168 STCEES 08 E rev 1 - Energy Security for the Euro-Atlantic Region
Rapporteur: Mario TAGARINSKI (Bulgaria)
TABLE OF CONTENTS
II. ENERGY DEMAND AND SUPPLY: THE TRENDS
III. ENERGY ALTERNATIVES
IV. ENERGY AND SECURITY
1. It should not come as a surprise that energy security has become one of the most central themes for the international community and organisations such as NATO, which was created primarily to deal with “hard security” challenges. Energy has always been a factor in international relations, sometimes even causing military conflicts. However, the importance of energy has never been as overwhelming as it is today, and it will undoubtedly increase in coming decades. We are already consuming twice as much energy resources than 30 years ago and this trend is projected to accelerate. In the mid-19th century, an average human being consumed an amount of energy equivalent to 150 watts per hour (Wh). In the 21st century, this figure has increased more than 13 fold to about 2,000 Wh.1 Our societies are more “addicted” than ever to energy and any major disruption of supply would cause much more damage to our economies and our way of life than it would have done in the not too distant past. Such a tremendous growth in energy consumption also results in a dependence on foreign energy supplies, not to mention the increase in pressure on the environment.
2. Energy security is defined as “assurance of the ability to access the energy resources required for the continued development of national power.”2 However, energy security has different meanings around the world. While the United States and the Eastern and Central European nations are preoccupied with the security of energy supply at a reasonable price, China is seeking to secure the supply for its booming economy almost regardless of the cost, the EU is striving for more efficient management of the demand and Russia is associating this with access to foreign markets. Private industry calls for a fair and transparent global energy market. Environmental groups and pro-green governments believe energy security is the flip side of environmental interests. Some may perceive energy security as a physical safety of energy infrastructure. And yet others almost wish their country had no oil and gas resources, because often revenues from these resources merely strengthen ruling authoritarian regimes, diminish prospects for democratisation and provide no tangible benefits for the society.
3. What does it take to be secure in terms of energy? It is generally agreed that the supply of energy resources has to be diversified, including wider range of available energy sources as well as different options for transportation of energy commodities. Stability and transparency of the global oil and gas market is another important precondition. Producers also need to have a “spare capacity” to increase production above normal levels in the event of a crisis, while consumers need to maintain emergency stocks, such as the US Strategic Petroleum Reserve of 700 million barrels of oil. Energy security cannot be attained without proper attention to the physical protection of energy assets as well as adequate funding of research and development (R&D) in the field of energy.
4. Looking from today’s standpoint and bearing in mind the challenge of climate change, it would be difficult to imagine a sustainable future other than a non-carbon future. However, it is also obvious that hydrocarbons will continue to play a significant role for decades to come. Reducing poverty is the top concern for many millions living in the developing world and a carbonbased industry remains the cheapest way to develop the economy. Some 75% of China’s electricity is generated from coal and this country builds approximately one coal-based plant every week.
5. A non-carbon future will eventually happen not because sooner or later mankind will deplete all existing resources of oil, gas and coal. As Sheikh Yamani, the former Oil Minister of Saudi Arabia, once put it, “the Stone Age did not come to an end because of a lack of stones.” The two key drivers of new energy approaches are increased environmental concerns and the need for energy security.
6. The issue of energy security is not a new topic for the NATO Parliamentary Assembly. Your Rapporteur would like to recognise an excellent report presented by Jos van Gennip to the Economics and Security Committee in 2006, followed by the Assembly Resolution. The Science and Technology Committee and the Sub-Committee on Energy and Environmental Security, in particular, also have the capability to contribute to the debate on this important issue by providing their own perspectives on the technological side of the issue. Your Rapporteur regards this report as the beginning of a several-year engagement examining various aspects of energy security within our Committee. This report will attempt to provide a background overview of the major elements of this very complex issue. Your Rapporteur also wishes to recognise the cooperation with the Committee on the Civil Dimension of Security, whose Rapporteur, Lord Jopling, was tasked to prepare a special report discussing the physical protection of critical energy infrastructure. Vahit Erdem, the Rapporteur of the Assembly’s Mediterranean and Middle East Special Group, is also producing a report on the energy situation in the Mediterranean.
7. The distribution of energy demand and supply across the world is highly uneven. More than 60% of the world’s proven oil reserves are found in the Middle East. Most of the world's natural gas is concentrated in just three countries: Russia (27%), Iran (15%) and Qatar (14%). Conversely, the developed world (members of the OECD) accounts for only 7-8% of global oil and gas reserves, while consuming 50% of the world’s natural gas and 60% of its oil. Moreover, Middle Eastern resources are in a much more favourable position in terms of exploration and development costs.3
8. According to estimates by the International Energy Agency (IEA), the world’s primary energy needs are expected to grow by 55% between 2005 and 2030. The acceleration of the growth in demand stems largely from the developing world: 74% of the global increase. China and India’s booming economies alone will contribute to almost half of the overall increase in energy consumption over that period. In aggregate, the developing world will account for more than half of the world’s primary energy consumption by 2030, compared with 41% today. China, having already surpassed the United States as the world’s largest CO2 emitter, is projected to become the world’s largest consumer of energy by 2010.
9. Fossil fuels will continue to dominate: their share in the global energy mix was 81% in 2005 and is expected to reach 82% in 2030. Non-fossil energy sources constitute the remaining 1819%: in 2005, nuclear energy accounted for 6% (expected to drop to 5% in 2030), biomass and waste 10% (9% in 2030) and hydropower 2% (IEA data).
10. With regard to specific types of fossil fuel, the picture is the following4:
- In 2006, the share of oil was 35% - 84 million barrels per day (mb/d). By 2030, this will decrease relatively to 32%, but in absolute terms, the demand will grow to 116 mb/d.
11. The soaring demand and particularly the growth of China and India is undoubtedly the key factor causing oil prices to rocket sky-high over the past few years (it has to be noted, however, that in real terms, the price of oil has still not reached its all-time high of the late 70s). China and Indian companies often do not have a profit motive and are mainly preoccupied by a secured flow of oil, even if they have to overpay or make political concessions, which distorts competition in the market. Natural gas is traditionally treated as oil’s “younger brother” and its price has also risen accordingly. Coal will remain an attractive source of energy for a number of countries, particularly China, which has vast coal resources. The cost factor features prominently in Chinese economic calculations: in the coal sector, one US dollar produces approximately one million British Thermal Units (BTU), while the same amount of energy coming from imported natural gas would cost about 7 dollars.5 China is already becoming a net importer of coal.
12. With few exceptions, European countries are very dependent on foreign energy supplies. Overall, Europe imports half of its primary energy sources and this figure will increase to more than twothirds by 2030.6 Germany, for instance, imports 100% of its uranium for its nuclear power sector, 97% of oil, 83% of gas and 61% of coal. Germany is self-sufficient only in lignite (which is an extremely dirty fuel) and renewable fuels, but these only account for 8% of the country’s energy consumption.7 Russia and the Middle East are the key suppliers, in terms of gas and oil, respectively: it is estimated that by 2030 EU countries will import 40% of their gas from Russia and 45% of their oil from the Middle East.8 Countries such as Finland, Slovakia, the three Baltic States, Georgia and Belarus have no alternative but to use Russia’s gas, and the Czech Republic, Hungary, Bulgaria, Greece, Austria and Turkey are also extremely dependent on Russian gas supplies.9
13. When it comes to oil, European Union nations will be consuming virtually the same quantity over next quarter of a century – less than 14 mb/d. OECD-Europe consumes more oil than it produces by approximately 9 mb/d and the dependence on oil imports is increasing (IEA data).
14. The situation is even more complicated with natural gas: its consumption in Europe is projected to increase from 22.8% of the market in 2000 to 32% in 2030, largely because of a considerable increase in electric power generation (IEA data). Currently, the EU domestically produces 37% of its gas needs, 29% come from Russia, 17% from Norway and 13% from Algeria.10 The domestic production of gas within the EU, on the other hand, is projected to decrease from 216 bcm in 2000 to 129 bcm in 2030. Hence, the reliance on imported gas will increase considerably, possibly up to 80% of the total gas consumption by 2030.11 Today, less than a half of gas has to be imported.
15. Consumption of coal in the EU is steadily declining (453 Mtce in 2005 and projected to be 393 Mtce in 2030) and domestic coal output is dropping even more sharply, largely thanks to the elimination of remaining subsidies and the concerted EU policy to fight climate change. Currently, the EU has to import almost half of its coal demand and this dependence will increase with time (IEA data).
