1. The Baltic Sea: Main East-West Gas Corridor in Next Decade?
Kari Liuhto
Professor, Director
Pan-European Institute
Bucharest

2. EU-Russia energy co-operation: starting point
EU’s energy production goes down
Forecast: 20%-decline by 2030
Are we really able to implement (ECR) plan by 2020;
for instance, are we able to lift share of renewables to 20%?
EU’s energy consumption goes up
Forecast: 10%-increase by 2030
Compare with plan
Forecast does not take into account the impact
of the current economic crisis
Russia has large hydrocarbon reserves
Gas: 25 % of global reserves
Oil: 7 % of global reserves
Reserves are large but the new reserves are located
in remote and harsh regions

3. EU’s primary energy consumption
???
Note:
Oil, gas, coal and nuclear account for 85% of EU’s energy production

4. Share of gas has increased 5 fold
in EU’s energy consumption since 1965
32%
2030
Share of gas in EU’s energy consumption continue to grow in the future

5. EU’s energy consumption and production
+10%
-20%
20 cut ?

6. Future of EU’s energy consumption

7. Russia as EU’s gas supplier - imports from Russia grown but share remained unchanged
2030
24% + ??
2030
16%

8. Russia’s share as primary energy consumption 2006
Remember also:
Gas transit via Russia
Russia’s total energy leverage
24% of EU’s gas consumption
29% of EU’s oil consumption
19% of EU’s uranium consumption
After Nord Stream ?

9. Have we prepared enough for supply cut?
60 days requirement
by European Commission

10. Russia’s operational capability to export gas in the future
Own consumption
Russia uses energy carelessly -> gas prices should be increased
Consumption structure does not support gas exports:
energy consumption: gas 57%, oil 18%, coal 14%, hydro 6%, nuclear 5%
Energy savings programme should be implemented:
Russia’s energy inefficiency = France’s energy consumption
Production stagnated even before financial crisis
Gas: over 10%-production drop prior the crisis (Gazprom’s production down 20% – exports some 50% down in 1H/2009)
Gas: independent producers are a question mark
(motivation non-existent: prices low & access to pipeline; flaring common)
Colossal investments into new fields required
Production concentrated on state hands (over 80%)
New fields located in arctic conditions (foreign knowledge needed)
Export infrastructure
Gas: new pipelines or LNG shipments ?

11. End of friendly-pricing not over yet
but …
European price
in in 2011

12. Russia’s traditional gas fields depleting, new projects delayed, own consumption grows after crisis: Russia’s ability to export more gas?
Arctic fields are huge in size, but also huge
in terms of know-how and finance needs
Russia’s production does not suffice unless 1) it is capable of opening new fields, 2) it lowers its own gas consumption and 3) control natural gas imports from CIS

13. 2/3 used by Russia 1/3 used abroad 2/3 exported to EU 3/4 exported
via Ukraine

14. Main gas pipes from East
55 bcm
~ 30 bcm
~100 bcm
EU’s gas consumption ~ 500 bcm
EU gas imports ~350 bcm
From Russia ~130 bcm
Pipeline imports ~ 87%
Liquefied gas imports ~ 13%
~30-60 bcm
16 bcm
Nabucco: ~ 30 bcm

15. Nord Stream: background information
Capacity 55 bcm / year (two legs)
Estimated investment $ 12 – 15 bn
Shareholders: Gazprom 51%, Wintershall 20%,
E.ON Ruhrgas 20%, Gasunie 9% (Holland)
Main sources of gas supplied to the pipeline: Yuzhno- Russkoye, Yamal Peninsula and Shtokman gas fields
Planned completion in (but could be delayed)

16. How to fill Nord Stream? (from Brotherhood & Yamal to Nord Stream)
In short run: re-direct gas flows from existing pipelines
(from Brotherhood & Yamal to Nord Stream)
In long run: open Bovanenkovo (Yamal Peninsula)
and Shtokman (Barents Sea)

