Baltic States – CIS, Energy, EU – Baltic States, EU – CIS, Forum, Russia

Günther H. Oettinger.

The EU as a bloc, its member states and companies have a long-standing record of cooperation on energy in the Black Sea region and with its coastal states. The accession of Romania and Bulgaria to the EU in 2007 was a major step for the Union’s perspective development in the Black Sea region.

In its Communication on the Black Sea Synergy already in April 2007, the European Commission pointed out that the Black Sea region was a production and transmission area of strategic importance for EU energy supply security, which offered significant potential for energy supply diversification. At the same time, the region has become an important component of the EU’s external energy strategy.

This regional strategic importance was underlined in the comprehensive and combined initiatives for cooperation policies established through numerous projects, e.g.  INOGATE, the Baku process, the Eastern Partnership, as well as the EU’s energy cooperation with the countries in the region.

Building strong energy partnerships

The EU’s energy policy for the Black Sea region is built on a strong and balanced partnership with all the countries in the region. First of all, Ukraine, which is a strategic partner with a strategic asset, i.e. extensive existing gas transportation network. The country is at a crossroad where it has a unique opportunity to ensure that it continues to make commercial sense for the gas market players to use the Ukrainian gas transportation network as one of the preferred routes for Russian gas supplies to the EU. The modern gas transit business requires transparent, efficient and quality transit services through a modernised gas transportation network.

The EU is of the opinion, argued the Commissioner that the reform of the Ukrainian gas domestic market and gas transit were not separate issues. Transit will not be totally guaranteed as long as the domestic gas system in Ukraine is not financially sustainable and transparent.

This is the reason the EU has been watching the reforms in Ukraine with great attention; the recently adopted in the country gas law was a positive starting point. The EU supports effective energy reforms, including the implementation of new legislation on public procurement and independent energy sector regulation, which will be conducive towards creating an efficient, transparent and well managed energy sector able to attract domestic and foreign investments.

Such reforms would also ensure that Ukraine can take maximum advantage of another strategic asset: the country’s under-exploited own energy resources. The European Union is helping as much as possible in this process by sharing experience on energy sector reforms and through the joint project for the modernisation of the Ukrainian gas transit system, said the Commissioner.

Second, Turkey, which is developing a modern and very dynamic energy market. Turkey is the EU’s strong partner and the Commission is of the opinion that the security of energy supply for Turkey and for the European Union is strongly interrelated. As a result, the EU has developed several projects of regional dimension, e.g. apparent progress achieved on the "Southern corridor" for which Turkey was playing a pivotal role.

Third, the importance of Russia as a key player in the Black Sea region is evident. The EU and Russia will celebrate this year the 10^th anniversary of their energy dialogue; the EU regards this dialogue as an essential component of the EU’s energy policy.

At the same time, the European Union and Russia are interdependent energy players: the EU is presently the biggest importer of Russian hydrocarbons and this is not expected to change in the future, underlined G. Oettinger. For these reasons, the EU believes that Russia has an important contribution to make to multilateral energy organisations such as the European Energy Charter. At the same time, the EU expects that the Russian partners would understand the security issues of supply policy based on diversification of energy routes and sources.

Fourth, Georgia, which has started an impressive investment programme to develop its hydro-generation capacities and its electricity interconnections with neighbor countries, in particular with Turkey. The European Union and the European banks (EIB, EBRD, KfW, etc.) are involved in the financing of these projects. The Georgian energy sector is already privatized to a large extent and is undergoing important reforms. Georgia has an observer status to the Energy Community and the EU would welcome its application for full membership.

The following partner is Azerbaijan. While not physically on the Black Sea, Azerbaijan is a major energy player in the region and a key partner for the European Union. The EU and Azerbaijan has reached fruitful cooperation, which is built on solid foundations, underpinned by clear mutual interests. The participation of Azerbaijan in the Eastern Partnership is a historic milestone and by signing the Southern Corridor Declaration in Prague, Azerbaijan has confirmed its critical role and commitment to building bridges to the EU. The Commission has long underlined its interest in a strategic allocation of gas from Shah Deniz-II, which allows the Southern Gas Route to develop.

In order to enhance political cooperation and move forward on gradual economic integration with the EU, it has launched in the beginning of July 2010 bilateral negotiations with Armenia, Georgia and Azerbaijan in view of concluding Association Agreements, which will bring the Southern Caucasus region closer to the EU.

Promoting common rules favourable to energy investment and trade

Energy trade and investments in the Black Sea region are gaining importance: new gas and electricity interconnection are built; new power plants are being developed, both as regards fossil fuel generation, renewable energies and nuclear projects.

The EU believes that trade and investments in the energy sector are best supported by multilateral frameworks ensuring transparent market rules, protection of investments and predictability and fair conditions for transit and trade of energy.

Presently, the five Black Sea coastal states are members of the World Trade Organization and these five coastal states (except Russia) signed and ratified the Energy Charter Treaty. As regards both the WTO and the Energy Charter Treaty, a dialogue is proceeding with Russia in view that Russia will be able to join the common platform soon.

The EU is of the opinion, argued the Commissioner that the Energy Charter Treaty continues to constitute a useful instrument to facilitate energy investment and trade.

In addition, several states have decided to integrate their energy market on the basis of the EU legislation. Besides Bulgaria and Romania, which have joined the European Union three years ago, other countries have decided to engage in the Energy Community process.

