Newsletter 32

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EUCERS NewsletterEuropean Centre for Energy & Resource Security European Centre for Energy & Resource Security European Centre for Energy & Resource Security European Centre for Energy & Resource Security Department of War Studies, King’s College LondonDepartment of War Studies, King’s College LondonDepartment of War Studies, King’s College LondonDepartment of War Studies, King’s College London

IntroductionIntroductionIntroductionIntroduction Welcome to the 32nd edition of the EUCERS Newslettersecond of the year 2014. This month’s general article section includes dealing with various issues of energy and resource Firstly, Bernd Weber, Doctoral Fellow at the OxfordSciences Po Research Group, assesses the success or failure of the EU’s external energy policy towards Azerbaijan. Secondly, Johanna Grusch, of King’s College London, writes on the need for a fully functional price for carbon as the means to provide the flexibility to manage the various uncertainties inherent in energy structures, as well as to reduce greenhouse gas emissions. Thirdly, Gus Constantinou, also of King’sLondon, elaborates on the politics around the USKeystone XL pipeline project. The Activities section will provide some background information on the topic of our first round table discussion this year “Turkey and Mediterranean Gas: What does it mean for Europe and the world?” We are very happy to announce our first roundtable discussion taking place on March 10, 2014, from 2King’s College London. We also would like to with you that EUCERS has been ranked in the Top 20 of the global Energy and Resource Policy Think Tanks Britain) in the “2013 Global Go To Think Tank Index Reportby the University of Pennsylvania. In EUCERS on the Road we will inform you about conference participation and presentations of our members, and latest publications. I hope you enjoy the newsletter! Justus Andreas KAS- Research Fellow at EUCERS, King’s College London

ewsletter European Centre for Energy & Resource Security European Centre for Energy & Resource Security European Centre for Energy & Resource Security European Centre for Energy & Resource Security Department of War Studies, King’s College LondonDepartment of War Studies, King’s College LondonDepartment of War Studies, King’s College LondonDepartment of War Studies, King’s College London

of the EUCERS Newsletter, the

section includes three pieces energy and resource policy.

Bernd Weber, Doctoral Fellow at the Oxford-Sciences Po Research Group, assesses the success or failure of the EU’s external energy policy towards

of King’s College writes on the need for a fully functional price for

provide the flexibility and incentives inherent in today’s

reduce greenhouse gas ntinou, also of King’s College

politics around the US-Canadian

will provide some background information on the topic of our first round table discussion

editerranean Gas: What does it mean

our first roundtable discussion taking place on March 10, 2014, from 2-4pm at King’s College London. We also would like to proudly share

been ranked in the Top 20 of the global Energy and Resource Policy Think Tanks (2nd in

Global Go To Think Tank Index Report”

In EUCERS on the Road we will inform you about conference participation and presentations of our members, and latest

EUCERS, King’s College London

In this Month’s Edition:

� IntroductionIntroductionIntroductionIntroduction

� Newsletter articlesNewsletter articlesNewsletter articlesNewsletter articlesThe EU’s External Energy Policy Towards Azerbaijan: Success Or Failure?By Bernd Weber Carbon Pricing in a Time of Uncertainty By Johanna Grusch Pipeline PoliticsBy Gus Constantinou

� ActivitiesActivitiesActivitiesActivities Turkey and Mediterranean Gas: A European GasBy Justus Andreas

� AnnouncementAnnouncementAnnouncementAnnouncement

� EUCERS on the RoadEUCERS on the RoadEUCERS on the RoadEUCERS on the Road

� PublicationsPublicationsPublicationsPublications

� Contact EUCERSContact EUCERSContact EUCERSContact EUCERSEUCERS on Facebook and Twitter

� EUCERS Advisory BoardEUCERS Advisory BoardEUCERS Advisory BoardEUCERS Advisory Board

� AcknowledgementsAcknowledgementsAcknowledgementsAcknowledgements

EUCERS Partners and Sponsors

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IssueIssueIssueIssue 32323232 00002222/2014/2014/2014/2014

In this Month’s Edition:

Newsletter articlesNewsletter articlesNewsletter articlesNewsletter articles The EU’s External Energy Policy Towards Azerbaijan: Success Or Failure?

Bernd Weber

Carbon Pricing in a Time of Uncertainty By Johanna Grusch

Pipeline Politics By Gus Constantinou

Turkey and Mediterranean Gas: A New Gas Corridor?

Justus Andreas

AnnouncementAnnouncementAnnouncementAnnouncement

EUCERS on the RoadEUCERS on the RoadEUCERS on the RoadEUCERS on the Road

Contact EUCERSContact EUCERSContact EUCERSContact EUCERS EUCERS on Facebook and Twitter

EUCERS Advisory BoardEUCERS Advisory BoardEUCERS Advisory BoardEUCERS Advisory Board

AcknowledgementsAcknowledgementsAcknowledgementsAcknowledgements EUCERS Partners and Sponsors

ARTICLES

The EU’s External Energy Policy Towards Azerbaijan: The EU’s External Energy Policy Towards Azerbaijan: The EU’s External Energy Policy Towards Azerbaijan: The EU’s External Energy Policy Towards Azerbaijan:

Success Or Failure?Success Or Failure?Success Or Failure?Success Or Failure?

Bernd Weber

2013 was a crucial year for energy relations between the EU and Azerbaijan, Europe’s key partner in the Caspian region. After a decade of ups and downs and a heated pipeline race, a Final Investment Decision (FID) has been reached on the Shah-Deniz phase II development (SD-II). It paves the way for Azerbaijani supplies of 10 billion cubic meters (bcm) per year, which will be shipped to Europe from 2019 on. These deliveries are considered to be the strategic “door opener” for the development of the Southern Gas Corridor, which is supposed to supply up to 20% of the EU ne

term.1 The corridor contributes to EU supply security by

giving European consumers access to Caspian gas resources. Severe political and economic uncertainties with regard to the future of Russo-Ukrainian relations and repeated gas conflicts between Europe’s main supplier and the major transit state highlight the importance of the corridor. While EU officials hailed the FID as a breakthrough for EU supply security and a groundbreaking milestone of EU external energy policy towards Azerbaijan, three shortcomings put this appraisal into question. Firstly, contracted gas volumes

represent only 2% of the gas consumption of the EU

Secondly, the strategic added value in terms of diversification of gas supplies for the most vulnerable consumers in Central and South East Europe remains limited. Thirdly, domestic reforms to integrate Azerbaijan into a common, pan-European gas market, based on liberal EU rules and norms have stalled. The question that arises is twofold: How successful has the EU external policy been towards its resource-rich neighbour and what are the remaining challenges and uncertainties for Euroenergy relations? The EU’s comprehensive approach to gas supply security

The EU’s import dependence on gas is supposed to

to more than 80% by 2035.3 In order to deal with this

structural dependence and the risk of potential cutBrussels is aiming to reduce the EU’s vulnerability towards dominant suppliers and supply routes by diversification. The Southern Gas Corridor has become the EU’s major strategic

1 European Commission (2013) Gas from Azerbaijan: Commission welcomes final investment decision to extract gas pledged for Europe, Press Release. 2 Calculation based on the “Policy Scenario” forecast for 2020 in: International Energy Agency (2013) World Energy Outlook 2013.3 Ibid.

The EU’s External Energy Policy Towards Azerbaijan: The EU’s External Energy Policy Towards Azerbaijan: The EU’s External Energy Policy Towards Azerbaijan: The EU’s External Energy Policy Towards Azerbaijan:

2013 was a crucial year for energy relations between the EU Azerbaijan, Europe’s key partner in the Caspian region.

After a decade of ups and downs and a heated pipeline race, a Final Investment Decision (FID) has been reached on the

II). It paves the way of 10 billion cubic meters (bcm) per

year, which will be shipped to Europe from 2019 on. These deliveries are considered to be the strategic “door opener” for the development of the Southern Gas Corridor, which is supposed to supply up to 20% of the EU needs in the long-

The corridor contributes to EU supply security by

giving European consumers access to Caspian gas resources. Severe political and economic uncertainties with regard to

Ukrainian relations and repeated gas s between Europe’s main supplier and the major

transit state highlight the importance of the corridor. While EU officials hailed the FID as a breakthrough for EU supply security and a groundbreaking milestone of EU external

, three shortcomings put this appraisal into question. Firstly, contracted gas volumes

represent only 2% of the gas consumption of the EU-28.2

Secondly, the strategic added value in terms of diversification of gas supplies for the most vulnerable

in Central and South East Europe remains limited. Thirdly, domestic reforms to integrate Azerbaijan

European gas market, based on liberal EU rules and norms have stalled. The question that arises is

ternal policy been rich neighbour and what are the

remaining challenges and uncertainties for Euro-Azerbaijani

The EU’s comprehensive approach to gas supply security

The EU’s import dependence on gas is supposed to increase

In order to deal with this

structural dependence and the risk of potential cut-offs, Brussels is aiming to reduce the EU’s vulnerability towards dominant suppliers and supply routes by diversification. The

orridor has become the EU’s major strategic

European Commission (2013) Gas from Azerbaijan: Commission welcomes final investment decision to extract gas pledged for Europe,

Calculation based on the “Policy Scenario” forecast for 2020 in: rgy Outlook 2013.

initiative in this context and Nabucco has become the flagship pipeline project within it. Indeed, the EU went far beyond the role it played in former infrastructure projects in terms of political, diplomatic, anby prescribing the supplies, route and regulation of the corridor. The Commission pursued a multiapproach, which included multiple potential Central Asian and Middle Eastern suppliers, Azerbaijan being but one of them. Furthermore, it prioritised a specific supply route, along the “South Eastern Achilles’ heel” of European gas supply security, which runs through the Balkans up to Central Europe. Countries along this route are characterised by a high dependence on Russiaalternatives and have experienced the most severe supply

cuts during former gas crises

beyond the strategic rationale of physical diversification, as it endowed the corridor with a liberal regulatory framework,

based on EU norms, such as Third Party Access (TPA).