2. North America
16. In contrast to Europe, the United States is much less concerned about the flow of natural gas and a secured supply for its electricity generation industry. Essentially, for the United States, energy security is associated with the security of oil supply for its transportation sector, 97% of which is petroleum dependent.12 According to IEA estimates, North America’s oil demand is expected to increase from 25 mb/d in 2006 to 30 mb/d in 2030 (IEA data). North America is an oil net importer by approximately 12 mb/d and its dependence on oil imports is expected to increase. Specifically, the United States imports approximately 60% of its oil needs, up from about 30% during the times of the 1973 oil crisis. Two thirds of oil imports come from other American countries (Mexico, Canada and Venezuela), one-sixth (10% of all US oil consumption) comes from the Middle East and the remaining one-sixth is divided between the North Sea and West Africa.13 Currently, Russia’s oil exports to the US are negligible, but they could increase with the completion of the Murmansk pipeline, reaching the level of 10-13% of all US oil imports by 2010.14
17. Regarding gas, currently North America is practically self-sufficient. However, by 2030, consumption of natural gas is expected to increase from 765 bcm to almost 1,000 bcm and this region is expected to become a major gas importer - 16% of the region’s gas consumption (IEA data). When it comes to coal, North America is essentially producing as much as it is consuming and this equilibrium is likely to remain in the foreseeable future. Both coal demand and production are projected to increase slightly over the coming decades.
18. In view of the unprecedented rise in demand, it is legitimate to ask if primary energy suppliers will be capable of meeting the needs. In 1956, geologist King Hubert, the father of the peak oil theory, forecasted that the availability of oil would drop and prices would rise dramatically between 1965 and 1970. He may have been right concerning the price, but his predictions concerning the amount and availability of this resource have not stood the test of time. Never before have more oil reserves been discovered.
19. The world is far from depleting its fossil fuel resources. Looking at today’s situation, the limits of 40 years for oil and 70 years for natural gas seem to be realistic. However, these frequently quoted figures do not take into account unconfirmed oil and gas reserves or those that cannot be accessed with today’s technology. Experts claim that in the period between 1860 and 1998, the world consumed approximately 300 gigatons of fossil fuel. However, the known resources are some 1,000 gigatons, and an additional 6,000 gigatons that could potentially be confirmed in future. In addition, future technologies can be expected to find a cost-effective solution to extract vast resources of unconventional oil resources, such as tar pits in Canada. Adding unconventional hydrocarbons such as methane hydrates could push the world’s fossil fuel reserves up to 17,000 gigatons. With annual consumption of 6.5 gigatons today, one can conclude that the threat of the world running out of fossil fuels is rather exaggerated.15
20. Thus, our economies can be expected to remain oil-, gas- and coal-driven in the foreseeable future. Even if renewable or other non-carbon energy becomes predominant in the future, the use of fossil fuels may still remain significant or even be greater in absolute terms as the overall energy consumption grows progressively.
21. However, the abundance of hydrocarbons alone is not enough to satisfy the growing demand: experts are seriously worried that investment in oil and gas infrastructure is currently far from adequate. Underinvestment - and not the lack of oil - seems to be the main factor causing fears over the security of oil supply. The remarkable growth in global primary energy demand raises serious doubts as to whether this growth is sustainable and if the suppliers will have a capacity to match it. IEA projects that, under current trends, during the period between 2006 and 2015, the world’s oil industry will need to add 37.5 mb/d of gross capacity (almost half of the current global oil production) to satisfy the growing demand and to compensate for the depletion of existing oil fields. OPEC and non-OPEC oil producers have announced plans to add 25 mb/d by 2015. Thus, a further 12.5 mb/d of gross capacity would be needed.16 However, it is very likely that even these predictions are too optimistic as decline rates of existing fields could be much higher than in the past.
22. All in all, in order to meet the rising demand in oil and gas, approximately US$ 22 trillion of investment in energy infrastructure will be needed between 2005 and 2030. Half of this amount would go to enhance power generation capacity as well as transmission and distribution networks. Most of the remaining half would be used to develop additional oil and gas fields, while investments in the coal industry are projected to be relatively small. More than half of all investments in energy infrastructure will have to be met by the developing world – China alone will need to invest almost US$ 4 trillion (IEA data).
23. The underinvestment is to a large extent the outcome of low oil prices in early 90s, which resulted in production capacity constraints. Also, in many countries, the oil and gas sectors have always been subject to absolute governmental control with foreign investments either strictly limited or entirely forbidden. More than half of world’s oil and gas companies have no foreign participation/investment.17
1. Domestic Production in the Euro-Atlantic Region
24. A few decades ago, the United States was the world’s largest single producer of oil, but its output has been steadily declining since the mid-80s. It is projected that US oil production will continue to fall at the rate of about 2% a year over the period of 2000-2030. During the same period, OECD Europe (the North Sea) oil production might decline even more substantially – at a rate of about 3%.18 During the next quarter of a century, North America will be producing slightly more oil than it does now: 15.2 mb/d in 2030 compared with 13.9 in 2006. However, this increase will only be caused by a more active exploitation of Canadian oil reserves, as the US domestic production is projected to fall from 7.1 to 6.3 mb/d. The decline in the OECD-Europe production will probably be even more dramatic: from 5.2 mb/d to just 2.5 mb/d (IEA data).
25. With regard to natural gas, North American production will grow slowly over the next few decades, while OECD-Europe (North Sea) resources are likely to decline from 315 bcm in 2005 to 251 bcm in 2030.19
26. The only realistic possibility to increase the output of fossil fuels in the Euro-Atlantic region is by exploiting new resources in the Arctic region. While the scientific community and environmentalists grow increasingly concerned about global warming, policy-makers and businessmen are already looking into ways to benefit from the Arctic thaw. It is a politically stable area and it is much closer to Europe than the Gulf region. There are a number of related challenges, however, such as remote location, cold weather, limited logistics and infrastructure, presence of sea ice, reduced daylight, etc.
27. The ice floes equivalent of the landmass of Texas and Arizona has melted within 30 years. A number of specialists in the field forecast that the Arctic Ocean could be ice-free by the summer of 2040, thus opening new navigable ways in the North and facilitating the extraction of the Arctic resources. For the first time in recorded history, in the summer of 2007 the Northwest Passage was ice-free all the way from the Pacific to the Atlantic. In the long term the disappearance of the ice fields may allow the mineral resources to be mined. It is believed that a vast and rich reserve lurks in the deep, including oil, diamonds, gold, silver, lead, copper and zinc (Kopp, Dominique, September 2007). That represents a real El Dorado for northern states such as Russia, Canada, the United States, Denmark, Norway, Sweden, Finland and Iceland. But are the Arctic resources the answer? Specialists are divided on this question.
28. A regularly-quoted US Geological Survey (USGS) report from 2000 states that the Arctic contains 25% of the world’s undiscovered oil and gas reserves (Graff, James, October 2007). Against a backdrop of energy-supply problems, these promising prospects generate high expectations among governments and provoke a rush towards the North. The accuracy of the data of the USGS report, however, has been questioned by a growing number of specialists and the figure of 14% seems to be more realistic.20
29. The exploitation of the Arctic resources has already begun, encouraging joint co-operation projects, such as Gazprom’s and Norsk/Hydro project to develop a very rich Shtokman field in the Barents Sea. Adopting new technology has allowed Statoil to develop the first offshore complex in the Barents Sea - the Snøhvit project. Without surface installations, this project involves bringing huge volumes of natural gas to land for liquefaction and export. The liquefaction plant is the first of its kind in Europe and the world's northernmost. One of the major challenges is to increase pressure in gas reservoirs in order to push gas towards production wells. To obtain this result, Statoil uses a practice to inject cold seawater into reservoirs.
2. The Middle East and North Africa (MENA)
30. Ever since it was established, the OPEC cartel has become an extremely important global economic and even geopolitical actor. While Russian, Caspian or Arctic oil resources can significantly contribute to European and North American energy mix, they will never be able to fully replace vast Middle Eastern resources. According to the IEA’s World Energy Outlook 2007, OPEC’s share of conventional and non-conventional oil production will grow from 42% today (36 mb/d) to 52% in 2030 (61 mb/d), provided that OPEC countries make the necessary investments in their oil industry. Middle East countries are responsible for more than two thirds of OPEC oil production. Saudi Arabia alone is producing about 10.5 mb/d, almost as much as the United States and OECD-Europe combined.21
31. Thanks to the OPEC rules, its member countries are obliged to honour certain caps on their oil production. Because of that, OPEC oil industries are either not operating at full capacity or storing the excess oil. In any case, these countries have a “spare capacity”, which can be used in the event of a crisis. Non-OPEC oil companies, on the other hand, do not have those incentives to create "spare capacity".22 However, by attempting to accommodate the dramatic rise in global demand, the OPEC’s liquidity mechanism has eroded from 10% of the market in 2002 to about 3% today. Because of that, as well-known expert Gal Luft put it, “the oil market today resembles a car without shock absorbers: the tiniest bump on the road can send a passenger to the ceiling.”23
32. In terms of natural gas, the role of the Middle East is expected to grow dramatically with production trebling between 2005 and 2030. By the end of that period the Middle East will produce 940 bcm of gas, more than Russia, which today is producing two times more gas than the Middle East region (IEA data). Iran, Qatar, Saudi Arabia, United Arab Emirates and Algeria hold, respectively, the world’s second, third, fourth, fifth and eighth largest gas reserves. Although their current export capacities vary, these countries share an undisputable potential in meeting growing transatlantic gas demand.
