420 7th Street SE, Washington, DC 20003Phone: (202) 986-2433 – Fax: (202) 546-3749

Email: info@streitcouncil.orgwww.streitcouncil.org

A Transatlantic Approach to European Energy Securityby Elena Nikolova

As the United States copes with the consequences of the BP Deepwater Horizon oil spill in the Gulf of Mexico, it is time to reevaluate its energy security strategy for the future. Equally rele-vant, however, is the energy security of its close Atlantic ally: the European Union. The United States and the European Union have been economically and financially interlinked for decades, together accounting for nearly 45% of global GDP.1 Since the gas disputes of 2006, the European Union has taken steps toward creating a new and reliable energy security strategy that will make its 27 member states less vulnerable to gas and oil supply shocks from partner countries. In order to ensure its own economic security, the United States needs to bolster these efforts by strength-ening energy cooperation with the European Union.

Is Energy Cooperation Necessary?

Substantial transatlantic economic cooperation necessitates the development of an equally robust support relationship for energy supply security. The US and the EU participate in the largest bilateral trade relationship in the world.2 Their interdependent partnership is evi-denced by the fact that EU direct investment flows to the US in 2008 amounted to €121.4 billion and US investment flows into the EU accounted for €50.5 billion. Trade in goods and services in 2009 reached equally high levels.3 It is therefore in the United States’ interest to ensure a secure supply of energy to Europe since a supply shock in Europe risks creating an unstable economic situation in the US The gas dispute between Ukraine and Russia in January 2009 is an example of the volatile atmosphere that can quickly develop and of the effects it can trigger in the econ-omy. While the dispute caused minor disturbances in most Western countries, many Eastern member states greatly suffered from the shortage of gas. Slovakia and Bulgaria, for instance, rely on Russia for more than 95% of their gas imports. Bulgaria was forced to scale down production in key plants across the country, while Slovakia declared a state of emergency.4 If a similar crisis

1 The Streit Council, “Transatlantic Economy,” accessed September 27, 2010 http://streitcouncil.org/index.php?page=transatlantic-economy-3.2 European Commission, “Trade Bilateral RelationsCountries: The United States,” accessed Sep-tember 27, 2010, http://ec.europa.eu/trade/creating-opportunities/bilateral-relations/countries/united-states/.3 Ibid.

occurs on a Europe-wide scale, production in all countries would be jeopardized, and conse-quently, so would trade and investment between the United States and the European Union.

There has not been much discussion on European energy security in the United States, but the recent Eurozone crisis, with its risk of contagion to the United States, exposes the level of linkage between the two economies. If a large-scale gas crisis were to occur, partially shutting down not only production in Eastern but also in Western Europe, then the US would be vulnera-ble to economic instability. Increasing transatlantic cooperation and ensuring European energy security would, at the very least, help minimize the economic impact that such an event would have on the US

U.S. Senator Richard Lugar has been a vocal supporter of a transatlantic approach to solving the EU energy crisis. He argues that if individual European states continue to conclude bilateral agreements with Russia, this sends the signal of a divided Europe and enables Russia to bully some of its European clients. If transatlantic cooperation were strengthened, then Russia would abstain from such "soft" aggression as it would fear a coordinated transatlantic response. A key tool in creating such a unified stance is the Nabucco pipeline, which would link the east-ern border of Turkey and Austria and bypass Russia. In 2008, US special representative to the EU Boyden Gray affirmed the United States’ support for the Nabucco project even though the US will not directly benefit from the energy supplies. He also expressed the United States’ hope "that the [Caspian] region and Europe both benefit and that we, as a trading nation, will also indi-rectly benefit and we very much want for [Europe] to have a strong independent existence to pro-mote your own economies to their fullest potential."5

The geopolitical benefits of transatlantic cooperation in this area include the gradual de-mocratization and development of Central Asian economies. Azerbaijan, Kazakhstan, and Turk-menistan hold rich reserves of natural gas and will be the future sources of energy for Russia and the European Union. They are also relatively new countries and have a history of unstable democracy. If the United States and Europe do not actively seek engagement with the Caucasus and Central Asian republics, they risk losing influence in the region to Russia and thus hindering chances of transition to the establishment of democratic rule. US Special Envoy for Eurasian En-ergy Richard Morningstar has been vocal about these links: in the beginning of 2010, he stated that by encouraging diversification, “it is clear we further US interests in raising global oil and gas production, in having secure energy supplies to our allies in Europe, and in supporting sovereignty and independence in Central Asia.”6 Robust economic relationships would also ex-tend US and EU influence in the region. Morningstar has continued to emphasize this as recently as June 2010 by stating that: “A Southern Corridor would provide commercial benefit for the countries of the Caucasus and Central Asia and also create a long-term partnership based on mu-tual interests with Europe.”7

Transatlantic Energy Cooperation So Far

4 “Factbox: 18 Countries Affected by Russia-Ukraine Gas Row,” Reuters, January 7, 2009, ac-cessed September 27, 2010, http://uk.reuters.com/article/idUKLA54196720090110. 5 Bruce Pannier, “Nabucco Gets A Boost In Baku,”, Radio Free Europe, September 10, 2008, LexisNexis.6 Mick Snow, “Eurasian energy 'engagement,’” Oil and Gas Journal, February 15, 2010, LexisNexis.7 “US Energy Envoy Hails Azeri-Turkish Gas Deal,” BBC Monitoring International Reports, June 2, 2010, LexisNexis..