EU regulations were introduced to limit supplier control and transit risks within the corridor. The second pillar of EU external energy policy towards Azerbaijan is embedded in the EU’s overall energy towards its neighbourhood. The EU seeks to integrate its neighbours in a pan-European energy market, based on EU norms, rules and standards. In this context, Brussels has multiplied its bilateral and multilateral instruments to export EU energy regulations, in order to liberalise and modernise the energy sectors of its neighbours. The unbundling of the gas sector, i.e. the separation of network operation from production and supply activities, is the linchpin of the EUenvisioned market restructuring.unbundling and transparent market pricing are supposed to stimulate investment and depoliticize energy sectors,

thereby contributing to EU supply security

4 Pirani et al. (2009) The Russo-Ukrainian gas dispute of January 2009: a comprehensive assessment, Oxford Institute for Energy Studies. 5 Intergovernmental Agreement regarding the Nabucco project, 13/7/2009 6 European Commission (2010) Commission Staff Working Paper on the Unbundling Regime.

Bernd Weber is a doctoral fellow of the OxfordSciences Po Research Group at the Department of Politics and International Relations at the University of Oxford, as well as a doctoral researcher and lecturer at Sciences Po Paris. His research focuses on EU energy policy in Europe’s Eastern and Southern neighbourhood and EU energy security.

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initiative in this context and Nabucco has become the flagship pipeline project within it. Indeed, the EU went far beyond the role it played in former infrastructure projects in terms of political, diplomatic, and financial sponsorship and by prescribing the supplies, route and regulation of the corridor. The Commission pursued a multi-supplier approach, which included multiple potential Central Asian and Middle Eastern suppliers, Azerbaijan being but one of

Furthermore, it prioritised a specific supply route, along the “South Eastern Achilles’ heel” of European gas supply security, which runs through the Balkans up to Central Europe. Countries along this route are characterised by a high dependence on Russian gas imports, limited alternatives and have experienced the most severe supply

cuts during former gas crises.4 The Commission went

beyond the strategic rationale of physical diversification, as it endowed the corridor with a liberal regulatory framework,

based on EU norms, such as Third Party Access (TPA).5

EU regulations were introduced to limit supplier control and transit risks within the corridor.

The second pillar of EU external energy policy towards Azerbaijan is embedded in the EU’s overall energy policy towards its neighbourhood. The EU seeks to integrate its

European energy market, based on EU standards. In this context, Brussels has

multiplied its bilateral and multilateral instruments to export lations, in order to liberalise and modernise

the energy sectors of its neighbours. The unbundling of the gas sector, i.e. the separation of network operation from production and supply activities, is the linchpin of the EU-envisioned market restructuring. The EU models of unbundling and transparent market pricing are supposed to stimulate investment and depoliticize energy sectors,

thereby contributing to EU supply security.6

Ukrainian gas dispute of January

2009: a comprehensive assessment, Oxford Institute for Energy

Intergovernmental Agreement regarding the Nabucco project,

(2010) Commission Staff Working Paper on

Bernd Weber is a doctoral fellow of the Oxford-Sciences Po Research Group at the Department of Politics and International Relations at the University of Oxford, as well as a doctoral researcher and lecturer at Sciences Po Paris. His research focuses on EU external energy policy in Europe’s Eastern and Southern neighbourhood and EU energy security.

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Tacking stock – What has been achieved?

While convergence with some technical norms and security standards has been achieved, convergence with EU key norms and rules is virtually absent. In 2006, Baku and Brussels signed a memorandum, which stipulates that the neighbouring country would reform energy tariffs, as well as establish an independent energy regulation authority and

Transmission System Operator (TSO).7 However, no

tangible progress has been made with regard to both market pricing and minimal unbundling. Furthermore, a Twinning programme between European and Azerbaijani experts on legal approximation and structural reforms has been carried out. Experts from both sides have prepared four draft laws in 2010, but there is little hope that they will be adopted. Compared to other Eastern neighbours, such as Ukraine, Moldova and Georgia, convergence of Azerbaijan’s gas sector with EU norms is minimal. While supplier countries have arguably less interest in unbundling and market pricing, since this would affect the dominant role of their state-owned energy companies and loosen their grip on an economically and politically sensitive sector, one wonders why Azerbaijan agreed to pursue reforms that aim for gradual convergence with EU legislation. Indeed, Azerbaijan formally committed to specific regulatory provisions, since it hoped to engage the EU in a wider and deeper strategic partnership, by accepting the EU’s convergence approach. Baku’s prior interest was to establish an outlet for Azerbaijani gas to Europe and to thereby pave the way for its development as a gas supplier in a geopolitically difficult environment. Western political and financial support was deemed to be crucial to achieve this objective. In the 90s, the US played this role with regard to the Baku-Tbilisi-Ceyhan oil pipeline and the EU appeared to be the actor capable to assume it with regard to a strategic gas pipeline.

For its part, Russia engaged on different levels to prevent Caspian gas from reaching its traditional markets in Central and South East Europe. Moscow tried to use its political and military support for the Armenian side in the Nagorno-Karabakh conflict as leverage, sought to acquire strategic assets in Azerbaijan’s energy sector and purchase large volumes of SD-II gas. Furthermore, it signed memoranda with member states and Turkey to facilitate the South Stream project, which aimed at supplying the same destination markets as Nabucco, in order to make the project unnecessary. The Russian-Georgian War shed further doubt on Nabucco’s geopolitical fate and increased

7 Memorandum of Understanding on a Strategic Partnership between the European Union and the Republic of Azerbaijan in the field of energy, 7/11/2006.

Baku’s vital interest in a geostrategic partnership with the EU. However, the more it became clear in the late 2000s, that the EU won’t be able to implement Nabucco, but continued nonetheless to give priority to the overambitious pipeline and neglected economically more feasible, smaller projects, the more convergence vanished from the Euro-Azerbaijani energy agenda. While its opening is certainly an important achievement, the Southern Gas Corridor, as its stands today, reflects only partially the shape and features the EU was striving for. Instead of having one pipeline filled with gas from several suppliers, only Azerbaijani gas will reach Europe via Georgia and the Southern Caucasus Pipeline (SCP), Turkey and the Trans Anatolian Pipeline (TANAP), before the Trans Adriatic Pipeline (TAP) brings it to Italy via Greece and Albania. Indeed, the EU managed to sign non-binding memoranda with Kazakhstan, Turkmenistan, Uzbekistan, and Iraq to source additional gas, but this has not proven to be effective for three reasons. Firstly, private European import commitments were not sufficient in the eyes of producers. While the EU has developed a mechanism to aggregate demand in order to address this issue, flat overall EU gas demand became the major obstacle in the aftermath of the economic crisis. Secondly, all suppliers are landlocked. The missing link is a pipeline that would enable Central Asian supplies to cross the Caspian and connect to Azerbaijani gas. In 2011, the Commission obtained an unprecedented mandate from the European Council to negotiate with Azerbaijan and Turkmenistan on a Trans Caspian Pipeline (TCP). However, the status of the Caspian Sea remains a highly politicized conflict, which involves Russia and Iran, who have an interest in preventing the project. Iraq as an alternative supplier is still struggling with severe security issues, which are a major obstacle for pipeline-based supplies. Thirdly, while Russia has political and economic means to put pressure on Central Asian countries, the EU is still no significant player in the region. Confronted with the deadlock of the EU-promoted Nabucco project, Baku began to actively reconfigure the Southern Gas Corridor. By the early 2010s, Azerbaijan’s strategic and economic ambitions went beyond its initial role as mere crude exporter. With its traditional partner Turkey, Azerbaijan agreed on the construction and terms of TANAP, in which the Azerbaijani state company SOCAR holds a majority stake. This fait accompli made the Eastern part of Nabucco obsolete, put the non-European section of the Southern Gas Corridor under Azerbaijan’s control and left only the final decision on the routing on European territory open. The EU reacted by adopting a more neutral approach towards the competition between different