33. In the short- to medium-term Algeria, Qatar and, to a lesser extent, Egypt are likely to dominate the Euro-MENA gas supply scene. Algeria, helped by geographical proximity, has traditionally been one of the major suppliers of gas to Europe. About 95% of its 65 bcm of gas exports goes to the EU-25, mainly via two existing pipelines linking the country to Spain via Morocco and to Italy via Tunisia. Two additional sub-marine pipeline connections are under construction, linking Algeria directly to Spain and Italy. Medgaz and Galsi, with their combined 30 bcm initial capacity, will come to reinforce Algeria’s position as a key source of energy to southern Europe in particular (Italy, Spain, Portugal and France). As the world’s pioneer producer of Liquefied Natural Gas (LNG), Algeria is also a leading exporter of liquefied gas with a significant proportion of its LNG exports satisfying US and Turkey’s demands.
34. Qatar, for its part, has seen its natural gas production grow significantly over the last decade. Until recently, all of the Gulf country’s 30 bcm of gas exports were in liquefied form, making Qatar the world’s leading LNG exporter. The country’s geographical location has meant that most of its LNG shipments have been directed at the Asia-Pacific market, notwithstanding some supplies to Spain, the UK and the US. However, the recent completion of the regional “Dolphin” pipeline project,24 connecting the natural gas networks of Oman, the United Arab Emirates (UAE) and Qatar, will allow the latter’s gas to satisfy the growing domestic demand in the other two countries, which, despite considerable reserves, have failed to develop adequate gas production policies.
35. In Egypt, moreover, recent discoveries have made natural gas the primary growth engine of the country’s energy sector. Despite its relatively modest gas reserves and production, Egypt has initiated a number of ambitious projects that are of strategic importance to its neighbours and to the EU. Indeed, besides a recently completed pipeline linking Egypt to Israel, an “Arab Gas Pipeline” project, extending an existing pipeline from Jordan to Turkey via Syria, will allow Egypt to sell 3-11 million cubic meters (Mcm/day) of gas a year to Turkey and eventually 6-17 Mcm/d to Eastern Europe via the planned Nabucco pipeline (US EIA data).
36. It has been suggested that an organisation of gas exporting countries (OGEC) could also be established, following the model of OPEC. In 2001, 15 of the world’s major gas producers, including Russia, Algeria and Qatar, founded the Gas Exporting Countries Forum (GECF). GECF countries control 73% of global gas reserves and 42% of global gas output. There are some speculations that GECF could evolve into an equivalent of OPEC in terms of natural gas, but a number of factors make it less likely, including the regionalisation of gas markets, the growing number of suppliers, the dominance of long-term contracts and the uncertainty over gas pricing.25
37. Russia is probably the most important single energy supplier for the Euro-Atlantic region. Since it is also one of the world’s most ambitious political and military actors, relations between Russia and its trade partners in the field of energy tend to be heavily politicised. Russia’s political establishment almost unanimously considers the country’s energy resources to be a key vehicle for Russia’s economic modernisation and restoration of its international prestige.
38. Russia’s oil sector is projected to continue its moderate growth from 9.7 mb/d in 2006 to 11.2 mb/d in 2030. Russia’s domestic consumption of oil over the same period is expected to increase from 2.6 to 3.3 mb/d. As far as natural gas is concerned, Russia is a major global power. It currently produces more than 20% of the global output and production is projected to increase further from 639 bcm in 2005 to 823 bcm in 2030 (IEA data). Russia supplies a quarter of Europe’s natural gas requirements and will probably increase its share to around 40% by 2020.26
39. Gazprom is the world’s second-largest energy company after Exxon-Mobil27 and largest natural gas producer that holds about a quarter of the world’s gas reserves, supplies one fifth of global gas demand28, and operates most of the pipelines in the former Soviet Union. Although its shares are traded on the Moscow stock exchange, Gazprom is state-controlled. In 2005, the Russian government increased its stake in the company to 51 percent and despite the fact that the ‘ring fence’ barring foreigners from owning Gazprom’s shares was abolished the same year, foreign ownership of the remaining 49 percent of the coorporation is modest, the biggest foreign investor being the German E.ON, with a 6% stake.29 Gazprom’s senior management is also appointed by and closely affilliated with the Kremlin: its chairman Viktor Zubkov, who succeeded Dmitry Medvedev in the post, is also the former Prime Minister and current First Deputy Prime Minister of Russia, whereas its deputy chairman and CEO, Alexei Miller, was a confidant of Putin during the latter’s time as deputy mayor of St. Petersburg and obtained his position owing to this.30
40. The role of Gazprom within Russia is extremely significant. Having a monopoly of gas pipelines in the country, Gazprom controls nearly 90 percent of Russia’s total gas production and 60 percent of its reserves.31 The company, which employs nearly 400,000 people, alone accounts for 8% of the nation’s GDP32 and is the single largest contributor to the Russian budget, providing about 25 percent of national tax revenues.33 As the OECD has noted, “it can at times be difficult even to identify where the state budget ends and Gazprom's begins”.34 For this reason, Gazprom has been central to the Kremlin’s internal policies. As about two thirds of Gazprom’s gas goes to the domestic market – to Russian companies and consumers who often cannot or will not pay – at subsidized prices (only 15 to 20 percent of those in Europe), it helps to ease social pressures.35 In exchange for this, the government has taken steps to improve Gazprom’s market position both within Russia and beyond it. Independent energy producers and foreign companies with stakes in Russian oil and gas projects have been subject to increasing pressure from law enforcement and state environmental agencies and laws have been passed which give Gazprom the sole right to export Russian gas. Gazprom has allowed the Kremlin not only to restore the state control of the economy but also to use the power accumulated thereby to further its foreign policy agenda.
41. The prospects of growth in Russia’s oil and gas industry are subject to debate. Firstly, Russia needs significant investment in the energy sector. Some of this demand will be covered by the Russians themselves, but there is still much scope for foreign investment. However, under the leadership of President Putin, the country is re-nationalising its energy sector, with the case of Yukos being the most outstanding example. A limited foreign participation in oil industry is allowed, while the gas sector remains almost exclusively in the hands of the state. Shell was forced to sell part of its shares in the “Sakhalin II” project in Russia’s far east to Gazprom, and the partlyforeignowned TNK-BP has to relinquish its control over the Kovykta gas field in Siberia also in favour of Gazprom. The pipeline system is completely state-owned. Russia also refuses to ratify the Energy Charter Treaty, which would prevent the discrimination of EU energy companies in Russia.
42. Secondly, Russia’s oil pipeline system seems insufficient to accommodate growing exports of Russian oil to Europe. For instance, in 2003, Russia’s oil industry was producing some 5 mmb/d for export, of which only 3.5 mb/d could have been transported via the Transneft system and 1.5 mmb/d had to no other alternative than the far less convenient rail or barge traffic.36 Although significant investment is necessary to upgrade the pipeline system, the Kremlin is determined to maintain the monopoly of the state-owned Transneft, despite some initiatives from the private sector. Gas pipelines are also ageing, which results in no less than an estimated 30 bcm per year being wasted.37
43. Thirdly, doubts have been expressed as to whether Russia would be able live up to its supply commitments in the future, especially if it is not supported by an influx of Central Asian oil and gas. In addition, natural gas is considerably under-priced in Russia’s domestic market, which leads to an inefficient use of gas as well as to a significant growth in domestic consumption, thus limiting export capacity. Contrary to Gazprom’s expectations of a growth of 1-2% in 2008, production in its three main fields in Western Siberia - which account for 70% of Gazprom’s production - is declining at a rate of 6-7%, a year, while domestic demand is growing at a rate of 2% a year.38 The state-owned gas monopoly, Gazprom, is also criticised for diverting its attention from its direct business to investments, such as building Olympic facilities in Sochi or expanding its assets in the media market. In January to mid-February 2006, a number of countries, including Serbia, Italy, Romania and Poland, faced disruptions of natural gas deliveries from Russia. These disruptions indicated Gazprom’s temporary inability to provide sufficient quantities of gas.39 Gazprom's performance has become less spectacular over recent years: as measured by its market capitalisation, the company moved from the third place in the world to the seventh.
