Anthony Luzzatto Gardner1
(1)
London, UK
Anthony Luzzatto Gardner
On October 27, 2014, senior government and business representatives from Lithuania, the United States, and the European Union gathered at the port of Klaipeda, Lithuania, to welcome the arrival of a ship measuring three football fields in length. The vessel converts natural gas, supercooled and condensed into a liquid for safe storage and transport, back into the burnable gaseous variety.
The vessel, aptly named The Independence, is capable of re-gasifying approximately 4 billion cubic meters (bcm) of liquefied natural gas (LNG) per year, nearly twice Lithuania’s total annual gas needs, and enables Lithuania to meet nearly all gas demand in neighboring Latvia and Estonia. Whereas Lithuania’s consumption of natural gas was satisfied entirely by Russian imports before 2014, the vessel now enables Lithuania to free itself entirely from these imports because LNG trades flexibly and globally.1 Once an “energy island” cut off from the intra-European gas supplies other than East-West flows from Russia, the Baltic states can now buy energy from multiple suppliers and through different routes. Given Moscow’s history of price gouging vulnerable customers and using gas as a political weapon to promote its political objectives in Europe, this change of outlook is highly significant.
Years before the delivery of The Independence the United States had helped Lithuania finance technical preparations for a LNG facility that would increase the country’s sources of energy supply. The significant up-front costs to build the onshore infrastructure were partly financed by loans from the European Investment Bank and Lithuanian government guarantees approved by the European Commission. Significant annual payments are required to lease and operate the vessel until Lithuania acquires it in 2024. But the project paid for itself in the first year when Gazprom quickly responded to Lithuania’s purchase of LNG from Norway with a 23% discount on future supplies. Most significantly, the terminal cut in half Gazprom’s share of Lithuania’s gas market. This share has been declining ever since the project’s completion as the terminal has taken LNG shipments from around the world, including the United States.
The inauguration of The Independence in Klaipeda is a neat illustration of how the European Union and the United States have worked together to reduce European energy insecurity.
Neither Europe nor the United States is a stranger, of course, to the perils of energy insecurity. The oil embargo of 1973–1974, imposed by the Arab members of the Organization of Petroleum Exporting Countries against the United States and several European countries that supported Israel during the Arab-Israeli War, elevated the issue of energy supply to a fundamental foreign and security policy concern on both sides of the Atlantic.
The oil embargo, resulting in a fourfold price increase for oil, led the US and Europe to create the International Energy Agency (IEA) as part of the Organization for Economic Cooperation and Development. The original focus of the agency was to promote cooperation in securing the energy supplies of industrialized nations. One early action toward that end was to create a regime for oil stockpiling, burden-sharing mechanisms in case of supply-side shocks, and regular mutual consultations on energy security.
While the oil embargo was a wake-up call, efforts to improve European energy security have largely focused on ensuring secure supplies of gas rather than oil. The principal reason for this is that oil is a widely traded commodity in global spot markets in which prices are fixed by the free market interplay of supply and demand. It can be imported into Europe from many sources and through many means of delivery. By contrast, gas has been mainly sourced from a few suppliers (especially Russia, Norway, and Algeria) through long-term bilateral contracts and almost exclusively through fixed infrastructure (mostly pipelines) that require years and billions of euros to build. Although Russia sells about four times more oil than gas to Europe in value terms, it has much less leverage to withhold supplies or to set arbitrarily high prices in the oil market. Even in the relatively rare instances in which Russia has disrupted oil supplies, such as when it shut down the Brotherhood pipeline in 2007 over a pricing dispute with Belarus, downstream consumers in Europe have been largely unaffected because they could quickly access alternative supplies elsewhere.
Russia’s Use of Energy as a Weapon
Russia frequently insists that it is a dependable energy supplier. To borrow a line from Shakespeare’s Hamlet, “Methinks the lady doth protest too much.” The reality is that Russia has a well-established track record of using gas exports as a tool, sometimes even as a weapon, to promote foreign policy objectives. Studies differ in their estimates about how often that has occurred. One has identified 15 instances in which Russia has exploited its power of price and/or physical delivery of gas (and occasionally oil) to pressure former Soviet states and countries in Central and Eastern Europe, especially in the middle of political tensions; countries that have complied with Russia’s foreign policy agenda have benefited, moreover, from lower prices than those that have not. Another study has concluded that Russia has cut off gas (and occasionally oil) exports on at least 40 occasions between 2000 and 2006 alone.2
The use of the energy weapon has differed widely. For example, Russia imposed an oil and gas embargo on the Baltic states in the early 1990s in an effort to crush their independence movements. After Russia cut off gas supplies to Ukraine in 1993, then-President Leonid Kuchma agreed to allow Russia to retain most of the Black Sea naval fleet in return for the cancelation of debt related to gas imports. More recent examples that have served to propel energy security to the very top of Europe’s foreign policy concerns are Russia’s interruption of gas supplies to Ukraine in 2006, 2009, and 2014—all strategically leveraging the winter months when the maximum pain could be inflicted.
On January 1, 2006, Gazprom reduced gas shipments to Ukraine after months of clashing with Naftogaz, Ukraine’s national oil and gas company, over the terms of gas supply and transit. Consumers of Russian gas further west in central Europe suffered lower supplies until Gazprom turned the spigot back on. While the disruption lasted only one day and available storage capacities could easily make up for the shortfall, the shot across the bow caused alarm. The interruption of gas supplies in January 2009, also over debt and contract terms, was far more serious as it lasted three weeks and resulted in a 20% decline in the gas reserves of the EU. Eighteen EU countries lost their Russian gas supplies entirely. In Ukraine, Slovakia, Romania, Bulgaria, and several Balkan states that had no or few other alternatives of gas supply, citizens suffered and even died in underheated apartments. The domino effect on downstream consumers of gas transiting Ukraine extended into France and southeastern Europe. These two crises made painfully clear to the EU just how important it is to ensure greater diversification of suppliers and supply routes, increased interconnection among Europe’s network of gas pipelines, as well as better and more coordinated efforts to plan for and respond to similar events.
Russia continued to use the gas weapon in December 2013 as a tool to ensure that Ukraine remained within the Russian sphere of influence. One of the main reasons why Ukrainian President Viktor Yanukovych abruptly changed his mind about signing an association agreement with the EU is that Vladimir Putin offered to have Gazprom supply Ukraine with gas at a one-third price discount. When Yanukovych was ousted and Ukraine veered back toward the EU as a result of the popular protests, Putin withdrew the offer. Following its annexation of Crimea and occupation of the Donbas through Russian-backed militants, Moscow canceled an agreement reached with Ukraine in 2010 extending Russia’s lease on the Sevastopol naval base in return for discounted Russian gas exports. As a result, Kyiv faced a near doubling of Russian gas prices and an additional drain of billions of euros. In addition, Moscow demanded the immediate repayment of Ukraine’s substantial debts related to gas imports that had accumulated over many years. The termination of coal deliveries from Donbas to the rest of Ukraine and the loss of gas fields in the northern Black Sea aggravated the energy shock to an economy already suffering from the conflict. The EU’s efforts at mediating a settlement between Ukraine and Russia relating to gas supplies failed in mid-June when Moscow once again turned the spigot off.
The immediate impact of the crisis was limited because Ukrainian gas reserves were high (due to the unseasonably warm winter of the prior year) and Ukrainian national gas production was sufficient to cover demand during the summer months. It was clear, however, that Ukraine would face a crisis during the critical winter months and peak heating season. EU member states, coordinated by the European Commission, raced during the normally sacrosanct summer holidays to conduct stress tests to determine national levels of vulnerability and appropriate responses to continued gas supply disruptions. EU mediation finally succeeded at the end of October due in large part to the able diplomacy of Günther Oettinger, the EU’s commissioner responsible for energy. Thanks to the EU’s agreement to act as a guarantor of Ukraine’s commitments, the deal resulted in a compromise between the draconian price increase demanded by Russia and the low price sought by Ukraine, as well as a rescheduling of Ukrainian debt for past supplies.
