European energy supply security has long been a geopolitical and geo-economic issue and has become a key concern for the EU. Over the last century, the security of energy supply and the price of energy have retained important roles in world politics and economics.
Challenges in diversifying
Europe has the third largest gross inland energy consumption worldwide and faces several challenges regarding its future energy supply. Amongst these challenges are rapidly rising global demand, competition for energy resources from emerging economies, persistent instability in energy producing regions such as the Middle East, an incomplete internal European energy market, and binding targets for renewables and energy efficiency as part of action to tackle climate change.
“To deal with these challenges, energy security, efficiency, infrastructure development, the completion of the internal energy market and sustainability are intrinsically linked” (European Commission 2015c, 1). The European Commission’s Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy (2015a) specifies the targets for an energy transformation to a low-carbon and secure energy system and economy. The EU economy is already the most carbon-effective economy in the world. And decoupling economic growth, energy consumption, and GHG emissions could be accomplished. “Between 1990 and 2014, the combined gross domestic product of the EU grew by 46 percent, while total greenhouse gas emissions decreased by 23%” (European Commission 2015c, 2). Decarbonisation of the economy by moving away from an economy driven by fossil fuels is still the primary objective of the Energy Union strategy. The Commission’s 2030 Energy and Climate Framework has “a binding domestic economy-wide emissions reduction target of at least 40 percent by 2030 compared to 1990 levels” (Ibid).
The energy mix of the European Union
The current energy mix of the EU-28 countries (cf. figure 1) is dominated by oil (31 percent) and gas (21 percent). The share of solid fossil fuels – lignite and hard coal – amounted to 18 percent. In 2014 fossil fuels together accounted for 70 percent of total primary energy consumption. Renewable energy sources reached the level of 13.4 percent. Nuclear heat accounted for 15 percent, however, two-thirds of this is waste heat.
Primary energy consumption of the EU-28 peaked in 2006 and then decreased by 12 percent (since 1990, by 4 percent). Consumption of solid fossil fuels decreased by 41 percent and oil and petroleum products by 15 percent. The share of natural gas increased by 17 percent and the consumption of renewables even increased by 180 percent.
While primary energy consumption accounted for 1,507.1 Mtoe in 2014, final energy consumption reached 1,061.2 Mtoe. The 20 percent target of the Europe 2020 strategy (European Commission 2010) for primary energy consumption is 1,483 Mtoe, and the EU-28 reached 15.7 percent reduction in 2014.
The structure of the energy mix varies significantly from member state to member state (cf. figure 1). While solid fuels are in the lead in countries like Estonia, Poland, Czech Republic, and Bulgaria, oil and petroleum products contribute the largest share in more than half of the countries. On a quantity basis view, the largest consumers are Germany, France, Italy, Spain, and the United Kingdom. The largest share of oil can be seen in the energy mix of Malta and of Cyprus.
According to data compiled by Eurogas, gas demand has shown a general downtrend in recent years. EU gas consumption was 487 billion cubic metres (bcm) in 2009, followed by an increase in 2010 to 527 bcm. But then gas consumption year-on-year declined to 477 bcm in 2011, 465 bcm in 2012, 458 bcm in 2013, and 407 bcm in 2014 (Platts 2015). The quantity view has the order Germany, United Kingdom, Italy, France, and the Netherlands.
Figure 1: National shares of fuels in gross inland energy consumption, 2014 (%). Source: Eurostat (online data code nrg_110a).
Nuclear heat contributes a significant share of primary energy supply in France, Sweden and the Slovak Republic. However, current nuclear power stations have an efficiency of approximately 30 percent, comparatively the lowest of all primary energy sources.
Renewable energy sources – inclusive hydroelectricity – are considerable in Sweden, Finland, Latvia, Denmark, and Austria. The quantitative contribution is significant in Germany, Italy, Spain, France, and the United Kingdom.
Final energy consumption (FEC) of the EU decreased between 1990 and 2014 by 2 percent. The FEC structure (cf. figure 2) in 2014 was still dominated by oil and petroleum products (39.8 percent). The share of gas accounted for 21.6 percent. Electricity covered 21.9 percent of FEC, 29.2 percent of which was generated from renewable sources. Nuclear electricity’s share of gross electricity generation was 27.5 percent, which accounted for 5.9 percent of FEC.
