National ambitions and energy security

By Martin Stier

During the last seven years two expansions of the European Union took place, as a result of which a number of its member states nearly doubled – from 15 to 27. From geographical point of view the newcomers can be divided into the following groups: Baltic (Estonia, Latvia, Lithuania), Central European or Vyshegrad (Czech Republic, Hungary, Poland, Slovakia), Balkan (Bulgaria, Romania, Slovenia) and Mediterranean (Cyprus, Malta).

Apart from geographical vicinity, countries falling into one group have other common features though, of course, one cannot speak about their complete identity. Economically at the average the most advanced are the Mediterranean states, followed by the countries of Central Europe and Baltic, and the Balkan ones close the list.

There are evident leaders in the last two groups. Curiously enough, they are the smallest amongst their neighbors: Estonia (population 1,3 million people) and Slovenia (2 million). It is enough to say that, as distinct not only from their partners but also from all Central Europeans, they managed to join the euro zone. In this connection it seems to be expedient to consider the state of affairs in these countries in more detail.

Herewith, due to the fact that at present the principal economic problem of the European Union is energy, the main emphasis will be made on clarifying the situations in Estonia and Slovenia in this sphere, and their contribution to providing energy security of the EU as a whole.

There is much in the field of energy that unites the EU member states. All of them wish to do something to inhibit global warming, to have an internal market with sufficient interconnections, to minimize energy price increases for consumers, and to determine for themselves how many of which energy sources to use.

At the same time, they are increasingly dependent on imported energy supplies, and their interests differ significantly in respect to energy-related foreign relations.

For example, for some countries, the import of Russian gas means a diversification of suppliers, while others are faced with the question of how to reduce their current total dependence on Gazprom. There are countries whose activities are affected by the fear that states outside the EU could use the import of energy carriers as a means of applying political pressure, and those for whom such a threat is not looking like something very dangerous.
Slovenia. While entering Slovenia was questioned by Brussels much less than all other candidates. Moreover, unlike such countries, as Poland or Malta, it almost did not need any indulgences and postponements, since long before the May 1, 2004, it corresponded already to the many European standards, and Slovenian economics grew annually more than four percent.

Essential part of Slovenians even doubted whether it was worthy to join the European Union. They feared that in the result of it their country will become poorer due to the necessity to share with neighbors. Fortunately it did not happen. Just opposite, before the world economic crisis of 2008 the average annual growth of Slovenian economy increased up to 5.5 percent.

On the other hand, the European Union has proven to be a favorable environment for Slovenian ambitions, providing it with benefits and advantages that bring positive financial and economic effects. In the 2007-2013 financial perspective, Slovenia has been allocated a considerable amount of European funds. More than ever before, opportunities for important investments and rapid development are arising.
> South Stream On The Map Of Europe

> Specifications of the South Stream Project
Slovenia’s energy intensity is much higher than the EU-27 average. It produces nuclear energy, solid fuels and renewable energy, all of which are also used in electricity generation in almost equal shares. Despite the availability from 1983 of Krško Nuclear Power Plant (capacity 730 MW), a decision on the longer-term future of atomic energy in Slovenia has yet to be debated.

Due to the Slovenia’s strategic position, its developed energy market and experience of the work at the local markets, Slovenian energy exchange Borzen can act as a connecting link between the EU market and regional ones. The European Union began its work on integration Slovenia into the EU common energy space, including legislation changing.

But one cannot say that there are no problems between the partners in energy sphere. It is known that diversifying suppliers and supply sources has become one of the priorities in the European Union energy policy. A major role is to be played by the Southern Corridor, which should bring new gas supplies to the European Union from the Caspian region, Central Asia and the Middle East, independent from major current suppliers. It includes Nabucco gas pipeline, Italy-Greece-Turkey Interconnector, Trans-Adriatic and White Stream pipelines as well as other important projects.

Last November, the European Commission presented a new approach to speed-up the necessary investments. Five critical European energy infrastructure priorities for electricity, gas and oil were determined: South-Western electricity interconnections; North Seas offshore grid; North/South gas corridor; Southern gas corridor; Central/South-Eastern electricity connections.