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projects, from which TAP and a downscaled “Nabucco-West” version with a capacity of 10 bcm emerged as final options for the EU section. Both projects were scalable and allowed for additional capacity between 10 and 15 bcm. Furthermore, TAP developed plans to supply also some destination markets in South East Europe, which was partially a response to EU demands. Behind the scenes, particularly the European External Action Service (EEAS) firmly supported the Nabucco-West option, however, the EU was not able to influence the Final Investment Decision in its favour. TAP does not ease Central and South Eastern Europe’s dependency on Russian supplies sufficiently. Azerbaijan’s choice of TAP was certainly influenced by economic considerations and its successful acquisition of additional strategic assets in the distribution and transmission sector along the route. In the context of privatisations during the Euro Crisis, SOCAR secured a majority stake in the Greek gas transmission operator DESFA. With regard to the regulatory framework of the Southern Gas Corridor as well, not much is left of the EU’s initial ambitions. The Commission drafted an Intergovernmental Agreement (IGA) for Nabucco, which provided for Third

Party Access for 50% of the supply volumes.8 Its signing by

all consumer and transit countries was considered to be a political and diplomatic breakthrough and the framework was presented as a model for future projects. The agreed provisions would have reduced the influence of energy producing countries and upstream companies along the whole route. However, the document is now obsolete. While the TANAP IGA is inspired by the Nabucco IGA, it

does not provide for Third Party Access.9 Furthermore,

TAP was granted exemptions from the TPA regime for the

entire initial capacity of 10 bcm for a period of 25 years.10 Remaining challenges and uncertainties The last decade has clearly shown the limits of EU external energy policy towards Azerbaijan. The EU’s efforts to promote structural reforms and regulatory convergence with EU legislation have largely failed to produce tangible results in Azerbaijan’s gas sector. With regard to convergence, EU external energy policy should now focus on other fields, such as energy efficiency and renewables. Reforms in both

8 Intergovernmental Agreement regarding the Nabucco project, 13/7/2009 9 Intergovernmental Agreement concerning the Trans Anatolian Natural Gas Pipeline System, 26/6/2012. 10 European Commission (2013) Commission Decision on the exemption of the Trans Adriatic Pipeline from the requirements on third party access, tariff regulation and ownership unbundling.

fields seem more feasible and could help to make more gas available for exports and thereby contribute indirectly to EU energy security. As to the further diversification of corridor supplies, it is highly questionable, whether other Central Asian producers will join Azerbaijan and supply gas to Europe in the mid-term. While the EU should continue to negotiate with Azerbaijan and Turkmenistan on a Trans Caspian Pipeline, Azerbaijan will probably opt to expand TANAP and fill the additional capacity with indigenous gas from fields like Absheron. Thus, the pipeline does not seem to be an infrastructure link available for other regional or Eastern Mediterranean suppliers. Finally, it remains to be seen, how much Azerbaijani gas will be available for the most vulnerable Central and South East European countries, since the bulk of the initial volumes is earmarked for the well-diversified Italian market. After the “death” of its flagship project Nabucco, the EU should now cooperate with Baku and TAP and firmly support interconnections, such as the Ionian Adriatic Pipeline (IAP), which would permit Azerbaijani gas to reach the Central and South East European network. References:

European Commission (2013) Commission Decision on the

exemption of the Trans Adriatic Pipeline from the requirements

on third party access, tariff regulation and ownership

unbundling laid down in Articles 9, 32, 41(6), 41(8) and

41(10) of Directive 2009/73/EC, C(2013) 2946 final. European Commission (2013) Gas from Azerbaijan:

Commission welcomes final investment decision to extract gas

pledged for Europe, Press Release, IP/13/1271. European Commission (2010) Commission Staff Working

Paper. Interpretative Note on Directive 2009/72/EC

concerning common rules for the Internal Market in natural

gas. The Unbundling Regime.

Intergovernmental Agreement among the Republic of Austria,

the Republic of Bulgaria, the Republic of Hungary, Romania,

the Republic of Turkey regarding the Nabucco project, Ankara, 13/7/2009. Intergovernmental Agreement between the Government of the

Republic of Turkey and the Government of the Republic of

Azerbaijan concerning the Trans Anatolian Natural Gas

Pipeline System, Istanbul, 26/6/2012.

International Energy Agency (2013) World Energy Outlook

2013, Paris: OECD.

Memorandum of Understanding on a Strategic Partnership

between the European Union and the Republic of Azerbaijan in

the field of Energy, Brussels, 7/11/2006. Pirani, S./Stern, J./Yafimava, K. (2009) Ukrainian gas dispute of January 2009: a comprehensive assessment, Oxford Institute for Energy Studies.

Carbon Pricing in a Time of Uncertainty Carbon Pricing in a Time of Uncertainty Carbon Pricing in a Time of Uncertainty Carbon Pricing in a Time of Uncertainty

Johanna Grusch

Uncertainty is a recurring theme in today’s debates on future energy sources, their prices and their security of supply due to the inherent unpredictability within the energy sector. The beginning of the 21st century was marked by several rapid transformations resulting from unforeseen economic, political as well as technological developments that impacted global energy markets. In order to achieve security of energy supply, this essay argues that political and economic flexibility is crucial for energy providers and consumers in order to adapt to the uncertainties and unpredictable changes in global energy structures. When putting energy security in the context of environmental sustainability, this flexibility imperative supports arguments in favour of carbpricing mechanisms, such as carbon taxing and trading schemes.

In addition to providing a neutral policy instrument in order to incentivize the reduction of greenhouse gas emissions, such market based instruments also protect the freedom to choose whichever technology economic actors perceive as most cost-effective. They therefore allow energy suppliers and consumers to adapt to unpredictable and unknowable changes quicker and more cost-effectively. However, even though different systems of carbon taxation and trading exist and already provide a higher degree of flexibility, these systems themselves entail inherent instability and have not been able to generate the required reduction in carbon emissions. What is needed is a restructuring, stabilisation and strengthening of carbon pricing mechanisms that equip energy providers and consumers with sufficient flexibility to adapt to a changing energy market and as a consequence, to achieve both security of energy supply and the mitigation of climate change.

The need for flexibility

Looking back over the last decade, several developments impacting global energy structures have occurred that could not have been predicted by policy makers or market participants in advance. In addition to technological advances allowing for instance for the US shale gas revolution (IHS CERA 2010), various unforeseeable political factors have significantly reshaped energy markets.

Memorandum of Understanding on a Strategic Partnership

between the European Union and the Republic of Azerbaijan in

Pirani, S./Stern, J./Yafimava, K. (2009) The Russo-Ukrainian gas dispute of January 2009: a comprehensive

, Oxford Institute for Energy Studies.

Carbon Pricing in a Time of Uncertainty Carbon Pricing in a Time of Uncertainty Carbon Pricing in a Time of Uncertainty Carbon Pricing in a Time of Uncertainty

Uncertainty is a recurring theme in today’s debates on future energy sources, their prices and their security of supply due to the inherent unpredictability within the energy sector. The beginning of the 21st century was marked by several

ions resulting from unforeseen economic, political as well as technological developments that impacted global energy markets. In order to achieve security of energy supply, this essay argues that political and economic

viders and consumers in order to adapt to the uncertainties and unpredictable changes in global energy structures. When putting energy security in the context of environmental sustainability, this flexibility imperative supports arguments in favour of carbon pricing mechanisms, such as carbon taxing and trading

In addition to providing a neutral policy instrument in order to incentivize the reduction of greenhouse gas emissions, such market based instruments also protect the freedom to

hever technology economic actors perceive as effective. They therefore allow energy suppliers

and consumers to adapt to unpredictable and unknowable effectively. However, even

ion and trading exist and already provide a higher degree of flexibility, these systems themselves entail inherent instability and have not been able to generate the required reduction in carbon emissions. What is needed is a restructuring, stabilisation nd strengthening of carbon pricing mechanisms that equip

energy providers and consumers with sufficient flexibility to adapt to a changing energy market and as a consequence, to achieve both security of energy supply and the mitigation of

Looking back over the last decade, several developments impacting global energy structures have occurred that could not have been predicted by policy makers or market participants in advance. In addition to technological

lowing for instance for the US shale gas revolution (IHS CERA 2010), various unforeseeable political factors have significantly reshaped energy markets.

Besides widespread political turmoil in the oilworld (Maher 2013), for instance, political ustemming from Russia and the willingness of its leaders to use energy markets as instruments for political leverage, contribute to the level of uncertainty in Europe’s energy supply.

Moreover, the combination of technological and political insecurity has rendered the nuclear power sector subject to major transformations. While the incidents in Fukushima led to a moratorium of nuclear power stations in Germany and a resulting increase in the use of highly carbonenergy sources, the UK is still strongly committed to using nuclear power in order to reach its emission reduction targets, mitigate climate change and increase its energy independence. The costs of nuclear power, however, can no longer be carried by private investors alone, nemajor government investments, such as a £16 Billion deal with EDF to build two reactors at Hinkley Point in Somerset (Froggatt 2013).

In the UK, and in Europe, these developments have led to a return of centralised energy planning. As Robinsonhighlights, the resulting re-politicisation of energy markets adds another layer of uncertainty, resulting in a demand for a ‘political uncertainty premium’ for investments. However, whether the political efforts to secure energy supplies while mitigating climate change will be successful, is as unforeseeable as the aforementioned developments. In fact, the impact of climate change on our environment itself remains not predictable. While documents like the Stern Review (2007) warn against the dangertemperature increases beyond 2°C and call for immediate action to avoid reaching a dangerous threshold of carbon concentrations of more than 450 parts per million, others point to the sheer impossibility of measuring the impact of a plethora of factors changing global temperature levels (Robinson 2013, Helm 2012).