In addition to renewables in electricity generation and transport, renewables consumption for heating was 7.7 percent and the contribution of solid fossil fuels accounted for 4.4 percent of final energy consumption in 2014.
Figure 2: Final energy consumption by fuel, EU-28, 1990-2014 (Mtoe). Source: Eurostat (online data code: nrg_100a).
The structure of final energy consumption by sector shows that transport (27.3 percent), industry (25.9 percent), and residential (24.8) each cover about one-quarter of the total. In 2014, the service sector accounted for 13.3 percent. Non-energy consumption (including fuels used as raw materials, rather than being used as fuel) amounted to nearly 100 Mtoe in this year.
The EU’s energy import dependency
The downturn in primary production of hard coal, lignite, crude oil, natural gas, and recently nuclear electricity in the EU-28 led to increased primary energy imports. The situation stabilised in the aftermath of the financial and economic crisis in 2008. In 2013, the bill for energy imports amounted to about 400 billion Euros.
In 2014, imports exceeded exports by 881 Mtoe (Eurostat 2016a, 47), and the EU’s energy import dependency ratio reached 53.5 percent (solid fuels, oil, and natural gas combined). The import dependency ratio for oil is currently substantially higher than for natural gas, amounting to 88.2 percent compared to 67.4 percent (Eurostat 2016b). Crude oil also ranks first in terms of quantities imported. The quantity of imported natural gas nearly doubled over the period 1990-2014 (cf. figure 3 and 4).
Figure 3: EU-28 Dependency by fuel 1990-2014. Source: Eurostat (online data code: nrg_100a).
The largest net importers are the most populous member states. Denmark was the only net exporter among member states until 2013.
Since 1980, European countries have not been self-sufficient in the supply of crude oil. Indigenous production is decreasing, whilst imports are rising due to the gradual depletion of North Sea resources. A similar picture can be seen in the natural gas sector, where since the middle of the nineties, in terms of volume, the greatest importers and consumers – Germany, Italy, France, and Spain – have increased their already-significant imports of gas. The EU has three main sources of gas: The North Sea, North Africa, and Russia.
Figure 4: Imports of selected Energy products, EU-28, 1990-2014 (Mtoe). Source: Eurostat (online data codes: nrg_100a, nrg_101a, nrg_102a, nrg_103a and nrg_105a).
The origin of EU-28 energy imports has changed somewhat in recent years, but Russia has maintained its position as the main supplier of crude oil, natural gas, and solid fuels since 2006 (cf. table 1).
Table 1: Main origin of primary energy imports, EU-28, 2005, 2009, 2014
(% of extra-EU-28 imports). Source: Eurostat (online data codes: nrg_122a, nrg_123a and nrg124a).
More than half of the oil imports come from former the Soviet Union and the Middle East. About 40 percent of natural gas comes via pipelines from Russia. For the natural gas sector, the future demand of the EU has been predicted to increase from nearly 500 bcm (2009) to 620 bcm in 2030. By improving energy infrastructure and implementing the EU strategy for liquefied natural gas (LNG) and gas storage, the projected EU gas demand could decrease in value to about 310 bcm by 2035 – only half of the value published in 2010 (European Commission 2015b). Because conventional European gas production is expected to decline amid uncertainties about the development of unconventional gas in the EU, import dependency for gas will continue, but the quantity may be even lower than in 2015.
Geopolitical challenges and conflicts
EU energy supply security has become a geopolitical and geo-economic issue. Crucial to European energy supply security, other actors such as Russia, China, and the US have also eyed the Caspian region with geopolitical interest. The region’s potential is huge, once integrated into the world market, yet its historical path has greatly hindered an easy transition.
At the beginning of the nineties, Russia, Kazakhstan, Turkmenistan, Azerbaijan, and Uzbekistan understood that their considerable hydrocarbon deposits could be a good basis for their future economy in a world where growth still depended on the supply of fossil fuels.
However, the hydrocarbon-rich post-Soviet countries faced a great challenge in their policies of building independent energy systems at the beginning of the nineties: the technical reality that the existing pipelines for oil and gas exports were passing through Russian territory. This was to Russia’s advantage and enabled it to keep the control of energy exports from its neighbouring Caspian countries.
