Yayin Tarihi: 12 Nisan /April 1998
EURASIAN ENERGY PROSPECTS:
Need For a Long-Term Western Strategy
MEHMET ÖGÜTÇÜ
contiued from Part I (published on 6
Nisan/April 1998)
II- CURRENT ENERGY SITUATION IN THE EUROPEAN UNION:
4. We shall focus our attention here mainly on the EU as it is considered to be the biggest single market for the Eurasian energy production. Recent tensions between Russia and other NIS once again have raised concerns regarding the security of the Eurasian energy exports to Europe. The problem of security supply at the EU level is very important, given that the Union is a major energy consumer in the international energy arena. (By the way, it should be noted that because of a lack of external energy policy the EU is not yet a major energy player). The integration of the Union's energy market requires the concept of security of supply to be defined at the Union level. It is this concept which will define the scope of the internal energy market and place it in the context of the Union's long-term energy policy. The role of the Union resources, the optimum degree of diversification of sources or forms of energy, the degree of com- petition in the market, the scope of regulations on production, distribution and use of energy, all have to be defined in this sense. It will shed light on how and at what rate national dimension can gradually be replaced by EU dimension (i.e. subsidiarity question). This is of particular importance for gas. Despite its undeniable advantages as a clean, comfortable, reasonably priced and environment friendly energy source and raw material, natural gas would not have attained its present important position, with a share of almost 20 percent of the Union's energy consumption, if it had not been possible to ensure uninterrupted security of supply. Thus, the security of supply has been from the very beginning of gas consumption - and is still today - a central concern of the gas in- dustries. A similar line of thinking can certainly be offered for oil industries as well.
5. It has become obvious that the current and future energy shortfall in the EU cannot be made up unless some more expensive reserves are mobilized in the traditional areas of supply, namely Russia, Norway and Algeria. Even so, there will be some requirement for new sources; but the financial resources needed to bring in such distant gas and oil to consumer areas are gigantic in comparison with the present financial capacities of the various partners. This shortcoming could be one of the major limitations on the EU economies unless coordinated solutions are sought and found to mobilising capital and creating more flexible credit terms. To encourage the participation of financial institutions and oil and gas companies, who will need to mobilize all their resources to respond to the new demand for oil and gas, the consumer countries also need to contribute by being prepared to accept prices that will provide a reasonable return, taking into account the expected higher costs. This is an inevitable condition: investors need to make firm commitments, which they will not come unless they anticipate lasting improvement in prices. We are, however, aware that the limitations faced today, notably financial, are likely to persist. It will therefore be necessary to step boldly beyond the types of co-operation implemented to date and tackle interactive schemes involving greater solidarity between partners. Such co-operation, based on a fairer sharing out of risks and earnings, would provide continuity of interest throughout the oil and gas industries, from production site to consumer areas, and would help to ensure a better guarantee of secure markets for producers and secure supplies for consumers.
6. At the beginning of the next century, the dependence of the OECD-Europe on OPEC oil will increase to about 75 %, especially as a result of a decrease in domestic production. It can be expected that the demand for OPEC oil (and other oil) from East European countries, too, will increase, especially in view of the diversification of suppliers, whereby these countries will wish to become less dependent on the former USSR for their supplies. The governments of Eastern Europe have been left with a legacy of energy conditions that continue to plague their economies. They have high dependence on energy imports from Russia; their energy prices do not reflect the international market; as a result, energy enterprises perform rather poorly. Eastern Europe, too, as a region lacks security of supplies and extremely high energy use there in relation to industrial output is particularly worrisome. In terms of domestic energy production, the most important observation is that indigenous oil and gas resources are very limited and those that are significant -- mainly in Romania -- have been declining over the last decade or more. In time the same situation could be applied to the other republics of the former Soviet Union as they also strive to become less dependent on the Russian Federation - the latter providing more than 90 % of the oil and gas production in this area. So the Eurasian energy will also target the East European and other neighbouring NIS countries in the future, but for the time being their eyes are fixed on the Western markets, which can help them build energy infrastructure and pay hard currency at the world market prices. Anchoring the Western capital in their energy investments is also seen as a political guarantee against possible Russian claims.
