Christian Cleutinx

Developing the EU-Russia Energy Dialogue

April 17, 2012

IMEMO- SWP Conference

Germany/EU - Russia : From Hydrocarbon Relations to a Modernisation Partnership

Christian CleutinxIndependent Expert

Senior Fellow - Netherlands Institute of International Relations

Treaty on the Functioning of the European Union

Article 194

1. In the context of the establishment and functioning of the internal marketand with regard for the need to preserve and improve the environment, Union policy on energy shall aim, in a spirit of solidarity between Member States, to :

a) a) ensure the functioning of the energy market;

b) b) ensure security of energy supply in the Union;

c) c) promote energy efficiency and energy saving and the

d) development of new and renewable forms of energy; and

e) d) promote the interconnection of energy networks….

2. (…)

Such measures shall not affect a Member States right to determine the conditions for exploiting its energy resources, its choice between different energy sources and the general structure of its energy supply…

The diversity of the EU Energy Mix - 2010

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

A B BG CY CZ D DK EE SF F GR H Ir I LV LT L M NL PL P RO SK SLO SP SW UK

Renew.

Nuclear

Gas

Oil

Solid fuels

Source : EU Energy Trends to 2030, European Commission

Trade with Russia is dominated by Oil

100,4

14,9

3,7

29,4

Imports from Russia in 2010 (000 mio €)

Oil

Gas

Coal

Other trade

Source : European Commission 2011

Russia : Export Revenue from Hydrocarbons is dominated by Oil ( bn US$)

0

50

100

150

200

250

300

350

400

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

revenue oil

revenue gas

total revenue

Sources : Bank of Russia 2012, Industry, own calculations

Growth of EU energy imports from Russia (%)

Share of Russian gas in total EU gas imports has been decreasing from 75% in 1990 to 33% in 2010 and represented, in 2010, 5.7% of total EU energy consumption.

Source : Eurostat 2011

Russian Production and Reserves

Reserves

Production

Res/prod

24

18,4

76

76

81,6

55

Other World

Russia

(years)

(%)

(%)

Source : BP Statistical Review of World Energy [2011]

Reserves

Production

Res/prod

5,6

12,5

20,6

94,4

87,5

46,2

(%)

(%)

(years)

GAS OIL

Evolution of Oil Imports (mb/d)USA - EU 27 – China

Can the EU afford to sit on the geopolitical Fence ?

0

2

4

6

8

10

12

14

2010 2015 2020 2025 2030 2035

USA

EU27

China

Source : Based on data from New Policies Scenario, World Energy Outlook 2011, IEA, Paris..

-0.2

0.2

0.0

0.4

0.6

1.0

0.8

1.2 Gas

Oil

Coal

Import dependency rises in Asia and Europe and …decreases significantly in the US

Billion toe

India China USEU27

80%91%

42%

47%

94%

32%

40%

80%

57%

Import share of

respective fuel

1990 2010 2030

Energy Outlook 2030

1990 2010 2030 1990 2010 2030

© BP 2012

6%

Energy 2050 Roadmap scenarios

Business As Usual Scenarios (BAU) - Policies underway and proposed by the

European Commission as of …

• Reference (March 2010)

• Current Policy Initiatives (as of April 2011)

Result: GHG emissions about 40% below 1990 by 2050

Decarbonisation Scenarios (New Policies to be eventually proposed to reach GHG

emissions target of 80% below 1990 by 2050)

• High Energy Efficiency

• Diversified Supply Technologies

• High Renewables

• Delayed CCS

• Low Nuclear

Energy 2050 Roadmap : Oil Imports (000 toe)A spread in 2050 of 463 million toe (9.3 million barrels/day)

0

100000

200000

300000

400000

500000

600000

700000

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Ref

Ref LE

Ref HE

Ref HGDP

Ref LGDP

CPI

Eeff

DivSup

High Res

DelCCS

LowNuc

Source :European Commission, Energy Roadmap 2050

EU 2050 Roadmap : Gas Imports (000 toe)A spread in 2050 of 222 million toe (242 bcm)

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Ref

Ref LE

Ref HE

Ref HGDP

Ref LGDP

CPI

Eeff

DivSup

High Res

DelCCS

LowNuc


13

Basis of scenarios:

80% reduction in

domestic GHG

emissions by 2050

corresponding to 85

% related CO2

Conclusion on

efficient pathway:

-25% in 2020-40% in 2030-60% in 2040

0%

20%

40%

60%

80%

100%

1990 2000 2010 2020 2030 2040 2050

0%

20%

40%

60%

80%

100%

Current policy

Power Sector

Residential & Tertiary

Non CO2 Other Sectors

Industry

Transport

Non CO2 Agriculture

Decarbonisation scenarios Low-Carbon Economy Roadmap (March 2011)


Energy 2050 Roadmap : Electricity

15%

20%

25%

30%

35%

40%

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

BAU Scenarios

Decarbonisation

Scenarios

15%

20%

25%

30%

35%

40%

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Gro

ss F

inal E

nerg

y C

onsum

ption (

%)


The Energy DialogueA brief history (1)

• First Progress Report-2001 : “The European Union and the Russian Federation have decided to establish a Strategic Energy Partnership… at the (Paris) Summit to develop a political partnership”.

• Fourth Progress Report-2003 : “…the establishment of an institutionalised relationship between Russia and the EU in the field of energy, which would pave the way for the creation of a real Energy Community”.

Arbitral Award Guarantee Fund : define the potential and merits of an investment support scheme.

Energy Technology Center : “to strengthen cooperation in the sphere of advanced energy technology in the sector of oil, gas, coal, electricity, new and renewable energies and energy savings”.

• Communication from the Commission on the Energy Dialogue between 2000 and 2004 :

“The energy dialogue… arose from the notion that the European Continent constitutes a broad geopolitical area linked culturally, historically and economically…. The Russian Federation … could also to a certain extend play a moderating role on international markets … being in some way the most promising – and geographically the closest alternative to the Middle-East as energy supplier to Europe”.


• The term “strategic partnership” did create expectations that were not fulfilled as such.

– A “partnership” involves some exclusivity, equal rights and a constructive discussion about the relationship.

– A “strategy” needs clearly defined common goals, timeframes and action plans and implies a common intention to reach these goals.

BUT

• the Dialogue has been very effective on specific topics such as

– Destination clauses in gas long term contracts

– Maritime safety for heavy crude transport

– WTO negotiations

– Feasibility study on the synchronisation of EU/CIS electricity grids

– Defining Nord Stream as a project of common interest

– Contribution to the ratification by Russia of the Kyoto protocol


MORE RECENTLY

- The implementation of an “Early Warning Mechanism” to prevent and manage energy crises

- Decision for a EU-Russia Energy Roadmap to make proposals for EU-Russia long-term cooperation in the energy sector

- Creation of a Gas Advisory Council to assess the development of the gas markets and provide recommendations

CONCLUSION

The initial vision of an energy common market with its own institutions turned into aproblem-solving instrument and effective partnerships are currently being conducted at thelevel of several EU Member States.

The future of the Energy DialogueEU-Russia Energy Roadmap to 2050Progress report – Expert Papers (1)

• Current Context

Russia is a vital supplier of energy to the EU

A reliable supplier of energy for near half a century despite the “collateral damage” linked to commercial disputes with some CIS Countries

The EU, a neighbour with 500 million energy consumers, is just as important to Russia as Russia is important to the EU

Energy relations are too often overly polarized and in certain quarters an element of political suspicion and controversy

Anxiety and uncertainty related to dependence from a single supplier or a single buyer or a single supply route generates tensions and defensive attitudes that can damage commercial relationships and impact political relations

Availability alternative suppliers might not necessarily be detrimental to the volume in Russian gas trade

CO2 intensity of GDP, 0.39 kg per unit of GDP in the EU and 3.7 kg in Russia

Carbon leakage can lead to distortions of competition

The EU is committed to reduce by 2050 GHG emissions to 80-95% below 1990 levels

Source : European Commission. Roadmap of the EU-Russia Energy Cooperation until 2050, Progress Report, Expert Papers, July 2011

EU-Russia Energy Roadmap to 2050Progress report – Expert Papers (2)

The Way forward

Define the relations between the EU, Russia and their common neighbours

₋ By 2050 Russia and the EU are strategic allies

₋ Russia will be a diversified, modern and competitive economy

₋ Russia, its non-EU neighbours and the EU will have moved towards a common market supported by a further political rapprochement and creating so an inclusive rather than an exclusive Europe

Define an energy vision

₋ Energy security will no longer be a divisive issue

₋ An integrated energy market requires a gradual approximation of rules, standards and markets leading to greater reciprocal investment and technology exchanges

₋ Oil and gas remain for the next decades the core of the EU-Russia energy relationship : vital component for the transition towards a green continent

₋ At the same time the EU and Russia cooperate with the support of the EU-Russia Partnership for Modernisation in the development of an innovative green sector of the economy

₋ The long term future of energy relations could prioritise electricity through a transcontinental integrated grid based on renewable and clean energy including CCS in order to transform the European continent into a low carbon zone.