44. And last but not least, Russia’s energy politicking poses a serious problem for some neighbouring countries and forces them to look for possible alternatives. The current position of Gazprom in the international energy market “follows the logic of political power more than the laws of the market’40. About one third of the total 540 billion cubic metres of gas produced by Gazprom is exported; almost all of it to European countries or the former parts of the Soviet Union.41 Gazprom’s top public relations official, Anastasia Ivanova, insists that the conglomerate’s “only goal is to commercialise the energy business and bring ‘normal market relations’ to the former USSR after years of politically motivated subsidies from Moscow”42. Gazprom’s recent activities, however, indicate that, in the words of the Director of Eurasia Group Cliff Kupchan, it is “a post-Soviet hybrid of business and politics”43. Energy prices can differ greatly depending on whether a country is considered to be Russia’s political ally or not. While a profit maximisation is a perfectly reasonable objective, lower tariffs for Belarus or Armenia cannot be explained using the same economic logic. President Putin himself once admitted that Gazprom is a “powerful political and economic lever of influence over the rest of the world.” 44 It is difficult not to notice political considerations in temporary supply disruptions for Ukraine and Georgia, following the “coloured revolutions” in those countries. In 2006, when Polish energy company PKN Orlen outbid Russian competitors in the purchase of shares of 'Mazeikiu nafta', the biggest oil refinery in the Baltic States, the flow of Russian oil to that refinery stopped immediately, referring to 'technical problems'. The flow has not been restored since. Three days after the Czechs signed missile defence deal with the US, a “technical difficulty” with the Druzhba pipeline from Russia caused a 40% fall in oil flow. This incident prompted the Czechs to look for an alternative.
45. Political overtones can also be detected in Moscow’s pursuit to acquire a controlling stake in pipelines, ports, storage facilities, and other key energy assets of the Central and Eastern European countries, to secure a range of gas transit routes through the region and, increasingly, to purchase energy infrastructure in Western Europe. This strategy is aimed at granting the Kremlin control of the domestic markets of the CEE states, reducing their leverage in negotiations with Moscow or even manipulating their internal political situation.45 Vladimir Milov, head of the Institute for Energy Policy, a Moscow think-tank, is one among the many experts, who suggest, however, that, from a strictly economic point of view, Russia would do better to invest in Gazprom’s production, infrastructure and the development of new gas fields rather than support the energy giant’s opaque business ventures46. All of this indicates that the line where Gazprom the company finishes and Gazprom the instrument of the state begins47 is difficult to draw.
4. The Caspian Region
46. The Caspian Sea resources present a particular interest not only because of their abundance, but also because of their geographic proximity to several key energy actors: Russia, Europe, China, India and the Middle East. It is often suggested that the Caspian Sea has become an arena for a geopolitical struggle.
47. Azerbaijan has experienced a dramatic growth in oil production, largely thanks to sizeable foreign participation. In 2007, it exported some 0.7 mb/d, mostly to Europe via Turkey. In total, Azerbaijan’s oil reserves are thought to be between 7-13 billions of barrels (this figure could be reassessed, however, as some experts claim that these resources are much greater). Kazakhstan is an even more significant oil producer, exporting some 1.2 mb/d with reserves between 940 billion barrels. International oil companies are also actively investing in the development of Kazakh resources. Most of Kazakhstan’s oil exports go to the West via the Russian territory, but some volumes are also directed to the Persian Gulf (via a swap agreement with Iran) and China (via the pipeline).48
48. In terms of gas, the Caspian Sea has an even greater potential. In 2005, Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan produced almost as much natural gas as Canada, while the region’s proven reserves are comparable to those of Nigeria.49 Turkmenistan’s reserves are presently estimated at 2.9 trillion cubic metres (trm), but since a full, public exploration of the Caspian seabed has not been conducted, Turkmenistan’s actual gas reserves can be assumed to be far greater, even at around 10 trm, according to the Economist Intelligence Unit. This would make the country the fourth in the world in terms of natural gas reserves. The biggest obstacles to fully exploiting this potential are the reluctance of respective governments to allow foreign investments as well as the lack of transportation options.
A. DIVERSIFICATION OF SUPPLY
49. Sir Winston Churchill’s famous quote "safety and certainty in oil lie in variety and variety alone" is perhaps more relevant in today’s world than ever. Dependency on one source is widely seen as a political problem, particularly in post-Communist Europe whose industrial legacy was developed based on an abundance of inexpensive energy supplies from the USSR. This legacy is extremely difficult and costly to readjust. Diversification of supply is perceived as a key prerequisite to energy security. It is important to note that by diversification one should understand not only the variety of suppliers, but also the ability to substitute one energy source for another. Therefore, this chapter aims to discuss both unconventional sources to power our economies and options to access alternative suppliers.
1. Alternative Sources of Hydrocarbons
50. Gas-to-Liquids (GTL). The generation of electricity and heating can be carried out in a variety of ways, ranging from coal-powered stations to nuclear plants. However, our transportation system is much less flexible and highly dependent on one source – oil. Yet, with the number of automobiles in the world expected to double in the course of the next quarter-century, new technological solutions for our transportation fuel are critically needed. There is a tangible progress in developing technology allowing the production of diesel fuel from sources other than petroleum. The FischerTropsch method of converting natural gas into diesel fuel can provide an extremely interesting alternative for diesel-driven vehicles. GTL is also a much more ecological fuel. To bring down the cost of this fuel further R&D is needed, eg in catalysis improvements and ceramic membrane technology. Production of GTL fuel can be commercially rational because it could use remote and 'stranded' gas resources that would not be otherwise exploited by traditional natural gas industry. According to experts, in the medium to long term, GTL “could alter the world energy equation, enabling the movement of large reserves of stranded gas to growing markets, helping to satisfy new environmental requirements and potentially easing political tensions”.50
51. Heavy oil and tar sands. The reserves of this unconventional oil are huge and roughly equal to the global reserves of conventional oil: approximately 1 trillion barrels. More than half of the unconventional reserves are located in the western hemisphere, mostly in Canada.51 Venezuela claims it has some 1.2 trillion barrels of heavy oil in the Orinoco Belt. Currently, global production of non-conventional oil is just 1.8 mb/d, or forty times less than conventional oil. However, by 2030, the production is predicted to increase more than four fold, with Canada accounting for more than half of the global production (IEA data).
52. Canada’s oil sands represent the second largest bitumen reserve in the world, after Saudi Arabia. Although Canadian oil sand reserves are huge, oil production is still limited52 due to the high economic and environmental costs of the extraction process. About 80% of the oil sands in Canada (most of which are located in the province of Alberta) are buried too deep below the surface to allow open pit mining. This oil must be recovered by in situ techniques. Using drilling technology, steam is injected into the deposit to heat the oil sand and thus lowering the viscosity of the bitumen. The hot bitumen migrates towards producing wells that bring it to the surface while the sand is left in place. In situ technology is expensive and requires certain conditions like a nearby water source. The challenges facing in situ processes are efficient recoveries, the management of the water used to make the steam and the co-generation of all (otherwise waste) heat sources to minimise energy costs. Other methods of in situ recovery look promising, and are in the research stages of development. Another downside of oil sands extraction is the fact that the process generates five times more greenhouse gas than with conventional oil due to the enormous quantity of natural gas necessary to transform the bitumen (Greenpeace, 2007).
53. Unconventional gas. The exploitation of unconventional gas resources, such as tight gas sands, gas shales and advanced coal-bed methane production is also promising. The US National Petroleum Council estimates that by 2015, unconventional gas sources will account for 20% of the current US domestic gas production.53
54. Clean Coal technologies (CCTs). Although widely considered to be a fuel of the past, coal is in fact the fastest growing component of global energy mix. Coal is the world’s most abundant and widely geographically distributed energy resource: over 40% of 909 billion tonnes of proved global coal reserves are located in the OECD member countries.54 The price and delivery costs of coal are thus relatively low and stable, whereas its supply is secure. The main problem with extensive use of coal, however, is that it is the most carbon-intensive fossil fuel and its burning produces about 9 billion tonnes of carbon dioxide emissions annually.55 The urgent need to address climate change has resulted in efforts at reconciling the demands of energy security and environmental sustainability through the development of CCTs. CCTs are "designed to enhance both the efficiency and the environmental acceptability of coal extraction, preparation and use".56 Conventional CCTs, such as coal preparation (e.g. coal washing), gasification (e.g. Integrated Gasification Combined Cycle systems) and removing coal pollutants (sulphur dioxide, nitrogen oxides and particulates) have been successfully deployed over the past 30 to 40 years.57 Recently, the focus has shifted towards low and near-zero greenhouse gas (GHG) emission technologies, primarily CO2 capture and storage (CCS). According to the European Commission, CCS could cut the amount of manmade carbon dioxide in the atmosphere by up to a third.58 In Europe, interest in constructing low carbon power plants fitted with CSS technology have been expressed by Bulgaria, Turkey, Bosnia and the Ukraine. Yet, due to the extremely high costs involved, not even a large-scale demonstration project has been built so far. Neither has the European Commission managed to secure the funding necessary to implement its plan for up to 12 demonstration plants to be constructed by 2015. For all its promised benefits, therefore, the prospects of CCS remain unclear. In the present pre-commercial stage, it needs firm political commitment and further R&D support, whereas for CCS to reach market maturity in the future, long-term vision and investment security will be necessary.59
55. Coal-to-Liquids (CTLs). In addition to electricity generation and heating, coal can also be liquefied and used to fuel cars and jets. There are several techniques to achieve that – such as the Fischer-Tropsch process used during the World War II to produce synthetic fuel – but they all release large quantities of CO2 into the atmosphere. The process also requires vast amount of water. Therefore, from the environmental perspective, the prospects of CTLs largely depend on progress in CCS technologies.
