The Baltic Sea: Main East-West Gas Corridor in Next Decade?

1. The Baltic Sea: Main East-West Gas Corridor in Next Decade? Kari Liuhto Professor, Director Pan-European Institute www.tse.fi/pei Bucharest 27.8.2009

2. EU-Russia energy co-operation: starting point • EU’s energy production goes down • Forecast: 20%-decline by 2030 • Are we really able to implement 20-20-20 (ECR) plan by 2020; • for instance, are we able to lift share of renewables to 20%? • EU’s energy consumption goes up • Forecast: 10%-increase by 2030 • Compare with 20-20-20 plan • Forecast does not take into account the impact • of the current economic crisis • Russia has large hydrocarbon reserves • Gas: 25 % of global reserves • Oil: 7 % of global reserves • Reserves are large but the new reserves are located • in remote and harsh regions

3. EU’s primary energy consumption ??? Note: Oil, gas, coal and nuclear account for 85% of EU’s energy production

4. Share of gas has increased 5 fold in EU’s energy consumption since 1965 32% 2030 Share of gas in EU’s energy consumption continue to grow in the future

5. EU’s energy consumption and production +10% -20% 20 cut ?

6. Future of EU’s energy consumption

7. Russia as EU’s gas supplier - imports from Russia grown but share remained unchanged 2030 24% + ?? 2030 16%

8. Russia’s share as primary energy consumption 2006 • Remember also: • Gas transit via Russia • Russia’s total energy leverage • 24% of EU’s gas consumption • 29% of EU’s oil consumption • 19% of EU’s uranium consumption After Nord Stream ?

9. Have we prepared enough for supply cut? 60 days requirement by European Commission

10. Russia’s operational capability to export gas in the future • Own consumption • Russia uses energy carelessly -> gas prices should be increased • Consumption structure does not support gas exports: • energy consumption: gas 57%, oil 18%, coal 14%, hydro 6%, nuclear 5% • Energy savings programme should be implemented: • Russia’s energy inefficiency = France’s energy consumption • Production stagnated even before financial crisis • Gas: over 10%-production drop prior the crisis (Gazprom’s production down 20% – exports some 50% down in 1H/2009) • Gas: independent producers are a question mark • (motivation non-existent: prices low & access to pipeline; flaring common) • Colossal investments into new fields required • Production concentrated on state hands (over 80%) • New fields located in arctic conditions (foreign knowledge needed) • Export infrastructure • Gas: new pipelines or LNG shipments ?

11. End of friendly-pricing not over yet but … European price in 2010 in 2011

12. Russia’s traditional gas fields depleting, new projects delayed, own consumption grows after crisis: Russia’s ability to export more gas? Arctic fields are huge in size, but also huge in terms of know-how and finance needs Russia’s production does not suffice unless 1) it is capable of opening new fields, 2) it lowers its own gas consumption and 3) control natural gas imports from CIS

13. 2/3 used by Russia 1/3 used abroad 2/3 exported to EU 1 3/4 exported via Ukraine

14. Main gas pipes from East 55 bcm ~ 30 bcm ~100 bcm EU’s gas consumption ~ 500 bcm EU gas imports ~350 bcm From Russia ~130 bcm Pipeline imports ~ 87% Liquefied gas imports ~ 13% ~30-60 bcm 16 bcm Nabucco: ~ 30 bcm

15. Nord Stream: background information Capacity 55 bcm / year (two legs) Estimated investment $ 12 – 15 bn Shareholders: Gazprom 51%, Wintershall 20%, E.ON Ruhrgas 20%, Gasunie 9% (Holland) Main sources of gas supplied to the pipeline: Yuzhno- Russkoye, Yamal Peninsula and Shtokman gas fields Planned completion in 2010-12 (but could be delayed)

16. How to fill Nord Stream? In short run: re-direct gas flows from existing pipelines (from Brotherhood & Yamal to Nord Stream) In long run: open Bovanenkovo (Yamal Peninsula) and Shtokman (Barents Sea)

