Besides the military, power political, social, ecological and economic aspects the security model being multifarious and complex it also takes into consideration the factor of reliable supplies of energy raw materials – primarily gas and oil.
In one of its possible definitions the energy security is understood as a constant accessibility of energy sources in their various forms, acceptable quality and affordable prices. The European Union countries have control over only 6% of the world’s oil reserves, 2% of natural gas reserves and 7.3% of coal reserves. In 2002 with its 6% share of world population EU accounted for 16% of world energy consuption. A year earlier with its 43% share oil was the dominant energy source in EU followed by the 23% share of natural gas. Around 50% of the EU’s energy raw materials consumption is at present imported and prognosis indicates that the level of dependance could rise to 70% in 2030.
In these days, 27.5% of oil imported to European Union comes from Russia, 24.6% from the Near East, 20.5% from Africa and 20% from Norway. The natural gas supplies are covered mainly by the imports from Russian Federation. Russian share of the gas consumtion represents 41%. In the recent years the natural gas has gained its popularity against oil not only as environmentally less damaging source of energy but also as an effective means of lowering the oil dependence rates.
In 2000 EU’s natural gas production represented 289 milliards cubic meters to 467 milliards cubic meters consumed. The difference had to be covered by imports, 70% of which came from Russian Federation. According to the estimations of U.S. Energy Information Administration, EU’s natural gas demand would increase to 900 milliards cubic meters by 2020 and the imports from Russia would consequently double. Russia with its estimated resources of 48 billion cubic meters (which is a 40-time multiple of the North Sea reservoirs) is the world’s resource leader. The North Sea oil production has become costly and thus not always profitable. By the more optimistic forecasts the intensity of production allows us to count on the present oil reservoirs storage for the period of forthcoming 15 or 20 years at best. With the natural gas the situation looks more advantageous as far as its reservoirs should last several years longer, its extraction, however, requires higher financial costs. In this respect, the EU’s long-term energy strategy should take into consideration the ultimate capacity of the North Sea reservoirs.
Even though since 1973 oil shock the EU had managed to decrease its overall energy dependence from 60% to 50% in 1999, in the next 20-30 years the dependence rate is to rise to 70% again with oil, natural gas and coal dependence rates oscillating around 90%, 70% and 100% respectively.
The problematic areas of European energetics
The real energy problems of EU lie beyond its borders. The EU will not trade effectivelly with Russia unless there are more suppliers on the market. Not even to mention that there are only dozen of reduced and mutually rivalling monopolies to trade with Russia in Europe.
The interconnection of transit network and diversification of Russian supply system supported overtly in all the official EU documents seems to be the way of preventing the supply outages caused by physical damages, earthquakes or terorism.
In the gas industry the concentration is much higher than in the oil industry for the biggest producer Gazprom controls the transit routes to Europe. If not for the concerns of American Ministry of Foreign Affairs dealing primarily with the question of energy supplies, the situation in Europe could have been much worse than it is now. The Baku-Ceyhan pipeline may serve as a good example. Transporting the Caspian oil through Caucasus it avoids the territory of Russian Ferderation. In a due time the pipeline, proposed by the American government and constructed under British Petroleum, will transport million barrels of oil a day. The gas pipeline is to follow the same route. If some of the imported gas ends in the terminals on the Mediterranean coast – where from it could be transported to Slovakia – this route holds perspective also for our country, although the connection does not yet exist.
In its 2000’s Green Paper the EU released the prognosis of Russian import rate doubling in the next 20 years, the possibility of which, however, still remains implausible. In 1999 Russian Gazprom produced 545 milliards cubic meters of gas, out of which 400 milliards were sold on domestic market. By 2020 Russian planned export gas rates should come to 275 – 280 milliards cubic meters, the same number as an indicated EU consumption increase by this time. These rates take into account supplies for Commonwealth of Independent States and South-East Asia both of which were overlooked in the EU’s estimations. The most important partners from among the Commonwealth of Independent States (Ukraine, Belarus and Moldavia) would thus have been left out with 30 milliards cubic meters, which would have been 13 milliards cubic meters less than in 2000 while no supplies would have been left for the countries of South-East Asia which is in a strict discord with the Russian export strategy for this area. Russia itself does not want to be dependent on one customer only. Moreover, thanks to its geographical nearness the South-East Asia proves to be less costly.