Russia’s depiction of the conflict as a mere commercial dispute was clearly false. Russia had routinely shown forbearance toward Ukraine for past unsettled debts and had offered low prices in return for political advantages, before radically changing tack when those advantages were no longer offered. Russia’s use of energy-related levers, such as changes in gas price and/or supply, in response to geopolitical events (such as those in Ukraine), fatally undermined Moscow’s claim to be a reliable energy partner. Russia’s claim to uphold international legal norms was also undermined when Gazprom ignored an international arbitration court’s ruling largely in favor of Naftogaz in February 2018 and cut gas deliveries to Ukraine once again.
The Diverging Prospects of US and European Energy Markets
While Europe’s dependence on Russian energy is in large part a natural result of its geographical location and the convenience of purchasing cheap gas from a neighbor, it also reflects geological factors and policy choices.
European energy production has been falling sharply due to a gradual depletion in oil and gas reserves. The decline in gas production has been steep, especially in the North Sea, and in the Netherlands, both of which have served as important alternatives to Russian gas. The Dutch government has announced that production from the giant Groningen onshore field, Europe’s largest gas field, will end by 2026 because of environmental and safety concerns.
Europe’s technically recoverable shale gas reserves, concentrated in Poland, France, and Ukraine, are nearly as large as those in the United States and could account for roughly one-tenth of global reserves. But many factors are holding back the exploitation of these reserves. The EU does not have common policies in place regarding hydraulic fracturing or “fracking,” aside from non-binding recommendations of the European Commission about “minimum principles” applying to exploration and production. Fracking is a process of injecting liquid, often water with a mixture of chemicals, at high pressure into subterranean rocks to force open existing fissures.
Numerous EU member states ban or severely limit fracking. Even where it is permitted, accessing the shale reserves is far more complicated than in the United States due, in large part, to higher population density, weaker public support, less favorable geologic conditions, and property rights over sub-surface minerals that limit incentives for investment. Shale gas (and oil) production in Europe will only make a modest contribution, therefore, to offset declining domestic production.
Natural gas and oil account for about 23% and 36%, respectively, of the EU’s total energy needs. While their combined share has been declining and will continue to decline over coming years, it is nonetheless projected to remain high at roughly 50% for the next decade. The EU’s dependency on imported oil is projected to rise slightly to 90% (from 87%) and on imported gas to 80% (from 65%) over the same period. While liquidity of global oil markets reduces the EU’s vulnerability to oil supply disruptions, the combination of the increasing use of natural gas in the energy mix, increased import dependency, and the legacy of fixed pipeline infrastructure as the dominant means of supply present a significant challenge.
That is particularly the case because Russia supplies 40% of the EU’s natural gas imports, well ahead of Norway and Algeria, and will probably supply even more in the coming years. While imports of LNG from Qatar, Algeria, Nigeria, Australia, and the United States are growing, these will continue to account for a small share of natural gas consumption. Russian gas can and even should continue to play an important role in European energy supplies. But the EU and the US share the conviction that it should do so only as part of a diversified energy mix.
Europe has also been hit by several energy-related developments that have undermined the competitiveness of European industry. Climate change policies, including high feed-in tariffs to promote renewable energy, resulted in higher energy costs. Until relatively recently, continental European gas prices in long-term contracts remained linked to the price of oil (rather than to pricing at gas hubs as is common today) and therefore did not decline with the world supply glut of gas. The US shale revolution, moreover, significantly reduced the cost of manufacturing, drew investments away from Europe to the US, and damaged European competitiveness.
On top of this challenging energy outlook, the EU faces the problem that its member states have rather diverging perceptions about what should be done to improve energy security. Many have pursued largely national policies, with little regard for pan-European interests and the need for solidarity.
Until recently, the United Kingdom has appeared little interested in EU energy policy as it exploited its oil and gas reserves from the North Sea. France has been a champion of nuclear power, in contrast to many other member states. Ignoring objections from the EU and fellow member states, Hungary recently awarded Rosatom, a Russian state-owned power conglomerate, a contract to build and provide nuclear fuel to two Russian-designed reactors without public tender and financed the purchase nearly entirely with a loan from Vnesheconombank, a Russian state-owned development bank. Germany has shown an unparalleled degree of comfort in the EU with its dependency on gas imports from Russia. Its decision to terminate by 2022 the use of nuclear power, widely considered an ideal green energy bridge to a renewable energy future, will increase its reliance on hydrocarbons. And Germany’s recent decision to achieve “carbon neutrality” (a net zero carbon footprint) by 2050, a key focus of its increasingly powerful Green Party, will require a very significant reduction in the use of dirty lignite coal that accounts for roughly one-third of its energy needs. Most EU member states have supported the carbon neutrality goal, but several others (especially Poland) that have relied on cheap coal to power their electricity generation may resist.
The energy security landscape in the United States during the past decade has evolved in a dramatically different direction to that in the EU. The US has experienced a revolution that boosted domestic energy production, significantly reduced oil and gas imports, and lowered energy-related costs of manufacturing.
The boom in US domestic oil production in the past decade has been remarkable: From 5.5 million barrels per day in 2011 to 12.5 million barrels per day in 2019, an increase that exceeds the annual oil production of Kuwait and the United Arab Emirates combined. As a result, US net oil imports (imports minus exports) as a percentage of total consumption have fallen (as of 2018) from about two-thirds to about 11%, the lowest percentage since 1957. Net imports have fallen to just over 2 million barrels per day. These dramatic shifts led the United States in 2015 to repeal its 40-year-old crude oil export ban and have resulted in downward pressure on global oil prices and OPEC’s diminished influence.
A similarly dramatic evolution occurred in the US natural gas market. In 2005, the United States was the world’s largest importer of natural gas, relying on imports for 16% of its consumption. According to government projections that year, import volumes would nearly double in the next decade, requiring the construction of many LNG import terminals. Yet within that period natural gas production rose by 50% and imports had dramatically fallen. By 2015 net imports had shrunk to only 5% of total consumption and almost none of those imports came from LNG. The idle import terminals were reconfigured to serve as export terminals. Just a few years later, in 2017, the United States became a net natural gas exporter for the first time in sixty years.
The change in US oil and gas fortunes was due principally to three technological innovations: more accurate seismic imaging that provides companies better information about where to drill; better horizontal drilling, a practice that involves drilling in different directions to access more of the reservoir; and cost effective, large-scale fracking.
The United States has experienced a boom in the past decade in the extraction of oil and gas from shale rock formations through fracking. The boom has been due to many factors. Shale formations are plentiful and located in sparsely populated areas that are easy to access. Moreover, the majority of wells are drilled on private land where consent is easy to obtain. Other factors include advanced drilling technology and conducive environmental and tax legislation. As of 2019 shale oil production represented roughly one half of total US oil production and shale gas production represented roughly two-thirds of total US natural gas production.3
US Support for European Energy Security
Improving energy security in the United States over the past decade has deepened its concerns about European energy insecurity. These concerns are not new. Alarmed about growing European reliance on Soviet energy supplies, for example, the Reagan administration imposed and then, under significant pressure from European allies, ultimately lifted sanctions in 1982 on European companies participating in the construction of an oil pipeline linking Siberia to European markets. US concern about European energy insecurity has also been marked by cooperation with Europe. In the late 1990s and early 2000s, for example, the US and the EU promoted the diversification of European energy supplies by supporting the Baku–Tbilisi–Ceyhan oil pipeline bringing Azeri crude to European markets.