17. Russia’s assumed gas strategy? Strategic goal: maintain CIS in Russia’s sphere of influence Operation A: build more leverage on Ukraine via diminishing its role in East-West gas transit (Russia’s military base in Crimea to expire in 2017) Operation B: acquire strategic companies in CIS Operation C: maintain gas flows from Central Asia to Russia Operation D: increase dependence of EU’s leading countries on gas deliveries from Russia (total dependency of EU does not grow extremely) If operations can be executed, then: Russia would have more leverage on political decisions in CIS & EU

18. Nord Stream: some arguments in favour and against • Some arguments in favour • EU needs more gas + Russia has it = new pipeline capacity needed • Reliability better without middlemen • Pipes bring Russia closer to the EU (pipes integrate – but who to whom?) • Sabotage less easy than on ground (reference to Caucasus/Turkey) • Creates new economic activity • Some arguments against • Political: divides EU, ”gas Ribbentrop” • Economic: more expensive • Environmental: releases chemical pollution in the bottom, WWII weapons • Military: Russia’s military presence in BSR increases (military exercises) • Interdependency a myth: pipe of peace becomes cause to conflict

19. EU-Russia interdependency is a myth Interdependence works during sunny weather but breaks on a rainy day (interdependence is like a good umbrella except it does not hold rain) Foundation: Natural gas sales to EU cover ~10-12 % of Russia’s budget while Russia’s gas covers ~6-7 % of EU’s primary energy consumption Why interdependence does not work on a rainy day?: 1) EU becomes more dependent on Russia’s energy while Russia becomes less dependent on EU machinery within this century 2) Energy is by far a more strategic commodity than money (EU’s hydrocarbon reserves insignificant = we need energy immediately – Russia FOREX reserves significant = Russia can wait longer energy import revenues) 3) Unbalanced negotiation power at firm level: EU buyers many and compete with each other while Russia’s energy exports concentrated 4) Gas OPEC vs EU’s common energy policy

20. Nord Stream: current situation around the Baltic Sea • Germany in favour (main beneficiary) • The Baltic States and Poland: critical position • Finland and Sweden: mainly environmental concerns • (security concerns raised particularly in Sweden) • In Finland: 46% in favour, 40% against, 14% no opinion • (Social Democrats 59% in favour, Greens 53% against) • Environmental assessment process progresses • in Finland and Sweden (construction permission next year?) • Building of pipe proceeds some 3 km/day • (some 400 days needed when the project is started)

21. Some conclusions External one source energy dependence of EU’s largest members may become too high (Vodka syndrome) need to reduce energy consumption (more efficient use of energy) need to increase energy production (especially renewables but also nuclear energy) EU should create common energy policy, incl. external component (energy solidarity will not be enough) need to build larger hydrocarbon storages and emergency energy producing capacity need to modernize relations with Russia

22. Some conclusions EU needs to modernize its relations with Russia Our trade relations should be diversified – e.g. SME co-operation should be increased (energy-dominated trade does not create sustainable bridges) Investment flows to both directions should be promoted but bilateral big deals between Russia and certain member states do not support integration (energy-related investment are too political to offer an alternative business bridge for EU-Russia relations) Common research efforts should be created (not unilateral propaganda-units) Younger generation should know each other better (those born in 1991 have already entered work life – they have never experienced personally the Soviet system)

23. Some conclusions EU needs to diversify sources of energy not routesNabucco is the major attempt to diversify source of energy Nord Stream and South Stream do not increase much EU’s gas imports from Russia at least not in medium run but replace major part of gas transit via Ukraine(full capacity of Nord Stream and South Stream is roughly comparable to Ukrainian gas transit volume) Trilateral ownership of Ukrainian pipe would support European integration (already ancient Romans recognized the importance of roads in connecting nations – bypassing nations means bypassing European integration) Bypassing pipelines would be a step back to history(Europe should avoid new Cold War and division between Western core Europe and Eastern buffer Europe)

24. Cartoons should give a humoristic picture on future Europe - not a realistic one In order to keep EU’s foreign policies sober, let’s advice the most addict members to consume Vodka wisely !