7. 62 percent of the EU's total natural gas consumption in 1989 was supplied by indigenous production. This ratio of 62 percent could well compare with 27 percent for oil. The main gas producers are The Netherlands - with nearly half of the Union production and more than a quarter of its total consumption - and the UK. Norway will also join the EU with its considerable gas production. But it became obvious some time ago that indigenous production of natural gas would be insufficient to cover the EU's steadily-rising demand. External natural gas sources had to be found and committed to the Union's supply. For security reasons, a diversification of supply sources was long recognised to be desirable. The European gas sought to establish a wider and more international natural gas markets and looked not only at its current external suppliers, but also at other possible sources such as Iran, Western Africa, Arctic Canada, South America and, more importantly, the former Soviet Union. Today, the imports from the non-Union countries, currently accounting for 38 percent of total gas needs, stem fairly equally from three suppliers: Algeria (11 percent), Norway (12 percent) and the former USSR (18 percent). The former USSR, with a giant natural gas grid reaching from Western Siberia in the east to Ushgorod at the Czech border, from where the Russian gas is fed into the Western European grids. Three parallel pipelines run to Waidhaus at the Czech/German border and four others to Baumgarten at the Czech/Austrian border. Natural gas supplies are more or less guaranteed for the coming decade but after the turn of the century, increasing use will have to be made of distant reserves, including those in the former USSR. Moreover, the consumption of oil and gas in the former USSR, too, already large, will continue to increase. Therefore, in the longer-term, Europe will have a vested interest in seeing the full exploitation of the large NIS reserves. The transport of gas over long distances is profitable only if it is achieved in large volumes and at a continous rate. The cost of transportation from the Siberian fields to Western Europe (approx. 5000 km) is difficult to estimate, but a very rough estimate would be in the region of 20 cent/m3. This is about the same as the price currently being paid by Western Europe. Natural gas currently emerges as the most serious competitor of coal and oil, mainly because of its clean combustion characteristics. It is a well established fact that contributions to future energy security of conventional resources will come primarily from coal and natural gas. The absence of sulphur and the relatively low levels of fuel nitrogen make natural gas highly attractive for combustion processes in comparison with coal or petroleum-derived fuels. The production of carbon dioxide, the major greenhouse gas, is lowest per unit of delivered energy of all of the fossil fuels.
8. This being the case, we might now attempt to sketch out how the EU intends to respond to its future energy challenge. Proposals for a new European Union energy policy up to the year 2020, if favourably received by the member states, could lead to the inclusion of energy policy measures within the Treaty on European Union when it is to be revised in 1996. Energy policy was deliberately omitted from the Maastricht Treaty with member states (jealous of their national control) deciding that it was an area best left to individual countries. But the Commission already has its eyes set on an energy chapter inserted into the revised text of the Treaty. The Commission's preliminary thoughts are still at an embryonic stage. The aim is not to tackle all the energy problems that still divide member states such as the liberalisation of gas and electricity markets, the supply-crisis measures, the energy/carbon tax and the European Energy Charter; instead, it aims to consider a number of European energy scenarios for the year 2020 - related to such aspects as economic growth, risk of shortage of supplies, carbon dioxide emissions, excessive demand for natural gas, need for energy efficiency - and will suggest ways in which these potential problems could be tackled. The Commission discussion paper on new orientations in energy is based on, but goes further than, the major report 'A View To The Future' published in 1992. It makes some general points which tend to reflect a long term thinking. According to the paper, the energy systems are complex and influenced by public policy, local circumstances, resource endowment, imbedded technology and prevailing supply, demand and trade structures. The discussion document also points to a number of key trends that will determine the energy future of the EU. Let us highlight some of these which are relevant to our paper: first, global supply of energy sources is unlikely to pose a physical or price constraint; second, indigenous production is set to decline; third, imports could reach 75 percent of consumption by 2020 and prices may be volatile but affordable; and, finally, the paper stresses the supply aspects of the Union's future energy needs, particularly the importance of energy in the evolving geopolitical framework and in external relations, treating energy as a factor for geo-political stability. Based on well informed contacts in Brussels, we may indicate that any formal Commission proposal is not yet expected for adoption before the next year.