Define a cooperation strategy

Agree on the main drivers, common themes and “no-regrets” options

Provide for a tolerable level of uncertainty in long term energy relations

Establish a broad cooperation plan with milestones (for example 2020, 2030, 2040) and recommendations.


Some Recommendations

• Electricity

Work towards a continent-wide interconnected electricity market

Develop regulations, standard and market rules to enhance cross border electricity trade, competition and investments based on non discriminatory access to grids

Evaluate the potential for renewable and low carbon electricity linked to CCS and the modalities for transcontinental trade (green certificates) including the use of gas in CCGT and the long distance transmission of electricity (DC and supraconductivity)

Contribute to modernise the grid infrastructure and its operation to accommodate the output fluctuations related to renewable electricity

Create a joint centre (one stop shop) to facilitate the development of a unified transcontinental electricity system

…



• Gas

Analyse risks of undesirable scenarios and ways to mitigate them (e.g. implementation of joint infrastructure projects)

Investigate the role of unconventional gas, biogas and the production of gas from CO2

Evaluate the potential and promote innovative uses of gas in transport (CNG and LNG) including common technical standards

Improve legal certainty to enhance mutual gas security

Exchange best practices to address the barriers to the efficient use of gas

Share before implementation information about new policy measures and their impact on the business environment

…

> 75 %

50 - 75 %

25 – 50 %

< 25%

0%

Ukraine

% of missing gas supply – 300

mcm/d for 14 days

The January 2009 Gas Supply Disruption



• Oil

Sharing crude oil and products supply and demand projections to increase supply and demand security

Evaluate the adequacy of oil existing and planned infrastructures

Technical cooperation between EU and Russian companies through the joint participation in projects (interpenetration of capital contributing to ensure security of supply and demand)

Exchange of information on possible changes in tax legislation

Cooperation on decarbonisation (gas flaring, biofuels)

Efficient use of energy in the production, transportation and refining branches

…



• Energy efficiency

Harmonisation of legislation and technical standards

Implementation of energy saving indicators

Exchange of experience of energy efficiency in the housing sector

Exchange of experience on energy audits

Joint action plan for a transition to a low-carbon economy

Exchange of best practices and analysis of legislation and goals taking into account political, economic, social and climatic conditions

Move from joint pilot- to large scale projects in energy efficiency

Cooperation on energy efficient technologies

• Renewables

Potential for Russian export of electricity generated by RES

Harmonisation of legislation and technical standards

Pilot projects to assess the potential and economics of technologies (pellets producing plants, biogas, small hydro…)

Development of joint financing mechanisms to facilitate investments in Russia (pellet plants and Joint Implementation, green investment schemes.

EU-Russia Energy RelationsSome Food for thought

• EU

Energy in the new make-up of the world’s economic and political systems is an economic good, a strategic good and a geopolitical power tool. Will the EU be able to develop an external energy policy or at least a more consistent EU approach to energy relations with countries such as Russia?

If so, will it manage to build on the successful energy partnerships that individual EU Member States have with Russia? Where business to business, trade, investment promotion and foreign policy are concerned, the Member states as states are an efficient tool.

• Russia

Will the gas sector in Russia be unbundled like the Russian oil and electricity sectors?

Will Russia WTO membership lead to a Deep and Comprehensive Free Trade Area with the EU in the framework of the New Agreement to replace the current Partnership and Co-operation Agreement?

What will be the impact of the emerging Eurasian Union?

How to develop a win-win partnership for modernisation between the EU and Russia blending political cooperation and business to business activity?

• Common challenge

To develop a continent wide integrated, competitive and sustainable energy market underpinned by the necessary modernisation of energy infrastructures and common basic competition and environmental rules.

Christian Cleutinx

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