2. Transportation Options
56. Currently, approximately half of all extracted oil is exported (41 mb/d) and the percentage of traded oil will increase with time. Natural gas is much more difficult to transport than oil. Consequently, only 13% of the world’s natural gas output has been exported. This share is expected to increase to 22% by 2030 (IEA data). In order to accommodate the rapid growth of oil and gas exports as well as to increase energy security, breakthroughs are needed in the development of additional infrastructure, such as new pipelines and LNG terminals.
57. Western countries and energy companies have long been pursuing the policy of 'multiple pipelines', particularly when it comes to deliveries of the Caspian oil and gas. The existence of different transportation channels provides obvious economic advantages by harnessing market forces. The Russian authorities do not deny the legitimacy of such a policy: at the Caspian Summit in Ashgabat, Turkmenistan, in April 2002, President Putin himself noted “Russia does not have an allergy to the idea of multiple pipelines”.60
58. Russia is actively involved in joint projects designed to develop additional pipeline architecture in the Caspian region, naturally, connecting it to the existing Russian grid. Russia considers itself as the indispensable intermediary between Central Asia and the West. As discussed before, it is in Russia’s interest to maintain a long-term commitment of the Caspian states to transport their oil and gas via the Russian grid, thus, in turn helping Russian companies meet their commitments to their Western customers. Reportedly, one-third of Gazprom’s gas exports to Europe comes from Turkmenistan. Russia’s exceptional position in the Caspian region also can be a cause of energy insecurity for certain countries: for instance, Russia refused Ukraine the transit of Central Asian gas in 2000, and the transit of Kazakh oil to Georgia in 2005.61
59. Russia’s role as an intermediary for Caspian oil exports has been steadily decreasing with the development of a number of pipeline projects in the region.
- Since the Baku-Tbilisi-Ceyhan (BTC) oil pipeline was opened in 2006, only small volumes of Azerbaijan’s oil are still being transported by the Baku-Novorossiysk pipeline as well as by rail.
61. In fact, all main gas producers of Central Asia and the Caucasus have at one time or another expressed interest in supplying pipelines to Europe that do not pass through Russia. Their principal motivation has been that Gazprom has paid them less than a market price for their resources64 as well as the fact that their gas that reaches the West via Russia does so through transit countries such as Ukraine, which often fail to pay for their energy supplies.65 Furthermore, there have been changes in Turkmenistan’s outlook lately. The new Turkmen president Gurbanguly Berdymukhammedov, who came to power following the death of Saparmurat Niyazov (also known as Turkmenbashi) in December 2006, has attempted to put an end to the isolationist foreign policy of his predecessor and pursue ‘multi-vector’ diplomacy.66 Realising that Turkmenistan has much to gain from strengthened economic ties with the West – not only increased flexibility in Ashgabat’s external relations but also ‘Western energy investment and expertise’ essential for relieving the country’s massive foreign debt and fostering its development,67 – Berdymukhammedov has indicated willingness to adopt a more cooperative stance in the energy sphere. As a result, in April 2008 Berdymukhammedov signed a memorandum of understanding with the EU ‘to supply 353.1 billion cubic feet of gas per year starting in 2009’68 presumably through pipelines bypassing Russia.
Figure 2. Caspian Region Gas Pipelines
62. The geopolitically significant EU-sponsored Nabucco gas pipeline project is intended to link SCP with Central Europe across the territories of Turkey, Bulgaria, Hungary and Austria. A branch of the pipeline should also span towards Greece and Italy. The project is expected to be up and running by 2013, but it was plagued with financing problems as well as some political disagreements, including between France and Turkey. Another key question is whether the gas supplies for the Nabucco will be sufficient, as the gas reserves of Azerbaijan alone are not significant enough to tangibly contribute to Europe’s needs. With Turkmenistan being committed to Gazprom, it is even suggested that Europe should consider an agreement with Iran, the second largest gas producer in the world, to ship some of the Iranian gas through the Nabucco. While such a proposal is sensitive from a political standpoint, one should also bear in mind that – at least in the short term - Iran has little to offer as it consumes almost all of its gas domestically. Hungary has recently taken leadership to revitalise the Nabucco project by proposing to host a Nabucco Summit and appointing one of its senior diplomats as a full-time special envoy for promoting the project. In his statement, Zsolt Hernadi, President of the Hungarian energy company MOL, which is a Nabucco shareholder, explicitly linked Nabucco’s prospects with Iranian gas.69
63. The impact of the Russia-Georgia conflict on the Nabucco project has yet to be seen. On one hand, many analysts stop short of claiming that disruption of oil and gas flow through Georgian pipelines was Russia’s true objective and argue that the reliability of Georgia as a transit country has been put into question. In the wake of this crisis, it will be even more challenging to find an investor eager to finance the construction of Nabucco. Interestingly, Gazprom has used this moment to offer to buy all Azerbaijan’s natural gas exports. If Azerbaijan agrees, it would be a serious blow to the efforts to diversify the flow of Caspian resources.70 On the other hand, the latest developments in the Caucasus once again demonstrated the significance of and the urgent need for the diversification of the energy sources as well as the energy routes. Thus, the recent crisis might give impetus to the relevant parties and states for the swift realisation of the Nabucco project.
64. The most recent proposal on the alternative route of transportation of Caspian gas to Europe came from Ukraine’s Prime Minister Yulia Tymoshenko. She asked for EU support to construct a gas pipeline ('White Stream') from Turkmenistan to Azerbaijan to Georgia then to Ukraine (on the seabed of the Black Sea) and then further on to Central Europe. The European Commission is currently studying the proposal.
65. Russia’s oil and gas export lines are almost exclusively directed towards Europe. Russian gas is delivered by pipelines that run through the territories of Ukraine and Belarus to Central European countries and Germany. Most of Russia’s oil is transported either via the Druzhba pipeline system in Central Europe, or by tankers via the Black Sea port Novorossiysk, the Bosporus or the Bourgas pipeline in Bulgaria.
66. However, these traditional routes are being revisited by the Russian authorities in the attempt to bypass Central and Eastern European intermediaries. For this purpose, Transneft has recently opened an oil export terminal in Primorsk near St. Petersburg, which redirects oil from the Druzhba pipeline system to tanker lanes in the Baltic Sea. This move has significantly diminished the importance of the Druzhba and resulted in the termination of oil flow to Latvia’s seaport of Ventspils and Lithuania’s Butinge that were used to export significant volumes of the Russian oil.
67. With regard to the redirection of gas export, the most significant project is the agreement between Gazprom, two German and a Dutch energy companies to build an offshore North European Gas Pipeline (Nord Stream) from Russia’s Baltic port of Vyborg to Germany by 2011. Former German Chancellor, Gerhard Schröder, was elected as chairman of the project’s stakeholders committee and the former Finish Prime Minister, Paavo Lipponen, was hired as a consultant. The Nord Stream pipeline will allow Russia to deliver gas directly to Germany, bypassing intermediaries. A number of European nations expressed their concerns about the project, both in terms of environmental risks and because it would leave some Russia’s neighbours with no leverage to offset their absolute dependence on Russia’s gas supplies. The environmental concerns are based on the fact that huge quantities of chemical munitions were dumped during and after World War II in the Baltic Sea. Any accident could affect the whole Baltic Sea region.
68. Gazprom is also looking into new options to export gas via South-Eastern Europe. The Blue Stream (with its proposed second leg South Stream) project is essentially a direct competitor of the EU’s Nabucco, running from Turkey to Central Europe. The Hungarian government has decided to opt for the Blue Stream instead of Nabucco, a decision that was criticised by some EU member states as well as by the Hungarian opposition. In defence of the government’s decision, the country’s prime minister referred to slow progress of implementing the Nabucco project.