The recent report of the Intergovernmental Panel on Climate Change (2013), which records a slowdown in temperature increases, further adds to the uncertainty. In combination with diverging national interests, capabilities, responsibilities and climate change impacts, this increases the difficulty of establishing an international agreement that would determine who will contribute how much to which level of climate change mitigation. It surprising that the World Energy Forum states an international climate agreement as the most uncertain of all

Johanna Grusch is a BA International Politics student at King’s College London. She is currently working on her dissertation on low carbon growth in the developing world and conducting an individual research project on environmental policies in Costa Rica Institute of Economic Affairs in London.

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Besides widespread political turmoil in the oil-rich Arab world (Maher 2013), for instance, political uncertainties stemming from Russia and the willingness of its leaders to use energy markets as instruments for political leverage, contribute to the level of uncertainty in Europe’s energy

Moreover, the combination of technological and political security has rendered the nuclear power sector subject to

major transformations. While the incidents in Fukushima led to a moratorium of nuclear power stations in Germany and a resulting increase in the use of highly carbon-intensive

is still strongly committed to using nuclear power in order to reach its emission reduction targets, mitigate climate change and increase its energy independence. The costs of nuclear power, however, can no longer be carried by private investors alone, necessitating major government investments, such as a £16 Billion deal with EDF to build two reactors at Hinkley Point in

In the UK, and in Europe, these developments have led to a return of centralised energy planning. As Robinson (2013)

politicisation of energy markets adds another layer of uncertainty, resulting in a demand for a ‘political uncertainty premium’ for investments. However, whether the political efforts to secure energy supplies while

igating climate change will be successful, is as unforeseeable as the aforementioned developments. In fact, the impact of climate change on our environment itself remains not predictable. While documents like the Stern Review (2007) warn against the dangers of global temperature increases beyond 2°C and call for immediate action to avoid reaching a dangerous threshold of carbon concentrations of more than 450 parts per million, others point to the sheer impossibility of measuring the impact of a

factors changing global temperature levels (Robinson 2013, Helm 2012).

The recent report of the Intergovernmental Panel on Climate Change (2013), which records a slowdown in temperature increases, further adds to the uncertainty. In

rging national interests, capabilities, responsibilities and climate change impacts, this increases the difficulty of establishing an international agreement that would determine who will contribute how much to which level of climate change mitigation. It is therefore not surprising that the World Energy Forum states an international climate agreement as the most uncertain of all

Johanna Grusch is a BA International Politics student at King’s College London. She is currently working on her dissertation on low carbon growth in the developing world and conducting an individual research project on environmental policies in Costa Rica at the

e of Economic Affairs in London.

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critical uncertainties in its World Energy Issues Monitor (2013).

Two things that are certain, however, are that we will not run out of fossil fuels in the near future as predicted by peak oil theories. Moreover, the increasing use of these fossil fuels will contribute to the warming of our planet by emitting large quantities of greenhouse gases, putting the stability of our climate, especially the climate in the global South, at a potentially very high risk (IPCC 2013). In order to achieve energy security in geopolitical, economic, technological as well as environmental terms, we need a restructuring and strengthening of institutions. These institutions need to allow us to be flexible and adapt to the uncertainties and the unpredictable transformations of the energy market and simultaneously provide the incentive to reduce environmentally harmful emissions.

The case for carbon pricing

Numerous attempts to move our economies from high carbon to low carbon intensive production have not been able to provide the required flexibility. This includes many of the current subsidization schemes and governmental support mechanisms ranging from feed-in tariffs to grants for the installation of renewables. These systems favour certain chosen technologies, blur the costs of these technologies and are often based on political considerations, guesstimates and inadequate information. As a consequence, attempts to correct what Stern identifies as “the greatest example of market failure” (Stern 2007: 1) led to severe government failures, such as solar power projects in Spain: Prior to the financial crisis, solar power generators in Spain could receive up to 575% of the average reference price for 25 years, leading to a ‘solar cell bubble’, a 77% increase in electricity prices for industries within 10 years and an additional hole in the government’s budget (Sandström 2013).

Designing effective subsidy schemes is an extremely difficult task for political authorities not only because of the informational constraints and adverse incentives as highlighted by authors of the Austrian and Public Choice School, but especially because of the sheer impossibility to predict the future of our energy markets. We simply do not know which technologies are going to be most cost-effective, which political factors will impact the supply of our energy resources, and whether currently unknown technologies or unused energy sources will revolutionise the way we produce and use energy. What is therefore required are strong but technologically and politically neutral incentives: Putting a price on carbon allows the market to reduce emissions most cost-effectively and quickly; it reduces the power of lobbyists and the danger of rent-seeking by avoiding the positive discrimination of a few sectors and technologies. Most importantly, if stable and predictable, carbon prices provide businesses with the incentive to reduce the environmental costs of their

emissions and to invest in research and development without depriving them of the freedom of choice.

The relative stability of carbon prices and the investors’ expectation that they will be going up in the future is a crucial feature of their effectiveness and one of the main reasons why the current European Union Emissions Trading Scheme (EU ETS) has so far been unable to provide sufficiently strong incentives. Setting the carbon price at the right level, however, is subject to the same cognitive constraints as the creation of subsidisation schemes. Because of the impossibility to predict the impact of different levels of carbon emissions on the environment and on different countries’ socioeconomic situations, it is not possible to set a ‘correct’ carbon price. Rather, a pragmatic one needs to be established initially, which would then be improved according to the markets’ responses.

The UK government estimates that a price of £30 per ton of CO2 in 2020 rising to £70 in 2030 would be appropriate, which some analysts, such as Bowen (2011), criticise as too low initially and then as too rapidly increasing. The EU ETS’ price per tonne of CO2 started promisingly but already began to plummet in its first year of implementation in 2005 and completely collapsed during the financial crisis. After hovering around £10 to £14 in 2009 and 2010, it has in 2013 fallen back to around £3 to £5 per ton (House of Commons 2013).

In order to make up for the lack of effectiveness and informational value of the EU ETS, the UK government decided to introduce a price floor on CO2 emissions and has published indicative prices up until 2017 (House of Commons 2013). This process reflects a ‘learning-by-taxing-process’, as widely recommended by environmental policy analysts, such as Bowen (2011) and Helm (2012), in order to find an economically, socially and environmentally appropriate carbon price. Helm hopes that the current, low, volatile short-term price will soon be replaced by a credible, long-term carbon tax regime.

A credible, steadily rising carbon price would then provide incentives to energy producers and consumers to switch to less carbon intensive alternatives. A move from coal to gas for instance, which is not encouraged by current subsidisation schemes, would already significantly reduce emissions. While this is certainly not an optimal solution in the long-term due to the carbon intensiveness of gas, it should be considered as an intermittent alternative as long as renewable technologies are too costly and not sufficiently developed. Some analysts (Gross et al. 2012) warn against the lock-in effects when switching to gas rather than to renewables. But as long as we do not know the cost-effectiveness and feasibility of renewable technologies, we instead run the risk of locking in inefficient technologies and losing the opportunity to invest in further research and development by subsidizing potentially wrong technologies.

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International collaboration

Even though more than sixty countries have implemented support schemes for renewables, a significantly smaller number of countries has introduced carbon pricing mechanisms, with the EU ETS being the most extensive scheme in place (Gross et al. 2012). In 2013, the Australian government even decided to scrap its carbon taxation scheme. At the same time, however, some highly carbon intensive economies like China and South Korea have started to set up their own carbon pricing mechanisms. Nevertheless, in most parts of the world carbon is still subsidised and not taxed. The International Energy Agency (2013) estimates that in 2012, subsidies for fossil fuel end-use accounted for around $544 billion globally, distorting and undermining incentives to reduce emissions and promote energy efficiency.

International negotiations to cooperate and to harmonise national efforts to reduce greenhouse gas emissions have not been able to result in a decisive agreement. In fact, many feared that the Kyoto Protocol would not even be extended after the first commitment period ended in 2012, when several major polluters, such as Canada, Japan and Russia, indicated that they would not sign up for a second period. The US, which signed but never ratified the treaty, still sees the Kyoto Protocol as inherently flawed and insufficient since it does not cover developing countries, including the world’s biggest polluter, China. In addition to severely affecting their domestic economy, the Kyoto Protocol would give a competitive advantage to one of their major economic rivals by allowing China to pollute in order to develop and attract the relocation of carbon intensive industries from the US.

Moreover, as Helm (2012) points out, the relocation of certain industries back to the US using less carbon intensive shale gas instead of Chinese coal, would result in an increase in US emissions but a decrease in global emissions. This would be good in environmental terms but bad according to the terms of the Kyoto Protocol. Following this argument, the creation of ‘carbon havens’ would result in a more rapid deindustrialisation of the developed world and an increase, not a decrease, in emissions. The European Union, for instance, prides itself with having significantly reduced its greenhouse gas emissions, while in fact, the import and consumption of high-carbon products and thus European carbon footprints have been steadily increasing.