With regard to the increasing dependence on Russian raw materials the European Comission’s agreement on Baltic submarine gas pipeline route connecting Russia and Germany proves to be a potential mistake. It can help Kremlin to establish stronger control over the German and British markets directly, excluding the transitional countries. On the contrary, less expensive branch of Yamal II would provide higher security for the European countries. By 2011 the planned 1200-meter-long submarine pipeline should have been transporting 55 milliards cubic meters of natural gas to Germany per year, the annual consumption of which nears 95 milliards cubic meters. Through this project the dependence of Germany would rise to 50%. There are some hints of geopolitical concerns behind it for the overland pipeline would be certainly less costly than 2 milliards Euros intended for this project. In the consortium Gazprom has formed with the German companies E.ON and BASF Russian company holds a 51% share.
Last year, one of the biggest energy companies in the world, German E.ON was granted a quarter share of Yuzhno-Russkoye natural gas field in western Siberia by Gazprom, the contract being however not yet signed. Although E.ON has guaranteed that it would sell 15-20% of gas from its own resources only 6% has been covered this way so far. Besides, this contract enables Gazprom to acquire the shares in E.ON’s daughter gas trading companies (those outside Germany as well) by the means of out-stepping of shares for Gazprom. In connection with this, the owner of the biggest Slovak refinery Slovnaft, Hungarian MOL has also been mentioned. The Hungarian government has however voiced its unwillingness with Gazprom acquiring the share. Daughter companies in Bulgaria, Czech republic, Poland and Slovenia are also “at stake”. Under such circumstances the Gazprom’s attitude towards the needs of German energy security would be uncertain.
Although the submarine pipeline contract has not prompted EU to push Russia into ratifying the Energy Charter Treaty, as a result of Russian-Ukrainian gas dispute France hightened its activities and on the meeting of G8’s ministries of finance and energy held in 2006 it called for Russia joining the Energy Charter Treaty and open its pipeline system to foreign investments.
As the matter of fact, there is no other primary supplier for Europe to be considered but Russia. That is why the European Union ought to push its officials into signing the Energy Charter Treaty. As far as Russia has manifested its willingness to become a member of World Trade Organization, EU could make its acceptance dependent on the privatization of its energy sector.
Dealing with the problem of EU’s unfavourable energy position one of the short-term solutions lies in acquiring the shares in Russian companies. The long-term solutions cannot avoid recoverable sources. The privatization of Russian energy sector is a complex and difficult process but the first experiences has already been gained.
British Petrol and Dutch Shell were more or less successful in the fusions and acquisitions, the daughter of E.ON, Ruhrgas, being the shareholder in Gazprom. The pressure on Gazprom signing the Energy Charter Treaty and adopting the rules of World Trade Organization seems also conceivable. The pact guarantees that all the ratifying countries keep their pipeline network open to the third party and in the case of mutual conflict they do not suspend the transition.
Several steps towards higher European energy security
One of the basic principles implemented in the Energy Charter Treaty is called the Third Part Access (TPA). It secures a third part an access to gas pipeline and electrical networks. The first step in which the present network owners would be guaranteed the access to the other networks would be followed by the full third part access. As far as the potential of TPA would not be utilized unless real network systems exist it is necessary that we connect different gas pipeline and electrical networks to create the so called network of networks. There are two ways how to reach this goal – either connect the isolated transit systems or extend the transit and storage capacities prompting the diversification of resources and gas transit routes.
EU ought to keep in mind that the energy strategy is a part of the overall policy towards Russia and as such it is in a complex reciprocal relationship with other areas influencing its final form. In this respect, the EU does have an economic and political means to make Russia improve its environment and reform its foreign policy so that it is more transparent.