69. It is often suggested that the westward orientation of Russia’s and Caspian exports should not be taken for granted. With new and lucrative markets emerging in Asia, Russian energy companies may begin to consider redirecting their trade routes to the East. Kazakhstan’s oil is already flowing via the Atasu-Alashankou pipeline to China. Turkmenistan has concluded a multibillion-dollar deal with China, which involves a supply commitment of some 30 bcm over 30 years as well as the construction of 7,000km of pipeline. Russia’s Transneft will soon finish the construction of an oil pipeline (Eastern Siberia Pacific Ocean Pipeline - ESPO) to its Pacific coast with a branch to the Chinese city of Daqing. The construction of a gas pipeline from the Kovykta gas field to the Pacific coast was less likely until recently, because this field was mostly owned by the private TNK-BP company and not by Gazprom. However, in 2007, Gazprom managed to take control over the Kovykta field, thus demonstrating Gazprom’s interest in the East Asian market. Of course, the development of comprehensive infrastructure from Russia to the Asian markets would take years if not decades, but European countries need to start the preparations for a scenario where Russia has a broader range of export options.
70. The South-East European region is of strategic importance to Europe. The region is a connecting link between the major producers and consumers of energy sources in Eurasia - the EU and Russia, the Black Sea and the Caspian regions, the Middle East and North Africa. It has and it will have an increasingly important role in the international projects aimed at diversification of the sources and the routes of energy supplies to Europe. In this context, one should welcome the European Commission's proposal to create a Pan-European Energy Community which would include all EU and South East Europe (SEE) countries. This energy community would represent the largest integrated and competitive energy market in the world, with more than 500 million consumers, abiding by universal regulations. Bulgaria proposed to set up an Office of the Energy Community Observatory (ECO) in Sofia. This observatory would monitor energy flows within the energy community and the Black Sea region.
71. In addition to Nabucco and the South Stream, other important gas energy infrastructure projects in the SEE region include:
- A regional regasification terminal for LNG on the Bulgarian Black Sea coast or, more possibly, on the Greek Aegean coast, depending on the results of the feasibility study.
72. As far as oil is concerned, the Burgas-Alexandrup, olis pipeline is important, not only for the countries that are directly engaged in its construction (Bulgaria, Greece and Russia), but also for the EU, as it will increase the security of the oil deliveries from Russia and Kazakhstan to the EU by considerably alleviating the burden on the Straits and the related regional ecological risks. The Burgas-Vlora pipeline, proposed by the American AMBO consortium, will increase the security of the oil supplies to the Black Sea, the Adriatic and the Mediterranean regions.
73. To sum up, the construction of additional pipelines could significantly alter the geopolitical situation in the world, bolstering the independence of the countries in the Caspian region, but the progress is rather slow, particularly when it comes to natural gas pipelines. These are expensive to build: on the average the cost per km is from US$ 750,000 (onshore) to US$ 1 million (offshore).71 The cost factor - some US$ 20 billion - is hindering the construction of an onshore pipeline connecting vast natural gas resources in Alaska to the rest of the United States. 72 Therefore, the transportation of gas in a liquefied form is becoming an increasingly attractive option.
b. Liquefied Natural Gases (LNGs)
74. It is generally agreed that LNG becomes a rational choice when considering transportation over distances further than 4,000 km. LNG accounts for the bulk of the increase in natural gas trade. Currently, less than 10% of gas is shipped in a liquefied form. In absolute terms, the amount of natural gas transported as LNG was 189 bcm in 2005 and it is expected to reach 758 bcm in 2030 (IEA data). In the case of the US, it will rise to 25-30% in 2020 from just 3% in 2004. This will be feasible mostly because new technological solutions drive the cost down making LNGs competitive with pipeline gas.73 Countries such as Japan and South Korea have switched completely to LNG, importing it mainly from Australia.
75. Nevertheless, many experts doubt that LNG can be seen as a panacea, because its growth rates are still insufficient and because the economics of LNG involves additional costs – for liquefactions and re-gasification – that are not applied to pipeline gas. If long-term supply contracts are absent, it is difficult to persuade industry to invest in LNG projects. Basically, LNG can only contribute to slowing down the increase of Europe’s dependency on Russian gas.74 Moreover, most of the European countries that are overwhelmingly dependent on Russian gas supplies, lack LNG terminals and re-gasification capabilities. The Baltic States also lack the link to the European gas grid, and therefore the interconnection between Lithuanian and Polish gas pipelines is of strategic importance in terms of energy security. Poland and Lithuania are taking concrete steps to construct LNG terminals on their Baltic coast within the next decade.
76. Natural gas can also be transported in a compressed form, rather than liquefied. At the moment, this method can only be used for short-distance transportation, e.g. from the Caribbean to the United States. The third option is to convert natural gas into middle distillates (GTL) that could be transported by conventional means, such as oil tankers or rail. GTL technology might offer an appealing and promising alternative to oil in the transportation sector.75
B. NUCLEAR ENERGY
77. The current hype over nuclear energy and calls for the 'nuclear renaissance' are based on very compelling arguments. Nuclear energy is almost completely carbon-free.76 If construction and waste management costs are excluded, it is also very cost-effective: one unit of uranium has a much higher energy density than fossil fuels and it costs only 10-15% of the cost of electricity it produces (when it comes to coal, this figure is 30-40%, and for gas it is 60-85%). Uranium can be stored and transported more easily, thus being much less exposed to market volatilities.77 And finally, although uranium reserves are concentrated in a handful of countries, most of them are stable and democratic countries. In fact, technological solutions such as enhanced fast breeder reactors, that actually produce more fissile material than they consume, have a potential to make the issue of supplies virtually irrelevant.
78. NATO member, Canada, is the largest global producer of uranium. As the price of uranium continues to rise, Canada’s uranium mining sector is moving to increase production. At present, Canada’s uranium production represents 29% of global production, with a total of 11,597 tonnes per year (the total amount of Canada’s uranium resources are estimated at 444,000 tonnes). Australia follows with a 21%, whereas 9% comes from Niger, Russia and Kazakhstan (Natural Resources Canada, 2005).
79. The sceptics of the 'nuclear renaissance' usually refer to the following disadvantages.
- The initial cost of building a nuclear power plant and related infrastructure is enormous. It is the single most important factor that prevents nuclear industry from developing at much faster rates. Most experts agree that, over the period of 2005 to 2030, overall nuclear plant capacity will increase only modestly: from 367 gigawatts-electric (GWe) to 400-600 GWe,78 lagging behind the growth rates in global electricity generation. Most of the growth is expected to occur in China, Japan, India, Russia, the United States, South Korea and the United Kingdom, though a number of European countries, such as Germany, Sweden and Belgium, are on their way to phasing out their nuclear sector.79 On the other hand, technological improvements could considerably ease the burden of construction costs. Modern nuclear power plants can serve much longer – even beyond 60 years – which would allow costs to be spread out over a much longer period.80
80. Regardless of the mixed views on the 'nuclear renaissance', a number of NATO countries seriously consider nuclear energy as an important tool to increase their energy security situation. The United States has radically changed its attitude in recent years, ending years of moratorium on nuclear energy development. Even the EU seems to have changed its negative stance on nuclear energy. Poland and the three Baltic States have agreed to jointly build a new nuclear power plant in Ignalina, Lithuania, to replace the old one, which is due to be closed by 2009. The new Ignalina power plant is expected to become a key factor ensuring the region’s independence in terms of electricity supply. The project also envisages the construction of the 'electricity bridge' between Lithuania and Poland, thus ensuring that the Baltic States are no longer Europe’s 'energy island'. Currently, electricity sectors in these three countries are a part of Russia’s electricity grid. The Belene power plant has a strategic importance to guarantee the security of supplies of electric energy for the SEE region, particularly after the premature closing down of reactors 3 and 4 of the Kozloduy plant.
