Pumps, Pipelines, and Perceptions: The Existing Divide between European Energy Security and Policy Rationality David Dusseault Eurasia Energy Group Aleksanteri Institute

Preliminary Questions What conditions underpin the current EU Russia energy relationship? What are the cost- benefit calculations? Who stands to benefit? What can be done?

Variation: Haves & Have-nots?

The Scope of the Issue

Interdependency: Actor Constraints 1.Physical Constraints: uneven resource distribution, finiteness of natural resources, existence of energy sector infrastructure, geography, climate, accessibility of resources; 2.Informational Constraints: elites do not posses full information regarding their resources or how to fully maximise their benefits accrued from natural resource wealth; 3.Financial Constraints: finite financial resources for investment and resource exploitation, commodity prices, market size; 4.Actor-based Constraints: number of competing actors, how actors perceive their interests and how they determine to develop their interests; and 5.Institutional Constraints: ability of state institutions to flexibly determine the rules of the game over time without marginalising actors or seeking rent.

Case One: Russia ConstraintsPositiveNegative Physical Large reserves, Geography Climate, Geography, Infrastructure Informational Comprehensive sector strategy Sector Maximisation Strategy Disagreement Financial Structuralisation fund, high world commodity price Price dependency, market volatility, High sector taxes Actors Few actors, consistent with industry trend State control, few outside investors, Image Institutional Consolidated control over industry Lack of Investment Incentives, Closed Sector

Case Two: Ukraine ConstraintsPositiveNegative Physical GeographyLack of Infrastructure, Import dependence, domestic demand Informational Comprehensive sector strategy? Sector Maximisation Strategy? Financial High world commodity price Price dependency, market volatility, price transparency Actors Few actors, consistent with industry trend Tentative privatisation Institutional Consolidated control over industry Lack of Investment Incentives, Closed Sector

Case Three: The EU ConstraintsPositiveNegative Physical Existing developed trans., refining infrastructure Geography, lack of significant reserves Informational Defined needs and identified challenges in energy sector Politicisation & securitisation of energy strategy Financial Price Setter for Imported Hydrocarbons High Commodity Price, Transportation costs Actors Multi-actor, multi- interest No coordinating body, incentives for cooperative action Institutional Diversified, competitive market Bilateralism, Lack of comprehensive energy strategy

Results CasesPositive Negative Russia Major Supplier; stable regime; substantial reserves; stable consolidated energy sector. Infrastructure, investment, market access, image, geography, lack of incentives, strategy. EU Attractive market, strategic partner, institutionally strong, incentive laden system. Politicisation of energy sector, highly fractionalised, no coherent, comprehensive strategy. Ukraine Large energy market, geographically strategic transit point. Politically indeterminate, opaque market, import dependent, transit monopoly, rent seeker.

Recommendations Europe must speak in terms of Energy Security with one voice: Reassessment of the definition of Energy “Security”; Establishment of internal energy regulatory framework; Movement towards a realistic, pragmatic, implementable external energy strategy; and Formulation of a specific EU Energy Policy directed at transit countries.