US Special Energy Envoy: “Europe, change your fundamentals”
In his address on 8 January to attendees at the first event of the Atlantic Council's newly inaugurated Global Energy Center, Special Envoy and Coordinator for International Energy Affairs at the US Department of State, Mr. Amos Hochstein, noted the dramatic events in Europe in 2014, with the Russian actions in Crimea and in Eastern Ukraine. “And that resulted in a reminder once again to Europe: If you don't do something about the fundamentals of your energy supply, this will continue to happen.”
He opined that this was not an extraordinary event. “When the gas was shut off from Russia to Ukraine on June 16th, that was not a unique event – it happened in 2006 and in 2009, therefore it happened again in 2014, and there is no reason to believe it will not happen again.”
According to Mr. Hochstein, the way to prevent a gas shutoff from occurring again is to change how Europe does business.
“And that means creating new infrastructures that can allow for gas and other sources of energy to come into Europe from other places to compete with Russian supplies, and there is no reason why Russia cannot be a continued and consistent supplier to Europe,” he explained. “It just has to play within a market system.”
This means, he said, that in terms of strategy there can't be 200 items on the priority list, but rather a few projects, focus on those and bring the infrastructure online. Part of the problem, according to him, is that some of those projects are simply not financeable on their own.
He offered, “So you're looking at bringing the infrastructure so that you can bring new sources in, new suppliers from other directions, making sure that the regulatory regime is there to support it.”
In that sense, Europe has done a phenomenal job, said Mr. Hochstein: “If you understood how critical the Third Energy Package was when it was passed – it sounded like a very bureaucratic name with very bureaucratic new rules – but when the crisis hit in June, that's when everyone realized the brilliance of it and how important it was – it worked exactly as it was intended to do.”
This, he explained, had meant that no destination clause could be used, so any gas that entered the EU could be shipped onwards. “And that meant that we can have reverse flows from Hungary, Poland, later from Slovakia go into Ukraine, and that changed the dynamic of the conflict and the disagreement between Naftogaz and Gazprom, and ultimately led to the fact that we can get an agreement negotiated between the two parties to allow for the gas flow to happen and we did not have a total shutoff to the rest of Europe in the middle of winter as we did have in January of 2009,” he explained.
The US, said Mr. Hochstein, will continue its close cooperation with the EU and Europe. “Through the US-EU Energy Council we have been able to extend and deepen our relationship, and with the new Commission that has come in now we are already working extraordinarily closely together,” he added.
As to why Russia had “blinked” on implementing the South Stream natural gas pipeline project, nixing the project, he said that Europe had taken a strong stand.
He replied, “I think Europe took a strong stand on what was in its own interest. Russia understood that it was going to be able to build new pipelines and new infrastructure with Europe as long as it played by European rules. Europe, for their reasons, stood up and said 'here's what the regulatory system is, here's what we're going to allow, and here's what's in our interest for energy security – diversification of supply.'
“South Stream was not a diversification of supply; it was taking the same gas from the same fields to the same end customers, but using new pipelines.”
As the recipients of the pipeline, Mr. Hochstein said it was necessary for countries participating in the pipeline to ask why the investor would sink $45 billion into the infrastructure and not expecting to ever make that money back. “That's when you have to ask that question; when you ask it, then you say, 'alright, this doesn't serve my interests.'”
Not entirely sure whether the project is dead or alive, Mr. Hochstein added that if South Stream were to be primarily based on economics, it would be successful.
Asked what his Top 5 projects for diversification would be in Central & Eastern Europe, he said that an LNG terminal on the Croatian island of Krk would be a “critical node that can impact a wide swathe of countries.” It exemplifies, he said, the kinds of projects that can be implemented towards diversification.
Another attendee asked him about when the recently installed LNG terminal in Lithuania might receive supplies from the US.
He commented, “What Lithuania did was remarkable. Naming it the 'Independence' says it all.
“As far as having access to American LNG exports, they have access to it – they can contract with the companies who are building it in the US and secure deliveries, just as other countries around the world have. There is no exports yet; they're only coming online at the end of 2015 and will grow from there.
He pointed out, however that the US does not cajole any company into where it should sell its gas.
Mr. Hochstein added, “The fact that we have approved exports of natural gas has already had an impact on Europe. Where the molecule actually ends up going also doesn't matter – it's going to go into the international market that will rationalize itself and will therefore mean that a commodity that has different prices in different markets will start coming down and you'll see some kind of coalescing of the prices that we saw when we stopped importing.”
The Eastern Mediterranean he described as a “critical area,” “because we believe that the new discoveries in the Eastern Med can be used as a vehicle to increase cooperation, collaboration, to support stability, security and prosperity – it's an opportunity, a moment in time, but it doesn't mean that it will necessarily happen.”
All of the parties in the region, he said, will have to take rational steps to overcome some of their tendencies and old conflicts to make things happen.
“You have a number of countries with different assets – some have new supplies coming online,” he said, explaining that some have old infrastructure that can be used like in Egypt, which has LNG terminals but went from being an exporter to a country that is now consuming more than it produces, or Turkey, which has great demand that will continue to grow over the next 20 years.
“All of this can be worked out together,” he added, “but for that regulatory things have to happen, rational decisions have to take place, and we have been standing ready to support that process along, of bringing people together to figure out how to take the next step.”
Mr. Hochstein said this had worked in the Israel-Jordan context, where US Noble Energy had signed a deal to deliver gas and build a pipeline, as well as signing a deal to deliver much more gas from Israel into Jordan.
However, he said that every small change can have a domino effect that can diminish the gains: “We've seen some of this play out in Israel recently, where a regulatory decision could have a ripple effect on the investment climate in Israel and, by extension, on the ability of Israel to take advantage of its energy resources to play a role in the Eastern Mediterranean – I'm an optimist, so I believe that's going to get worked out,” he said. “I don't know how, but I believe it will.”
He recalled that recently an article on the online website Politico included the recommendation: “Accept non-stop energy drama in 2015.”
“That's exactly what it's going to be,” he remarked. “There article referred more to the US, but I think that applies to the rest of the world – we're going to start 2015 with the same intensity that we ended 2014.”
The drama, according to Mr. Hochstein, will be global: in Europe, Asia, the Middle East, as so much is happening across the board and simultaneously when it comes to energy.
-Drew Leifheit