Three options have been proposed to address this problem: The first option, namely the harmonisation of carbon prices through an international agreement (Barbier 2010), is likely to remain gridlocked by different national interests and arguments about differentiated responsibilities. Considering that time is a crucial factor, some call for a second option, the implementation of national carbon prices without waiting for an international harmonisation. Adherents of this

argument often maintain that the reduction of competitiveness through carbon prices is exaggerated and that other factors are more decisive for companies’ choice of location (Gross et al. 2012).

Helm (2012), who disagrees and considers the lack of carbon prices in certain countries a significant competitive advantage, proposes a third option which would introduce taxes on carbon imports in addition to domestic carbon taxes. Such a tax could start with some of the most carbon intensive products like steel, aluminium and petrochemicals and could then be extended to other sectors. This option would allow for a bottom-up approach starting from the national level instead of the global, and protect early movers from the problem of free-riding and the competitive advantage of externalised carbon costs. Moreover, a carbon tax on imports would still allow for the required flexibility in changing energy structures and keep the informational needs of the government to a minimum.

Conclusion

The high number of different policy instruments currently in use can neither provide the flexibility needed to manage the political, economic, technological and environmental uncertainty inherent in our energy structures, nor create stable incentives to reduce greenhouse gas emissions. Only a credible and fully functional price for carbon can provide both the flexibility and the incentives needed for quick, cost-effective and low carbon adjustments.

The UK government maintains that as long as the price of carbon is inappropriate or lacking in other countries, subsidies and other support mechanisms are necessary in order to lower the carbon intensity of its economy. However, current subsidy and support schemes do not improve the credibility and stability of the carbon price, but significantly impact the market and distort its price mechanisms. Alternative strategies to strengthen the carbon price, such as international agreements or national measures, are strongly needed.

References: Barbier, E. D. (2010). Rethinking the Economic Recovery: A Global Green New Deal. United Nations Environment Programme. Cambridge: Cambridge University Press. Bowen, A. (2011). The case for carbon pricing. Policy Brief, Grantham Research Institute of Climate Change and the Environment, Centre for Climate Change Economics and Policy. <http://www.lse.ac.uk/GranthamInstitute/publications/Policy/docs/PB_case-carbon-pricing_Bowen.pdf> Froggatt, A. (2013). UK Power Deal: Implications for the Global Nuclear Sector. London: Chatham House.

Gross, R. et al. (2012). On picking winners: The need for targeted support for renewable energy. ICEPT Working PaperRef: ICEPT/WP/2012/013, Centre for Energy Policy and Technology, Imperial College London. Helm, D. (2012). The Carbon Crunch: How We’re Getting Climate Change Wrong – and How to Fix It. New Haven and London: Yale University Press. House of Commons (2013). Carbon Price Floor. Briefing Paper SN/SC/5927, November 07, Science and Environment Section. <http://www.parliament.uk/briefing-papers/sn05927.pdf%E2%80%8E> Intergovernmental Panel on Climate Change (IPCC) (2013). Climate Change 2013: The physical science basis.<http://www.ipcc.ch/report/ar5/wg1/#.Uue7WBBFCM8> International Energy Agency 2013. World Energy 2013. Paris: IEA, OECD. IHS CERA (2010). Fuelling North America’s Energy Future: The Unconventional Natural Gas Revolution and the Carbon Agenda, IHS CERA Special Report. Cambridge, Massachusetts: IHS CERA Inc. Maher, S. (2013). The Arab Spring and its Impact on Supply and Production in Global Markets. EUCERS Strategy Paper No.4. London: Department of War Studies, King's College London and Konrad-Adenauer-Stiftung e.V. Robinson, C. (2013). From Nationalisation to State Control The Return of Centralised Energy Planning. IEA Discussion Paper No. 49. London: Institute of Economic Affairs. Sandström, C. (2013). Are Green Jobs Promising the Moon? On Europe's New Growth Policy. Stockholm: Timbro. Stern, N. (2007). The Economics of Climate Change:Stern Review. Cambridge: Cambridge University Press.World Energy Council 2013. World Energy Issues Monitor 2013. London: World Energy Council.

Piiiipeliiiine Poliiiitiiiics

Gus Constantinou

The annual North American Leaders Summit, dubbed the ‘Three Amigo’s Summit’ in the popular press and held this year in Toluca, Mexico, was a disappointment for the Keystone XL (KXL) pipeline. The annual summit, a chance for the leaders of Canada, Mexico and the US to discuss pressing issues, was the first face-to-face opportunity US President Barak Obama and Canadian Prime Minister

On picking winners: The need for targeted support for renewable energy. ICEPT Working Paper, Ref: ICEPT/WP/2012/013, Centre for Energy Policy and

arbon Crunch: How We’re Getting and How to Fix It. New Haven

Carbon Price Floor. Briefing November 07, Science and

Intergovernmental Panel on Climate Change (IPCC) . Climate Change 2013: The physical science basis.

/report/ar5/wg1/#.Uue7WBBFCM8>

World Energy Outlook

Fuelling North America’s Energy Future: The Unconventional Natural Gas Revolution and the Carbon

IHS CERA Special Report. Cambridge,

nd its Impact on Supply EUCERS Strategy Paper

No.4. London: Department of War Studies, King's College Stiftung e.V.

From Nationalisation to State Control – Centralised Energy Planning. IEA Discussion

Paper No. 49. London: Institute of Economic Affairs.

Are Green Jobs Promising the Moon? . Stockholm: Timbro.

The Economics of Climate Change: The Cambridge: Cambridge University Press.

World Energy Issues Monitor

The annual North American Leaders Summit, dubbed the popular press and held this

year in Toluca, Mexico, was a disappointment for the Keystone XL (KXL) pipeline. The annual summit, a chance for the leaders of Canada, Mexico and the US to discuss

face opportunity US sident Barak Obama and Canadian Prime Minister

Stephen Harper would have had to discuss the longpipeline since September 2013’s GPetersburg, Russia. Instead of such a discussion, attention was directed at ways to ‘ease travel betcountries and better protect the monarch butterfly.’add insult to injury, President Obama also only attended the Summit for 8 hours. President Obama’s dismissal of the pressing issue is reflective of the strain between the neighbours and strong allies of Canada and US and largely to do with ongoing delays in approving the KXL pipeline. The estimated cost of the pipeline is USD$7 billion barrels a day across the world’s largest border. Those 700,000 barrels would comprise Canada’s crude, and carbon heavy, tarAlberta across the US border to Steel City, Oklahoma, before linking up with the Gulf Coast Project pipeline on to refineries in Port Arthur, Texas and over an 1,179 miles (or 1,897 kilometers).12 The pipeline is seen as being in step with the US policy of reducing energy dependence on foreign sources, most notably in the Middle East, and rein domestic and international energy production.maintaining heavy reliance on fossil fuels, Obama’s energy policy also hopes to support and integrate greener energy alternatives, such as wind and solar. Originally rejected by President Obama in its original application in 2012 for environmental reasonsreceived a significant boost when a January 31Department review stated the pipeline would have little impact on the environment, with the crossthe deal necessitating US State Departments approval. The main reason cited for the approval, however, was that the tar-sands oil would be developed and exported by Canada anyway. Canadian insistence to develop the tar sands would therefore negate any possible environmental gain, in the form of CO2

11 http://www.bbc.co.uk/news/blogs12http://www.washingtonpost.com/blogs/thefix/wp/2013/04/03/the-keystoneexplained/ 13 http://www.whitehouse.gov/energy/securing

Gus Constantinou is completing an MA in International Peace and Security Studies Department of King’s College, London, focusing on energy security. You can follow him at @gus_c13

Page 9

Stephen Harper would have had to discuss the long-delayed pipeline since September 2013’s G-20 Summit in St. Petersburg, Russia. Instead of such a discussion, attention was directed at ways to ‘ease travel between the three countries and better protect the monarch butterfly.’11 To add insult to injury, President Obama also only attended the

President Obama’s dismissal of the pressing issue is reflective of the strain between the neighbours and strong allies of Canada and US and largely to do with ongoing delays in approving the KXL pipeline. The estimated cost of the

and aims to provide 700,000 barrels a day across the world’s largest militarily undefended border. Those 700,000 barrels would comprise Canada’s crude, and carbon heavy, tar-sands oil from Hardisty, Alberta across the US border to Steel City, Oklahoma,

fore linking up with the Gulf Coast Project pipeline on to refineries in Port Arthur, Texas and over an 1,179 miles (or

The pipeline is seen as being in step with the US policy of reducing energy dependence on foreign sources, most

tably in the Middle East, and re-emerging as a big player in domestic and international energy production. While maintaining heavy reliance on fossil fuels, Obama’s energy policy also hopes to support and integrate greener energy

and solar.13

Originally rejected by President Obama in its original application in 2012 for environmental reasons, the project received a significant boost when a January 31st, 2014 State Department review stated the pipeline would have little

he environment, with the cross-border nature of the deal necessitating US State Departments approval. The main reason cited for the approval, however, was that the

sands oil would be developed and exported by Canada

lop the tar sands would therefore negate any possible environmental gain, in the form of CO2

http://www.bbc.co.uk/news/blogs-echochambers-26298815 http://www.washingtonpost.com/blogs/the-

keystone-xl-pipeline-and-its-politics-

http://www.whitehouse.gov/energy/securing-american-energy

is completing an MA in International Peace and Security at the War Studies Department of King’s College, London,

