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Energy Policy: Christian Cleutinx about EU, USA and Russia strategies epos_print_logo.png
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Energy Policy: Christian Cleutinx about EU, USA and Russia strategies

Monday, 05 November 2012 11:35
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Epos converses with Christian Cleutinx

by Alessandro Savaris
EPOS Conversations

Alessandro Savaris - Mr Cleutinx, how do you see the current geopolitical context in the energy field evolving in the next future? What will be the role respectively of the EU, USA and Russia in this strategic game?

Christian Cleutinx - There is no doubt that energy developments in these three parts of the world will play a very important role in the future. Let’s start with the current situation. Significant developments have taken place in the US energy market over the last couple of years as a result of the growing importance of shale gas. It’s a game-changer. In the US you are currently paying about 3 US $ per million BTUs for natural gas where in the EU it is 12 US $ and in Japan 17 US $. This clearly influences the respective competitiveness and efficiency of the EU, Japanese and US industries. For the production of petrochemicals, the advantage for the US as compared to the EU can exceed 50%. Shale gas could enable the US industry to reduce yearly by 2025 its raw material and energy costs by around 12 billion US$. The US industry that had been closing down ethylene plants - an important material for example in the production of plastics - due to high oil prices, has been recently investing 15 billion US $ in ethylene production, increasing its capacity by about 35 %. Ethylene can be produced from natural gas liquids.

Looking at the steel industry, the US is changing its production processes to increase the use of natural gas in order to improve its competitiveness compared to Japanese, Korean and definitely also European steel mills. Low gas prices also influence the price for electricity. Is it then in the interest of the United States to export LNG? Naturally US natural gas producers want to sell gas abroad where they can get higher prices. US electricity producers together with the manufacturing sector and the residential and tertiary sectors would, however, like prices to remain low. Only in 2011, consumers could have saved more than 100 billion US $. Restricting exports of LNG would ensure ample supplies. Bearing in mind the high level of unemployment and the need to stimulate industrial production, the US is most probably going to follow the law of comparative advantages. We might see US shale gas in Europe but "embedded" in products.

Energy geopolitics will become a higher priority for the EU. If 2015 is often associated in the EU with the completion of its internal market for natural gas and electricity, fewer people realize that it is also in 2015, according to the International Energy Agency, that the EU will become the largest oil importer in the world, taking over from the US. By 2030 the US may well be completely independent from oil supplies from the Middle East. It is reducing the growth rate of its consumption, production of domestic hydrocarbons is growing, and the six million barrels/day it will still need to import by 2030 will probably originate from the Western Hemisphere (Canada, Mexico, and Brazil). In the EU, whatever scenario we take from the EU Energy Roadmap for 2050, the EU is expected to still import around 10 million barrels/day of oil in 2030.

Since the time of President Jimmy Carter in the late 70ies, energy security for Washington has meant building strong military capabilities to defend its interests – and by the same token our interests - in the Middle East and maintaining sea lanes open for trade at a cost estimated by some experts at around 40 billion US $ per year. This is a significant part of the US defence budget. Even if there are other priorities for the US to maintain its military presence in that part of the world, it may well ask its European allies for more financial solidarity and military commitment. Whether the EU would be prepared or ready to take over this kind of responsibility remains an open question.

Turning now to the third actor: Russia. There is a lot of rhetoric about the reliability of Russia as a natural gas exporter and the need to diversify away from Russia. I would like here to mention a few points. First, to date we have never witnessed any bad "natural gas" intentions from Russia towards the EU as far as security of supply is concerned. Russia recognizes the importance of the EU market for its energy resources and one only needs to look at the percentages of Russia energy exports that go to the EU to understand this. The interruption of gas supplies to the EU in early 2009 was not directed at the EU but was a result of a dispute with its neighbour.  The proof is that Russia tried to increase transit through Belarus with Yamal Europe and through Turkey with Blue Stream. Second, the supply deficit which represented some 3% of the annual deliveries of Russian gas to the EU mainly affected a specific group of countries where interconnections were deficient. Would we have had a number of reverse flow interconnections, these difficulties could have been much more manageable. There was enough gas available within the EU to help out but not at the right locations. Reverse flow capabilities had not been seen as necessary in those EU States when they were part of the former Comecon as the natural gas had been traditionally flowing from East to West - nobody over there thought at the time that one day the gas would have to be flowing from West to East. Reverse flow capabilities on key sections of gas pipeline infrastructure in the EU and the Energy Community will enable more market flexibility and less risk of energy deficiencies should there be technical or other problems in the future. This is one of the important priorities of the EU with respect to gas security.

Finally if we follow the Expert Papers published in July 2011 in the framework of the 2050 EU-Russia Energy Roadmap and that foresee a Common Energy Space extending from Vladivostok to Lisbon, then our common European Continent could be energy independent already by 2030. You only need to add up all the “Energy Strategies” and other “Scenarios” developed all over this Continent of ours to discover that the forecasted total energy supply of 2 500 million tonnes of oil equivalent perfectly matches the forecasted demand in 2030. And you do not even need to consider in this context the huge potential that renewable energy could represent in Russia: 300 Gigawatts of yearly production capacity (the equivalent of 200 Nuclear EPR’s) out of which 200 could be wind energy. Conclusion: we would even be able to produce more than what we plan to consume.