81. “Nuclear fusion” reactors are often floated as a possible technological solution that could overcome many of deficiencies of traditional ‘fission’ technologies. In 2006 China, the EU, India, Japan, Russia, South Korea and the US launched the International Thermonucelar Experimental Reactor (ITER) project, which aims to prove that nuclear fusion can be used to generate power. ITER, located 60km from Marseilles, will be the largest reactor of its type in the world. The reactor hopes to fuse deuterium and tritium particles (both isotopes of hydrogen) together to produce a stable isotope of helium and a large amount of energy. This process sounds simple in theory but requires a temperature of around 100 million degrees to overcome the force of electromagnetic repulsion; which is a major engineering challenge to create and control. Fusion produces relatively little radioactive and the raw fuel is naturally abundant in seawater, while the potential energy output is enormous. A breakthrough occurred in South Korea in July 2008, where scientists working on a similar reactor managed to create deuterium plasma, demonstrating the required temperatures for 0.3 seconds. ITER predicts that 300-500 seconds must be maintained in order to produce a useful fusion of nuclei. However the technology is expensive and requires international collaboration to fund. A recent redesign raised the cost of ITER from 10 billion to 11.6 billion Euros, and delayed the operational start up from 2016 to 2018. The US Congress has shown signs of cold feet over the project, and pulled US$149million from the 2008 budget. Nevertheless ITER is gaining momentum; it gained its license to begin construction in 2008 and plans to begin building the reactor itself (according to a Russian Tokamak design) in 2012. The IAEA predicts that it could be 40 years before nuclear fusion makes a contribution to global energy needs, but the timescale will depend governments’ ability to divert funds from other energy sources.
82. Renewable energy sources, such as sunlight, wind, water, geothermal and biomass, are a highly preferable option, particularly since they generate little, if any, waste, pollutants or greenhouse gases. However, for most renewables to compete with conventional fuels, either the costs of production have to come down or the cost of fossil fuel has to go up further. Renewables such as geothermal, solar, wind and tidal energy sources are projected to be developed more rapidly (almost 7% of annual growth) than any other type of energy over the next quarter of a century, but they will still make up a small fraction of total energy output.83 The EU intends to increase the share of renewables in the EU energy mix to 20% by 2020.
83. Solar power is usually (but not exclusively) associated with photovoltaic energy (PV), which directly converts sunlight into electricity using semiconductor materials such as silicon. PV systems are generally rather costly, and are therefore mostly employed in areas located away from power lines. Producing electricity by solar power units is, on the average, 10 times more expensive than in conventional power plants.84 Nevertheless, capital costs for PV panels have decreased dramatically over the years. The effectiveness of “third generation” solar cells is expected to be 2-3 times higher. The major disadvantage is the relatively low amount of energy delivered by sunlight, requiring large surface areas to collect tangible volumes of energy. The intensity of sunlight also greatly varies in terms of geography, weather conditions and the time of day or year.
84. Wind energy has been experiencing a rapid growth in recent decades, particularly in countries such as Germany, Spain and the United States. Technological progress has reduced the costs of wind energy to levels that are almost competitive with those of conventional power. In 2005, wind machines in the United States generated enough electricity to power a city the size of Chicago, but still it constituted only 0.4% of the country’s electricity production. The major drawback of wind energy is the harm wind turbines can cause to wild bird populations.
85. Geothermal energy harnesses the heat that is produced under the surface of the earth. It can be used in a several ways: firstly, hot water from springs can be directed to heating systems of buildings; secondly, steam can be used to generate electricity; and thirdly, stable soil temperatures near the surface can be used to heat and cool buildings. The last way, called geothermal heat pumps, can basically be used everywhere and not only in the seismically active areas. Heat pumps are considered to be an extremely promising and completely clean and effective technology, which is projected to grow dramatically in the future.
86. Hydropower is expected to retain its share of approximately 2% of global energy output. The slow rate of growth in the industrialised world is largely related to the fact that there are very few unused opportunities to develop new hydropower projects.85 Hydropower is also probably the least environmentallyfriendly of all renewable sources, as it to a certain extent damages river ecosystems.
87. Oceanic energy resources, such as tides, waves and thermodynamic flows, present interesting and, possibly, great promise. However, the technologies to convert this potential into a useful form in a cost-effective manner are still in their infancy.
88. Biofuels present an extremely interesting category, since this renewable resource is the only one so far that competes with oil in powering the transportation sector. Until present, biofuels have had little impact upon global oil production and consumption, but its production doubled between 2000 and 2005. Biofuels now represent around 3-4% of the total gasoline used. It is forecasted that production will almost double again by 2010. Brazil and the United States are indisputably the world’s largest ethanol producers.
89. Biofuels are defined as any fuels derived from biomass. The production of fuel energy from biomass involves a range of technologies including gasification and fermentation. These technologies produce liquid and gas fuels from a diverse set of biological resources, such as traditional crops (sugar cane, maize, oilseeds), crop residues and waste (wheat straw, rice hulls, cotton waste). The two main types of biofuels are bioethanol and biodiesel. When blended with gasoline or diesel, the use of these fuels requires no engine modification.
90. While opening new opportunities, biofuels also raise new concerns, in particular in connection with their effects on land uses, food prices, small producers and their accessibility to developing countries. Observers are concerned about trade-offs of lower food security for higher energy security. In the case of sugar cane, net emissions of CO2 are more than 80% lower than in the case of fossil fuels. However, one has to take into account the fact that bioethanol production requires energy, fertilisers, transformation and transportation, all of them CO2 emitting activities. The production of biofuels raises a number of other environmental concerns, such as deforestation and overuse of water and fertilizers.
91. To offset these trade-offs, the second generation of biofuels is being developed. The production of these products, such as cellulosic ethanol, is based on sources that otherwise would be wasted, for instance agricultural, forestry, human and plant waste, as well as crops that can be grown on degraded lands.86 The technology for the second generation of biofuels is still in its infancy, however.
D. ENERGY EFFICIENCY
92. Energy efficiency should not be perceived as a synonym of a sacrifice. By rationalising energy consumption, societies can benefit without having to drastically change their way of life. In the context of the famous 3Three E3 triangle - energy (secured supply), economy (affordable cost), ecology (environmental attentiveness) - it is often claimed that nations cannot achieve all three Es simultaneously; only combinations of two priorities are possible. However, energy efficiency seems to be an exception to this rule as it is beneficial in all respects.
93. Technological advancements have been contributing rather significantly to making energy use more efficient: the growth of GDP normally outpaces growth in energy consumption by 12 percentage points a year.87 However, this progress merely compensates for population increases and thus does not result in an overall decrease in energy consumption. According to IEA estimates, global energy intensity, i.e. ratio of energy consumption to GDP, will continue to decline at the rate of 1.8% per year between 2005 and 2030, slightly faster than in the past. This acceleration will largely come from developing countries and transition economies that have much more room to apply energy-saving innovations, particularly in terms of thermal efficiency.88
94. The EU leaders have announced the goal of 20% improvement of energy efficiency by 2020. There are a number of ways to reach this goal and exceed it. For instance:
- Efficiency improvements in the power sector. New coal-fired plants have efficiencies of up to 46%, compared to 30% of the world’s average. Raising the world’s average to at least 42% by 2030 would save roughly the same amount of carbon as building 800 nuclear plants.89
95. There is considerable potential for co-operation between Europe and Russia to improve energy security in Russia. Only 10% of Russia’s households have heat and water meters.93 This cooperation would be mutually beneficial, particularly in reducing domestic gas consumption in Russia. Unreasonably high domestic consumption can significantly diminish the volumes of Russian gas available for the European market.
A. THE ROLE OF NATO
96. The role of NATO in the energy security debate is an open question. Some claim that energy is not a primary theme for the Alliance and that other organisations, such as the EU and the IEA, are better equipped to deal with this challenge. Champions of such views suggest that energy is nothing but one segment of economics and that it should be left to industrialists and not to politicians and especially not the military. Your Rapporteur, however, holds a different view. Energy is a very special asset that is vital to our societies and has significant security and even direct military implications. Firstly, the examples of energy resources being a significant cause of military conflicts are abundant and well known. For example, during the Iran-Iraq War (19801988), a coalition of nations, mainly NATO member states, took part in a military operation called Earnest Will, which was designed to secure the supply of oil. During the operation, the allies engaged in fire fights with Iranian troops and captured Iranian vessels mining shipping lanes.94 Secondly, energy considerations can affect military strategy and tactics: for instance, during WWII, the decision of German strategists to turn south towards Stalingrad was based on the desire to cut off oil reserves in the Caucasus from the Russians. Thirdly, fuel is an indispensable asset for armed forces, and fourthly, NATO itself has undergone enormous changes after the end of the Cold War, revisiting its agenda and adopting a much broader definition of its mission.
97. The Riga Declaration has been an indication that the issue of energy security is becoming one of the key topics for the Alliance.95 The leaders of Allied states and later foreign affairs ministers have explicitly empowered the North Atlantic Council to bring this issue onto its agenda. At the NATO Summit in Bucharest, the leaders of the Allied nations have identified areas for NATO’s engagement in terms of energy security, namely: information and intelligence fusion and sharing; projecting stability; advancing international and regional cooperation; supporting consequence management; and supporting the protection of critical energy infrastructure. They also stated that “the Alliance will continue to consult on the most immediate risks in the field of energy security.” The Summit has also tasked the NATO Council “to prepare a consolidated report on the progress achieved in the area of energy security for our consideration at the 2009 Summit.”
