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Summary: This paper examines

the possible role energy policy


and cooperation will have in
collective security. While high-
lighting various energy-related
clashes between Russia and
the West, the author cautions
against the exploitation of
economic parochialism by the
United States and Europe and
instead calls for the establish-
ment of a more collective and
productive European energy
sector in the face of Russian
resistance.
Transatlantic Security Task Force Series
Policy Brief
Transatlantic Energy Relations: Embracing
Collective Security over Parochialism
by Matthew J. Bryza
German Marshall Fund of the
United States-Paris
71 Boulevard Raspail
75006 Paris
T: +33 1 47 23 47 18
E: infoparis@gmfus.org
October 2014
Te U.S. energy transition could
generate tension in the transatlantic
community if economic parochi-
alism is not held in check. But if the
United States and Europe embrace the
sense of collective security that forms
the foundation of the transatlantic
community, they could use energy
cooperation to restrain Russian
aggression and fnally secure a Europe
whole and free.
Te technology-driven boom in
unconventional oil and gas has
boosted U.S. oil production by over
50 percent during the past fve years.
In 2014, the United States overtook
Russia and Saudi Arabia to become
the worlds largest oil (and gas liquids)
producer at 11 million barrels per
day.
1
Similarly, thanks to the shale
revolution, the United States is
now the worlds largest natural gas
producer, and enjoys natural gas
prices roughly half those in Europe
and one-third those in Asia.
Relatively cheaper natural gas has
given energy-intensive industries in
the United States a major advantage
over their counterparts in Europe,
leading U.S. President Barack Obama
to declare in his 2014 State of the
Union address that U.S. businesses
now plan to invest $100 billion in new
1 http://www.bloomberg.com/news/2014-07-04/u-s-
seen-as-biggest-oil-producer-after-overtaking-saudi.html
factories that use natural gas.
2
Euro-
pean leaders can ofen be heard at
international conferences lamenting
the loss of investment to the United
States thanks to cheaper U.S. energy.
Such economic parochialism is
echoed in the United States, where
outdated legislation prohibits export
of U.S. hydrocarbons, including liquid
natural gas (LNG), except to countries
with which the United States has a
free trade agreement. Consequently,
the United States European allies are
unable to import cheap U.S. LNG to
reduce their dependence on Russian
natural gas. Tough this U.S. legis-
lation resulted from bygone price
controls and the 1973 oil shock, key
U.S. industries have successfully
lobbied to keep such export prohibi-
tions in place.
Russia can be expected to exploit
such economic parochialism to slow
competition from shale gas and
to generate disagreement between
the United States and its European
allies. NATO Secretary General
Anders Fogh Rasmussen has accused
Russia of funding European non-
governmental organizations (NGOs)
to aggravate fears of environmental
and tectonic threats from hydraulic
2 http://www.whitehouse.gov/the-press-of-
fce/2014/01/28/president-barack-obamas-state-union-
address
Transatlantic Security Task Force Series
Policy Brief
2
fracturing,
3
mirroring Moscows unsuccessful cultivation of
environmental NGOs in Georgia and Turkey to try to block
the Baku-Tbilisi-Ceyhan oil pipeline during the late 1990s.
Moscow is also trying to sow discord within the trans-
atlantic community to prevent a frm response to its war
against Ukraine, with energy playing an important role.
Te timing of President Vladimir Putins rush to conclude
an economically unattractive natural gas deal with China
(and cave in to Beijings decade-long price demands)
on May 21
4
suggests an attempt to frighten Europe into
thinking Russia may take its gas elsewhere. Such fears
contribute to dissonance on both sides of the Atlantic, with
Washington appearing to drag along a reluctant Berlin and
Brussels on sanctions toward Russia. Meanwhile, within
Ukraine itself, Moscow is complementing its hybrid war of
covert invasion, stoked insurrection, and propaganda with
a threat to cut of natural gas to Ukraine unless Kyiv either:
1) accepts a doubling of the gas price, which will bank-
rupt energy intensive industries and destabilize Ukraines
political system; or 2) negotiates a deal that perpetuates
Moscows ability to exploit vulnerabilities among Ukraines
political elite, who are addicted to commercial relation-
ships with Gazprom and shady Russian intermediaries.