The January 2009 gas war between Ukraine and Russia only reaffirmed the EU's need for a more diversified energy mix. Its new strategy includes stressing the interdependent relationship between Russia and the EU and engaging Russia in formulating and maintaining stable, produc-tive relations. This is necessary since Russia is the top oil and gas supplier to the EU. The EU also imports 80% of Russian gas, making it Russia’s most important customer. Despite these sig-nificant figures, the EU is also committed to combating climate change through its 20/20/20 strategy and is actively pursuing research and development in alternative energy areas. It is on track to meet its 2020 goals.8 Additionally, the EU is turning toward its North African neighbors through the Euro-Mediterranean Partnership (the Southern counterpart to the Eastern Partnership Neighborhood Policy) and establishing solar energy networks through the Sahara desert.9 The EU recognizes the Nabucco gas pipeline project as a key part of its diversification effort - a counterweight to Russia's Nord Stream and South Stream projects - and a way to directly tap into the rich gas resources of Central Asia.

The United States, on the other hand, has experienced setbacks as the Clean Energy bill was first watered-down and later not introduced in the Senate. While individual states are at-tempting to lessen their dependence on foreign oil, the US as a whole lacks a comprehensive and centralized climate change policy. But the US has expressed concern over Europe’s increasing dependence on Russia: members of the 110th Congress have held hearings on the threats and risks of such dependence.10 Sen. Richard Lugar has led a similar effort to promote transatlantic cooperation in energy security. The US has also affirmed its support for the Nabucco Pipeline, a project that is part of the European energy security strategy and aims to diversify gas resources for Europe's energy needs.

Both the US and the EU have recognized the need for and benefits of greater cooperation in energy policy. The EU-US Summits of 2006 and 2007 yielded progress when both sides agreed to establish an institutional framework for the discussion of transatlantic cooperation on this issue. This framework includes an annual strategic review of US-EU energy cooperation; a US-EU High Level Dialogue on Climate Change, Clean Energy and Sustainable Development; and a US-EU Energy CEO Forum.11 In November 2009, the two sides established the US-EU Energy Council consisting of three working groups: Energy Policies, Global Energy Security and Global Markets, and Energy Technologies Research Cooperation.12

Barriers to Cooperation

8 Leigh Phillips, “EU oOn Track To Meet Renewable Energy Target,” EU Observer, March 12, 2010.9 “EU Sees Solar Power Imported from Sahara in Five Years,” EurActiv, June 23, 2010, En-ergy Supply section. 10 Select Committee on Energy Independence and Global Warming, 110th Con-gress (2008) (Testimony of Amy Myers Jaffe, Wallace S. Wilson Fellow for Energy Studies, Rice University), June 11, 2008. 11 Congressional Research Service, “The European Union’s Energy Security Challenges,” Janu-ary 30, 2008.12 European Union Delegation to the United States, “New EU-US Energy Council to Boost Transatlantic Energy Cooperation,” November 4, 2009, accessed September 27, 2010, http://www.eurunion.org/eu/index.php?option=com_content&task=view&id=3539&Itemid=58

A key factor in EU-US relations is Russia – the largest exporter of gas into Europe, with a 40.8% share of the market in 2007.13 This presents an especially complex situation for the United States since it is divided between supporting its ally – the EU – and cultivating a produc-tive relationship with its former enemy and strategic partner – Russia. There are a few particu-larly important points of contention with regard to both European and US energy security. The first is relations with Central Asia – the origin of gas resources for both Russian and European pipeline projects. The Caspian Sea/Caucasus region is the source of dueling projects, each aim-ing to oust the other from the oil and gas distribution market. Russia views Nabucco as a direct threat to its monopoly while the US is trying to court the country into engagement, driving it away from the hostile atmosphere of recent years and reassuring it that it is a viable, equal part-ner in the international scene.

