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European Energy Relations with Russia and Central Asia, IFRI

01.02.2008

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High Representative Solana, Excellencies, Ladies and Gentlemen,

It is with great pleasure that I have accepted IFRIs invitation to talk to You today about European energy relations with Russia and Central Asia. And indeed you can hardly open any newspaper these days and not read about Gazprom, about European dependency on fossil fuels and corresponding initiatives to reduce greenhouse gases, on the enormous transfer of wealth from European consumers to state-owned companies that have been created in many countries around the world.

All seem to have one basic underlying argument in common, as one article in a German newspaper recently put it: “The endgame for oil has begun”. This sentence somewhat reminds me of the phrase that was discussed after the fall of the Soviet Empire: “The end of history.” We all know how that discussion was decided. Nevertheless, we have to acknowledge that fossil fuels cannot be tapped forever, they are not an endlessly available resource.

Europe’s response to these challenges so far is correct: on the one hand, we aim at ensuring and improving the flow of fossil fuels to Europe through diversification of transportation routes, types of fuel and new pipelines. On the other, we strive to reduce our dependency on fossil fuels by introducing energy saving measures, by increasingly using renewable energies and by promoting new technologies that substitute oil and gas. We give strong signals that we are preparing ourselves for the Low-Carbon future the world needs to aim at. However, for some time to come we remain dependent on fossil fuels.

That is what many people in the foreign policy community are so much afraid of: that Europe might reach a point when specific economic dependencies from having to import goods that define the very core and nature of our economies turn into political dependencies that diminish our capabilities to act internationally.

European oil and gas reserves are dwindling. At the same time there is no doubt that Russia and increasingly Central Asia are becoming more important partners for Europe for imports of oil and gas. Russia has become an energy giant. For Germany and Europe, Russia is one of our leading oil and gas suppliers. The question that some people ask is: Do we become so dependent on Russian oil and gas that such a dependency reduces our abilities to conduct foreign or even internal policies as we choose? Are we on the verge of actually sliding into strategic dependency?

Currently there are basically two schools of thought that try to answer these questions:

-        First of all, there is the interdependency school, as I call it, which holds that Europe has been importing oil and gas from Russia for many years now. Europe has overall made good experience with the Soviet and the following Russian energy supply for almost four decades now: Relations are reliable and independent from political change. They are build on economic raison d´être and not political power games. It is argued that the Russian pipeline system is geared so much towards Europe that Russia is as - or even more - dependent on exports to Europe as is Europe from imports from Russia. And Russia is not in a position to change that dependency very quickly due to the lack of infrastructure that could provide gas to other world regions. Furthermore the argument goes, Russia needs European technologies to continue to uphold its gas production from far off and hard to reach oil and gas fields. Without such technologies, revenues from fossil fuels exports on which the Russian state heavily depends will decrease and Russia will not be able to continue to grow as it does right now. Proponents point out that there already is an investment crisis in the gas sector, particularly on the important Jamal peninsula. And indeed Gazprom investment activities in these days seem to be oriented more towards western European downstream activities and distribution systems then towards upstream activities in Russia itself.

-        This, however, is an argument that the second school of thought which I would like to call the geopolitical school also uses to underline their case. The basic assumption here is that Russia is intent on gaining maximum political leverage from its oil and gas reserves - that Russia is using energy as a weapon or at least as a strategic tool for geopolitical power maximization. As evidence proponents of this view cite Russia's sometimes blunt attempts to force Central Asian countries to export their oil and gas to the West via Russia by using Russian monopolistic structures in Central Asia. They cite increasing activities by Gasprom to gain control of foreign downstream activities like in the Ukraine and Serbia. They cite Russian attempts to miss no opportunity to make transit countries cede control of their pipeline networks. They also cite Russian threats vis‑à‑vis Eastern European Countries, whose energy imports Russia subsidizes, to cut such subsidies both to ensure "good behaviour" and to punish what it deems errant behaviour. Russia's dealings with Belarus, the Ukraine and Georgia are said to be typical examples of such tactics. According to this view, Russia is motivated by commercial interests but considerations of power politics play a dominant role.

To make this clear from the start: I feel very inclined to follow the reasoning of the interdependency supporters. It seems to me that the choice of thought that one adheres to is defined by historical experience, by geography and equally by judgements on what kind of country Russia is today and what kind of country future Russia will be.

For me there is no other way to ensure inter-dependency than on the one hand to involve Russia in the ongoing international dialogue on energy security as well as the equally important dialogue on Climate change control and on the other hand to continue our European efforts for import diversification. Putting it more broadly, the time is ripe to deepen integration between energy producing and consuming states and to rebuild confidence in international energy markets on the basis of cooperative approaches.

At the Munich Conference on Security Policy in February 2006, Foreign Minister Steinmeier coined the term "foreign energy policy" and urged the importance of enhancing energy security through greater cooperation between producer, consumer and transit countries as well as with the private sector.