Whilst the dissolution of the Soviet Union provided an opportunity for the newly-independent states of the Caspian region to become new players in the international community, Russia was keen to limit its neighbours’ independent search for foreign investors like China, India, the EU, and even the US. The Russia-Georgia war in 2008 underlined the geopolitical reality of this multi-player struggle in the South Caucasus, with each competitor aiming to fill the vacuum left by the end of centralised control. Russia’s invasion of Georgia, however, established new strategic realities in Eastern Europe and Central Eurasia. Whilst Russia was willing to use force to deepen and promote its interests, western powers withdrew, leading to Russian supremacy in the region after decades of “rigid bipolarity” during the cold war (cf. Weber and Herd 2001).
Russia nevertheless faces its own share of challenges as it seeks to maintain supremacy in the region. The Baku-Novorossiysk oil pipeline, another important energy route that is under complete Russian control, was completed in 1997. The Chechen conflict forced Russia to route the Baku-Novorossiysk pipeline through Dagestan. The security of the corridor depends on the real power of the Russian state, which it can no longer afford to demonstrate at all costs given the rise of new regional powers.
China, for example, has been eager to cooperate with countries in the region. A pipeline between Turkmenistan, Kazakhstan, and China has been a mark of one, and by no means the only, success of tapping into the Caspian energy reserves. Other infrastructure projects have been well developed and even countries like the United States seek to manifest their energy and non-energy related interests here. With the proposal of a pipeline from Turkmenistan over Afghanistan and Pakistan, the United States seeks to isolate Iran’s regional energy plans for the transfer of gas from South Pars to Pakistan and India.
The issue of energy transit should be studied as a part of energy policy and at the same time as an independent problem. The South Caucasus and the Caspian region provide a unique possibility for studying energy transit policy as a problem: the mosaic of political relations and conflicts, and geographic and geopolitical features enable us to view the problem of energy resource transit from various perspectives, using both existing and novel research methods and theories. Two general sets of issues can thus be analysed: firstly, the domestic difficulties of both energy producers and transit countries; and secondly, the international impact of their resources in the broader geopolitical picture.
The main domestic issues for Azerbaijan, Kazakhstan, and Turkmenistan – which are often labelled as ‘post-Soviet rentier states’ – are corruption, nepotism, and the curse of the petro-state. Rentier states derive all, or a substantial share, of their national revenues from the rent of indigenous resources like oil and gas to external customers. If investments are not made in the diversification and industrialisation of the economy, these countries are likely to face economic, social, and political hardships (Dutch disease). Often these countries are also faced with petrodollar or Euro-recycling problems, as oil and gas deliveries are traded in either US dollars or Euros. Since these energy-rich countries earn more money from exports than they can invest in their economy, they invest their surplus in industrialised countries.
To understand the geostrategic significance of oil and gas exports for Russia, its dependence on export revenues must be considered. In 2015, Russia was – after Saudi Arabia and the United States – the third-largest oil producer (accounting for 12.4 percent of total global production) and the second-largest exporter. With a share of 16.1 percent, it was also – after the United States – the second-largest producer of natural gas and the leading exporter of gas. The most important consumer of Russia’s energy exports is the EU-28. “In 2014, more than 70 percent of Russia’s crude oil exports and almost 90 percent of Russia’s natural gas exports went to Europe” (Bradshaw and Connolly 2016, 157). However, since the 2014 oil and gas price collapse, earnings from Russia’s hydrocarbon exports declined from 350 billion US dollars to almost 200 billion US dollars.
The Caspian region’s energy resources
Proven hydrocarbon reserves in the Caspian region have increased in volume during the last decade, making its oil and natural gas resources—primarily in Iran, Azerbaijan, Kazakhstan, and Turkmenistan—an accessible alternative energy supply for the EU. This could contribute to solving two critical issues: firstly, the diversification of energy supplies away from Russia and secondly, a more visible role in the region for Europe, as an alternative to Russian interests.
The regional geopolitical complexities, resulting from actors’ competing interests, hindered a smooth integration of the South Caucasus and the Caspian region into the world market. The region’s dependence on transit countries for the marketing of hydrocarbon production leads to the question of whether political factors even allow for a diversification of transport routes and an increase in production. The main issue for the newly independent countries then became the creation of new transit routes for oil and gas exports, and transit policy became the backbone of energy policy in the Caspian region for many years.
The Baku-Tbilisi-Ceyhan (BTC) oil pipeline and the Baku-Tbilisi-Erzurum (BTE) gas pipeline represent existing infrastructure today for bringing Caspian-sourced energy to the European market that is not under Russian control.