The Energy Community Treaty provides for full market integration with the European Union on the basis of EU energy and environment legislation. Thus, Moldova recently joined, Ukraine is about to join soon and will have to put in place the required legislative and regulatory framework. Other countries are interested: negotiations have been opened with Turkey and Georgia has been accepted as an observer and could apply for fill membership.

Turkey is in a specific situation since it is at the same time engaged both in the EU accession and in the Energy Community processes; in both cases, the perspectives of market integration and the reference regulatory framework are the same. In the case of Turkey, the synchronous interconnection of the electricity system with the EU, which is likely to be finalised next year, will represent an important step towards market integration. In any case, the energy market regulation in Turkey is already close to the European Union regulations and that the Intergovernmental Agreement on Nabucco signed last year is fully in line with the EU legislation.

The EU’s aim is to strengthen multilateral energy cooperation in the Black Sea region, reassured the Commissioner, and added that the EU is in favour of a multi-dimensional approach. In this regard, the WTO and Energy Charter Treaty provide for the key principles, as the partner countries expect that the Energy Community Treaty will be the main tool for further market and regulatory integration with the European Union.

These multilateral frameworks are not static; they need to keep pace with the evolutions in the energy sector. This is particularly important for the Energy Charter process, which is entering a phase of review and modernisation.

Promoting projects of common interest

The EU is mainly interested in two projects, which the EU is supporting and which constitute good examples of regional integration.

First, is the modernisation of the Ukrainian gas network. In March 2009 the Commission jointly hosted with Ukraine a high level conference on the modernisation of the Ukrainian Gas Transit System which involved the European Investment Bank, the European Bank for Reconstruction and Development and the World Bank. The resulting Joint Declaration committed Ukraine to undertake the necessary reforms that would permit the international financial institutions and other lenders to invest in the modernisation of the Ukrainian gas transit network. It also demonstrated the commitment of the EU to the modernization of Ukraine’s gas transit system.

Since then, Ukraine has begun the difficult process of reforming its gas sector while in parallel the International Financial Institutions are undertaking their due diligence procedures. The EU is assisting by financing, through the Neighbourhood Investment Fund, the necessary technical feasibility study and environmental impact assessments that are required by the banks. The EU expects concrete projects to be implemented by early next year.

Southern corridor

The EU Energy Commissioner underlined that the European Commission was aware of the necessity of some extraordinary measures, for example, in gas markets, an extraordinary effort is needed to open the Southern Gas Corridor.

When this project started, there was feedback from the industry saying that the development of the Southern Gas Corridor was desirable, but that no institution, the European Union included, had the muscle to open the Corridor. The number and the complexity of problems was simply too great, and a list of bilateral relationships and issues that need to be considered proved the point.

However, the European Commission is showing that the solution can be provided even in this “delicate navigation”, and that the success does not only depend on the EU. Extraordinary measures to achieve success are needed, such as the Caspian Development Corporation or the building of a trans-Caspian pipeline link. These measures will capture the public goods associated with diversification of supply and give confidence to new suppliers to move ahead in forging relationships with the EU.

The Commissioner described the situation around the Nabucco project, which resolves some of the strategic energy issues. First, it tackles a public interest in energy security; in this regard, the gas markets isolation of the Central and Southern EU member states is a concern to the Commission. Second, the project should enhance wholesale competition; presently a project that takes gas directly from the ground and sticks it in a gas turbine does not deliver on this.

Third, it should be clear what the transit regime in transit states is: either there is a project, which establishes a physical connection itself or clear transit rights are foreseen to securing oil transportation

The Black Sea region is strategic for the export of oil from Russia and the Caspian region. Hence, the EU expects that in future additional quantities of crude oil will likely be imported into the EU through the existing or new pipelines and/or via tankers.

The congested Turkish straights will not be able to transit additional oil quantities and this situation raises concerns both in terms of security of supply and with regard to the environmental threat of possible tanker accidents in the seas surrounding the European Union.

The Samsun-Ceyhan oil pipeline project, according to the Commission, will be a good solution and it is reflecting a successful example of cooperation between Turkish, European and Russian companies. Other projects will also be needed to further alleviate the pressure on the Turkish Straits and reduce environmental risks in the Black Sea and the Mediterranean; though additional discussions would follow.

The EU priorities in the Black Sea region

First, the EU intends to develop the Southern corridor in a manner that will balance the interests of the producing countries, of the transit countries and of the consumer countries, bearing in mind that several countries, like Turkey, are at the same time a consumer country and a transit country.

The Commissioner underlined that according to the EU analysis, it was not possible to ensure the Union’s own security of supply if the security of supply of our partners were not guaranteed as well. The EU is confident that in the coming months important steps will be taken towards the investment decisions on Nabucco project.

Second, the EU will pursue market integration with those countries wishing to do so, in the framework provided by the Energy Community Treaty. The accession of Ukraine will be a major event in the coming months. In this regard, the EU will continue to accompany and support Ukraine along the road of market and energy sector reforms.

Third, the EU wishes to promote regional solutions to energy problems such as the oil export routes and the preservation of the maritime environment in the Black Sea and the Mediterranean Sea.

Regional initiatives in this direction and closer cooperation are of interest to all states surrounding the Black Sea, concluded the Commissioner.