Why should the United States care about whether European energy insecurity? The reason is that energy insecurity translates into political and economic insecurity. When Europe is energy insecure, the United States, not just Europe, bears the consequences. If European energy consumers lose their access to stable and affordable energy supplies, they may reduce their investments and hire fewer workers, curbing economic growth. That would have an indirect but important impact on US investment in and exports to Europe, both of which are important contributors to the US economy. Moreover, European energy security is intrinsically tied to Europe’s stability. A Europe that is energy insecure lives in the perpetual fear of supply interruptions or politically motivated price changes and would therefore be exposed to blackmail, manipulation or at least pressure to conform to the demands of dominant energy suppliers. Specifically, weakness in standing up to Russian pressure could divide and weaken NATO and the EU, both essential partners of the United States in addressing military, political, and economic issues of regional and even global significance.
Some European countries were either completely dependent (in the case of the Baltic states and Finland) or highly dependent (in the case of Austria, Slovakia, the Czech Republic, and Bulgaria) on Russian gas supplies when the Crimean crisis broke out. In some cases, those supplies were not only the only available source of imports but also represented a significant share of total energy consumption. Losing energy imports representing 10–20% of energy consumption literally overnight would cause serious economic and social problems. Fear of that risk obviously clouds a country’s independent policy-making.
For example, when US diplomats tried to convince EU member states to join the tough US-EU sanctions regime against Russia in 2014, the Baltic states and Poland offered robust support despite their vulnerability to reduced Russian gas supplies, while most of the other member states were lukewarm. Amos Hochstein, a friend and former colleague when he served as the State Department’s most senior executive on energy issues during President Obama’s second term, has described the lukewarm reaction he got from several heads of state as follows:
How can I talk about sanctions on Russia after Crimea if they turn off the heat in the dead of winter? That’s not an argument in the abstract…look at Ukraine. They did it in ’09; they did it in ’14. Why would they not do it to me? And what are my alternatives? So…if the United States wants my country’s support on these issues that have nothing to do with energy, you’re going to have to help me figure this out. I cannot be that victim.4
Those heads of state were, of course, right to be concerned. Russia’s decisions to cut off gas supplies to Ukraine were wake-up calls for the United States as well. They dramatically increased the attention that US diplomacy reserved to energy issues. Under Secretary Clinton, several small units at the State Department that dealt with energy affairs were merged into a full-fledged Bureau of Energy Resources led by an Assistant Secretary. That bureau would, within several years, be staffed with about one hundred professionals around the world. The 2015 National Security Strategy, the last one issued by the Obama administration, reflects the conviction that not only the nation’s energy security, but that of our allies as well, is a key component of national security.
The Russian decisions to cut off gas to Ukraine were also important motivations behind the creation by the US and the EU of an Energy Council in 2009. The objective of the council was to ensure a dedicated bilateral channel of communications between high-level officials on transatlantic energy cooperation, especially related to European energy security. While energy had naturally featured in their relations before that time, both sides felt in light of geopolitical events that energy should be treated separately as a high-profile issue with regular follow-up.
The council meetings, held annually under the Obama administration (but less frequently under President Trump’s term), bring the US secretaries of state and energy together with their numerous EU counterparts (the High Representative for Foreign Affairs, the Vice President of the European Commission in charge of Energy Union, the Commissioner for Climate Action and Energy and a representative of the rotating EU presidency) to discuss a wide range of topics. For example, the council has often discussed the promotion of transparent and secure global energy markets, including through the diversification of energy sources, regulatory cooperation to encourage efficient and sustainable energy use and the identification of priorities to promote research into clean energy technology. The meetings of the principals are supplemented by regular interaction by senior officials in four working groups. Neither the US nor the EU has a similar energy council with any other country.
The significance of the council is not captured by the rather formalistic meetings or the turgid communiqués that follow them. The council shines a spotlight on energy issues of common concern, especially European energy security. It has served as an important forum for the US and the EU to track the EU’s progress toward creating an Energy Union, consisting of common policies to diversify fuel sources, energy supplies, and import routes and aimed at creating an integrated, open, and competitive internal energy market based on non-discriminatory free market rules.
While the Trump administration has continued the Obama administration’s focus on European energy diversification, this appears to be motivated principally by the desire to exploit the economic potential of plentiful US LNG and reduce the trade deficit with Europe, rather than as a means for Europe to diversify its energy supplies for its own good. The main focus of the 2019 US-EU Energy Council was to host a business forum of more than 500 energy executives to discuss the future of US LNG supplies to Europe.5
In order to avoid the imposition of US car import duties, the EU has been eager to show that it is a good customer for US energy exports. At a meeting with President Trump in July 2018, President Juncker stated that the EU intended to increase its purchases of LNG from the United States significantly. The decision to buy LNG in Europe lies in the hands of private parties and not the European Commission, of course. Nonetheless, the European Commission has trumpeted the fact that EU purchases of LNG following the meeting appear to be on a steeper upward trajectory than they were before the meeting.
The Vision of an Energy Union
A few weeks after my arrival in Brussels in March 2014, Donald Tusk, then Poland’s Prime Minister, penned a deliberately provocative article in the Financial Times proposing a European Energy Union that would reduce Russia’s “stranglehold” on Europe’s energy.6 The overwhelming focus of the article on energy security reflected the author’s Polish perspective, shared by the overwhelming majority of the Central and Eastern European member states that joined the EU in 2004 and 2007. Those states felt that the EU’s energy policy had prioritized climate policies over energy security. As these states had long felt vulnerable to Russia because of their dependence on imported Russian gas, they insisted that at least equal attention should be paid to energy security.
Tusk argued for a more coordinated European approach to Russia in the energy sector. The argument was not new, of course. Partly due to the Russian cutoff in gas supplies to Ukraine in early 2006, the European Commission’s first significant policy paper on energy security published that year had made the same argument. Not enough had been done, however. Even the Commission’s efforts to compel member states to be more transparent about their energy supply contracts with Russia had run into resistance and had demonstrated that many of those contracts were incompatible with EU law.
Perhaps the most provocative of Tusk’s ideas was his proposal to centralize EU gas purchases through a single buyer to offset Russia’s power as Europe’s predominant gas supplier. Tusk pointed out that the EU member states already purchase uranium for their nuclear power plants through the European Atomic Energy Community. The idea was problematic for several reasons, however. Establishing a buyer cartel in response to a supplier quasi-monopoly is not compatible with the EU’s guiding principle that the internal market should be governed by free competition and free movement of goods and services. It was also unclear whether the idea would apply to non-Russian gas suppliers or whether a buyer cartel would be effective when the buyers had few supply alternatives.
Tusk’s article barely mentioned Gazprom, Russia’s energy behemoth that produces about 500 bcm of natural gas per year (around 12% of global gas output) and exports about 40% of that to Europe. State-owned since 2005, the company is Russia’s largest energy-exporting company and underwrites about 13% of the state budget, thereby enabling many of the Kremlin’s activities that are antithetical to the interests of the EU and the United States. The company was very much at the core of Tusk’s concerns, however, because it was the main reason why Russia exercised a “stranglehold” over EU energy as the dominant, and sometimes exclusive, supplier. In April 2015, after a four-year investigation into Gazprom, the European Commission’s anti-trust department reached its provisional conclusion that the firm was abusing its dominant position in breach of EU law by pursuing a strategy of partitioning gas markets along national borders in eight Central and Eastern European EU member states.