It is perhaps this second threat that is the most dangerous
for Ukraine and its transatlantic partners. During the past
two decades, Ukraines oligarchs (including top politicians)
have generally amassed their fortunes by buying Gazprom
gas cheaply (via privileged connections) and selling it in
the EU for double or even triple the price. Tis was possible
because Ukraine never installed gas meters on its border
with Russia, making it impossible to determine how much
gas enters Ukraine. Consequently, Ukrainian and Russian
schemers have been able to pad gas deliveries to EU
customers and sell undetected additional volumes through
shady intermediaries for billions of dollars.
Te most famous such deal resolved Russias January 2006
gas cutof to Ukraine. It was brokered by Russian orga-
nized criminal Semyon Mogileyevich
5
on behalf of a shady
Swiss company called RosUkrEnergo, which was jointly
controlled by Gazprom and one of Ukraines most powerful
3 http://www.theguardian.com/environment/2014/jun/19/russia-secretly-working-
with-environmentalists-to-oppose-fracking
4 See Ilya Zaslavskiys analysis for Chatham House of how politics trumps the
economics of the Russia-China gas deal. http://www.chathamhouse.org/expert/
comment/14633#sthash.RCsl3hfB.dpuf
5 At the time, Mogileyevich was on the FBIs Wanted List; in 2009, he was elevated to
the FBIs Top Ten Most Wanted List.
oligarchs, Dmitriy Firtash. Under U.S. federal indictment
for bribery, Firtash has been a key donor to virtually every
top Ukrainian politician since 1991 (perhaps with the
exception of current President Petro Poroshenko). Te
RosUkrEnergo deal thus underscores the nexus of natural
gas, Russian organized crime, and Ukrainian politics,
which has generated legal and political vulnerabilities
Moscow continues to exploit.
Te EU must end these schemes if it is serious about
helping Ukraine defend itself and deterring further Russian
aggression. Tis will require that EU member states main-
tain solidarity and secure the following concessions from
Moscow (and Kyiv): a gas metering station on the Russia-
Ukraine border; oversight and/or operational control of
Ukraines gas transit system; and a single price for Russian
natural gas at the Russia-Ukraine border, which will deny
Moscow the ability to divide-and-conquer within the
EU by ofering individual member states preferential (or
discriminatory) natural gas deals.
If EU member states secure these demands, Ukraine may
emerge as a stable and prosperous country that is less
vulnerable to manipulation by Moscow. If not, Russia
will be tempted to pursue similar economic and military
aggression beyond Ukraine, perhaps in the Baltic States,
which face their own energy and political-military vulner-
abilities.
Estonia, Latvia, and Lithuania remain energy islands,
entirely dependent on Russian natural gas supplies. Teir
electricity systems are synchronized with northwest Russias
electricity grid rather than the EUs. Russia has exploited
these vulnerabilities. In 2012, Russia punished Lithuania
for implementing the EUs own directives for strengthening
energy independence from Russia, unilaterally imposing a
gas price of $497 per thousand cubic meters (tcm), which
was 15 percent higher than Germanys and 30 percent
higher than Europes average. Gazprom Vice President
Russia will be tempted to pursue
similar economic and military
aggression beyond Ukraine,
perhaps in the Baltic States.
Transatlantic Security Task Force Series
Policy Brief
3
Valery Golubov bluntly explained in February 2012 that
Gazproms price gouging in Lithuania was justifed by
Vilniuss inadequate behavior while restructuring the gas
sector to reduce Gazproms monopoly leverage.
6
Te Baltic States are working with the European Commis-
sion to reduce such vulnerabilities by integrating into
European energy networks. Besides two undersea elec-
tricity cables connecting Estonia and Finland, several other
key infrastructure projects (e.g., LNG terminals and gas
and electricity interconnections) are under development
ofen with EU fnancial support. Lithuania is working
most actively, with Estonia not far behind. Latvia, however,
is moving more slowly, refecting the penetration of the
countrys energy sector by Russian political and business
interests.
Latvia could be particularly vulnerable to the hybrid
warfare tactics Russia has employed in Ukraine. A
worrisome scenario might involve Moscow exploiting
energy-related corruption among political elites, agitating
Russian-speaking communities, invoking Russias right/
duty to protect these communities, then covertly deploying
Russian special forces to occupy a swath of Latvian terri-
tory. As extreme as this scenario may sound, Russian
Ambassador to NATO Alexander Grushko warned during
an open session on Ukraine at GMFs Brussels Forum on
March 22, 2014 that hundreds of thousands of people in
the Baltic states have their human rights violated simply
because they choose to speak Russian.
