Report on Ukraine and European energy security by Amb. Keith C. Smith, Center for Strategic and International Studies (CSIS), USA, at Lviv International Security Forum, 15-16 April, 2010

1. ENERGY SECURITY FOR CENTRAL EUROPE:
THE WAY FORWARD
LVIV, UKRAINE
APRIL 15-16
KEITH C. SMITH
THE HURDLES TO BE OVERCOME
- The EU continues to move at a slow pace when it comes to energy reform. No
common energy strategy has emerged and no common energy market is on
the horizon.
- More EU funding for interconnectors is being provided to those Western
European countries that already have more diversified sources of energy
supply than to the more import dependent countries of East Central Europe.
- The larger members of the EU, primarily Germany, France, Italy and Austria,
continue to resist efforts of Central Europeans to blunt the effects of energy
coercion from Russian companies. They also resist discussion in the EU
regarding possible anti-trust action against monopoly supplier companies.
- Germany and France are more willing to accept Moscow’s claim to a
“privileged relationship” with former Soviet republics, such as Ukraine and
Georgia. Acceptance of Moscow’s violation of the terms of the Georgia-
Russia 2008 troop withdrawal agreement has only emboldened the hawks in
Moscow.
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2. - No visible steps are being taken by the EU to increase energy transparency, or
to require a public declaration by legal or public relations firms representing
the interests of foreign energy companies before the EU or in member states.
- EU continues to have little capacity to counter Russian public relations and
intelligence efforts in Brussels.
- Expensive and unnecessary pipeline projects such as Nord Stream and South
Stream are supported by EU officials, even though the projects have not been
demonstrated to be viable business ventures, particularly in an era of softer
natural gas prices.
- Nord and South Stream will only further increase the political and economic
leverage of monopoly importing countries, one of which consistently uses gas
shipments to coerce its neighbors.
- The recent election in Ukraine has brought back to power political elements
more supportive of Russia’s monopoly supply position, and of the re-
establishment of non-transparent and unnecessary energy intermediary
companies.
- Gazprom is now more likely to gain control of Ukraine’s gas pipeline to
Europe, even if the ownership structure appears to give Russia only a minority
stake. Any EU stakeholder will eventually come under intense pressure to sell
its shares to Gazprom or, at a minimum, to vote consistently with the
interests of the Russian partner.
NEW OPPORTUNITIES FOR ENERGY SECURITY IN EAST CENTRAL EUROPE
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3. - Natural gas prices in Europe have moderated over the past year, providing
some relief for importing states.
- The unconventional gas “revolution” in the U.S., coupled with the increased
availability of Liquefied Natural Gas (LNG) on the world market, will prevent
gas prices from returning to high levels of 2007-8.
- The stepped up hunt for unconventional gas in Central Europe could result in
larger supplies of domestic gas (and possibly oil) within 5-10 years, thereby
supplanting some imports from Russia and Central Asia.
- Gas supplies from a new LNG port in Poland, and a possible one in the Baltic
States, might also increase the leverage of importing countries negotiating
supply contracts with Russia.
- Central Asian oil and gas producers, such as Azerbaijan, Kazakhstan and
Turkmenistan now want greater control over their energy exports, including
those going to European markets.
- Moscow is slowly losing control over gas exports in Turkmenistan, as that
country develops a stronger energy relationship with China.
- The gas crises of January 2009, has given an impetus for the EU to fund more
gas and electricity interconnectors and for natural gas storage by all member
states, potentially bringing a measure of security in case of future disruptions.
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4. - As a result of the above measures, Moscow appears to be more reluctant to
engage openly in energy coercive measures against importing states, with the
exception of Georgia.
- East and Southeastern Central European governments now appear more
willing to coordinate their energy policies for their common security interests.
The meeting of eleven countries in Budapest on February 24 was a positive
first step.
- There is a greater recognition in Central and Southeastern Europe of the need
to develop a stronger coalition within the EU in order to defend their security
interests against the commercial policies of the wealthier member states.
RECOMMENDATIONS FOR ACTION BY EAST AND SOUTHEAST EUROPEAN STATES
- Governmental reforms that bring greater business transparency should top
the priority of each importing state. Reforms should include reporting
requirements for all impending energy deals, whether for imports or sale of
facilities.
- No intermediary companies should be inserted between the exporters and
importers unless there is solid and public evidence that the company brings
added value (including lower prices) to the transaction.
- The February 24 Budapest Conference should be followed up by each of the
eleven attending states appointing a high-level official to represent them on
the Inter-governmental Commission.
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5. - The Inter-Governmental Commission should organize a technical panel of
experts that is empowered to advise the Commission on measures that will
increase regional energy security.
- The eleven states should set up an independent office in Brussels that would
assist the group in pushing through energy security recommendations in the
European Parliament, and in the EU Council and Commission.
- Use the combined political weight of the eleven countries (even if some are
not member states) to receive a greater share of the EU’s funding for energy
projects, from interconnectors, storage facilities and pipelines, thereby
bringing forward the goal of real supply diversification.
- Support an EU requirement for full discussion and disclosure of Commission
positions on pipeline proposals, such as Nord Stream, South Stream, Yamal II,
Amber, White Stream and other southern corridor proposals. They should
demand that the EU fund an independent calculation of the costs and benefits
of each project.
- Push for quicker enforcement by DG COMP of the regulations on energy
unbundling, and for greater enforcement of the Energy Charter Treaty, in
particular, any action that took place before Russia’s formal withdrawal from
the Treaty in 2009. This would necessitate increasing the institutional
capacity of DG COMP.
- Encourage the EU Commission to enforce the Lisbon Treaty articles on
competition and anti-trust in all cross-border deals between individual
member states and foreign entities, including agreements with Gazprom and
Transneft.
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6. - Demand the right for the EU to immediately investigate the causes,
irrespective of where they occur, of any disruption of energy supply to a
member state on the part of a non-member importer. The investigation
should be transparent and include representatives of those states directly
affected by the disruption.
- Support putting the issue of energy security on the NATO agenda, with the
NATO Council having direct authority to make recommendations for
corrective action.
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