five key areas for joint cooperation and projects in the

forthcoming years:1.1. Infrastructure needs and the diversification of ene rgy Infrastructure needs and the diversification of ene rgy

supplies; supplies; 2.2. external energy relations; external energy relations; 3.3. oil and gas stocks and crisis response mechanisms; oil and gas stocks and crisis response mechanisms; 4.4. energy efficiency, and energy efficiency, and 5.5. making the best use of the making the best use of the EUEU’’ss indigenous energy indigenous energy

resources.resources.

→→→→ implementation of the EU’s decisions of March 2007 and the November 2008 package might even freeze the EU’s oil and gas imports by 2020 at current levels.

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2005 2020

EU-27Mtoe

Baseline Projection : Oil Price $61/bbl

Baseline Projection: Oil Price $100/bbl

New Energy Policy Projection: Oil Price $61/bbl

New Energy Policy Projection: Oil Price $100/bbl

Primary Energy Demand

1811 1968 1903 1712 1672

Oil 666 702 648 608 567

Gas 445 505 443 399 345

Solids 320 342 340 216 253

Renewables 123 197 221 270 274

Nuclear 257 221 249 218 233

EU-Energy Production

896 725 774 733 763

Oil 133 53 53 53 52

Gas 188 115 113 107 100

Solids 196 142 146 108 129

Renewables 122 193 213 247 250

Nuclear 257 221 249 218 233

Net Imports 975 1301 1184 1033 962

Oil 590 707 651 610 569

Gas Mtoe (bcm) 257 (298) 390 (452) 330 (383) 291 (337) 245 (284)

Solids 127 200 194 108 124

Final Electricity Demand

238 303 302 257 260

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Diversification of Non-Russian Gas Pipeline Project s:

Project Supplier From To Capacity (Bcm)

Invest-ment (M

€)

Foreseen Start-Up

Medgaz Algeria Hassi R’Mel

Spain 8-10 1300 End 2008

Galsi Algeria Hassi R’Mel

Italy 8-10 1200 2009-2010

ITG-IGI Caspian Greece Italy 8-10 950 (IGI) 2011

Langeled Norway OrmenLange

UK 22-24 1000 2006-2007

Nabucco Caspian Turkish Border

Austria 25-30 4600 2010

Total additional non-Russian gas supply capacity vi a pipelines to Europe: 71 –84 bcm + 120 bcm LNG in 2020 + <120 bcm from Norway – gas import demand of the EU?

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ImportanceImportance of Turkmenistan of EUof Turkmenistan of EU

� Independent Survey of Some of its Gas Fields by theBritish firm Gaffney, Cline and Associates (GCA) –Preliminary Results of October 2008:� The South Yolotan-Osman Field in Southeastern:

� is the fourth or fifth-largest gas field in the world (4-6 tcm witha high estimate up to 14 tcm ⇄ Russia: 48 tcm and Iran: 26 tcm in total);

� Five times larger than Dauletabad as presently the largest of the country with some 1.4 tcm;

� Confirmation that Turkmenistan (current production: 70-80 bcm) has more than sufficient gas to fullfill its existing contract commitments:

� Russia: 50 bcm (aims to increase up to 70-80 bcm after 2009);� China: 40 bcm� Iran 8 bcm;

� Government in 10/2008: increasing gas exports to 125 bcm annually by 2015.

� Prospects for Nabucco (31 bcm) and White Stream (32 bcm; acquiring same EU priority status) Gas Pipelines?

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EU‘s Gas Import EU‘s Gas Import DemandDemand in in PerspectivePerspective�� Do EU still Do EU still needs needs all all kindkind of of newnew gas gas pipelinespipelines : North : North

and South and South StreamStream , , NabuccoNabucco , White , White Stream Stream etc.?etc.?�� ReducedReduced Gas Gas DemandDemand byby 2020:2020:

�� 284 284 bcm bcm –– 452 452 bcmbcm (2nd (2nd Strategic EnergyStrategic Energy ReviewReview););

�� Gas Gas imports from imports from NonNon--Russian SourcesRussian Sources::�� Pipelines: 71Pipelines: 71--84 84 bcm bcm ((including Nabuccoincluding Nabucco););�� LNG: <120 LNG: <120 bcmbcm�� NorwayNorway: <120 : <120 bcmbcm

�� Total: 310Total: 310 --328 328 bcmbcm�� Russian Russian Imports: 150Imports: 150--200 (200 (inclincl. North . North StreamStream););�� Oversupply Oversupply of of Natural Natural Gas Imports?Gas Imports?�� Implications forImplications for::

�� EU Pipeline Plans and EU Pipeline Plans and PoliciesPolicies;;�� EUEU--Russia Energy PartnershipRussia Energy Partnership;;�� Middle Middle East/Iran;East/Iran;�� Central Central AsiaAsia//Caspian Caspian Region.Region.

Rising Rising CompetitionCompetition ??

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Nabucco versus South Stream�� Strategic Importance Strategic Importance of of NabuccoNabucco::

�� In In contrast contrast to to the the North North Stream Stream and South and South Stream Stream Pipelines Pipelines it offers it offers both both a a diversification diversification of of transport transport route route andand the supply sourcethe supply source!!