Slovenia is in the area of the last three of them. However no one of the aforementioned gas pipelines is going to pass through its territory, it is a member of Constantsa-Trieste oil pipeline project only. Possibly this is the main reason why Ljubljana is interested in participating in the South Stream gas pipeline project, which in the course of several years is actively promoted by the Russian Federation and its prime minister Vladimir Putin personally.

On March 22, 2011, his visit to Slovenia took place. One of the key questions discussed was energy cooperation between the two countries, and in the negotiations spotlight there was realization of the South Stream project.

The main purposes of the South Stream initiators are concluded in creating for Gazprom a continuous chain of generating profit from borehole to a burner at the European kitchen, as well as to avoid Ukraine, where Russian company does not control the transit networks.

Russian hope that increasing the amount of project participants will allow to break the resistance of the European bureaucrats. According to Paolo Skaroni, head of Eni, Italian company participating in the project, South Stream will be able to work only in the case if it will not fall under the EU restrictions. But Slovenia’s minister of economy has confirmed that Russia must agree about exception from new rules, which have been named the ‘3rd energy package’.

Its aim is to make the energy market completely effective and to create a single EU gas and electricity market. It excludes monopoly supplier’s control over the transport networks and opens the gas pipelines that cross interstate borders for other gas suppliers.

In the result of the meeting the agreement was signed concerning creation of joint venture on designing, building and exploiting of Slovenian part of the South Stream. Its annual capacity can reach 22-24 billion cubic meters of gas nonregistering the volumes, intended for the market of Slovenia itself. The final determination of the transit volumes depends on what amount of gas will be delivered through Slovenia transit to Austria.

Vladimir Putin attempted also to becalm Slovenians with regard to possible threats to the project on the side of Turkey, which hitherto did not permit pipeline laying-out on the Black Sea bottom.

In spite of this achievement, the experts express their doubts in successful future of the South Stream, since purposes of Russia and Europeans’ reckonings evidently do not coincide. For Europe changing the route instead of using new sources of the gas is not a step to strengthening energy security and in no case can be considered as diversification of sources of energy carriers.

Over the years of working towards creating a well-functioning EU internal market it has become clear that national energy regulators alone and the existing advisory group – the European Regulator Group for Electricity and Gas (ERGEG) – are insufficient to cope with the tasks of regulation at the EU level. Thus it was decided to create a body with special expertise on technical issues, independent from the Commission, national governments and energy companies.

So on March 3, 2011, as new legislation for liberalizing the EU’s internal energy market came into force, the European Union inaugurated in Slovenia its special office – Agency for the Cooperation of Energy Regulators (ACER). At the ceremony in Ljubljana the European Commissioner for Energy Gunther Oettinger urged EU member states to transpose the new rules into national legislation, warning that without that “a truly integrated European market will not be achieved,” and waved aside complaints in Moscow about the energy package, insisting that the “Russian partners have to accept the European rules.”

Such development of events permits to conclude that Gazprom will hardly manage to use Slovenia to avoid competition in Europe.
Estonia. Situation in Estonia’s is much more complicated though membership in the European Union has also become an invaluable factor in raising its political and economic profile.

On its side, Estonia has revealed itself as an active and constructive partner. On the basis of macro economical parameters Estonia is one of the most disciplined and successful in financial attitude of the European Union countries. In 2009 deficit of its state budget was only 1.7% of GDP. For comparison: in Germany it was 3.3%, in France – 8%, in Great Britain – 12%, in Greece – 13%. On the average the EU ‘budget hole’ reached 6.8% of GDP, and in the euro zone – 6.3%.

> Estonia Map
Estonia’s energy sector feels the impact of the Community’s requirement to open its electricity market and minimize environmental damage caused by energy production. The country had already assumed some obligations regarding its energy sector during the accession process to the European Union, which required, among other things, an increase in the efficiency of electric power production and a decrease of harmful effects of mining and burning oil shale.

Thus in order to improve the efficiency of electric power production, two 215 MW energy blocks of the Estonia Power Station and the Baltic Power Station were renovated. Liquid fuel stocks were built up, corresponding to at least 90 days’ of combined average national consumption of the relevant fuel in the preceding year, reaching the required level by the year 2010.