So the main question is: how, at the level of the European Continent, can we reach a political agreement aimed at ensuring everyone's energy security? Energy security includes the physical amount of energy that needs to be available bearing in mind at the same time energy conservation and efficiency. This is the case if you consider the 2500 million tons of oil equivalent I have mentioned previously. Energy security also includes financial security, meaning the ability to be able to finance the investments required. You need economic security, which means reasonable, competitive and affordable prices. Here we continue to have a problem because the pricing of a large amount of imported natural gas on this continent, more than 50 %, is still linked to oil prices. If you pay 12 US $ for a million BTUs in the EU instead of 3 US $ as in the US, your industry has a hard time to compete and the gas supplier risks seeing his market shrink over the longer time for short term gains.

You also need environmental security and there we have another problem. The price per tonne of CO2 is a far cry from its 30 € level of 2008 and at around currently 8 € per tonne, a long way from the 40 € we need to make carbon capture and storage competitive. This, combined with high prices in the EU for natural gas, has made coal very competitive again for the production of electricity. However, using coal is challenging in the context of climate change.

Then you need technological security as well. So as you can see security of energy supplies is only one element of a subject that is by far more complex. These are the kind of things that we should discuss with the Russian Federation for instance in the framework of the EU-Russia energy roadmap until 2050.

Alessandro Savaris - What about the political level? Some analysts say that the EU and Russia are sharing both interests and values meaning that they are strongly interdependent in economic terms and have a common historical background but, at the same time, there are still a lot of differences and misunderstandings between them, especially at the political level. How, in your opinion, will the relations between these two actors evolve into the future and how should they evolve in order to ensure an increased and better co-operation?

Christian Cleutinx - The first thing is, as you have mentioned, recognition of the true interdependence. Most analysts are saying that Russia is as dependent on us as we are dependent on Russia. I fear that they have their numbers wrong. I would venture in saying that the interdependence is asymmetric and that we might be more dependent from Russia than Russia is from us. This can explain the security concern of the EU. Why? First, if you look into Russian hydrocarbon export revenues you will discover, and for most of us it comes as a surprise, that 80 % of those export revenues are generated by oil and not natural gas. Russian export revenues from oil for 2011 were about 270 billion US $. If you take natural gas, the figure was only around 60 billion US $. So out of the 330 billion US $ of Russia's hydrocarbon export revenues, the lion’s share is oil and it is a fungible product: if Russia does not sell it to the EU, it can and will sell it somewhere else.

We made Russian gas important, not Russia. May I add that until 1991 there was even an EU Directive forbidding the burning of natural gas in electricity power plants in the EU.  When the Energy Dialogue was started in 2000, the main subject was oil and increasing the oil security of supply through diversification. You should recall that we were just in the middle of an oil shock. Natural gas never really came as a security issue to the negotiation table until 2006.

If Russia turned off the natural gas tap - and I am convinced they won’t because they have never deliberately done it against the EU – it is true they would lose some revenue. They probably wouldn’t, for example, be able to continue to cross-subsidise the Russian citizen consuming gas in Novosibirsk – Gazprom is also in this context a kind of social venture -  and would have to scale back on many ambitious projects, but it would not necessarily be the end of the road for them. It would have considerable economic/tax revenue repercussions and they would need to find new customers at prices that might be nearer to coal prices but the damage would remain to some extend limited. But for the EU, it is unlikely that other gas suppliers could make good for the shortfall either through pipeline or LNG. The fact that Russia imports only manufacturing goods from the EU, goods that are also available somewhere else on the world market weakens the bargaining position of the EU. It is easy to buy a Toyota instead of a Mercedes, or a Boeing instead of an Airbus.

Finally to answer your question on common values, it is a fact that there is a difference in what we understand as common values and what Russia understands. However one has to recognize that this European Continent is still in the process of finding its identity. The EU has grown to 27 Member states while the countries of the former Soviet Union imploded into 15 independent States, and both are still trying to find their place in the world of tomorrow.

In today’s world, size does matter and values make the difference.  But it is not by blaming each other that we are going to create this Europe from Lisbon to Vladivostok. We must engage Russia in order to develop with our common neighbourhood or their "near abroad" an integrated Continent of freedom, democracy, rule of law and solidarity. This is why the more we communicate within this Continent, the more we will be able to co-operate, and a visa free travel regime with Russia is an important step in this direction. You cannot exchange values by treaties, you exchange values through communication and discussion between people, between European citizens and this should be our main objective.


DISCLAIMER: The views expressed in this article are the author’s own and do not necessarily reflect EPOS WorldView’s editorial policy

Last modified on Monday, 18 August 2014 15:13

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