In March 2006 the European Council adopted the Energy Policy for Europe (EPE). Its three policy objectives are: increasing security of supply, ensuring the competitiveness of European economies and the availability of affordable energy supplies and promoting environmental sustainability and combating climate change. The European Commission followed suit with its Green Paper entitled "A European Strategy for Sustainable, Competitive and Secure Energy", which made the case for a cooperative approach based on energy partnerships. In 2007 during the German EU and G8 presidencies we tried to continue our common efforts to increase energy security within existing frameworks.“Cooperation instead of confrontation” especially applies to energy security – considering that suppliers’ and consumers’ interests very often differ with a good case for establishing mediation and early warning mechanisms.We are still facing a lack of a well-established culture of dialogue.In that respect we undertook special efforts during our two presidencies in 2007 in order to reconcile those conflicting interests and explore avenues for confidence building measures including the creation of new, informal platforms such as the conference on the role of foreign policies for energy security and climate protection organised on December 3rd in Berlin. Following G8 - presidencies might want to take a look into that line of thought.

Therefore I believe Europe today is ready to discuss with Russia the succession of the existing Partnership and Cooperation Agreement. It should include an ambitious section on energy, accounting for the importance that such a dialogue on energy already has today. If we get the EU - mandate to negotiate the PCA with Russia for the next decade, we will have a good chance to make energy cooperation an important point in that binding document.

Some core aspects of the European Energy Charter Treaty , especially concerning mediation, could be introduced. Let me also remind you that the creation of an early warning mechanism which was agreed upon at the EU-Russian summit in Samara last spring still remains to be implemented.

On the institutional side I would also like to support the IEA’s endeavours to expand its membership and its cooperation with non-member states against the background of dramatically increasing energy demand of emerging economies.

As far as the Nordstream pipeline is concerned, we feel that it could become a sensible and economically viable diversification of supply routes. The pipeline is one of the EU's trans-European transport network projects and I believe that concerns about the nature of the project are increasingly dispelled by the sheer economic necessities that go along with the project. To make one point very clear: It is a European, not a German project that many EU member states will be able to profit from; already today, French, Dutch, British, Danish and German companies have ordered big quantities of gas which will be delivered by the Nordstream pipeline. We would like to ensure that future - for example Russian-Belarusian or Russian-Ukrainian - disputes do not have any adverse consequences for consumers in Europe. So the Nordstream pipeline is a very important contribution to Europe’s energy security. On the one hand we want Russia to honour its contracts and to be a reliable supplier. On the other hand we have to make sure that Russia is physically capable of being exactly that.

Of course in our dealings with Russia the legacy of European history will always make itself felt. Central and Eastern European countries continue to have reservations vis-à-vis Russia’s rising economic power based on fossil fuels, because they have such a strategic value. Nevertheless it is important that we set our sights to the future. Russia and Europe are economically dependent on each other. Russia needs the income from fossil fuels exports to the EU and the EU needs secure and stable energy supplies from Russia. In figures: 70% of Russia’s energy exports go to Europe whereas the EU imports 30 % of its energy from Russia. In addition to that, Russia’s internal energy demand is increasing heavily, such that future gas exports might go at the expense of internal growth. Russia therefore must be interested in new technologies from Europe, for example on how to insulate buildings, use renewable energies etc. So the question remains: Who is more dependent on whom?

No matter how You answer that question, it is always wise not to put all your eggs in one basket. Europe’s energy mix needs to be diversified as much as possible to reduce our needs for fossil fuels. We have to increase power production by renewable energies, we have to make all endeavours to save energy and we have to use new technologies to both cut emissions and energy use. At the same time Europe needs to diversify its energy imports on a regional basis.

Here Central Asia, especially the countries around the Caspian sea basin, and its huge oil and gas reserves come into play. The energy producers of the Caspian region alone might have a production potential that equals that of Gazprom. The Nabucco pipeline project therefore is central and vital in our efforts to diversify energy imports. Gazproms policy to buy cheap gas in Central Asia and sell it for a much higher price to Europe is a good economic model for Gazprom. But it might be a less good one for Central Asian states. Therefore I believe that Central Asian countries are very much willing to discuss with us their diversification of fossil fuels exports. It is also in the interest of Central Asian states not to put all eggs in one basket.

The Caspian alternative was implicitly acknowledged by the EU through the realization of the INOGATE project, implying the construction of pipelines that will connect Europe to the gas producers of the Caspian region, as well as the BAKU initiative. The opening of new diversified energy supply lines is of course in the full interest of Europe – and I might add as well in the interest of Russia –even if they might not see it that way today. Diversification of supply routes will put pressure on Gazprom to increase investment and transparency and by that will give it sustainability and stability in the long run

There is a clear match between the European strategic interests and those of the states of the Caspian region and Central Asia as such. Europe is in need of diversified access to energy and other supply routes to Europe, while the states of the region desire closer ties to economic and security institutions in Europe. We also have to be aware that partners like China and Japan are also increasingly trying to tap into the energy reserves of Central Asia. The footrace is on but we should not underestimate that the European Union as a consumer of fossil fuels and as a producer of heavily needed new technologies carries considerable weight. When we talk to Russia and Central Asia we need, however, to have a clear idea of what we want.

I am very happy to see that this event organized by IFRI strongly contributes to that discussion.

Thank You very much. 

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