I had hoped during my term as ambassador to see the EU impose fines on Gazprom of ten per cent of its €100 billion revenues, as the EU had the power to do. After all, the European Commission had been levying multi-billion euro fines on many US tech firms, such as Google, Intel, and Qualcomm, for alleged abuses of their dominance. There was no question that for years Gazprom had forced vulnerable gas customers to pay billions more than they should have. Although the European Commission disappointingly decided to settle the case in 2018 without imposing a fine, the terms of the settlement eliminated some of the key tools Gazprom had used to exercise its stranglehold. For example, Gazprom accepted binding obligations to remove restrictions preventing customers from re-selling gas across borders; to facilitate gas flows to and from parts of Central and Eastern Europe that remained isolated from other member states due to the lack of interconnectors; and to offer customers prices that reflect benchmarks at European gas hubs rather than reference higher oil indexes.7
Gazprom has also suffered a defeat at the WTO in its efforts to fragment European gas markets and gouge European consumers. In August 2018, a WTO panel unanimously rejected Russia’s complaint that EU gas market rules in its Third Energy Package (TEP) (described below) were discriminatory and broke WTO law.
Many of the ideas in the Tusk article were fleshed out in the EU’s first energy security strategy paper of May 2014 and then by the legislative program of the EU’s Energy Union launched under the Juncker Commission in November. The objective of the Energy Union is ambitious: to replace a fragmented European energy landscape characterized by uncoordinated national policies and market barriers with a more centralized internal energy market where energy flows freely. Since his appointment in December 2014 as president of the EU Council, Tusk was able to play a key role in ensuring that energy security remained a top priority of the EU during his five years in office.
The EU’s Energy Union has been broader than Tusk’s primary focus on energy security. It has also included measures to create a fully integrated internal energy market, moderate energy demand by promoting energy efficiency (above all in the transport and building sectors), reduce the reliance on fossil fuels, lower emissions, and stimulate research, innovation, and competitiveness in low-carbon technologies.
The Energy Union builds on the prior so-called TEP, implemented in 2011, that provides the core legal architecture governing the EU’s internal energy market in gas and electricity. In addition to providing detailed rules, the TEP established independent national regulatory authorities to implement them and serve as watchdogs over the national energy markets.
The TEP has liberalized and promoted competition in the energy sector. It includes, for example, the requirement to separate energy supply and generation from the operation of transmission networks. If a single company operates a transmission network and generates or sells energy at the same time, it is likely to have an incentive to obstruct competitors’ access to infrastructure, thereby preventing fair competition in the market and leading to higher prices for consumers. TEP regulation therefore requires network operators (with a few exceptions) to grant energy companies non-discriminatory access to their infrastructure. That means that they must offer the same service to different users under identical conditions. At the urging of the United States, the EU also included in the TEP a prohibition of so-called destination clauses that prevent customers of gas suppliers from re-selling to customers in other countries. This proved to be of crucial significance in enabling Slovakia, Hungary, and Poland to argue that the “destination clauses” in Gazprom’s supply contracts could not legally prevent them from re-selling gas to Ukraine in 2009.
The TEP has also resulted in other important achievements, such as “network codes” that enhance cross-border cooperation among firms operating pipelines and grids. These codes form a legally binding set of common technical and commercial rules governing access to and use of European energy networks. Moreover, it has resulted in rules to promote open and fair retail markets by protecting the rights of European energy consumers. Suppliers are required to assume pro-consumer obligations relating to transparent billing, the contents of supply contracts, the length of time that consumer data may be retained, and the ability of consumers to switch suppliers quickly and easily.
Although the Energy Union has been broader in scope than what Tusk proposed, several of his key proposals regarding energy security have been implemented. For example, he advocated a phased approach toward having EU member states jointly negotiate energy contracts with Russia. The first step would be to strip “secret and market-distorting clauses” from existing supply contracts before implementing a template for all new gas contracts and then giving the European Commission a role in all new contract negotiations. EU member states were not prepared, however, to centralize power with the European Commission over bilateral inter-governmental energy supply contracts. Nonetheless, it was clearly unsatisfactory that existing rules only allowed the European Commission to review such contracts after their signing and didn’t give it the power to address their numerous deficiencies with EU law. Amended rules implemented in 2017 required member states to submit new contracts to tougher scrutiny before their signing to ensure that they are both compatible with EU law and not harmful to the EU’s energy security.
The Tusk article also argued that in countries most vulnerable to energy supply cutoffs the EU should provide three-quarters of the financing needed to build critical infrastructure, such as gas links and storage capacity. While Tusk’s proposed level of direct EU subsidy for national energy infrastructure has not been achieved, the EU has provided significant financial assistance. Energy infrastructure projects that have been identified as “projects of common interest” by the European Commission and essential to the completion of the European internal energy market are eligible for financial support from the Connecting Europe Facility (CEF), an EU fund for pan-European infrastructure investments. The CEF has earmarked roughly €5 billion during 2014–2020 for energy-related projects, a rather modest amount compared to the €200 billion required according to European Commission estimates. However, roughly a quarter of the €315 billion European Fund for Strategic Investments, an initiative launched in 2015 by the European Commission and the European Investment Bank to mobilize private financing for critical cross-border infrastructure, has also flowed to the energy sector. Thanks to this infrastructure, the European Commission projects that all EU member states, except for Malta and Cyprus, will have access to three sources of gas by 2022.
Other proposals in the Tusk article have been fleshed out as part of the EU’s Energy Union. The EU has promoted the coordination among member states of their national energy policies, including with regard to contingency planning and risk assessments, and has improved the ability of the EU to speak with one voice on international energy policy matters. It has helped to implement “solidarity” mechanisms that boost emergency fuel reserves and guarantee intra-EU deliveries of alternative fuel to vulnerable consumers (such as hospitals and schools) in member states whose energy supplies are disrupted.
Tusk also emphasized the importance of reaching out to partners outside of Europe to provide new sources of energy. EU member states, supported by financing and technical assistance from the European Commission, as well as important diplomatic support from the United States, have made substantial strides to achieve this objective.
Diversifying Energy Supplies with LNG
Lithuania hasn’t been the only European country wishing to reduce its energy dependency on Russian gas. Thanks to about €220 million in EU funds, Poland opened an LNG terminal in 2015 at Świnoujście, not far from Szczecin, a city made famous by British Prime Minister Winston Churchill in 1946 when he proclaimed that “From Stettin in the Baltic to Trieste in the Adriatic, an iron curtain has descended across the Continent.” After an extension in 2019, again financed largely with €120 million in EU funds, the terminal has a regasification capacity of 7.5 bcm per year, almost half of the country’s total natural gas consumption. Before the terminal was constructed Poland was importing about two-thirds of its natural gas from Russia.
As natural gas has represented a relatively small percentage of its total energy consumption, Poland was not as exposed as Lithuania to the risk of Russian energy blackmail. But Poland was sufficiently concerned, especially after Russia’s annexation of Crimea, to spend €1 billion on the terminal. Over the past few years, it has been signing long-term LNG purchase agreements with exporters from the US, Norway, and Qatar. These supplies, supplemented by gas from an EU-financed pipeline under the Baltic sea linking Poland to Norway’s gas fields, may enable Poland to cease imports from Gazprom when its agreement comes up for renewal in 2022.
Not far from the Iron Curtain’s terminus in Trieste, Croatia is expecting to complete a floating LNG terminal with a capacity of 2.6 bcm per year on the northern Adriatic island of Krk by 2021 (if sufficient downstream purchase agreements can be secured). That represents most of Croatia’s total consumption of gas, roughly 70% of which used to be imported from Russia. Both the EU and the United States have been eagerly promoting this project for many years with technical assistance, diplomatic engagement and (in the case of the EU) about €120 million in financing. Not only would the project free Croatia from dependency on Russia, it would also provide landlocked countries in Southeastern Europe with alternative sources of gas.
Even Germany, which has not had the same concerns about relying on imported gas from Russia, is planning to complete by 2022 two LNG facilities, one as an onshore terminal at Brunsbüttel on the Elbe River with a capacity of 5–8 bcm per year and the other as a floating vessel (like The Independence) at Germany’s only deepwater port in Wilhelmshaven with a capacity of 10 bcm. Together those terminals represent a regasification capacity that is a sizeable chunk of the gas that Germany imports from Russia per year.