Nevertheless, being located in the EU northwest margin, Estonia hardly can bring an essential contribution to providing energy security of the EU as a whole. Moreover, its own security is an integral part of the common European one, so if Moscow will continue its pressure, the united Europe inevitably will have to render Estonia necessary assistance.

It is difficult to expect that Kremlin will forget that in 2007 Tallinn took the decision not to allow surveys for the Russian-German Nord Stream gas pipeline to be conducted in its exclusive economic zone since it was evident that other alternatives for transporting gas to Western Europe exist, including overland ones, which would have smaller environmental risks and which have not been seriously considered.

In today’s EU, the Baltic countries are in fact an energy enclave, with a gas network that can be supplied only by Russia. Their electrical system is also linked with Russian, and the only connection with the other EU member states is the small-capacity undersea Estlink-1 cable between Estonia and Finland opened in December 2006. Estonian President, Toomas Hendrik Ilves, called it an energy window to Europe, which meant the country's energy security was no longer closely tied to its past.

However all three countries still rely heavily on gas imported from Russia to supply their energy needs, feeling vulnerable to their neighbor. From a national security point of view, they would not be left intolerably dependent on a non-EU and non-NATO supplier, who speaks openly about using energy as an important instrument of foreign policy.

Russia considers itself to be an independent centre of power and influence in the world, with global competition raging over its energy supplies. Despite pressure from the EU, Russia has not given up strategic control over energy production and export.

In order to reach its political and economic interests Kremlin has used different energy levers: partial or total disconnection of deliveries; covert or public threats to stop deliveries; manipulation of prices; manipulation of debts, or causing new debts; takeover of infrastructure necessary for the transit of energy carriers.

Although using such measures against the member states of the European Union is unlikely, the Baltic States constitute a certain exception. Since 1991 Russia has applied energy levers in mainly economic but also political interests against Lithuania at least twenty times and against Latvia and Estonia at least twice.

Therefore interconnections of oil, gas, and electricity networks are necessary both for national security and for the functioning of the EU internal market. They are expensive but inevitable, and cannot be based only on immediate economic benefits.

Unfortunately sometimes it is quite difficult for the EU member states to find a common language in energy questions when some foreign country presents a challenge to the bloc’s unity. Thus, Russia has clearly held a course toward dealing with each member state separately and is even more clearly attempting to set them off against each other.

Using bilateral relations, Russia has managed to create competition between countries wishing to join the planned Nord Stream gas pipeline as well as the planned South Stream one. This factor constitutes an additional impediment to the attainment of a consensus in elaborating the EU energy policy. Bilateral relations open opportunities for Russia to maneuver in relations with the EU by taking advantage of disagreements between individual member states and the European Commission.

Furthermore, new pipelines will divide the EU into two parts – the Central and Eastern part of the EU will depend on Russian gas deliveries through Ukraine and Belarus while the Western and Southern parts will get their gas via the Nord Stream or South Stream. This will grant Russia additional influence over the energy policies of the Central Europe.

The possibilities of small states to enlarge the circle of suppliers are limited, too, especially when due to the existing energy connections there is only one supplier. Open energy markets may weaken the rule of domestic monopoly companies but the insufficient number of actual energy connections forces the Baltic States into an even greater energy dependency on Russia. Supported by Estonia the European Commission initiative on liberalization of energy markets has run up against opposition from member states such as France and Germany.

Estonia was one of the first EU member states to start talking about the relationship between energy and national security. Although currently it is less dependent on imports than the majority of other member states because its electricity needs are covered by power generated from domestic oil shale, it has to worry about energy security. And Tallinn is troubled by the fact that the issues of external energy relations and of the connection between energy and national security form only a relatively small portion of the EU decisions.

For example, the EU energy market needs to consolidate by 2014, and due to new gas and electricity supply channels Estonia, Latvia and Lithuania are to become a part of it. This can take place through the pipeline Baltic Connector, linking Estonia and Finland, as well as through new power supply channels between Latvia and Estonia. Estonia could receive financial support from the EU for the construction of these projects.