98. Your Rapporteur is convinced that NATO should play an increasing role in the domain of energy security. The Alliance can provide an added value both due to its capacity in the area of physical protection of energy infrastructure and because it is a unique vehicle for co-operation and coordination among members of the transatlantic community. NATO brings on board non-EU countries that are extremely important in terms of energy security: the United States, Canada, Norway and Turkey. In the framework of the Istanbul Cooperation Initiative (ICI) of 2004, NATO has established intensive co-operation with energy-rich countries in the Gulf: Bahrain, Qatar, Kuwait, and the United Arab Emirates (UAE). NATO co-ordination mechanisms can and should contribute to enhancing solidarity among the Allies in the event of major supply disruption and other outstanding energy security challenges. Some politicians, such as US Senator Lugar, even suggest that energy security be raised to an Article 5 issue. 96 An establishment of a specialised NATO agency dealing specifically with energy security should be considered.
B. THE ROLE OF THE EU
99. The EU itself started as an energy-based project, the Coal and Steel Community. The EU is taking steps to create a common European energy policy. In 2007, EU institutions introduced a two year (2007-2009) action plan, designed to strengthen the EU’s role in energy relations, although the scope of this role is still a subject of discussions among member states. Despite the calls for Europe to speak with one voice on energy matters, this solidarity is yet to be achieved, due to the very different degrees of energy security in different EU member states. Currently, European nations rely on bilateral agreements with oil and gas suppliers, with little or no co-ordination with other EU members.
100. Besides the issue of oil and gas supplies, the EU is determined to achieve a breakthrough in energy efficiency and the promotion of the renewable energy by setting its famous '20-20-20' target (cutting greenhouse gas emissions by 20% and increasing the share of renewables in the energy mix to 20% by 2020).
101. The current European Commission is perceived as being liberal and 'pro-market'. It believes that market rules, rather than geopolitical considerations, should be applied in the energy sector. Therefore, the Commission actively promotes the liberalisation and decentralisation of energy markets in Europe, despite concerns expressed by some energy giants, including suppliers such as Gazprom, which is increasing its share in European energy grids. The Commission plans to 'unbundle' ownership of energy assets (by prohibiting power generating companies from owning transmission networks) and/or creating an independent transmission systems operator. France, Germany, Austria and four other EU member states oppose such plans, claiming that liberalisation and ‘unbundling’ would weaken the ability of European energy giants to withstand aggressive policies of Gazprom. Advocates of liberalisation, on the other hand, argue that Gazprom and Russian companies would have to adhere to European rules as well, if they wished to compete in the European market. Recently, the Commission agreed not to insist on relinquishment of ownership rights, provided that certain safeguards were introduced, such as guarantees of adequate investment to eliminate bottlenecks. The final decision on 'unbundling' is expected to be reached during the French Presidency.97
102. EU-Russia energy co-operation has a potential to grow as interdependence between them increases. The EU accounts for 58% of Russia’s foreign trade.98 Russia is also counting on Europe’s support of its efforts to become a member of the World Trade Organisation (WTO). At the EU-Russia Summit in 2007, Europe and Russia agreed to develop a joint early warning system for energy bottlenecks, but overall the co-operation is not sufficient. In particular, the EU is concerned about re-nationalisation trends in Russia and the obstacles for foreign investments in its energy sector.
C. SECURITY IMPLICATIONS FOR DEVELOPING COUNTRIES
103. The energy security interests of NATO and EU member states should not be limited to secured access to oil and gas resources. Energy policies in the developing world also have significant ramifications for global security. Skyrocketing prices for oil and other energy commodities will have a much more damaging effect on energy "have-nots" in the developing world, such as Pakistan. It is estimated that the high price of energy in the future would cost Pakistan one-tenth of its GDP (US$ 400bn) over the next quarter of a century.99 Rising prices jeopardise Pakistan’s economic development and increase the potential for social explosion in this already fragmented country, which possesses nuclear weapons and has terrorist bases on its territory.
104. Energy “haves” in the developing world face different challenges. Vast oil and gas resources often result in internal inequality, increased corruption and even civil unrest. In mid-2007, civil unrest in Nigeria resulted in 750,000 barrels per day being shut in.100 Energy resources can also increase the immunity of ruling regimes to demands for democratisation and transparency. Iran’s vast oil and gas resources have clearly helped its ruling regime to offset international pressure and render the US and UN sanctions virtually ineffective. The UN Security Council’s refusal to impose oil- and gas-related sanctions has been linked to the fear to further increase the price of these commodities. Sudan’s energy resources and ties with China are reportedly helping the local warlords to receive military equipment. 101
105. Generally, there are two ways of addressing the challenge of energy security: a reactive approach and a pro-active one. The former focuses on dealing with the existing global energy landscape and finding ways to ensure we have sufficient supplies of oil and gas to keep our economies going. The pro-active approach implies that a long-term strategy is also necessary to facilitate (and even push for) the transition to the post-carbon future. Both approaches must be considered when shaping energy policies and strategies.
106. The bulk of the problems associated with energy security derive from the fact that, instead of being treated just like any other sector of the economy, energy is often subject to extensive state control. In fact, around 90% of the global oil and gas reserves are in state hands.102 If left to the market forces and competition alone, it is very likely that many acute problems would disappear altogether. The European Commission clearly shares this view, but it is faced with suppliers that prefer completely different game rules and efforts to impose these principles from the outside can be counterproductive.
107. Therefore, while trying to promote the notion of liberalising the energy market, the EuroAtlantic community has no other choice but to continue playing old geopolitical games. In the short term, it needs to augment its solidarity to ensure that none of its members are exposed to energy blackmailing. Multiple pipelines, LNG terminals and grid interconnectors are all extremely important in this regard. The efforts to diversify the supply routes should not be interpreted as being directed against a particular country; indeed, the Nabucco pipeline, for example, is not designed to deliberately circumvent Russia - it is, in fact, the shortest route from the Caspian region to Central Europe. Diversification of supply routes also has another significant security implication, as it diminishes motivation for terrorist attacks on energy infrastructure.
108. Having said that, one should also bear in mind the fact that a liberalised market will not solve all the problems and a certain degree of governmental involvement will be necessary. Often market forces are too focused on short-term profits and not on generating sufficient stocks in the event of a supply disruption. The diversification of supply is not a priority either: private companies do not mind buying resources from a single supplier, as long as prices are acceptable. Yet another negative aspect of oil market liberalisation is that the excess oil capacity has diminished to a level that would not be sufficient to protect Western countries in the case of a major oil supply disruption.103
109. Maintaining sufficient emergency oil stocks is an important aspect. The IEA requires its members to accumulate sufficient emergency oil stocks to compensate for supply disruption for at least 90 days. However, this requirement is not being strictly obeyed. The US Strategic Petroleum Reserve (SPR) contains approximately 670 million barrels of oil, but with projected rates of consumption, by 2020, even a reserve of one billion barrels would only be able to cover 57 days of oil imports. Experts suggest reinstating the original requirement of the IEA to have a cover for at least 90 days. The private sector also has to have incentives to increase its reserves and excess capacity. SPR should be used more frequently to address even short-term disruptions.104 Also, the mechanism to employ SPR has to be more flexible. Even the global strategic petroleum reserve, operated by the IEA, should be considered. Such a reserve could provide a tool to effectively counter-weight OPEC.105 Membership of the IEA should not be limited to OECD countries. A number of key countries, including China, India, Indonesia and Mexico, need to be involved as well. Finally, a similar solidarity arrangement could be considered for natural gas.
110. The interests of the suppliers must also be taken into account. Some experts even suggest that low oil prices could be counterproductive to our security as they might destabilise the situation in some key producing countries, such as Saudi Arabia. There is a clear need to strengthen the supplier-consumer dialogue through the International Energy Forum (IEF) or through direct contacts between the IEA and OPEC.
111. Yet, everyday concerns about the flow of hydrocarbons must not outshine the long-term vision of 'life after oil'. Without breakthroughs in clean energy technology, global economic growth will soon become simply unsustainable, particularly in terms of the environment. The IEA has estimated that, if the international community were to adopt a set of policies designed to decrease the reliance on fossil fuels by promoting alternatives such as nuclear energy and renewables, total energy consumption by 2030 could be 11% lower compared to the 'business as usual' scenario. This is roughly equivalent to China’s entire current energy consumption.106 Particular attention must be paid to diverting investment from traditional R&D focused on hydrocarbons, to alternative technological solutions in order to avoid being locked into fossil-fuel technologies for decades.
1 Speech by Prof. Dennis Snower, President, The Kiel Institute for the World Economy, XVI Malente Symposium “Energy, Climate, and Future Welfare – Changing Global Dynamics”, Lubeck, 810 October 2006.