As a result of all this construction of LNG terminals, the EU is expected to have 2022 a total regasification capacity of around 232 bcm, more than half of the total EU imports of natural gas in 2018. The desire of some EU member states, especially in Central and Eastern Europe and the Balkans, to build new LNG terminals may appear puzzling when existing terminals in Europe have been operating (as of 2019) at about 30% of their capacity. The high level of spare capacity has reflected the stagnant demand for natural gas in the early 2000s, partly due to cheap coal and subsidized renewables, as well higher prices for LNG in Asia that have drawn LNG exports away from Europe. The reason for the construction of new terminals is that many of the existing terminals have been located (until recently) in western and southern Europe, especially Spain, France, and Italy, rather than in the countries where it has been most needed. Before 2015 many countries behind the former Iron Curtain continued to be tied exclusively to long-distance Russian gas pipelines and therefore cut off from the network of intra-regional European gas supplies.
The United States is currently the third-largest exporter of LNG in the world, behind Australia and Qatar. According to the IEA, the US may become the largest exporter by 2024. In recent years, most of US LNG shipments have been directed to Asia and Latin America where prices have been higher. Compared to the roughly 550 bcm of annual natural gas demand in Europe and European imports of roughly 120 bcm of LNG, US annual LNG shipments to Europe of roughly 10 bcm per year are a drop in the ocean. But LNG shipments to Europe have grown rapidly in absolute terms and relative to total shipments since they began in 2016. Natural gas companies from the UK, France, and Spain have rushed to contract LNG from the handful of export terminals on the US Gulf Coast. Strongly motivated to diversify gas supplies and delivery routes, Poland has placed several large long-term orders. During the first quarter of 2019, an impressive 30% of all US LNG exports arrived in the EU.
The real significance of US LNG shipments to Europe goes well beyond the volume. The explosion of US natural gas production has caused a global LNG supply glut by displacing significant volume that would have been consumed in the United States onto the global market. Even modest US LNG exports to Europe, coupled with the prospect of rapid growth of these exports over time, have strengthened the negotiating leverage of European importers with Russia. Studies have shown that even modest exports of US LNG to Europe could result in significant wealth transfers from Russia to European consumers by virtue of reduced contract prices.8
Diversifying Energy Supplies with New Routes and Sources for Piped Gas
The search for new gas sources and routes has focused on the Caspian Sea region. Azerbaijan, Turkmenistan, Kazakhstan, and Uzbekistan represent 11% of proven world gas reserves and are therefore critical to the EU’s long-term energy security. Efforts to improve energy diversification have included, perhaps most notably, the development of a “Southern Gas Corridor” (SGC) linking the giant Shah Deniz field in Azerbaijan to Europe. The SGC, in operation as of early 2020, consists of three separate pipelines: The first, the South Caucasus Pipeline, links Azerbaijan to Georgia; the second, the Trans-Anatolian Pipeline (TANAP), traverses Turkey; and the third, the Trans-Adriatic Pipeline, connects TANAP to Greece and Albania before crossing the Adriatic Sea to Italy.
Sustained US and EU diplomatic engagement contributed to the success of the SGC. In 2018, the European Investment Bank approved a loan of $1.5 billion, its largest loan to an energy project in its history, for the construction of the third leg of the pipeline. EU recognition of the pipeline as a “project of common interest” made it eligible to benefit from streamlined permitting, preferential regulatory treatment and significant financing from the EU’s Connected Europe Facility.
Admittedly, the project is not a game changer as it will do little in itself to diminish Europe’s energy dependence on Russia. The initially projected capacity of 16 bcm of gas per year is about half of what European planners had anticipated. About 6 bcm is earmarked for Turkish demand, leaving only 10 bcm for Europe (roughly equivalent to only 1.7% of total annual gas consumption). But it is significant nonetheless as it brings non-Russian gas to Europe by pipeline for the first time in many years. Its significance would be greater if it provides new routes to southeastern Europe and the Balkans, regions that have hitherto been “energy islands.” The new routes could be in the form of interconnectors enabling gas to flow from Greece to Bulgaria (and its neighbors) and from Albania to Croatia (and its neighbors).
Diplomatic efforts to promote the SGC and its interconnectors under the Obama administration have continued under the Trump administration. Indeed, the latter provided a rare waiver from its tougher sanctions on companies doing business with Iran in order to enable continued development of the second phase of the Shah Deniz project in which Iran’s national oil company has a minority stake.
In addition to developing new sources of energy supply and new delivery routes, the United States and the EU have had some success in blocking projects that would increase European reliance on Russian gas. Perhaps the principal example was Gazprom’s South Stream project that would have transported gas from Russia across the Black Sea to Bulgaria and eventually Austria. Why was Russia willing to spend about €40 billion when additional gas export volume could be accommodated with increased throughput in existing pipelines? The answer is that with 63 bcm of planned capacity, nearly equal to the entire volume of gas that transits Ukraine, the pipeline would have enabled Russia to undermine Kyiv’s negotiating leverage regarding transit fees (accounting for roughly €2 billion or 3% of GDP per year) and would have increased the dependence of downstream customers, especially in Central and Eastern Europe and the Balkans. Although several EU energy and pipeline construction firms had economic interests in the project, most member states supported the European Commission’s decision to block the project because it violated EU energy market rules.
This victory may be short lived, however, if Russia succeeds in selling more gas to Europe through Turkey. Gazprom’s Blue Stream gas pipeline that links Russia and Turkey under the Black Sea before connecting to Bulgaria already handles up to 16 bcm of gas per year, largely for Turkey’s domestic market. The completion of additional pipelines from Russia to Turkey, known as Turkish Stream, might have the same negative impact as South Stream on Ukrainian transit fees and European energy independence if they bring additional Russian gas to European consumers. Under conditions of equal access to third parties, an additional pipe would create more options for the consumer. But as Gazprom is the only company in Russia allowed to export piped natural gas and is not required to provide equal access to its pipes outside the EU, unlike European operators subject to EU law, Turkish Stream will not create more consumer optionality.
Compared to the battle over South Stream, the one over the Nord Stream pipeline has been far more controversial. The Nord Stream I pipeline under the Baltic Sea linking the Leningrad region to Greifswald in Northern Germany halved the percentage of Russian gas exports to Europe that transit through Ukraine from about 100% prior to the pipeline’s inauguration in 2011. Nord Stream II, a second pipeline running alongside the first, would double the original capacity to 110 bcm. Gazprom (supported by leading energy companies in Western Europe) has underwritten the €10 billion bill to construct the pipeline despite the fact that its existing pipelines from Russia to Europe are only 60% utilized. The reason is that the project is as much politically as economically motivated. Nord Stream II would increase Gazprom’s share of the German gas market from 40% to 60% and would concentrate roughly three-quarters of Russian gas exports to the EU through a single route, thereby offering Russia a valuable choke point at which to disrupt supplies.9
Ukraine has been the transit route for nearly half of all Russian gas exports to the EU. Combined with a multi-line Turkish Stream, Nord Stream II would enable Russia to service its European customers while circumventing Ukraine entirely. Gazprom has publicly announced that this is its intention as soon as possible after 2020. It is not at all clear how Ukraine would recover from the blow of losing €2 billion per year in transit fees. When Chancellor Merkel sought assurances from President Putin that Russia would continue to export gas through Ukraine’s pipelines even after the completion of Nord Stream II, Putin replied that Russia would do so if that made economic sense.10 That was obviously far from the assurance she was seeking.