�� Pipelines Pipelines fromfrom North North AfricaAfrica ::

�� New EU New EU membermember statesstates will will hardlyhardly benefitbenefit withwith thethe resultresult: : strengtheningstrengthening of of gas gas import diversificationimport diversification in in thethe „„old EUold EU““, , butbut notnot in in thethe newnew oneone ((withwithmembermember statesstates often often up to 100% up to 100% dependentdependent fromfrom RussiaRussia//GazpromGazprom((highlightinghighlighting thethe importanceimportance of of thethe Southern Gas Southern Gas CorridorCorridor and MOLand MOL‘‘s s NETS NETS programmeprogramme). ).

�� WithoutWithout NabuccoNabucco, a , a unitedunited,, liberalizedliberalized EU EU EnergyEnergy-- and Gas and Gas InternalInternalMarket Market withwith a Global a Global CompetitivenessCompetitiveness will will hardlyhardly been realizedbeen realized..

�� NabuccoNabucco and South and South StreamStream will will hardlyhardly beenbeen implementedimplemented in in lightlight of of RussiaRussia‘‘s gas s gas crisiscrisis and and thethe EUEU‘‘s s decreasingdecreasing gas gas importimport demanddemand and and diversificationdiversification of gas of gas importsimports byby LNG and LNG and fromfrom NorwayNorway;;

�� CostsCosts forfor buildingbuilding South South Stream Stream ((€€1919--24bn) 24bn) visvis--àà--visvis NabuccoNabucco ((€€8bn) 8bn) more than twice as more than twice as high.high.

�� Russia Russia has just 10 has just 10 bcm for bcm for South South Stream Stream ((probably even by using probably even by using gas gas from other pipelinesfrom other pipelines).).

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ConclusionsConclusions and and PerspectivesPerspectives II

�� If the NabuccoIf the Nabucco--pipelinepipeline willwill not be implementednot be implemented,, the newthe newEUEU member statesmember states in Eastern Europe willin Eastern Europe will largely remain largely remain dependentdependent onon RussiaRussia. .

�� UnderUnder these circumstancesthese circumstances, a, a commoncommon regional EUregional EUmarket is hardly realisticmarket is hardly realistic.. ItIt willwill rather be fragmentedrather be fragmented,,underminingundermining a a common liberalizedcommon liberalized EuropeanEuropean energy energy marketmarket. .

�� It wouldIt would alsoalso havehave negativenegative consequences for the EUconsequences for the EU’’ssCFSP andCFSP and speakingspeaking ““with one voicewith one voice”” towards Russiatowards Russia and and otherother producerproducer statesstates. .

�� For For RussiaRussia, a , a fragmentedfragmented regional Europeanregional European energy energy market seems themarket seems the bestbest guarantee for Russiaguarantee for Russia to to ““dividedivideandand rulerule”” a a rather weak rather weak EU EU but this is not but this is not in in itsits longlong--term interestterm interest..

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ConclusionsConclusions and and PerspectivesPerspectives IIII

�� EUEU--Russia: Russia:

�� EU appears to underestimate the divergence of interests towards EU appears to underestimate the divergence of interests towards Russia, if one argues that both sides just need better informatiRussia, if one argues that both sides just need better information, on, understanding and communication channels to solve their conflictunderstanding and communication channels to solve their conflicts s and problems; and problems;

�� Ultimately, divergence of interests they boil down to a proUltimately, divergence of interests they boil down to a pro--found found conflict of power and competing interests as well as different conflict of power and competing interests as well as different energy security definitions between the EU, Russia, China and energy security definitions between the EU, Russia, China and CACR;CACR;

�� NeedNeed to to AvoidAvoid ZeroZero--Sum ThinkingSum Thinking on on bothboth SidesSides, , butbut EU EU leverageleveragetowardstowards MoscowMoscow isis limitedlimited..

�� RussiaRussia‘‘s s deepening economic crisis may lead deepening economic crisis may lead to to new new opportunities for opportunities for a a closer energy cooperation closer energy cooperation and and more more politicalpolitical--economic realism economic realism in in the Kremlinthe Kremlin, , if present trrends if present trrends continuecontinue..

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ConclusionsConclusions andand PerspectivesPerspectives IIIIII

� EU-pipeline policies and plans: �� member states and gas companies need to take care not to contracmember states and gas companies need to take care not to contract t

too much gas with longtoo much gas with long--term contracts;term contracts;

�� not all discussed pipeline plans will be realistic any longer. not all discussed pipeline plans will be realistic any longer. Consequently, pipeline competitions such as betweenConsequently, pipeline competitions such as between NabuccoNabucco and and the South Stream project may rather increase;the South Stream project may rather increase;

�� in particular careful with Russiain particular careful with Russia’’s s ““pay and takepay and take”” clauses, which clauses, which prevent to sell Russiaprevent to sell Russia’’s imported gas to third parties; s imported gas to third parties;

�� need to reneed to re--negotiate those contracts with Moscow to ensure more negotiate those contracts with Moscow to ensure more flexibility enshrined; flexibility enshrined;

�� what the EU needs most of all in the coming years is to what the EU needs most of all in the coming years is to have the common political will to implement all the decisions have the common political will to implement all the decisions they have agreed upon they have agreed upon →→→→ political credibility of its economic, political credibility of its economic, energy and its CFSP at stake.energy and its CFSP at stake.

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ThankThank youyou veryvery muchmuchforfor youryour attentionattention !!