Te potential consequences of this scenario are chilling.
Latvia would likely invoke Article 5 of the North Atlantic
Treaty. Confronted by the prospect of full-scale war
with Russia over a handful of felds and towns in eastern
Latvia, several NATO member states may refuse to join a
consensus to respond militarily. As a result, President Putin
might be able to undermine Article 5s credibility and efec-
tively dismantle NATO without fring a shot.
Te United States and EU thus face a shared and urgent
need to eliminate energy and military vulnerabilities in
Europes East. Tough the EU must take the lead, the
6 Gazprom Vice President Valery Golubov admitted in February 2012 that Vilniuss
determination to its vulnerability to Moscows monopoly power justifed the price
increase. [Aleksey Gribach],
: Lietuvos
Dujos [Gazprom deputy chairman Valery Golubev: The price of gas for Lithuania
does not depend on the composition of the board of Lietuvos Dujos],
[Moskovskie Novosti], February 11, 2012, http://www.mn.ru/busi-
ness/20110211/300430801.html.
United States can help in two key ways. First, Washington
can enact legislation enabling LNG exports to its European
allies (assuming such exports make commercial sense),
then enshrine them in the Transatlantic Trade and Invest-
ment Partnership.
Second, the United States can strengthen its support for EU
eforts to establish a single and unifed European energy
market with diversifed supplies of natural gas. Central to
this efort will be expansion of gas trading hubs, like the
United States own Henry Hub, where prices are deter-
mined by supply and demand via liquid trading among
competing suppliers. In recent decades, several such
hubs have emerged in the North Sea Basin, which form
a genuine though regionalized natural gas market.
Expanding trading hubs to the Baltic States should be the
EUs next major step. Te United States should provide
support to European political leaders and regulators to
counter Russian resistance to the spread of gas trading
hubs, just as Washington has done since the mid-1990s for
oil and natural gas imports to Europe from the Caspian
Sea.
In summary, the United States and Europe need to suppress
economic parochialism and embrace a spirit of collec-
tive security to spread market forces throughout Europes
energy sector. If successful, the transatlantic community
will fnally secure a Europe that is whole and free, and deter
a revanchist Russia from challenging NATOs very exis-
tence on the Alliances eastern frontier.
The United States and EU thus
face a shared and urgent need
to eliminate energy and military
vulnerabilities in Europes East.
Transatlantic Security Task Force Series
Policy Brief
4
Te views expressed in GMF publications and commentary are the
views of the author alone.
About the Author
Matthew Bryza is a non-resident senior fellow with the Atlantic
Councils Dinu Patriciu Eurasia Center. He is the director of the Inter-
national Center for Defence Studies in Tallinn, Estonia. He resides
in Istanbul, where he also works as a business consultant and board
member of several private companies. His last assignment within the
U.S. diplomatic corps was as U.S. ambassador to Azerbaijan from
February 2011 to January 2012.
About GMF
Te German Marshall Fund of the United States (GMF) strengthens
transatlantic cooperation on regional, national, and global challenges
and opportunities in the spirit of the Marshall Plan. GMF does this by
supporting individuals and institutions working in the transatlantic
sphere, by convening leaders and members of the policy and business
communities, by contributing research and analysis on transatlantic
topics, and by providing exchange opportunities to foster renewed
commitment to the transatlantic relationship. In addition, GMF
supports a number of initiatives to strengthen democracies. Founded
in 1972 as a non-partisan, non-proft organization through a gif from
Germany as a permanent memorial to Marshall Plan assistance, GMF
maintains a strong presence on both sides of the Atlantic. In addition
to its headquarters in Washington, DC, GMF has ofces in Berlin,
Paris, Brussels, Belgrade, Ankara, Bucharest, and Warsaw. GMF also
has smaller representations in Bratislava, Turin, and Stockholm.
Contact
Dr. Alexandra de Hoop Schefer
Director, Paris Ofce
German Marshall Fund of the United States
Tel: +33 1 47 23 47 18
Email: adehoopschefer@gmfus.org