The current backbone of the South Caucasus Transportation System includes the BTC oil pipeline (with a current throughput capacity of 1 million barrels a day), the Baku-Supsa oil pipeline, the BTE gas pipeline (with a potential capacity of 30 bcm of natural gas annually), the South Caucasus railway system, and the Georgian ports of Poti, Batumi, Supsa, and Kulevi.
New European-led projects have been discussed in recent years, the most well-known being the Nabucco pipeline project, originating in Azerbaijan and going through to Austria. Nonetheless, the cancellation of the Nabucco project has undermined the feasibility of these European plans. Russia actively developed a rival project: South Stream. Construction of the Russian onshore facilities for the pipeline started in December 2012, but the project was cancelled by Russia in December 2014. The main reasons were obstacles from Bulgaria and the EU, the 2014 Crimean crisis, and the imposition of European sanctions on Russia.
Turkey is located between major energy producers and consumers and could become a transit state carrying hydrocarbons from the Middle East and the Caucasus to Europe. The Southern Gas Corridor (SGC) refers to pipeline projects which shall transport gas from the Caspian region and the Middle East to Europe through Turkey. The “South Caucasus Pipeline (SCP), Baku-Tbilisi-Erzurum Natural Gas Pipeline (BTE), Turkey-Greece Interconnector (ITG) are existing pipelines while the Trans-Anatolian Natural Gas Pipeline (TANAP) and the Trans-Adriatic-Pipeline (TAP) are planned projects within the context of Southern Gas Corridor. The delivery of gas to Turkey through TANAP will start in mid-2018 and to Europe in 2020” (Republic of Turkey 2016).
Turkey’s aims, to be an energy hub and to become an energy bridge to Europe, are not only supported by Russia. In 2015, Russia and Turkey agreed that the supply of Russian gas to Turkey would be raised by 3 bcm per year via the operating Blue Stream pipeline, which since 2010 has had a maximum discharge of 16 bcm. A parallel line to Blue Stream was proposed in 2009, but replaced by the South Stream project, itself abandoned in 2014. Another new undersea pipeline from Russia to Turkey—Turkish Stream or Turk Stream—with a planned capacity of 63 bcm/a reappeared on the agenda in October 2016. If this pipeline is realised, Turkey could resell Russian gas to Europe in the future.
Azerbaijan will play a particularly crucial role in European energy supply security over the coming years. Local instability is giving Azerbaijan the opportunity to be the first country in the region to be able to deliver gas to Europe through the EU’s Southern Gas Corridor initiative. The Shah Deniz-2 gas field will deliver additional gas in 2018, and of a total production of 16 bcm/a, Europe will receive 10 bcm and Turkey 6 bcm. Furthermore, there are six gas fields under exploration in Azerbaijan with reserves between 150 and 400 bcm. Its geographic position also qualifies the country as an energy transit country for future deliveries from Kazakhstan or Turkmenistan.
Iran is regarded as an energy superpower and is—after Venezuela, Saudi Arabia, and Canada—ranked fourth in terms of proven oil reserves (BP 2016, 6). Russia and Iran are competing for the first rank in ownership of the largest natural gas reserves worldwide (BP 2016, 18), followed by Qatar and Turkmenistan. Qatar and Iran share the giant gas field South Pars/North Dome in the Persian Gulf, the largest gas field in the world. In July 2007, Turkey signed a preliminary agreement with Iran to develop three gas projects in the South Pars gas field and build two pipelines for 30 bcm/a of Iranian and Turkmen gas to Turkey for resale to Europe. However, US and EU sanctions against Iran spoiled this deal. Iran is the world’s third-largest producer of natural gas, consuming 192.5 bcm in 2015 (BP 2016, 22), which is used for electricity generation and domestic heat production.
Over the last two decades, many efforts have been made to build new pipelines and to create an independent infrastructure network for energy exports, but the problems have not been solved at all. Russia, the US, the EU, and China still struggle over the hydrocarbons of the post-Soviet states and energy transit policy continues to be a key point of contention. This instability, combined with complex actor dynamics, promises to bring forth continuous developments—both opportunities and challenges.
The paper was originally published as European energy security: Challenges in diversifying and decarbonising the energy fuel mix, in P. Schulze (Ed.). Core Europe and Greater Eurasia. Frankfurt/New York: Campus
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