Germany has insisted on proceeding with Nord Stream II despite an outpouring of criticism from many EU member states and the European Commission itself. During EU discussions on Russian sanctions in 2015, Italian Prime Minister Matteo Renzi argued that Germany was subordinating the EU’s collective diplomacy to German economic interests. Other countries have also been angered by the apparent contradiction between the termination of South Stream and the continuation of Nord Stream II. The reason why Germany has been able to endorse Nord Stream II is that it is an entirely undersea pipeline originating outside the EU and making landfall in Germany, whereas South Stream would have transited several EU member states. EU energy market rules clearly applied only to the latter until they were modified in 2019. Those rules include provisions requiring ownership “unbundling” (essentially the separation of companies’ generation and sale operations from their transmission networks), third-party access, and non-discriminatory tariffs. As amended, the rules now apply to all offshore pipelines. But since member states may ask for derogations in case of existing (rather than future) pipelines, Germany has so far been able to safeguard Nord Stream II.
The Obama administration worked intensively with the European Commission and supportive EU member states to question the rationale for Nord Stream II. Over the past three years, the Trump administration raised the pressure substantially on Germany and the project’s commercial backers. At a NATO summit in July 2018 President Trump attacked Chancellor Merkel for allowing Germany to be “totally controlled” and “captive to Russia” because of its reliance on Russian gas and questioned why the United States should spend billions defending European countries that handed billions to Russia in business deals.11
In a rare sign of bipartisan consensus, the US Congress approved sanctions in December 2019 on companies and governments working on the project. Germany has strongly criticized the legislation, arguing that it is unacceptable interference in national sovereignty, and has vowed to proceed. When international contractors suspended work on the project because of the sanctions, Gazprom announced that it would complete the pipeline alone. The decision of Denmark to allow the pipeline to cross its seabed suggests that the project appears likely to be completed. The key question is whether the pipeline’s negative impact can be minimized by ensuring that it operates under EU energy market rules and that Ukraine continues to serve as a country for the transit of Russian gas.
While the tactics and the rhetoric of the Obama and Trump administrations on this issue differ sharply, they display a higher degree of continuity than in nearly any other area of US policy toward the EU. Opposition to Nord Stream II may be influenced by the desire of the US government to promote US LNG exports. Yet that in no way diminishes the main (valid) criticisms that the pipeline weakens Central and Eastern Europe by making the region less relevant for gas transit, undermines Ukraine’s reform program, and retards the EU’s energy diversification goals. It is not correct to state that both Russian and US energy exports to Europe are state controlled. Unlike Russia that can direct Gazprom to do what it wishes, US LNG exporters are free to pursue their own market interests. The biggest champions of US LNG exports are in fact European governments, such as Poland and the Baltic states.
Both the Obama and Trump administrations have shared the view of many prior Democratic and Republican administrations that energy security is a core element of foreign policy and national security and that promoting European energy security is in the US national interest. I applaud this and hope the bipartisan approach continues.
Ensuring the Free Flow of Gas and Electricity Within the EU
The United States has also supported the EU’s efforts to ensure that gas and electricity flow freely in every direction to where they are needed. While more progress has been made in the gas sector in the past decade, significant steps are also taking place in the electricity sector.
As noted above, many countries in Central and Eastern Europe, especially Ukraine, have suffered the consequences of the fact that Russian gas has (until recently) flowed only East to West. Those countries would have been in a far better position had they been able to access supplies from their neighbors. Gas pipeline interconnections and “reverse flow” (i.e., bi-directional flow) capabilities are helping to address the problem. The free flow of gas does not mean that Russian gas will be replaced with other sources. In many instances, the same Russian gas will continue to transit through European pipeline networks, but through different routes. That additional flexibility is a guarantee that Russia cannot exploit the use of its pipeline network to apply selective pressure on downstream consumers.
The Baltic states, once an “energy island,” are being increasingly integrated into the European gas and electricity network. The Baltic Energy Market Interconnection Plan (BEMIP) has included multiple projects to this end. A gas pipeline interconnector between Poland and Lithuania aims to connect the Baltic and Finnish gas networks with the continental European gas network by the end of 2021. Another gas pipeline interconnector between Finland and Estonia, completed in 2019, connects the Finnish gas network with the continental European network. BEMIP also includes a submarine power cable between Lithuania and Sweden, a submarine power cable between Estonia and Finland and an electricity link between the Baltic transmission system (integrated with that of Russia and Belarus) and the continental European transmission system. As a result of these and other projects, the Baltic states are now among the best interconnected regions of Europe.
Poland is emerging as a gas hub, thanks to the completed LNG terminal in Świnoujście, mentioned above, and a future gas pipeline from Norway to Poland that is expected to bring 10 bcm per annum of Norwegian gas to Poland and other Central European and Baltic countries. Thanks to about €300 million in EU funding, a gas interconnector between Poland and Lithuania is expected to begin operations in 2021. Poland is also working on gas interconnectors with Lithuania, Ukraine, Slovakia, and the Czech Republic. These developments would provide a secure alternative to Russian gas from Nord Stream. Hungary, Slovakia, and Poland have introduced “reverse flow” capabilities on the pipeline supplying them with gas from Russia through Ukraine. Hungary has built interconnectors with Croatia, Romania, Slovakia, and Bulgaria (through Serbia). The Eastring gas pipeline, whose first phase is projected to be completed around 2025, would tie western European gas hubs to the Balkans by connecting Slovakia with the external border of the EU in Bulgaria. A proposed Ionian-Adriatic gas pipeline would transport gas from Albania, through Montenegro and Bosnia and Herzegovina, to Croatia. Interconnectors between Greece and Bulgaria and between Bulgaria and Serbia are also planned.
Promoting the flow of gas southwards from the new LNG terminals in Poland and Lithuania, and the flow of gas northwards from the new LNG terminal in Croatia, is a major strategic priority of the Three Seas Initiative, comprising twelve Central and Eastern European member states whose territories lie between the Baltic, Black, and Adriatic seas. The forum gathers head of state and ministers annually to discuss regional economic development and the interconnectivity of transport, digital and energy infrastructure, focusing especially on the promotion of gas pipeline interconnectors.12 In addition to drawing on EU funds, the members have launched an investment fund with a €5 billion budget that aims to stimulate up to €100 billion in new projects. The Trump administration has lent high-level support for the initiative, including a speech by the president at the 2017 summit in Warsaw and a promise by Energy Secretary Rick Perry to catalyze investments identified by the initiative.
Central and Eastern Europe is not the only region in Europe where gas and electricity interconnections are moving ahead. For many years, the Iberian Peninsula has been isolated from the European electricity system, largely due to French reluctance to enable Spain to export excess electricity generated from renewable energy. Whereas the EU aims for each member state to reach a minimum 10% interconnection level with its neighbors (to be raised to 15% by 2030), Spain has been stuck at well below that. Due to France’s recent change of heart and the EU’s significant financial backing of a Franco-Spanish subsea power cable under the Bay of Biscay, Spain (and Portugal) will no longer be isolated from the European electricity grid. Despite regulatory hurdles, the EU continues to push for a gas pipeline across the Pyrenees that would double gas transport capacity between France and Spain.
Helping Ukraine Strengthen Its Energy Sector
As detailed above, the EU and the US have cooperated on numerous dimensions of the EU’s Energy Union that seek to enhance energy security through diversifying routes and sources of supply and promoting the free flow of energy within the EU.
In addition to this cooperation, the EU and the US have worked together to improve Ukraine’s energy security. The stakes could not be higher: If Ukraine is not energy secure, it cannot enjoy political stability, and if it is politically unstable, it will be vulnerable to Russian domination. That would represent a failure of the EU’s effort to project stability in its neighborhood and a major setback for transatlantic efforts to promote a united, prosperous, and democratic Europe.
Following the Russian annexation of Crimea and the instigation of a separatist movement in the Donbas in March 2014, Ukraine not only lost a significant part of its coal deposits, offshore Black Sea oil reserves, and its power generating assets, but also faced the possibility of reduced natural gas supplies from Russia. US and EU experts raced against the clock to help Ukraine to prepare contingency measures for the upcoming winter. Naftogaz wanted to buy significant quantities of gas but didn’t have strong enough credit to do so because of its financial troubles. Amos Hochstein and European Commission Vice President Maroš Šefčovič led an intensive effort to put into place a lending mechanism through the European Bank for Reconstruction and Development to enable Naftogaz to do so.