17. Russia’s assumed gas strategy?
Strategic goal: maintain CIS in Russia’s
sphere of influence
Operation A: build more leverage on Ukraine via
diminishing its role in East-West gas transit
(Russia’s military base in Crimea to expire in 2017)
Operation B: acquire strategic companies in CIS
Operation C: maintain gas flows from
Central Asia to Russia
Operation D: increase dependence of EU’s leading countries on gas deliveries from Russia (total dependency of EU does not grow extremely)
If operations can be executed, then: Russia would have more leverage on political decisions in CIS & EU

18. Nord Stream: some arguments
in favour and against
Some arguments in favour
EU needs more gas + Russia has it = new pipeline capacity needed
Reliability better without middlemen
Pipes bring Russia closer to the EU (pipes integrate – but who to whom?)
Sabotage less easy than on ground (reference to Caucasus/Turkey)
Creates new economic activity
Some arguments against
Political: divides EU, ”gas Ribbentrop”
Economic: more expensive
Environmental: releases chemical pollution in the bottom, WWII weapons
Military: Russia’s military presence in BSR increases (military exercises)
Interdependency a myth: pipe of peace becomes cause to conflict

19. EU-Russia interdependency is a myth
Interdependence works during sunny weather
but breaks on a rainy day (interdependence is
like a good umbrella except it does not hold rain)
Foundation:
Natural gas sales to EU cover ~10-12 % of Russia’s budget while
Russia’s gas covers ~6-7 % of EU’s primary energy consumption
Why interdependence does not work on a rainy day?:
1) EU becomes more dependent on Russia’s energy while Russia
becomes less dependent on EU machinery within this century
2) Energy is by far a more strategic commodity than money
(EU’s hydrocarbon reserves insignificant = we need energy
immediately – Russia FOREX reserves significant =
Russia can wait longer energy import revenues)
3) Unbalanced negotiation power at firm level: EU buyers many and compete with each other while Russia’s energy exports concentrated
4) Gas OPEC vs EU’s common energy policy

20. Nord Stream: current situation
around the Baltic Sea
Germany in favour (main beneficiary)
The Baltic States and Poland: critical position
Finland and Sweden: mainly environmental concerns
(security concerns raised particularly in Sweden)
In Finland: 46% in favour, 40% against, 14% no opinion
(Social Democrats 59% in favour, Greens 53% against)
Environmental assessment process progresses
in Finland and Sweden (construction permission next year?)
Building of pipe proceeds some 3 km/day
(some 400 days needed when the project is started)

21. Some conclusions External one source energy dependence of
EU’s largest members may become too high
(Vodka syndrome)
need to reduce energy consumption
(more efficient use of energy)
need to increase energy production
(especially renewables but also nuclear energy)
EU should create common energy policy, incl. external component
(energy solidarity will not be enough)
need to build larger hydrocarbon storages
and emergency energy producing capacity
need to modernize relations with Russia

22. Some conclusions EU needs to modernize its relations with Russia
Our trade relations should be diversified – e.g. SME co-operation should be increased (energy-dominated trade does not create sustainable bridges)
Investment flows to both directions should be promoted but bilateral big deals between Russia and certain member states do not support integration (energy-related investment are too political to offer an alternative business bridge for EU-Russia relations)
Common research efforts should be created
(not unilateral propaganda-units)
Younger generation should know each other better
(those born in 1991 have already entered work life
– they have never experienced personally the Soviet system)

23. Some conclusions
EU needs to diversify sources of energy not routes Nabucco is the major attempt to diversify source of energy
Nord Stream and South Stream do not increase much
EU’s gas imports from Russia at least not in medium run
but replace major part of gas transit via Ukraine (full capacity of Nord Stream and South Stream is roughly
comparable to Ukrainian gas transit volume)
Trilateral ownership of Ukrainian pipe would support
European integration
(already ancient Romans recognized the importance of roads
in connecting nations – bypassing nations means bypassing European integration)
Bypassing pipelines would be a step back to history (Europe should avoid new Cold War and division between
Western core Europe and Eastern buffer Europe)

24. Cartoons should give a humoristic picture
on future Europe - not a realistic one
In order to keep EU’s foreign policies sober, let’s advice the most addict members to consume Vodka wisely !