Energy security: Brussels, stop dreaming about the market and confront Russia and China geopolitically

Energy security: Brussels, stop dreaming about the market and confront Russia and China geopolitically

By Dr. Cyril Widdershoven – Berry Commodities – Global Head of Strategy & Risk

European leaders are under the delusion that they can solve Europe?s security of energy supply problem by creating a strong internal market, which they believe the rest of the world will be eager to serve. In reality, reducing dependence on Russia will require long-term political commitment, real power play and engagement with countries in the Middle East and North Africa (MENA), write Cyril Widdershoven of energy research institute TNO and Sijbren de Jong of The Hague Centre for Strategic Studies. If it?s not too late already: Russia and China are already filling the gap in the MENA region that the US is leaving.

Top US officials and energy experts showed themselves highly positive recently at a conference in Istanbul about the progress the EU has made in reducing its energy dependence on Russia. And they said that with US LNG exports under way, the ?monumental? Southern Corridor under construction, and Gazprom?s South Stream project under pressure (and now cancelled), Europe?s position will only get stronger.

The same picture emerged from a high-level US-EU Energy Council Meeting in Brussels on 3 December, attended, among others, by European Commission Vice President Maro? ?ef?ovi?, EU High Representative Federica Mogherini, European Commissioner for Climate Action and Energy Miguel Arias Ca?ete and US Secretary of State John Kerry.

In a Joint Statement, the two parties said ?that energy should not be used as a political tool?. They reaffirmed ?recommendations made by the European Commission in the EU?s Energy Security Strategy to increase energy efficiency, strengthen domestic production, diversify supplies, complete the internal energy market, maintain a unified voice in external energy policy, bolster emergency and solidarity mechanisms while protecting critical infrastructure?. They also said that ?energy security is underpinned by open, competitive and transparent international energy markets and through supportive policies that promote the sustainability of energy production and consumption, in particular the development and deployment of renewable and low carbon energies and energy efficiency.?

As to diversification of supplies, the EU and US representatives ?welcomed the prospect of U.S. liquefied natural gas exports in the future since additional global supplies will benefit Europe and other strategic partners? and pinned their hopes on ?the growing potential of the new gas resources in the Black Sea, North Africa, and Eastern Mediterranean?.

The diplomats in Brussels will have been happy: the EU?s energy security seems to be taken care of before a real crisis has even emerged. Non-Russian energy supply will be available, bringing relief to energy thirsty Europe while denying Russia additional power over Brussels. All this is in line with the latest European? Commision In-depth study of? European energy security, ?in which the global gas market and EU?s security of energy supply was assessed. The market will solve the problem, European customers will be served, no worries about cold winters. The dreams of Brussels about energy independence from Russia and Washington?s geopolitics seem to be coming true. The current Cold War between East and West on security of energy supply will not become hot.

Politics and energy have become even more intertwined than before. Europe?s capability to deal with this new reality is minimal

As Jason Bordoff, Professor and Director of the Center on Global Energy Policy at Columbia University, and a former special assistant to the President and former Senior Director for Energy and Climate Change on the Staff of the National Security Council, stated in Istanbul, ?we are already seeing the success of European energy security policy??The gas stress tests show that most of Europe is secure. This is because the EU has spent a lot of money on reverse flow and interconnections. And because we have a Third Package that underpins the legal rules of the market.?

In other words, liberalize the market, support investment in new infrastructural projects and interconnections, and the problem will resolve itself. Bordoff noted that ?the share of gas-to-gas pricing in the European market has jumped from 10-15% five years ago to 50% today.? When the US starts to export LNG, Europe?s position will become even better.

Vulnerability

European leaders apparently believe that even in case of a full-blown crisis with Russia, with a total gas supply blockade by Moscow, the global gas market will stand ready to supply the hard-needed 170 bcm (billion cubic metres) of gas to Europe. What they don?t seem to understand is that in recent years the situation in the gas exporting nations in the Middle East and North Africa (MENA) has changed considerably. They also ignore the sharply increased role Russia and China are playing in the MENA region.

There are three developments that have led to this new situation.

First, the unexpected shale gas and oil revolution in the US has changed the geopolitical system dramatically. It has not only led to a significant reduction of the American dependence on energy imports, but also to a ?rebalancing? of US foreign policy from Europe and the Middle East toward other regions, notably the Asia/Pacific. The increasing void left by the American retraction of its military-economic involvement in the MENA region is being rapidly filled by emerging economies, China, India and Russia in particular.

Second, tied to the rise of emerging economies, the pro-market ideology of the 1980s and 1990s has been giving way to a resurgence of state capitalism and increasing power of National Oil Companies (NOC). This ?resource nationalism? has led to a decline in the importance of western (international) oil companies (IOCs). Big NOCs now make up six of the ten largest oil producers in the world. This means that IOC?s are relegated to less attractive regions and methods (e.g. deep-water) ? and that politics and energy have become even more intertwined than before. Europe?s capability to deal with this new reality is at present minimal. NOCs and their governments in the MENA region speak the same language, and the same goes for Moscow and Beijing. But the EU lacks a willingness to speak with a clear voice in the language of power politics.