I recall the concern of the experts from the US Department of Energy who regularly passed through the US Mission to the EU to report on progress in their work with the Ukrainian government. The emergency plans included decisions about how to allocate energy supplies to different parts of the economy, maximize domestic energy production, reduce demand, increase storage of gas, and increase “reverse flows” of gas from Ukraine’s neighbors.
Even while the upcoming winter in Ukraine was the overriding concern, the US and the EU have also had to work on a longer-term plan to modernize and diversify Ukraine’s energy sector. The European Investment Bank and the European Bank for Reconstruction and Development have provided significant loans to help Ukraine finance the costs of doing so.
Reforming a country’s energy sector is a tough challenge in the best of times. Doing so under severe time pressure in a country of 45 million people straining under the significant financial and human costs of conflict, struggling to address endemic cronyism and corruption (especially in the opaque energy sector), and shouldering the legacy of Soviet-style infrastructure is a herculean task. Most of Ukraine’s power generation assets will reach the end of their life cycle during the next decade and will need to be decommissioned or upgraded. Those assets will have to be integrated with the EU’s power system and meet EU environmental standards, both of which will require significant investment. In light of the devastating consequences of the Chernobyl disaster, caused by a faulty Soviet nuclear power plant, US and EU experts have also been engaged with Kyiv to introduce modern safety practices and technology into Ukraine’s operating nuclear reactors.
One of the challenges US and EU experts faced was to help Ukraine increase its domestic oil and gas resources in order to reduce the country’s dependency on imports. The conflict in eastern Ukraine had largely driven out the few large international energy companies that had braved the administrative red tape and chronically dysfunctional nature of Ukraine’s energy sector. The remaining domestic and smaller international firms did not have the financial and technical means required to exploit the country’s significant reserves, especially of gas. The country has Europe’s third-largest deposits of shale gas, but these are largely difficult to reach and hence expensive to exploit.
During the critical early years of the conflict, domestic gas production declined to about three-fifths of the country’s needs. US and EU experts helped Ukraine weather the storm by increasing its gas storage capacity and accessing gas from its neighbors through “reverse flow” agreements. As a result, Ukraine was able to stop importing gas from Russia as of 2015. The experts also helped Ukraine with the longer-term project of making the energy sector more professional and transparent, improving the regulatory structure to provide greater incentives for foreign investors, accessing modern technology to increase extraction from existing conventional wells, and exploiting the country’s significant shale resources. Ukraine aims to become self-sufficient in gas by 2022, a dramatic turnaround from the pre-war period in which Ukraine was importing about 45 bcm per year. Moreover, investment in the Ukrainian renewable energy sector has increased substantially due to reforms in regulations and attractive feed-in tariffs. As a result, the renewable energy share of total energy consumption tripled from about 4% in 2014 to 12% in 2020.
Part of the reason why Ukraine can now meet its energy consumption needs without requiring significant foreign imports is that domestic demand has been reduced dramatically. Some of this reduction was due to the loss of energy-intensive industries in the Donbas and the economic downturn caused by the conflict. But much of it has also resulted from the efforts of Ukraine, assisted by the EU and the US, to lower demand.
According to the US Energy Information Administration, Ukraine is one of the least energy-efficient countries in Europe; it uses about two to three times more energy per unit of economic output than even its direct neighbors in the EU. Efforts to lower demand have included the phased reduction in extremely generous energy subsidies for gas, heating, and electricity that represented about 7.5% of GDP in 2012. Residential consumers have faced significant price hikes, but the poor and vulnerable have received offsetting direct payments. In 2016, the Ukrainian government was spending roughly seventy times more on subsidies for public utilities than on energy efficiency. The US and the EU have advised the government on how to reduce that gap by planning a modernization program, including proper insulation, for buildings owned by federal, regional, and local entities. The gap between production of energy and demand has also been reduced by urgent measures to lower very high loss rates on electricity transmission lines and repair leaky pipelines.
Just as important as the technical measures to boost production and lower consumption outlined above was the advice of the EU (with assistance from the US) to the Ukrainian government on urgent regulatory reform. Ukraine is obliged to implement the EU’s energy laws, including the TEP, as one of the requirements of its membership in the Energy Community. Founded in 2005, this international organization brings together the EU and eight non-EU countries in Southeastern Europe and the Black Sea region to create an integrated pan-European energy market. As a result, Ukraine has undertaken numerous reforms, such as the structural reform of the gas and electricity market; “unbundling” of supply and generation assets from the operation of transmission networks; and the creation of an independent regulator. Among the recent achievements of these reforms, Ukraine implemented an Electricity Market Law in 2019 that introduced more open competition and non-discriminatory participation in the electricity market. Now companies have freedom to buy and sell electricity, consumers have greater choice of electricity suppliers, tariffs reflect actual costs, and transmission and distribution grids can be accessed by third parties on transparent, market terms.
A major part of this work has involved cleaning up Naftogaz. Representing 14% of Ukraine’s budget revenues, it has long been exploited by politicians as a tool of patronage and corruption. Work toward ensuring professional and independent management, as well as transparent accounting meeting international standards, has advanced significantly, but it is still not complete. It is essential that the US and the EU continue to encourage the Ukrainian government to finish this work so that Ukraine can finally enjoy the benefits of a competitive energy market and a democracy that is clean and efficient.
Future Areas of US-EU Energy Cooperation
My diplomatic mission reaffirmed my conviction that energy cooperation should be a priority for US-EU relations because of its spillover effects on economic, political, and security relations and because there are so many areas in the energy sector where the US and the EU could be doing more together.
Shortly after my arrival in Brussels in 2014, I pushed for an additional five-year extension of the 1998 US-EU Agreement on Scientific and Technological Cooperation. The agreement provides an official framework for cooperation in a very wide range of research areas, including in non-nuclear energy and materials science. I also collaborated with the dynamic EU Commissioner for Research, Science and Innovation, Carlos Moedas, to simplify the participation of US research institutions in the European Commission’s €80 billion Horizon 2020 research and innovation fund. The very low participation rate of US institutions in Horizon 2020 projects, due to several technical legal obstacles, made no sense to either of us, especially when those institutions were not actually seeking funding from the EU.
During my diplomatic mission, I had the pleasure of traveling several times to Ispra, Italy, to visit the EU’s Joint Research Centre (JRC), one of Europe’s leading research campuses. In 2008 the JRC had reported to the European Commission that due to the use of illegal software (so-called defeat devices) there was a significant discrepancy in diesel vehicle emissions between testing and road conditions. EU member states did not act on the European Commission’s further investigations, and it was only when the US Environmental Protection Agency charged Volkswagen in September 2015 with violations of the Clean Air Act that the “Dieselgate” scandal broke out.
But the reason for my visits had nothing to do with automotive manufactures’ cheating of laboratory emissions tests. I wanted to learn more about the collaboration between the JRC and the Department of Energy’s Argonne National Laboratory in Illinois on electric vehicles’ interoperability with smart grids and charging stations. Smart grids, an essential building block of a more energy-efficient future, are essentially energy networks that can automatically monitor energy flows and adjust to the changes in energy supply and demand accordingly. Interoperability refers to the notion that any electric vehicle and supply equipment should be capable of being plugged in anywhere and anytime without disturbing energy networks. This is a critical element in the effort to prepare for a cleaner energy future in which more electric vehicles circulate on our roads. The collaboration between the two labs also seeks to define global product standards for electric vehicle interoperability with smart grids and charging stations with the objective of minimizing trade barriers and facilitating adoption of new technology.
