Monday, October 20, 2014
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Multilateral Engagement for Energy Security

Our global need for energy reliability binds us together as surely as the global network that delivers it; a failure in one part of our network will inevitably affect everyone. Local interests and persistent conflicts that sit astride our networks, including the as yet unresolved issue of Russian gas supply to Ukraine and Europe, have again raised the specter of energy being used as a weapon to gain political leverage. Energy security is at the top of the agenda of the G-8 meeting hosted by President Vladimir Putin in Saint Petersburg. The G-8 has correctly identified the key economic issue, energy interdependence, and now is the time for focused multilateral engagement on this issue.

For some countries that are blessed with vast supplies of oil and gas, the use of energy exports to reward friends and punish foes seems a tempting option. Today, however, it is more likely to prove disruptive to friend and foe alike, as well as damaging to those countries that indulge this temptation. Energy embargoes have generally proven counterproductive. The price rises that followed OPEC’s oil embargoes of the 1970’s were unsustainable and led to conservation efforts and expansion of non-OPEC production. As a result, OPEC’s share of world oil exports dropped sharply in the twelve years following the embargo of 1973-1974.

Experience has taught us that transparency and price stability is in everyone's interest. Pursuit of these principals while encouraging the development of global markets is essential to greater overall growth prospects for the world economy. So when Russia sought earlier this year to quadruple the price of its gas exports to Ukraine, it argued that it was simply demanding market rates. The message sounded fair and it did, for a short time, appeal to some policymakers and investors not fully apprised of the situation.

To be clear, measured price changes implemented over time was never in dispute; indeed, some internal price adjustments for Ukraine were in order. Unfortunately for Russia’s neighbors, it is not the market that determines what price is paid for Russia’s gas or transport; it is Gazprom and its chairman, Dmitry Medvedev, who is also the Russian government’s First Deputy Prime Minister. The price charged by Gazprom for each country bordering Russia is different and is largely determined by political relationships with the Kremlin. Economically speaking, gas supply and transport prices are more correlated to political relationships than to fundamental supply-demand or gas transport basis calculations.

Ukraine was threatened with an immediate quadrupling of its prices – or interruption of its gas supply - as a result of it new-found independence from Russia during the Orange Revolution. Georgia, also feeling the wrath of Moscow following the Rose Revolution, faced potentially harmful price increases as well. Belarus, however, still in strong alignment with the Kremlin, continues to enjoy highly subsidized gas.

Of course, Ukraine was not the only country put at risk by this brinksmanship; suppliers such as Turkmenistan, geographically locked into transit requirements through Russia, also suffer. And for the consuming nations of Western and Central Europe, the price effects and supply disruption anxieties were of significant consequence. Immediate multilateral intervention by the European Union and the United States probably are what probably caused Gazprom to turn the gas back on.

Natural gas may be the commodity most vulnerable to event-driven supply disruptions. The fixed interconnected pipelines lock producers and consumers in a near-exclusive embrace. Diversification in natural gas transportations is a long-term cross-border asset development proposition requiring enormous investment and political commitment on a multilateral level.

Many solutions are already under consideration: new gas storage capacity, increased efficiency, expansion of domestic production of both oil and gas, and alternative energy supplies such as coal-bed methane. Additionally, a market in tradable liquefied natural gas (LNG) is rapidly emerging. It is more feasible to diversify the supply chain, albeit incrementally, by importing gas from distant producers rather than from monopolistic suppliers next door. All of these efforts together will soften shocks somewhat and create more energy self-sufficiency. Yet more is required.

First, G-8 leaders should consider implementing standards in energy transactions requiring open and transparent contracts in line with best practices in business. It is important to dilute the global impact of local politicians pursuing non‑energy agendas, or simply their own limited interests. We see these problems today in state-owned firms in Latin America, political unrest in Africa, tensions in the Middle East or through opaque business intermediaries, as in the questionable gas deal between Ukraine and Russia, known now as RUE (RosUkrEnergo).

In the end, energy security for all of us in Europe requires recognizing that the linked nature of our supply and transmission systems makes us interdependent. This is where an “Energy Alliance” of consumers and suppliers could be useful, starting with the nations of Europe helping to guarantee the energy supplies of others in a major disruption. The Energy Charter, which emphasizes market access and transparency, is a laudable effort but it is not sufficient for those moments of crisis; our markets are not yet well enough equipped to deal with event-driven disruptions. The Energy Charter might be a vehicle for this collective energy security, if deepened and broadened.

It is our duty as leaders to chart a course for a secure energy future. Tolerance of questionable dealing today for the sake of political expediency will cost more in the future for us all. When the inevitable conflict occurs, public confidence, political credibility and market reliability are needlessly sacrificed – this has clearly occurred for Russia and for Ukraine. Threats to energy security must be challenged and resolved on a multilateral basis, with all stakeholders present. The interdependent nature of our energy infrastructure requires a multilateral approach. We are all depending on it.

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