Page 10

carbon emission decrease, from scrapping the project outright. Scrapping the project would also have a detrimental effect on US economic interests, as the pipeline is cost effective and makes sense from a trade perspective: Canada lacks the processing capacity to turn the heavy tar sands crude into oil products, something US facilities in Texas are well placed to benefit from. The State Department review also stopped short of making a recommendation that the pipeline be approved. The review merely passes the pipeline project on to a 90-day review process where it is open to comments from other federal agencies, including the Environmental Protection Agency (EPA) until the end of April. After that, it needs to gain approval from the Secretary of State, John F. Kerry, himself. Kerry has come out to say he has no deadline to deliver a final recommendation. If Kerry does decide to approve it, the KXL project then it will be passed onto President Obama for his approval, where there similarly is no deadline (nor discernable appearance of urgency) for the President to decide on moving the project along.14 President Obama has met stiff domestic resistance from environmental groups over what they argue is an environmentally unstable practice of using carbon heavy tar-sands oil and the process of fracking, using high-pressure water to ‘blast’ oil and natural gas out of sandy rock. There is concern that fresh water is now being depleted in areas such as the Athabasca River and replaced with toxic run-off lakes from the fracking, having a detrimental effect on local habitat. President Obama’s detractors in the Republican Party and business community are frustrated with the President’s delays and constantly espouse the economic benefit such a project will have. They also point to the isolation and frustration it is having with the US’s northern neighbour. Prime Minister Harper also shares environmentalist objections to KXL. However the Prime Minister is adamant on KXL’s construction, calling the pipeline a ‘no-brainer’ and stating ‘that [he] won’t take no for an answer,’15. On the other hand, President Obama has taken a prolonged and cautious approach. With an estimated 85 pipelines traversing the 49th parallel, Prime Minster Harper is merely pursuing his domestic energy and economic agenda: pursuing an economic and political agenda that prioritizes his native Alberta base, specifically in the energy sector, over the rest of the country and certainly over

14 http://www.latimes.com/opinion/commentary/la-oe-mcmanus-column-keystone-pipeline-20140212,0,6287892.column#axzz2tU8systW 15http://www.google.com/hostednews/afp/article/ALeqM5jmUexRQTu1hG6BDw7OA_IS_P8ytA?docId=321af618-76f0-42d4-8bd6-eadf1c03c506

environmental concerns. In 2015 Harper faces an election year and his strategy appears to be leaning on gains in the energy sector, especially for his Alberta base. Critics are also voicing concern over the Prime Minister’s aggressive pursuit of the pipeline’s approval and threaten to seek energy export away from the US and towards hungry Asian markets. Canadian Foreign Affairs, Minister John Baird’s ‘impolitic’ remarks that Obama should make up his mind16 are seen as a continuation of evidence that the PM’s Conservative Party is being overly aggressive in pursuit of KXL. As any follower of Canadian politics can attest, Baird has never been known to be ‘politic’ (quite the opposite) and the PM’s move is aimed at shoring up domestic support, while growing Canada’s own economic and energy policies. His support for the tar-sands and the pipeline will hold firm. Indeed, Prime Minister Harper has not been the only one to question the delays in approving the project. Supporters argue that the conclusion should be drawn that the pipeline is safe. Indeed, pipeline supporters point to the safety issues of using rail transport as an alternative by pointing to the July 2013 train derailment in Quebec’s Lac-Mégantic, where a 74-car freight train carrying crude oil derailed and killed 42 people and destroyed 30 buildings in a blast that measured one kilometer in radius. Critics also point to the fact that an estimated 85-90 pipelines already traverse the US-Canada border. One strong bet is that President Obama is weighing the effect of a pipeline decision against domestic and political calculations. Here, the urgings of Prime Minister Harper pale in comparison to this November’s mid-term Congressional elections. With approval ratings plummeting, President Obama is walking a fine line heading into an election that will decide the formation of a Congress divided along party lines unsympathetic to the Obama administration, playing a strong role in his last two years in power. The President is caught between not being able to appear too pro-pipeline to ensure the votes and donations of core constituents of Democrat environmentalists, while also not seeming anti-pipeline so as to gain support of Democrats who oppose the pipeline. President Obama must also simultaneously support Democratic Senators in contested ‘red’ states who need the pipeline for its union jobs, economic benefits and, ultimately, votes. If this wasn’t enough, President Obama also cannot afford to be seen to be ceding electoral ground to US Republicans, whose party and

16 http://www.cbc.ca/news/canada/keystone-xl-supporters-detractors-clash-over-u-s-pipeline-report-1.2519704

constituents have joined Prime Minister Harper in trying to force the Presidents hand on the matter. Ultimately for President Obama, the debate seems to boil down to ballots in boxes and not footprints of carbon. ACTIVITIES

First Roundtable Discussion First Roundtable Discussion First Roundtable Discussion First Roundtable Discussion in March, in March, in March, in March, 2014 2014 2014 2014

Turkey and Mediterranean GTurkey and Mediterranean GTurkey and Mediterranean GTurkey and Mediterranean Gas: A New European Gas as: A New European Gas as: A New European Gas as: A New European Gas Corridor?Corridor?Corridor?Corridor?

Justus Andreas

For the first session of the series of five roundtable discussions with the overall theme of "Changing Political and Economic Dynamics of Global Energy Flows" coby the Institute for Strategic Dialogue (ISD) and the Konrad Adenauer Foundation (KAS) in London, the European Centre for Energy and Resource Security (EUCERS) will discuss the topic of “Turkey and Mediterranean Gas: What does it mean for Europe and the world?”. The event is to be held on March 10, 2014, from 2-4pm at KingLondon (for further information, see Announcof this Newsletter).

With the approval of the “Trans Adriatic Pipeline” by the Shah-Deniz Consortium last year, Turkey will officially play an essential role in opening up a “Southern Gas Corridor” for Europe. Its strategic geographic position, the significant new gas finds in the Eastern Mediterranean, may render Turkey a future energy hub for Europe.

In 2010, the U.S Geological Survey (USGS) estimated that the Levant Basin, situated off the coast of Israel, Lebanon and Syria in the Levantine Sea, held potential reserves of 1.7 billion barrels of recoverable oil, and a mean of 122 trillion cubic feet (tcf, approximately 3.45 trillion cubic meters) of recoverable natural gas. Important offshore hydrocarbon discoveries in recent years tend to have confirmed the estimates, potentially opening up a new gas corridor for Europe (Schenk et. Al., 2010).

In May 2012, the Israeli Ministry of Energy and Water Resources estimated the nation’s offshore natural gas reserves at 49.4 tcf (1400 billion cubic meters) (Pelaghias, 2012). From the two largest gas plays, the Tamar gas field commenced first productions in March last year, and the Leviathan gas field expects to commence production within the next years.17 Together, the two plays constitu28tcf. Moving beyond the mere economics, they may also implicate decisive shifts in Israel’s foreign relations, i.e. towards Cyprus, Turkey and Greece.

17 Estimates range from 2015-2017.

constituents have joined Prime Minister Harper in trying to

Ultimately for President Obama, the debate seems to boil down to ballots in boxes and not footprints of carbon.

2014 2014 2014 2014 ––––

as: A New European Gas as: A New European Gas as: A New European Gas as: A New European Gas

For the first session of the series of five roundtable discussions with the overall theme of "Changing Political

nergy Flows" co-hosted by the Institute for Strategic Dialogue (ISD) and the Konrad Adenauer Foundation (KAS) in London, the European Centre for Energy and Resource Security (EUCERS) will

Turkey and Mediterranean Gas: What The event is to be

4pm at King’s College London (for further information, see Announcement section

With the approval of the “Trans Adriatic Pipeline” by the Deniz Consortium last year, Turkey will officially play

an essential role in opening up a “Southern Gas Corridor” for Europe. Its strategic geographic position, also in light of the significant new gas finds in the Eastern Mediterranean, may render Turkey a future energy hub for Europe.

In 2010, the U.S Geological Survey (USGS) estimated that the Levant Basin, situated off the coast of Israel, Lebanon

n the Levantine Sea, held potential reserves of 1.7 billion barrels of recoverable oil, and a mean of 122 trillion cubic feet (tcf, approximately 3.45 trillion cubic meters) of recoverable natural gas. Important offshore

ears tend to have confirmed the estimates, potentially opening up a new gas

In May 2012, the Israeli Ministry of Energy and Water Resources estimated the nation’s offshore natural gas

billion cubic meters) (Pelaghias, 2012). From the two largest gas plays, the Tamar gas field commenced first productions in March last year, and the Leviathan gas field expects to commence production within

Together, the two plays constitute around 28tcf. Moving beyond the mere economics, they may also implicate decisive shifts in Israel’s foreign relations, i.e.

Other gas fields, such as the Gaza Marine, which contains about 1tcf of recoverable gas, may also have decisive political implications. The project had been revived last year as part of the strife to decrease the Palestinian Territories’ reliance on foreign aid as well as Israeli energy imports. The plan was supported by the Israeli government, which expects the play to be exploited by investors led by BG Group on behalf of the Palestinian Authority. The field is estimated to require four years to develop wcapital investment of $1bn. Further progress, however, remains completely dependent on diplomatic efforts between the two political parties (Reed, 2013).