The electricity production in Estonia is based on the domestic fossil fuel-oil shale. Its structure has stayed unchanged during almost 50 years, and over 90% of electricity is produced in the world largest oil shale power plants. In spite of many negative aspects of such kind of power industry, which include the energy inefficiency and considerable environmental problems, optimal electricity prices, sustainable economic development and security of energy supply or independence from the import have been provided for the country’s economy for a long time.

The last indicator places Estonia to the fourth position in the European Union. Only Denmark, Poland and Czech Republic are in a better position.
However, under the present conditions of electricity production along with providing the security of energy supply, the environmental problems, market situation and energy policy must be taken into consideration.

The 3rd energy package will have a significant impact on the Estonian electricity and gas sector. Technically, Estonia could import almost all the electricity that it needs. This puts it in a very different position from other EU member states, since competition on the Estonian electricity market could come not only from within the EU, but also from non-EU countries whose electricity markets operate with entirely different rules and that can sometimes also be politically manipulated.

E.g., to avoid situations where Moscow can use the energy sector for exerting pressure on international relations, Estonia must limit its electricity purchases from Russia to compensating only the deficits form covering peak loads and has to be an equal partner to Russia at negotiations. That can be achieved only through the cooperation of European countries.

Thus, according to Estonian experts, in the long term it is unavoidable that part of country’s electricity supply be provided by the import of nuclear energy from possible nuclear power plants in Lithuania or Finland, or both. But the talks regarding the construction of a new nuclear plant started in 2006 among the three Baltic countries and Poland progressed with difficulty, and the completion of the new plant by 2015 can no longer be considered realistic. Additionally it is expected the EU will not allocate funds to the nuclear power plant construction.

Estonia can draw more attention to the protection of the Baltic States’ interests as their energy would be better secured if the Baltic electricity networks would be connected to the EU networks via the Union for the Coordination of Transmission of Electricity (UCTE) and the Organization for the Nordic Power Cooperation NORDEL.

Although the energy sector in the three Baltic States is rather diverse, they share the common dependency on Russian deliveries of natural gas. Estonia can consider cooperative action with other Baltic States, Poland, and Finland, to evaluate the advisability of constructing branches from the Nord Stream, and to consider possible additional connections with the Latvian gas storage Incukalns.

Nord Stream is not planned to extend auxiliary line to Estonia from the pipe. But Estonia could indirectly benefit from its construction during the heating season insofar as the continental part of the pipeline is envisaged to provide Saint Petersburg with additional gas deliveries which would help reduce Saint Petersburg’s demand for the gas from Incukalns.

The use of liquefied natural gas (LNG) in the Baltic Sea region is worth considering in a mid- to long-term perspective. Estonia should start negotiations with neighboring states for the purpose of construction of a common high-capacity LNG terminal, and a distribution system for delivering natural gas from there. It can get the EU financial support.

The important step in the direction of unification was made on June 17, 2009, when Baltic Energy Market Interconnection Plan (BEMIP) was created. In order to do away with the isolated ‘Baltic energy island,’ the BEMIP dictates an action plan that includes establishing a second cable between Estonia and Finland (Estlink 2) as well as connections between Lithuania and Sweden, and Lithuania and Poland. The political support put down on paper in the BEMIP as well as the allocation of 100 million euros within the framework of the European Economic Recovery Plan gives hope that the Estlink 2 cable will be completed in 2014. And the first step in creating a joint Nordic-Baltic energy market was the launching of the Nordic electricity exchange NordPool for the Estlink market area on 1 April 2010.
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The main EU problem in the energy field is a lack of agreement between the member states. For example, Russia’s bilateral relations with some of them (such as Germany or Italy) are characterized by its disregard of the common interests of the European Union for the benefit of bilateral agreements. This creates a vicious circle, because without a common policy other countries are forced to carry out their own policy.

So generally both Estonia and Slovenia need to support the elaboration of an adequate EU energy strategy and to link it to its Common Foreign and Security Policy in order to represent the common interests of member states in relations with Russia and other energy exporters.