9. Towards A European Energy Charter: On top of the supply security concerns, we know that the development of new fields in the Eurasia will take longer and is more costly than might have been expected only two or three years ago. The overall picture is still not clear. The Union is now actively developing ideas for energy co-opera- tion on a sound, workable basis with Eastern Europe and the NIS of the former Soviet Union, conscious of the growing problems in those areas which could put pressure in the years to come on the world energy market and particularly on the former Soviet gas supplies. And here one should not pass without elaborating the concept of the European Energy Charter (no longer a "European" affair in its geographic coverage), which was first put forward in 1990 by the Dutch Government and known as the Lubbers Plan. It was presented as a way of ensuring that the energy resources indigenous to the West, which will not last forever, can be supplemented by those of Eastern Europe and the former Soviet Union, which would benefit in return from Western know-how and capital inflow to unlock its potential energy resources. The fundamental purposes of the Charter are to open up the energy resources of the former Soviet Union and Eastern Europe, encourage investment and free trade, and ensure reciprocal access to markets, as well as to support economic transition for the political evolution towards democracy. Recent disruptions to energy flows between the former Soviet republics have clearly illustrated the need for such an agreement with Russia being involved in a number of disputes over fuel prices and supplies with Ukraine, the Baltic and other republics. Drafted in the form of a policy declaration, this Charter has been regarded as simply one step on the way to a more detailed agreement, leaving the signatories to decide exactly how it should be implemented in subsequent, legally binding accords. The success of this initiative would hopefully help to provide some back-up ammunition to the NIS reformers in order to introduce a market economic approach in this strategic sector. It will also fuel economic recovery in the East by promoting the creation of stable commercial relationships through proper legal and fiscal frameworks in energy sectors of the countries concerned. The European Council in Lisbon in early 1992 stressed the importance of developing close co-operation in the energy sector as a vital contribution to facilitating and accelerating this transition process towards a market economy. After a series of meticolous negotiations, the Charter was signed at the Hague on 17 December 1991 by 48 countries including all the members of the European Union, as well as the Union itself, all the other countries of Western Europe, nearly all the countries of Eastern Europe and all, except Turkmenistan, of the former USSR, three countries in the Mediterreanean and four major non-European countries of the OECD, namely the US, Japan, Canada and Australia.
10. Since the signing of the Charter, the participating countries have been negotiating the Charter's Basic Agreement (now "Charter Treaty") with a view to providing the legal basis for the energy industries' operations and investment in all signatory countries. At the moment the priority is to complete as early as possible the negotiations on the Treaty. It is expected to address the issues which are important for the East-West co-operation in energy, including investment protection, non-discrimina- tion, transit and open trading conditions. There are, however, still some fundamental technical difficulties to be resolved. Also, the nature of the negotiations in progress does not make things any easier and, above all, the large number of participants clearly slows things down. The involvement of the non-European OECD countries all too often transforms the discussions into a negotiation solely between the Western countries. Last but not least, the economic and political instability of the former Soviet Union makes certain negotiators exceedingly cautious. The Charter talks were stalled over Russia's reluctance to give Western investors the legal guarantees they need to channel the badly needed expertise, equipment and cash to the East. The slowness of the talks was leading the EU, which initiated the negotiations, to consider whether the plans should be made less ambitious or whether a break of several months should be agreed to give Russia time to put its house in order. Political problems such as infighting between the EU, the US and Japan over access to Russian and other NIS energy reserves, as well as a host of unresolved issues in agreeing a legally binding text has brought the talks practically to a halt. Norway and Russia, some of the biggest oil and gas producers in the talks, both insist that domestic companies or state companies must be allowed to keep their current privileged position. Another problem is that of subsidized energy prices in the NIS. Most NIS republics are being asked to give a firm date for when they will free energy prices while negotiating transitional arrangements. The Western countries want transitional arrangements to be as limited and brief as possible, something being resisted by some NIS and East European governments who argue that their economic reforms and new legislation in such areas as foreign investment will take considerable time. The EU, too, has been criticized by other participants that Brussels aims at getting a higher level of energy co-operation with Russia than the US or Japan can get. Some Europeans, on the other hand, feel the US and Japan gatecrashed what was a European affair and still resent this. Nevertheless, the negotiators agreed last December to a two-tier approach which was promoted by the EU, leaving aside the most ambitious and difficult part, namely the pre-investment protection, of the exercise until a later date. The EU scaled down its initial ambitions because the main beneficiary of the Charter, the former Soviet republics, was not in a position to open up its market completely to the exploration of and drilling for oil and natural gas. The new compromise, reluctantly agreed to by the US as well, envisages that the provisions on pre-investment protection will not be included in the phase I Treaty, which might be signed before the summer recess, according to Charles Rutten, who is chairing the Charter negotiations. With the exception of the pre- investment problem to be covered under the phase II Treaty, only a limited number of unresolved issues are to be negotiated separately (e.g. the possible inclusion of energy equipment and services).