The discovery of gas, however, has also initiated various disputes. Lebanon, for exampleand the Leviathan gas fields range into their Exclusive Economic Zones (EEZ) and Similarly, a political standoff has also developed between the Republic of Cyprus and Turkey. This is based on Tuand Turkish Cypriot objections to drillings in the EEZ that Cyprus has legally claimed under International Maritime Law. Turkey continues to be the only country in the UN refusing to recognise the sovereignty of the Republic of Cyprus (Kashi, 2013).

Following the decision of the Israeli government to export 40% of its natural gas production (Yaakov, 2013), exporting destinations may include Turkey, Greece, Jordan, Egypt, and even South Korea. Export could take place through a floating facility moored directly over the Leviathan field, or through onshore LNG production. However, due to environmental and physical security concerns, building a liquefaction plant on Israeli territory appears politically impossible (Bryza, 2014). Other options include buildnew terminal in Cyprus, where Delek and Noble main investors in the Tamar and Leviathan fields rights to the Cypriot Aphrodite gas play, and could pool its gas with Israel’s. Aphrodite’s gas amounts are estimated at 3.6-7tcf. For Cyprus, building an LNG terminal at Vasilikos on the island’s southern shore is considered a priority, providing revenue and jobs to mitigate the country’s financial crisis. The most ambitious plan is to build an undersea pipeline to either Turkey, which woulinvestment of $2bn to $3bn, or Crete (Greece), linking the gas directly to the European grid.

Since Cypriot leaders begin to recognize the economic necessity of a pipeline to Turkey, combining a 292Israel-Turkey pipeline with an LNG term

Justus Andreas is the 2013/14 KAS Fellow at EUCERS and editor of the monthly Newsletter. He conducts his primary research on the geopolitical and economic implications of tUS drive for energy independence.

Page 11

Other gas fields, such as the Gaza Marine, which contains about 1tcf of recoverable gas, may also have decisive political implications. The project had been revived last year as part of the strife to decrease the Palestinian Territories’

n aid as well as Israeli energy imports. The plan was supported by the Israeli government, which expects the play to be exploited by investors led by BG Group on behalf of the Palestinian Authority. The field is estimated to require four years to develop with a needed capital investment of $1bn. Further progress, however, remains completely dependent on diplomatic efforts between the two political parties (Reed, 2013).

The discovery of gas, however, has also initiated various disputes. Lebanon, for example, has claimed both the Tamar and the Leviathan gas fields range into their Exclusive Economic Zones (EEZ) and argued Israel was ignoring this. Similarly, a political standoff has also developed between the Republic of Cyprus and Turkey. This is based on Turkish and Turkish Cypriot objections to drillings in the EEZ that Cyprus has legally claimed under International Maritime Law. Turkey continues to be the only country in the UN refusing to recognise the sovereignty of the Republic of

Following the decision of the Israeli government to export 40% of its natural gas production (Yaakov, 2013), exporting destinations may include Turkey, Greece, Jordan, Egypt, and even South Korea. Export could take place through a

directly over the Leviathan field, or through onshore LNG production. However, due to environmental and physical security concerns, building a liquefaction plant on Israeli territory appears politically impossible (Bryza, 2014). Other options include building a new terminal in Cyprus, where Delek and Noble – the two main investors in the Tamar and Leviathan fields – have rights to the Cypriot Aphrodite gas play, and could pool its gas with Israel’s. Aphrodite’s gas amounts are estimated at

rus, building an LNG terminal at Vasilikos on the island’s southern shore is considered a priority, providing revenue and jobs to mitigate the country’s financial crisis. The most ambitious plan is to build an undersea pipeline to either Turkey, which would entail an investment of $2bn to $3bn, or Crete (Greece), linking the gas directly to the European grid.

Since Cypriot leaders begin to recognize the economic necessity of a pipeline to Turkey, combining a 292-mile

Turkey pipeline with an LNG terminal in Cyprus

Justus Andreas is the 2013/14 KAS Fellow at and editor of the monthly Newsletter.

research on the geopolitical and economic implications of the

independence.

Page 12

might be commercially feasible, as well as economically and politically advantageous to all parties, including the EU. ‘Building an Israel-Turkey pipeline connected to a Cyprus LNG terminal offers strategic opportunities that transcend economics, including a chance for Israel and Turkey to restore their strategic partnership. It would also push Turkey to reach an agreement on the Cyprus question, removing a 40-year irritant in relations with Europe and re-energizing Turkey’s flagging efforts to join the EU’ (Offshore Technology, 2014).

‘Energy security lies in variety, and variety alone’ (Yergin, 2006, p.69). These words by then First Lord of the Admiralty Winston Churchill at the outset of the 20th century have not lost their value for the European continent 100 years later. With Europe’s natural gas production in decline for years, and its consequent dependence on imports increasing, diversification of energy sources remains an imperative. The role that Eastern Mediterranean gas and Turkey as a potential energy hub can play in this respect remains to be seen, but it certainly has not only great economic potential but could also improve the political environment of the region with extensive security implications.

References:

Bryza, Matthew (2014), Israel-Turkey Pipeline Can Fix

Eastern Mediterranean. In Bloomber, January 20, 2014. <http://www.bloomberg.com/news/2014-01-20/israel-turkey-pipeline-can-fix-eastern-mediterranean.html> Kashi, David (2013), Israel, Lebanon And The Eastern

Mediterranean's Oil And Gas, A Source Of Conflict Or Peace?

In International Business Times, October 07,2013. <http://www.ibtimes.com/israel-lebanon-eastern-mediterraneans-oil-gas-source-conflict-or-peace-1415718> Offshore Technology (n/a), Leviathan Gas Field, Levantine

Basin, Mediterranean Sea, Israel. Retrieved, February 19, 2014. <http://www.offshore-technology.com/projects/leviathan-gas-field-levantine-israel/> Reed, John (2013), Gaza Strip Gas Project poised for

approval. In Financial Times, October 9, 2013. <http://www.ft.com/cms/s/0/13474ef2-3027-11e3-80a4-00144feab7de.html#axzz2th2EHSVz> Schenk, C.J., Kirschbaum, M.A., Charpentier, R.R., Klett, T.R., Brownfield, M.E., Pitman, J.K., Cook, T.A., and Tennyson, M.E. (2010), Assessment of undiscovered oil and

gas resources of the Levant Basin Province, Eastern

Mediterranean, U.S. Geological Survey Fact Sheet 2010-3014, 4

<http://pubs.usgs.gov/fs/2010/3014/> Yaakov, Yifa (2013), High Court gives green light to gas

export. In The Times of Israel <http://www.timesofisrael.com/high-court-gives-green-light-to-gas-export/#ixzz2tnO1jMp5> Yergin, Daniel (2006), Ensuring Energy Security, in Foreign Affairs, Volume 85 No.2 March/April 2006 Issue

DISCLAIMER The views expressed in this Newsletter are strictly

those of the authors and do not necessarily reflect those

of the European Centre for Energy and Resource

Security (EUCERS), its affiliates or King’s College

London.

Page 13

ANNOUNCEMENTS

The European Centre for Energy and Resource Security (EUCERS) cordially invites you to the first of a series of five roundtable discussions on "Changing Political and Economic Dynamics of Global Energy Flows" co-hosted by the Institute for Strategic Dialogue (ISD) and the Konrad Adenauer Foundation (KAS) in London

Turkey and Mediterranean Gas:

What does it mean for Europe and the world?

10 March 2014, 14.00 - 16.00 with a reception afterwards ♦ River Room, second floor ♦ King’s College London ♦ Strand Campus ♦ London WC2R 2LS

Confirmed speakers for introductory statements include

Ambassador Daniel Shek, Former Israeli Ambassador to France, ISD Engaging Turkey Task Force Member

Androulla Kaminara, Director/Special Adviser European Commission, currently Academic Visitor at St.Antony's College, Oxford

Dr Amit Mor, CEO, Eco Energy Ltd., Israel

John Roberts, Energy Security Specialist, Platts

Aura Sabadus, Editor of Turkish Energy Hub Daily, ICIS and Research Associate at EUCERS, King's College London

The workshop is followed by a reception.

In order to attend the event please RSVP to [email protected] or call 020 7848 1912

EUCERS has been ranked in the Top 20 of the “2013 Global Go To Think Tank Index Report” (2nd in Britain). You can find the overall ranking (p.54) and the full report under:

http://gotothinktank.com/dev1/wp-content/uploads/2014/01/GoToReport2013.pdf

EUCERS ON THE ROAD

Our team represents EUCERS at various conferences and events all over the world. This section gives a regular update and overview of conferences and interview contributions by EUCERS Director Professor Dr Friedbert Pflüger, Associate

Director Dr Frank Umbach and Research Director Dr Petra Dolata.

20.02.2014 Berlin, Germany

Friedbert gave a presentation on “Energy, Water Management and Urban Planning” and moderated a panel on business opportunities in the province Kurdistan at the ‘3rd Iraqi-German Business and Investment Forum’.