Third, the onset of the Arab Spring (2010) and the resulting revolutions in several North African countries (Libya, Tunisia, Egypt) and Syria, as well as the rise of ISIS, have weakened the historical links between Europe and the Arab world. Europe?s support of Washington?s ill-fated democratization efforts has negative repercussions in MENA countries. They are not waiting anymore for European and American influence or support. Instead, in the new globalized world, Russia, China and India are becoming the preferred partners.

Russia sees itself as ?the great Northern civilization? to which it hopes to draw countries beyond its periphery

The events around the Arab Spring have shown the vulnerability of Europe as the uprisings have had a big impact on the supply of oil and natural gas. Libya?s oil and gas exports came to an almost complete stop during the civil war. The removal of President Mubarak in Egypt, which was followed by the rule of the fundamentalist Muslim Brotherhood, disrupted natural gas exports. The Arab Gas Pipeline (AGP) which transports natural gas from Egypt to Jordan, Syria, Lebanon, and ? until April 2012 ? to Israel was sabotaged over a dozen times between 2011 and 2012. Egypt?s expected role as a major LNG supporter to Europe has also become much less certain. Egypt?s LNG exports have dropped considerably from 343 bcf in 2010 to 256 bcf in 2012.

Great Northern Civilization

The developments in the MENA region have provided new opportunities for countries like Russia and China to increase their presence there, and they have not been slow to make use of those.

Russia has over the last few years developed a new strategy for the MENA region. It sees itself as ?the great Northern civilization? to which it hopes to draw countries beyond its periphery. Russia has not only upped its support for old allies in the region, such as Syria, Algeria and Iran, but is also increasingly supporting Egypt?s military regime, and getting involved in Libya, Iraq and even Bahrain and Saudi Arabia. Moscow?s pivot to the East is a direct response to Western sanctions as well as NATO?s creeping up to Russia?s borders. In energy Moscow has set itself new strategic goals (see here, here, and here)to be involved in oil and gas projects in the MENA region, not because the Russians need oil and gas supplies from there, but because they know Europe needs North African and Middle Eastern gas.

Moscow?s strategy is to challenge the US-EU doctrine and position in the region. Russia is feeling growing support for its ideas as Arab states are blaming the West for their support for opposition forces (Muslim Brotherhood/fundamentalists) in the broken states of the region?Syria, Iraq, and Egypt.

Analysts are especially worried about the possibility that key-Western allies, such as Egypt and Saudi Arabia, are willing to sign major military sales contracts with Moscow and its allies. At present, there is now word of potential arms sales to Saudi Arabia?s allies again ever since ?the retirement? of Prince Bandar bin Sultan, who was despised in Moscow and seen ?as an agent of the American-Atlantic community.? In Saudi Arabia, Russia?s Lukoil is active in the Eastern Province and there appears to be a warming in relations between the two countries.

Russia has for a long time been involved in Iran of course. Iran has been Russia?s main trading partner in the Middle East, with a total bilateral trade around US$4-5 billion. Most of the trade at present is still flowing from Russia to Iran, based on ferrous metals, cars, arms, and military materiel. But both sides are also much focusing on cooperation in upstream oil and gas. Russian companies have increased their investments and operations in Iran?s oil and gas projects, mainly via Russian energy companies such as Gazprom and Lukoil.

Another concern is Iran and Russia?s willingness to increase the power of the Gas Exporting Countries Forum (GECF), which is a group of states that control an estimated 70% of proven natural gas reserves worldwide.

Moscow?s cooperation with Syria is well-known, but Iraq has also risen on the agenda in Moscow, partly thanks to that country?s growing ties with Iran. Until recently, Russia?s influence in Iraq had been waning, as a result of its support of the Saddam Hussein regime. But Moscow?s commercial interests are now growing in Iraq?s energy, military and infrastructure projects. In early 2013 Russia forgave Iraq its multi-billion dollar debt. In 2012 Moscow and Baghdad agreed on weapons contracts worth $4.2 billion. Russian companies have also made substantial investments in the Iraqi oil and gas sector, with Lukoil and Gazprom leading the charge.

It is time for a wake-up call inside of the offices of governments in the EU and especially Brussels

Moscow?s influence in North Africa is also growing strongly. Egypt?s military regime has stepped up cooperation with Moscow. The main focus of their bilateral trade is on transport, equipment, automotive parts, oil and minerals, civilian aircraft, agriculture, and water desalination, but Russia is reportedly also interested in establishing joint ventures with Egyptian counterparts in areas such as oil exploration and modernization of the country?s power plants.