11. As the current outlook suggests, the world energy trade has evolved from a focus on long-term, fixed price, fixed volume and exclusive contracts to a set of flexible arrangements, whereby market participants are positioned to benefit from different and changing costs, from price changes, from shifts in supply or demand and from new production techniques or other energy-related technologies. One of the most important things that Western countries can share at this stage with their Eurasian partners is precisely their experience in making this transition from less to more market- oriented energy trading patterns. But it is, as always, easier said than done: changing from an economically and environmentally inefficient energy sector to a more rational and market-determined one will, by definition, be painful and costly since these countries will continue to depend heavily on energy imports. It is argued that the Charter would, once concluded, have the following spin-off advantages for the West:
-- It would first reduce Western dependence on OPEC for its oil supplies. There is some risk attached to reliance on NIS energy: in the event of high West-NIS tension (which does not at the moment seem likely to develop) or of internal disorder or collapse, supplies would be cut off. However, this danger should not be overstated; the NIS have up to now been a reliable supplier of energy to the West, and are likely to continue to be so if only because they need the hard currency. -- Second, the introduction of Western energy technology in the NIS would limit various environmentally-damaging discharges into the atmosphere (such as leaks of methane from gas pipelines) and into rivers and lakes. All the evidence is that real progress towards efficiencies in the NIS and Eastern Europe could quite significantly reduce world greenhouse gas emissions in the medium term. -- Third, it should give the West better access to NIS energy resources. This would work in three ways. More energy would be produced, thanks to the introduction of Western technology. Energy efficiency measures would lead to a reduction in domestic energy demand, releasing more for export. And physical access to, for example, NIS gas supplies would be extended. Gas is likely to be the most important NIS energy resource for the West. Its cleanness and competitiveness point in the direction of sharp rises in West European demand over the next decade. In the long term the West could come to depend critically on the NIS's enormous supplies. -- Fourth, it would lock the NIS and other East European countries more closely than hitherto into the Western financial and trading system. -- Finally, closer co-operation would open up the NIS and East European energy sectors to Western companies.
12. It goes without saying that the NIS countries need to be reassured from the outset that they, too, would benefit from co-operation and that they would not lose control over the exploitation of their energy reserves. The following benefits might be identified from the NIS point of view: -- Greater efficiency of production and consumption would release oil and gas supplies for export to the West, boosting the NIS's hard currency revenues; more hard currency would in turn enable greater investment in other sectors of the economy. -- Greater efficiency would extend the longevity of reserves currently being exploited. -- NIS reformers would see an attraction in greater NIS-West economic interdependence. -- Better management of NIS energy reserves and consumption would help respond to growing NIS awareness of its environmental problems. -- Closer integration of NIS energy sector with that of the West seems very likely also to contribute to restructuring of the NIS economies. The expansion of hard currency outlets for NIS energy production, combined with more active involvement of Western companies and technology in exploration and exploitation, should increase the pressure for a more sensible price structure, greater independence for operators and better incentives for productivity and efficiency. And restructuring of the energy sector, which of course plays a central role in most NIS economies, is bound to increase the pressure for a more general economic restructuring along the same lines. Also, politically, the best security guarantee for their independence and sovereignty will be the presence of the Western business.
13. It might be useful to highlight briefly the EU's TACIS and PHARE programmes of technical assistance to the countries of Eastern and Central Europe and NIS, which include a number of important regional energy schemes. The PHARE regional energy programme began in 1992 with an Ecu 7 mn budget. One of the projects, which is to be cofinanced with TACIS, relates to potential problems at the interface between Central European electricity networks, the Balkan networks and the former Soviet network if and when the CENTREL is interconnected with the UCPTE. A strategy needs to be developed which allows exchanges between the ex-East Bloc networks even if they are not operated synchronously. Similarly, the programme includes a study of the interconnection of gas networks and supply diversification possibilities for the Central and Eastern European countries. The EU wants to ensure that these interconnection feasibi- lity studies open a real discussion between East and West and provide a concrete base for future investment possibilities. It expects, for example, that they will provide data with which the EIB and the EBRD can work. It maintains close contact with such financing institutions as the EIB and EBRD, which have a mandate to invest in East and Central Europe, as well as in NIS, and for which network projects are a priority. The two other projects are also under way - a management twinning scheme and legal/regulatory support for the European Energy Charter. Nevertheless, the PHARE and TACIS studies may well conclude that the best investment projects cannot be fully funded on a commercial basis. So a governmental lead is needed. The TACIS programme has sponsored a number of energy feasibility studies in the Eurasia, which has served as a prelude to European energy investments. Technical assistance has also been extended by the TACIS, the PHARE programmes, besides the World Bank, the EBRD and the UNDP assistance for the energy sector.
III- ENERGY PROFILE AND POTENTIAL OF THE EURASIAN REGION:
to be continued ( 19 Nisan/April 1998)
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