12.02.2014 Essen, Germany

Friedbert held a presentation at the ‘E-world Energy and Water 2014’ on “Europe’s Increasing Gas Import Options”.

07.02.2014 Krakow, Poland

Friedbert moderated the panel on “Innovations – a driving force for Europe’s competitiveness” at ‘The Economic Weimar Triangle’.

30.01.14 Winnipeg, Canada

Petra presented on "Oil and Gas in the Canadian Arctic" at a Panel regarding Resources and Economic Development, of the ‘2014 Political Studies Students' Conference – Canada and the Arctic: Challenges and Opportunities’, at the University of Manitoba.

28.01.14 Königswinter, Germany

Frank held four presentations on global and European Energy Security, the German Energiewende and cyber threats to energy infrastructures at a Bundeswehr seminar at the Karl-Arnold-Foundation in Königswinter.

PUBLICATIONS

Dr Frank Umbach shares with us his most recent publications and interviews:

Frank talked about the progress and problems of the South Stream project with Anca Gurzu, published under the title “Despite Legal Issues, South Stream Plans on Schedule - Gazprom” in ‘Europolitics’, on 17 February 2014 (http://www.europolitics.info/sectoral-policies/despite-legal-issues-south-stream-plans-on-schedule-gazprom-artr360135-10.html)

Frank wrote on “Ukraine’s Cut-Price Gas Deal with Russia Is another ‘Virtual Discount’”, for the Geopolitical Information Service (GIS - www.geopolitical-info.com), 14 February 2014, 3 pp. Frank discussed the recent energy negotiations between Russia and Japan with Priscilla Inzerilli, published under the title “Tokyo-Mosca, intesa energetic”, in: L'Indro (Italian Online Newspaper), 14 February 2014

(http://www.lindro.it/politica/2014-02-14/118579mosca-intesa-energetica) Frank published with the Geopolitical Information Service (GIS - www.geopolitical-info.com) on “EU’s New ClimateChange Targets Will Drive Industry Towards US and China10 February 2014, 4 pp. The Article was reprinted in the newspaper Volksblatt (Lichtenstein), on 15 February 2014 under the title: “Europa: Hohe Energiekosten beschleunigen DeIndustrialisierung” on page 11, and in Ostthüringer Zeitung (Germany), on 15 February 2014 under the title „Europäische Union die Industrie vertreibt“ on page 3. Frank talked about the new contract between Hungary and Russia to build an new nuclear power plant and its implications for the EU with Andras Kósa/Márta Orosz, published in:an article of the HVG (Hungarian Business newspaper) called “Jön az uniós eljárás: eltaktikázta magát a kormány Pakssal?”, on 7 Febraury 2014 (http://hvg.hu/itthon/20140205_Paks_diplomacia_EU_vizsgalat)

Frank gave an interview with Joshua Posaner from Interfax, which was published under the title of “Gabriel Takes on Stewardship of Germany's Energiewende” Natural Gas Daily, on 24 January 2014, p. 4.

Frank published on “Commercial Confidentiality: An Obstacle to Effective Mitigation to Cyber Attacks on Critical Energy Infrastructures?“, in the Energy Security Forum (ed. by the NATO Energy Security Centre of Excellence, Vilnius/Lithuania), Vol. 2 (8), December 20132014, pp. 4-8.

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CONTACT EUCERSCONTACT EUCERSCONTACT EUCERSCONTACT EUCERS

If you have found our Newsletter interesting, wish to hear more about our activities, or, indeed, contribute with ideas or essays, please contact Carola Gegenbauer, Operations Coordinator EUCERS on [email protected] 020 7848 1912.

14/118579-tokyo-

published with the Geopolitical Information Service EU’s New Climate-

Change Targets Will Drive Industry Towards US and China”,

The Article was reprinted in the newspaper Volksblatt February 2014 under the title:

chleunigen De-11, and in Ostthüringer Zeitung

(Germany), on 15 February 2014 under the title „Wie die “ on page 3.

Frank talked about the new contract between Hungary and d an new nuclear power plant and its

implications for the EU with Andras Kósa/Márta Orosz, published in:an article of the HVG (Hungarian Business

Jön az uniós eljárás: eltaktikázta magát a

g.hu/itthon/20140205_Paks_diplomacia_EU_viz

Frank gave an interview with Joshua Posaner from Interfax, Gabriel Takes on in the Interfax-

014, p. 4.

Commercial Confidentiality: An Obstacle to Effective Mitigation to Cyber Attacks on Critical Energy

in the Energy Security Forum (ed. by the NATO Energy Security Centre of Excellence, Vilnius/Lithuania), Vol. 2 (8), December 2013-January

wsletter interesting, wish to hear more about our activities, or, indeed, contribute with ideas or essays, please contact Carola Gegenbauer, Operations

[email protected] or

Page 14

Page 15

EUCERS ADVISORY BOARDEUCERS ADVISORY BOARDEUCERS ADVISORY BOARDEUCERS ADVISORY BOARD

The EUCERS Advisory Board supports the activities of EUCERS King’s College London. We would like to thank and present the members of the board.

Professor Mervyn FrostProfessor Mervyn FrostProfessor Mervyn FrostProfessor Mervyn Frost, Chairman of the Board, Professor of

International Relations, Department of War Studies, King's College

London

Marco ArcelliMarco ArcelliMarco ArcelliMarco Arcelli, Executive Vice President, Upstream Gas, Enel, Rom

Professor Dr Hüseyin BagciProfessor Dr Hüseyin BagciProfessor Dr Hüseyin BagciProfessor Dr Hüseyin Bagci, Department Chair of International Relations, Middle East Technical University Inonu Bulvari, Ankara

Andrew BartlettAndrew BartlettAndrew BartlettAndrew Bartlett, Head Oil & Gas, Helios Investment Partners, London

Professor Dr Professor Dr Professor Dr Professor Dr Albert BressandAlbert BressandAlbert BressandAlbert Bressand, Professor in International Strategic Management in Energy, University of Groningen

Professor Dr Iulian ChifuProfessor Dr Iulian ChifuProfessor Dr Iulian ChifuProfessor Dr Iulian Chifu, Advisor to the Romanian President for Strategic Affairs, Security and Foreign Policy and President of the Center for Conflict Prevention and Early Warning, Bucharest

Dr John ChipmanDr John ChipmanDr John ChipmanDr John Chipman, Director of the International Institute for Strategic Studies (IISS), London

Professor Dr Dieter HelmProfessor Dr Dieter HelmProfessor Dr Dieter HelmProfessor Dr Dieter Helm, University of Oxford

Professor Dr Karl KaiserProfessor Dr Karl KaiserProfessor Dr Karl KaiserProfessor Dr Karl Kaiser, Director of the Program on Transatlantic Relations of the Weatherhead Center for International Affairs, Harvard Kennedy School, Cambridge, USA

Frederick KempeFrederick KempeFrederick KempeFrederick Kempe, President and CEO, Atlantic Council, Washington, D.C., USA

Ilya KochevrinIlya KochevrinIlya KochevrinIlya Kochevrin, Executive Director of Gazprom Export Ltd

Janusz LuksJanusz LuksJanusz LuksJanusz Luks, CEO Central Europe Energy Partners (CEEP), Brussels/Warsaw

Thierry de MontbrialThierry de MontbrialThierry de MontbrialThierry de Montbrial, Founder and President of the Institute Français des Relations Internationales (IFRI), Paris

Chris MottersheadChris MottersheadChris MottersheadChris Mottershead, Vice-Principal (Research & Development), King's College London

Hildegard MüllerHildegard MüllerHildegard MüllerHildegard Müller, Chair of the Executive Board of the German Association of Energy and Water Industry (BDEW) and member of the Executive Committee

Dr Pierre NoëlDr Pierre NoëlDr Pierre NoëlDr Pierre Noël, Director Energy Policy Forum, Judge Business School, University of Cambridge

Dr Ligia NoronhaDr Ligia NoronhaDr Ligia NoronhaDr Ligia Noronha, Director Resources, Regulation and Global Security, TERI, New Delhi

Deepak PuriDeepak PuriDeepak PuriDeepak Puri, Chairman & Managing Director, Moser Baer India Ltd., Delhi

Janusz ReiterJanusz ReiterJanusz ReiterJanusz Reiter, Center for International Relations, Warsaw

Professor Dr Karl RoseProfessor Dr Karl RoseProfessor Dr Karl RoseProfessor Dr Karl Rose, Senior Fellow Scenarios, World Energy Council, Vienna/London

Professor Dr Burkhard SchwenkerProfessor Dr Burkhard SchwenkerProfessor Dr Burkhard SchwenkerProfessor Dr Burkhard Schwenker, Chairman of the Supervisory Board, Roland Berger Strategy Consultants GmbH, Hamburg

ACKNOWLEDGEMENTSACKNOWLEDGEMENTSACKNOWLEDGEMENTSACKNOWLEDGEMENTS

We would like to thWe would like to thWe would like to thWe would like to thank our Partners and Supportersank our Partners and Supportersank our Partners and Supportersank our Partners and Supporters

And our Media Partners: And our Media Partners: And our Media Partners: And our Media Partners:

ank our Partners and Supportersank our Partners and Supportersank our Partners and Supportersank our Partners and Supporters

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