With the European Union (EU) securing around 25% of its gas from Russia and natural gas being an ever more important fuel for thermal power plants, the failure thus far of the European Union and Russia to agree a new long-term energy agreement has to be of concern to the electricity industry.
Russian and EU will huddle at a summit staged at Samara, Russia, where the stated aim of all parties is to start substantial negotiations on a new treaty, which the European Commission wants to reflect the principles of the 1994 international Energy Charter - as yet unratified by Russia - and which gives guarantees on access to pipeline networks and inward investment.
But whether this will be achieved has long been open to doubt, with president Vladimir Putin refusing to adopt all its principles. This stance was recently backed by Russian foreign minister Sergei Lavrov following a meeting with EU ministers in Moscow in February, where he said that while he accepted and was guided by most of the charter’s principles its "mechanisms related to transit and investment are unacceptable."
Such comments and plans to boost pipeline links between Russia, China and Japan are being read in some circles as evidence that Russia is prepared to sit out negotiations, until an energy-hungry EU effectively begs for terms.
Against this background, there is little doubt that the European electricity industry is genuinely fearful that, to quote a power industry insider, "political considerations will prevail at Samara to the detriment of the European electricity industry and ultimately of European energy consumers." In short a sell-out to the Russians is feared. "Russia’s been flexing its muscles. Ivan the Terrible is on the warpath again but this time using Gazprom as the battering ram," said the industry executive.
In Brussels, Eurelectric, which represents the national electricity associations of the 27 EU countries plus other OECD countries, wants to see a clear market framework for international energy relations with Russia emerging. "We’re working with our counterparts there - the Electric Power Council - and have established roadmaps aimed at bringing the energy markets of the two blocs together," says Chris Boothby, Eurelectric spokesman. "We want compatible market conditions to apply. The roadmaps have been established by industry and have been applauded at the ministerial level. Now we want it carried to a higher political level. But reciprocity must be the guiding principle," he said.
Mr Boothby explained that reciprocity, compatible market and environmental conditions and common nuclear safety standards should be a sine qua non of energy relations between the EU and any external partner. Given this, then Eurelectric was keen to bring the two markets together. "We’re pro-active," he told Modern Power Systems. "We want a pan-European liberalised electricity market extending east to Russia and south to the Mediterranean."
But could this be compromised by an EU/Russia deal that promotes gas at the expense of electricity - a clear anxiety among European electricity companies at present? "We know that the West needs their oil and gas but we want to be sure that there isn’t a trade-off to the detriment of electricity," said a senior figure in the EU industry.
As to the idea that the Russians might use their pipeline deals with China and Japan to pressure the EU into a hasty and disadvantageous deal, this is discounted by power industry officials. According to the European natural gas association Eurogas, it will take between five and ten years more for the Russians to construct such pipelines. One gas company executive says the threat is just "bluff and bluster." He said the Russians "would never give up all they have in the west at present – customers who pay the right price, the infrastructure, the channels, the deals, the contacts - just because there’s some rough talk between us. It’s not realistic."
Another diplomatic threat to the EU made by President Putin has been the suggestion that an OPEC-style group be formed for natural gas. Indeed such an idea was suggested at the Gas Exporting Countries Forum in April in Qatar. However, there is some doubt whether such a formal organisation is even necessary. Dr Abdul-Hussain Ali Mirza, Bahrain's Minister of Oil and Gas Affairs and Chairman of the National Oil and Gas Authority, told Modern Power Systems in an interview that he thought such a cartel was unlikely.
"It doesn't look like it will materialize. Gas is a product only a few countries have (in large quantities). Top producers Russia, Iran and Qatar are already dictating terms, so they don't need to form a cartel, but they will decide that," he said.
However, that does not mean that Russia will not gain influence in other natural gas producing countries. Zeyno Baran, of the Hudson Institute, recently told a European Parliament foreign affairs committee hearing that Moscow had been flexing its diplomatic muscles in the key EU gas supply region of North Africa, where it has "been actively courting its Soviet-era clients." He said that in January Russia and Algeria had agreed to "significantly deepen their co-operation in exploration and transportation in the energy sector", adding "Moscow has made similar overtures to Libya and Egypt, signing an agreement in December 2006 on co-operation in exploration and production of oil and gas in Egypt". He warned: "Without a united effort from the EU, the energy producing states of North Africa will drift under the influence of Russia and its policies."
One alternative tack for the EU is wooing natural gas producers in the Caucasus and central Asia, such as Azerbaijan and Turkmenistan. And the current EU president, Germany, has been pushing for better energy relations with these countries, with a Commission discussion paper acknowledging their gas reserves as being of "permanent strategic importance". It has warned that the EU risks losing access to these reserves by adopting a tough policy over human rights, which are often abused in these countries. According to specialist newswire the European Voice, the paper encourages Brussels to stop limiting diplomatic contacts with regimes with weak civil liberties records: "EU policies of limiting engagement have not had the desired impact," it claims, saying that the "EU should now shift its focus toward what is described as a "security, governance and resources partnership" - food for thought in Moscow.
But taking all this into account, what really is the likelihood of a happy ending for a Russia-EU energy agreement? Slim, claimed Vladimir Milov, President of the Institute of Energy Policy, Moscow, at the European Parliament foreign affairs committee’s hearing. He said recent restrictions on foreign direct investment within Russia were "very worrying" and could lead to significant underinvestment in developing gas and oil fields. Furthermore, he said: "It is difficult to expect any liberalisation of the energy market in Russia under the current administration." Milov advised the EU to tie Russia’s prospects of investing into the European energy market to their allowing similarly permissive rules in Moscow. The EU should unite behind such a requirement of "reciprocity of a legal nature," he suggested.
The problem with the EU and foreign policy is that consensus is required amongst an often fractious body of 27 member states with widely divergent interests, especially as regards relationships with Russia. The negotiations between Russia and Germany for a direct undersea Baltic pipeline link have long irked Poland and the Baltic States, for instance. Also the negotiations between Russia, Bulgaria and Hungary over the extension of the Russian Blue Stream pipeline are at odds with the plans to build the Greece-Turkey and related Italian interconnectors, designed to bring Caspian gas to EU markets.
It is the effective veto wielded by any one member state regarding agreements between the EU as a whole and a third country that really causes problems. The long-running spat between Russia and Poland’s current right-wing populist government over the Russian ban on Polish meat exports has led Poland to block progress over a new Partnership and Cooperation Agreement (PCA). Until the meat ban goes, Warsaw has said, an energy deal will not receive its blessing. In the run up to the May summit, the European Commission has been trying to coax the Poles to relax their veto, with talks being staged between recent talks between commission President José Manuel Barroso, German Chancellor Angela Merkel and the notoriously prickly Polish President Lech Kaczynski. Poland says the ban is pure politics, giving Moscow an additional lever in energy negotiations. And it is not just the Poles who have threatened to block progress on an energy agreement – Lithuania has made similar threats over the halt since last July of Russian oil supplies to its Mazeikiu Nafta refinery.
But optimism springs eternal and Russia news agency Interfax has reported the EU’s upbeat foreign policy co-ordinator Javier Solana as being confident that talks on a new EU-Russia energy agreement would be launched soon. He claimed obstacles preventing negotiations "will be solved in the upcoming weeks, and that we can then launch negotiations for the new EU-Russia Agreement before the summer." He continued: "We are mutually interdependent in this sector…Russia is and will remain the EU's foremost external energy supplier." Time will tell whether the current nicely balanced arrangement continuew to hold true.
Keith Nuthall, Alan Osborn, Paul Cochrane
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