In the EU there are three main areas which are to be touched by the changes: process of liberalization of energy markets, process of investing to trans-European networks and process of creating an EU internal unified energy market. The aim of the liberalization of energy markets has been to create a competitive environment despite the existence of natural monopolies, enable the customers to chose their own suppliers subjected to the equal competition and prompt the increase of economic efficiency. The demanded ideal is represented by the free competition in the spheres of demand – offer and supply – transaction based on the principle of transparency. Following the same philosophy the natural gas price is sought to get lose of its bound on oil price development and copy the natural demand – offer balance. In this respect, the spot trading is often mentioned. It means that the prices reflect the factual demand and offer in various selling spots. Liberalization of energy market requires systemic changes of the overall entrepreneurial environment. Throug the nature of energy networks operating which prevents the full-scale competition the key role of regulation is established. While the energy sector is quite a financially demanding sphere in the beginning it is often given a helping hand by the state. The semi-state monopolies which are its natural consequence control the trading and distribution of the energy. The structural unbundling and legal separation of distribution from trading should change it. The existence of monopolies is claimed to be the biggest handicap in further liberalization. The described processes should effect SPP as well. In the future it might split to form a distribution and an international transport section.
In comparison to former trade markets highlighted by the presence of regional monopolies in the liberalized markets it is far more difficult to predict the demand and make a consequent offer. The customers may change their suppliers quite often. With regard to the long-term contracts supplemented by the so called „take or pay” enabling realization of big projects, the former suppliers might find themselves in a difficult position. In 2003 the United Nations Economic Commission for Europe released a report putting an emphasis on the direct propotion between high reliability and ability to guarantee the gas supplies on one hand and the existence of long-term contracts on the other hand. The form of liberalization process in EU markets has been criticized not only by Russia but also by the other supplying countries. According to Alexander Medvedev, the general manager of Russian Gazprom, the biggest shortcomings of liberalization rest in the existence of the short-term contracts and incapability of a unified market to impose independent mechanisms for large and expensive project financing. Step by step, the gas producers are pushed into climatically more and more demanding regions requiring very modern and costly technologies. The pressure on natural gas price decrease meets with the negative reception of suppliers on the borders of EU expressing their readiness to look for alternative markets.
It was the Competition Commissioner Neelie Kroes who also touched the topic of drawbacks in liberalization. Among the major ones the high concentration of markets and dominance of former state monopolies, vertical integration of sector, unsatisfactory integration of energy markets on European level, non-transparency and factual bound between the natural gas price and the oil price development. The edging of the competition on the market takes place through long-term contracts and culmination of capacities in the pipelines, reservoirs or cross-border transport networks. In the following 20 years European energy sector shall need enormous investments due to an increased demand and unavoidable repairing of infrastructure.
Finally, the agreement on synchronizing the energy policies of European countries was reached at the EU summit in the first half of 2006. (The first who openly pronounced this strategy a must was Tony Blair in European Parliament in October 2005.) It is the 2000 Green Paper, however, which may be claimed the predecessor of this discussion but the initiative caught much less attention at that time than it should have. Neither Germany, the biggest economy in Europe, opened the issue. Not even after the terrorist attacks on WTC, or the decisions regarding the environmental concerns by which it has put a stop to nuclear energy and brought a reduction to its coal mining. In the past decades the question of energy security was left to private sector self control. Only the strategic reservoirs have remained in the hands of the governments. Under the dictate of profit the market moreover deals with uncertain information and is often inclined to shortsighted visions.
A new Green Paper dealing with the problem of strategy for sustainable, competitive and secure energy has defined 4 parameters of energy policy – security of supplies and costs, competitiveness and emissions of CO2. The chief function in providing the gas supply is played by LNG terminals and natural gas reservoirs projected for one- or two-month consumption. The strategy counts on the new import capacities planned for the near future such as the pipelines connecting Norway and Great Britain, Baltic pipelines, LNG terminals and Nabucco and trans-Caspian pipelines. It also underlines the importance of a dialogue with the producing countries from among which Russian Federation being the most strategic. In the case of oil pipelines the document puts stress on further extension of connection networks with the countries of Middle East and extension of Odesa–Brody pipeline to Poland with the branches to Latvia, Germany, Slovakia and the Czech republic mentioning Bratislava–Schwechat connection and Druzhba–Adria pipeline. In the case of Caspian pipeline network, the project does not count with Russian Federation.