Another challenge is that not all EU member states have addressed energy security with equal urgency. Germany is particularly dependent on natural gas imports from Russia. By the mid-2000s, its energy imports reached 62% and are projected to rise to more than 70% by 2020.14 While Germany has been actively restructuring its energy policy in response to the 2006 Russia-Ukraine gas dispute, it has not taken concrete steps to wean itself from Russian natural gas. Germany supports the EU’s strategic energy policy and the Nabucco pipeline project, but the alternative is unlikely to substantially affect German dependence. The Nabucco pipeline project, moreover, has not yet secured contracts with any supplier countries that would enable gas to fill the pipeline.15 Russia has already signed contracts with Azerbaijan for an older pipe-line, increasing its influence over the rich Shah Deniz gas field and questioning the viability of Nabucco.16

Central Asia is not the only contentious energy region; the Arctic Ocean has also proven to be a hotspot for oil drilling. The Arctic ice shelf is said to house 22% of the world's undiscov-ered oil and natural gas resources.17 Russia has a large border with the Arctic and many of the Arctic's waters are contested between Russia, Norway, Canada, the United States, and Denmark. The United States has not been as active in this region, but projections estimate that about 36% of these resources are in North American provinces.18 Russia, therefore, is likely to become even more critical to European energy security and its disputes regarding international Arctic waters may involve the United States as it too looks for additional sources of oil and gas.

Routes to Deepening Transatlantic Cooperation

1. Reaffirm American Support. Even though the US has not neglected EU energy security, it has adopted a temperate approach to supporting its allies. The Senate has held several hearings

13 European Commission, Statistical Pocketbook 2010, 2010, , EU Commission p. 14. 14 John S. Duffield, “Germany and energy security in the 2000s: Rise and fall of a policy is-sue?,” John S. Duffield, Energy Policy 37 (2009); p. 4287, accessed September 27, 2010.15 Ibid.16 Bruce Pannier, “Russia, Azerbaijan Achieve Gas Breakthrough,” June 30, 2009, accessed September 27, 2010, http://www.rferl.org/content/russia_azerbaijan_achieve_gas_breakthrough/1766221.html17 US Energy Information Administration, Arctic Oil and Natural Gas Potential, October 19, 2009, accessed September 27, 2010, http://www.eia.doe.gov/oiaf/analysispaper/arctic/index.html.18 Ibid.

during the 110th Congress on Europe’s dependence on Russia. Additionally, Senator Richard Lu-gar was dispatched to Turkey to represent the US for the signing of Nabucco. But the U.S. needs to be more vocal about this issue in order to bolster EU efforts and recognize its own interdepen-dence with Europe.

2. US-EU Energy Council. Since its inception in November 2009, the US-EU Energy Coun-cil has not taken further significant steps, leading one to doubt its effectiveness and the credibil-ity of the bilateral agreements. The EU Delegation to the United States declined to comment on the Energy Council. The State department has also not responded to requests for information on the Council’s activities. But if the Council is utilized to coordinate US-EU action on energy se-curity, it could play a significant role in coordinating U.S-EU efforts to strengthen transatlantic energy and economic security.

3. Promote energy efficiency. Russia is not energy efficient but wants to improve. Gas flaring during oil production, in particular, is harmful to both the environment and the economy. The Accounts Chamber of the Russian Federation has estimated that Russia lost $5.7 billion in revenue from gas flared into the air in 2009.19 The country has already taken steps to reduce its waste: in 2009, Prime Minister Vladimir Putin signed a decree “setting the target of 95 percent APG utilization by 2012.” 20,21 The EU and US both have an interest in sharing their experience and expertise with Russia to achieve this goal. Greater energy efficiency benefits Russia, its citi-zens, and the exchange of information and technology between it, the US and the EU. Promoting energy efficiency would not be perceived as threatening by Russia since this would increase en-ergy revenues by improving Russia’s oil and gas output capacity. Ultimately, such US-EU assis-tance would build confidence and strengthen relations with Europe’s key energy supplier.

The same approach can be applied to the Central Asia region, where transatlantic cooper-ation in promoting energy efficiency can lead to increased production and revenue for Azerbai-jani, Kazakh, and Turkmen gas production, making them more economically prosperous and competitive. This aligns well with US and EU interests in the region and would not exclude Rus-sia since it would encourage (much like the official US stance) the Caucuses to be economically competitive in the oil and gas market and to diversify their exports. The EU has already estab-lished the INOGATE financing program, which works to finance energy efficiency projects, as a part of its engagement policy with Central Asia. The United States could formulate a similar pol-icy and encourage investment in energy efficiency projects in the region.

19 Adam Newman, “Energy efficiency: Russia’s hidden reserve,” O&G Next Generation, March 24, 2010, accessed September 27, 2010, http://www.cisoilgas.com/news/energy-efficiency-russias-hidden-reserve/.20 APG: associated petroleum gas.21 Adam Newman, “Energy efficiency: Russia’s hidden reserve,” O&G Next Generation, March 24, 2010, accessed September 27, 2010, http://www.cisoilgas.com/news/energy-efficiency-russias-hidden-reserve.Adam Newman, “Energy efficiency: Russia’s hidden reserve,”Ibid