Algeria, the only North African Arab country that has not witnessed an Arab Spring revolution, has been an ally of Moscow since the end of the civil war against the French. The military cooperation between the two countries has been growing substantially over the last few years. During 2003-2012 Algeria spent almost US$54 billion abroad on military sales, of which more than 90% went to Russia. Those purchases accounted for 10% of Russia?s total arms exports, making Algeria one of the Kremlin?s best customers after only China and India. But much of Russia?s cooperation with Algeria revolves around the exploration and production of oil and hydrocarbons, with several Russian companies, such as Rosneft and Gazprom, active in these areas.. Russia?s impressive involvement in Algeria could be a potential threat to European gas supplies in the long-run.

The? increased Russian involvement in key energy sectors in the MENA region could be a threat to Europe in case of a conflict. Southern European countries, such as Italy, Spain and Greece, are increasingly dependent on gas supplies from North Africa and the Levant. Russian influence, buttressed by military cooperation, will be a potential risk for Southern Europe.

Major force

At the same time, China is becoming a major player in the MENA arena, while India is following in its path. Two economic-military spearheads of Chinese foreign economic and military policies are clear: Iran and Sudan. China?s involvement in those countries has always been classified as a geopolitical move to have access to oil and gas reserves. Iran?s economic relationship with China has historically been based on the oil and gas trade, but due to the international sanctions against Iran and China?s increased economic significance, the Tehran-Beijing relationship has now become wider and deeper. Whereas in the past, Germany, Italy and Greece were Iran?s main trading partners, they have now been replaced by China.

In Iraq, China?s support of the Al Maliki government has given Chinese companies new openings to get access to additional sources of oil (and gas).

Egypt has also become a major trade partner for China, mainly for inexpensive Chinese products. China currently is Egypt?s largest economic partner, surpassing the US in 2011. For China, Egypt is of immense interest, as it can offer China economic and geopolitical influence in Africa and the Middle East. As a traditionally influential player in the Arab world, a closer relationship with Egypt could buy China political goodwill in the region, but may also lead to practical benefits such as expedited access to the Suez Canal for Chinese commercial vessels and warships. Still, some issues have emerged between the two countries, as Beijing was initially positive about the Muslim Brotherhood government of President Mursi. Relations with the new Egyptian (military) president Sisi are still unclear.

At the same time, Algeria, North Africa?s main LNG and pipeline gas supplier to Europe, also has China?s full attention. Although it has an interest in Algerian oil production, China mostly relies on domestic natural gas and liquid natural gas (LNG) imports from the Persian Gulf and Asia. China?s latest projects are focused on engineering. After France and Italy, China is Algeria?s third largest source of imports.

Oil and gas markets are not liberal, but controlled by geopolitical power players, NOCs, IOCs and governments

China?s new-found activism, combined the desire of regional actors to diversify their economic and political partners, is beginning to foster a new political dynamic in the Middle East. Beijing has become a major force, threatening the historical power positons held by Russia and the US.

Power players

As a result of the encroachment of Russia and China in the MENA region, the EU?s negotiating position in the region has weakened. Arab countries, even the historically pro-Western regimes in Saudi Arabia, Egypt and the United Arab Emirates, seem to be increasingly interested in developing ?cooperation with new partners, especially Moscow and Beijing. The growing influence of Chinese and especially Russian energy and defense conglomerates in these countries could constrain future flows of oil and gas to Europe.

It is time for a wake-up call inside of the offices of governments in the EU and especially Brussels. The Ukraine crisis has led to some action and has raised awareness of the importance of an energy security strategy. In response to the Ukraine crisis, the March 2014 European Council mandated the European Commission to present a comprehensive plan to reduce European energy dependence, which it did in May 2014. Brussels recognized the importance of diversification and said it would be targeting MENA suppliers, but nothing really happened. As the EU-US Energy Council on 3 December showed, wishful thinking and lack of knowledge of current developments prevail.

What is needed now is a reassessment of EU energy security. Europe will have to take up a much more active role in safeguarding oil and natural gas exploration, production and transit in the MENA region. Some European politicians ?have shownsome awareness of this necessity, but Brussels mostly seems to subscribe to the fallacious belief that global oil and gas markets are waiting for any opportunity to come to Europe. This is a fallacy. Brussels and EU member states need to face the fact that energy and geopolitics are intertwined.

New energy supplies can only be secured if Europe speaks with one voice, and if Brussels is willing to become a real power player, fully engaging Arab governments and willing to discuss their concerns without making unrealistic demands for democracy. Oil and gas markets are not liberal, but controlled by geopolitical power players, NOCs, IOCs and governments. Countries such as Algeria and Egypt play a pivotal role in the geopolitical game concerning European gas supplies. Algeria, for example, one of Russia?s closest African allies, is at the same time the third largest supplier of natural gas to the EU. They need to be approached as such.

Freeing Europe?s energy thirst from Moscow?s political hard-line options will be hard, requiring? a long-term approach with political commitment and large volumes of investment, but it is necessary. The current half-hearted European foreign policy agenda and the internal bickering between West-European and East-European governments, will not persuade gas exporters in the Middle East and North Africa to make long-term commitments to supply gas to Europe.

By Dr. Cyril Widdershoven for energypost.eu