The US and the EU have also collaborated effectively on energy efficiency. The ENERGY STAR Agreement, signed in 1991 by the European Commission and the Environmental Protection Agency, promotes the use of a voluntary label and a consistent set of performance standards for the energy efficiency of office equipment on both sides of the Atlantic. By helping manufacturers avoid the burden of complying with multiple labeling programs, the agreement has increased the global supply of and demand for energy-efficient office equipment. The agreement expired in February 2018 and should be renewed.
The communiqués of the US-EU Energy Council have repeatedly mentioned many other areas of collaboration, but practical progress has been too slow. One priority area should be research into storage solutions for renewable energy. The main obstacle preventing faster expansion of renewables is no longer their cost (wind and even large-scale solar power is already cheaper than coal and gas), but rather their intermittency since the wind and sun don’t always blow or shine. Electricity grids have difficulty handling significant electricity loads from renewable energy sources because of their volatility. A critical component to addressing intermittency is the improvement of distributed storage solutions, such as batteries, pump storage (reservoirs), and electric vehicles themselves, so that excess energy can be stored when produced and then released when needed.
Batteries would be a particularly fruitful area of cooperation as the EU has made this a major priority since launching the European Battery Alliance in October 2017. The group, consisting of several EU member states, the European Commission and the European Investment Bank, as well as industrial and research partners, seeks to build a strong and competitive European battery industry. The European Commission has authorized, pursuant to its rules on subsidies, seven EU member states to contribute roughly €3.2 billion to finance the project. The Department of Energy and the US car manufacturing industry, among others, are also focusing on the same objective. The US and the EU should explore whether it makes sense to join forces.
The US and the EU should also continue to prioritize collaboration on methods of capturing carbon dioxide emissions (usually at power plants and factories) for subsequent underground storage so that they will not enter the atmosphere. While the technology and sufficient storage sites are available, the high cost and concerns about carbon dioxide leakage are slowing the speed of implementation. With growing evidence that the earth’s climate is warming at an alarmingly increasing rate, it is critical to accelerate our ability to prevent carbon dioxide from being emitted in the first place and to remove it once it is already in the atmosphere.
As described above, one of the reasons for the divergence between the US and the EU in terms of energy security is the decision of the US to encourage the exploitation of shale oil and especially shale gas reserves, whereas many EU member states have banned it. Some member states, including Poland, and critical non-EU member states, such as Ukraine, are interested in developing their shale reserves. The US has unparalleled experience in defining a regulatory framework that promotes shale projects. Fortunately, it is sharing that experience with foreign governments through the Unconventional Gas Technical Engagement Program of the US Department of State. This program deserves continued support. While the program could theoretically undercut US “energy dominance” in shale and US LNG exports to Europe over the long term, it is far more important that the US encourages European energy security.
The US and the EU should also focus their collaboration on combatting the risk of cyber-attacks on energy infrastructure. This risk is far from theoretical and can result in devastating consequences for energy production and public safety. Although many such attacks remain confidential, there are numerous well-publicized cases such as the attacks on Ukraine’s power grid, Iran’s nuclear facilities, and Saudi Aramco’s computer systems. In 2018, the US Department of Homeland Security and the FBI declared that Russian-backed hackers had embedded malware into a range of US power plants and had gained remote access into energy sector networks.
The US and the EU should continue to align their diplomatic efforts at expanding energy supply options for Europe. Very large reserves in the eastern Mediterranean—between 5 and 8 trillion cubic feet of natural gas recently discovered off the coast of Cyprus and about 19 trillion cubic feet in one field off the coast of Israel—have the potential to be game changers if significant production is (eventually) destined for export, including to Europe. While the development of Cyprus’s offshore reserves are complicated by the ongoing conflict with Turkey and the transportation of gas to Europe from the Israeli reserves are beset by political and technical challenges, the US and the EU should do their utmost to provide private energy operators with as much confidence as possible to invest in these projects.
Energy has the potential to be a powerful force for peace, not only in Europe but around the world. One good example is a recent agreement whereby Israel will export up to 7 bcm of natural gas per year to Egypt. This deal, worth $15 billion, is arguably the most significant one these neighbors have ever concluded since they made peace in 1979.
Finally, the United States should be clear that European energy security is about more than just selling US LNG to Europe, as much as this contributes to reducing the over-reliance of certain EU member states on Gazprom or other suppliers. When the US engages in aggressive commercial promotion, it undermines the credibility of its message and the effectiveness of its diplomacy to promote a competitive and integrated energy market in Europe—an objective that is even more important than reducing the transatlantic trade imbalance.
Footnotes
1
https://ec.europa.eu/energy/sites/ener/files/documents/2014_countryreports_lithuania.pdf.
2
Gabriel Collins, “Russia’s Use of the Energy Weapon in Europe,” Baker Institute for Public Policy, Issue Brief, July 18, 2017. https://www.bakerinstitute.org/media/files/files/ac785a2b/BI-Brief-071817-CES_Russia1.pdf. Agnia Grigas, “Legacies, Coercion and Soft Power: Russian Influence in the Baltic States,” Chatham House Briefing Paper, August 2012. Grigas cites Robert L. Larsson, Russia’s Energy Policy: Security Dimensions and Russia’s Reliability as an Energy Supplier, Swedish Defence Research Agency, March 2006. https://www.chathamhouse.org/sites/default/files/public/Research/Russia%20and%20Eurasia/0812bp_grigas.pdf.
3
https://www.eia.gov/tools/faqs/faq.php?id=847&t=6 (shale oil); https://www.eia.gov/tools/faqs/faq.php?id=907&t=8 (shale gas); and https://www.eia.gov/outlooks/aeo/data/browser/ (projections).
4
Speech at the 2nd Washington Oil and Gas Forum, Cosmos Club, June 9, 2016. https://2009-2017.state.gov/e/enr/rls/258436.htm.
5
Richard Morningstar, Andras Simonyi, Olga Khakova, and Irina Markina, “European Energy Security and Transatlantic Cooperation: A Current Assessment,” Atlantic Council Issue Brief, June 2019. https://www.atlanticcouncil.org/images/publications/European_Energy_Security_and_Transatlantic_Cooperation.pdf.
6
Donald Tusk, “A United Europe Can End Russia’s Energy Stranglehold,” Financial Times, April 21, 2014. https://www.ft.com/content/91508464-c661-11e3-ba0e-00144feabdc0.
7
http://europa.eu/rapid/press-release_IP-18-3921_en.htm.
8
“Made in America: The Economic Impact of LNG Exports from the United States,” Deloitte Center for Energy Solutions, 2013. https://www2.deloitte.com/insights/us/en/industry/oil-and-gas/made-in-america-the-economic-impact-of-lng-exports-from-the-united-states.html.
9
Written Testimony of Deputy Assistant Secretary of State John E. McCarrick of the Bureau of Energy Resources before the Senate Foreign Relations Committee’s Subcommittee on Europe and Regional Security Cooperation, December 12, 2017. https://www.foreign.senate.gov/imo/media/doc/121217_McCarrick_Testimony.pdf.
10
Claire Jones, Guy Chazan, and Kathrin Hille, “Merkel and Putin Discuss Syria and Ukraine at Landmark Meeting,” Financial Times, August 18, 2018. https://www.ft.com/content/08f7f0c4-a303-11e8-8ecf-a7ae1beff35b.
11
Jonathan Lemire and Jill Colvin, “Trump Rattles NATO, Knocking Its Value, Assailing Germany,” AP News, July 12, 2018. https://apnews.com/e863b9f08c1d48fc94c75030cdfcae46.
12
James Shotter, “Three Seas Seeks to Turn Tide on East-West Divide, Financial Times, November 22, 2018. https://www.ft.com/content/2e328cba-c8be-11e8-86e6-19f5b7134d1c.