The position of Slovakia
The Slovak discussion about oil and gas supply diversification has lasted for more than a decade by now. Although the diversification is one the priorities of Slovak energy policy as stated in the official document agreed on in the beginning of this year, this decision has been followed by no real steps yet. The fact that the long-term contracts guarantee Slovakia’s position of a transition country with 90 milliards cubic meters of natural gas transported through its territory to western Europe is interpreted as a linchpin of supply security.
As far as the transit is concerned the position of our country is weakened by the Yamal and the Baltic submarine pipeline projects. The realization of the Baltic submarine gas pipeline guarantees Gazprom the position in the biggest markets in Europe (German and British) without the mediatory transit countries. The expected rise of gas consumption in all the countries of Europe and Gazprom’s efforts to preserve its EU market share should protect Slovakia from any radical decrease of transported gas. In the future it is however purposed for Central Europe usage only. Our country does not possess the means and opportunities for autonomous diversification of supplies – that is why it is necessary to insist on common energy policy of EU and find a way for our projects be included among the priorities of EU, because that would suit our needs better.
The energy strategy document agreed on in the beginning of this year reflects all the above mentioned issues. It also underlines the importance of energy market regulation based on the fact that it is impossible to create a full-scale competition. It proclaims the decrease of supply dependence on difficult areas by means of energy supplies and transition routes diversification as its priority. Except for the reference to Nabucco pipeline the document says nothing about the concrete steps or projects. As far as the supply security is concerned the document highlights the importance of underground reservoirs, interconnection of the transport networks and the existance of long-term contracts as a condition for supply and transit capacities planning. In this particular thing the document is in a discord with the proposals of European Commission, where the short-term contracts are proposed. Overall, the document offers no conrete or new ideas. Summarizng the facts already known it may however serve as a starting point for the future discussion on this topic.
The vision at least expresses the support of the project Odesa–Brody which has been talked about a lot recently. After the intervention of the European Commission, Slovakia was also invited to participate in the project. Druzhba oil pipeline’s potential is exploited only on 50%. Both lines meet exactly at Brody. The connection to Poland should be finished by the year 2009. If Transpetrol does not built the reservoirs to enable the transport of Caspian oil it is possible that the project will ignore us. The costs of it represent 2 milliards Slovak crowns. Despite Yukos’ promise to built more reservoirs it has not done this yet. The existing deposits are full of Russian oil and strategic state reserves. Transpetrol declined the offer of Ukrainian transit company to support the financing of the construction. Doing this our company would lose some profit from depositing the oil.
The energy strategy does not take these facts into account. However, it could have been predicted that the discussion concerning Odesa–Brody oil pipeline and its former route will be opened. This document could be a proofstone for the ministry about how serious the oil diversification really is. There is nothing about spliting of SPP and its consequences, about liberalization, freedom of choosing the supplier by customers and effective third party access of energetic facilities.
There is not a definite solution of the energy problem. The shares of western consortia in Russian companies by the means of which the bounds with Russian politics would be cut and new standards of company management would be introduced is one of the short-term solutions. The accession of Russia to WTO would leave a positive influence on transparency of Russian investment environment. The ratification of Energy Charter Treaty would lead to more transparent conditions of transport system accessibility while mining consortia of Russian and foreign producers would guarantee the necessary transfer of investments and modern technologies resulting in higher efficiency of extraction. The leviability of the rights that the treaty guarantees is however questionable in the Russian legal system. Other ways lie in the diversification of sources and import routes, energy saving, increasing of energy efficiency and increasing the usage of rechargeable sources. In the future EU should also be capable of supporting its economic interests by strengthening its position within NATO. The deployment of European troops should be based on the transport routes as marked in the project TRACECA. The long-term solution however rests in the energy of future such as hydrogen and fuel cells. All these steps may contribute to solving the global energy problem.