Is the EU getting serious about its energy future?

On November 13 2008, the European Commission proposed the Security and Solidarity Action Plan which included, among others, three key proposals:

1. An EU super-grid to accommodate higher percentage of renewables, especially wind power;
2. “The Community Gas Ring” which allows for pooling gas supplies of EU countries in the event of gas supply disruptions; and
3. Construction of two new gas pipelines connecting Caspian and African gas networks (connections to Nabucco).

Certainly these projects highlight that EU planners have realized the urgency to diversify energy supplies, and the fact that it is time for action- not just words.

Whether these projects materialize, and when, is a story in and of itself. Some of these are recycled ideas, but this does not make them any less important or urgent. Certainly, the last two are more immediately relevant, as we are reminded by renewed end-of-the-year threats between Russia and Ukraine regarding gas-related payments and contract negotiations, which may affect gas supplies to the EU. Considering recent geopolitical developments, I will focus on the options that the EU (and by extension the West, including the US) has to secure its energy future.

A number of Russian initiatives have made it more difficult for the EU to diversify its energy supplies, at least with regard to tapping Caspian energy sources. The South Stream pipeline promoted by Russia clearly competes with Nabucco, and as the demand for natural gas softens temporarily due to the financial crisis, it will be even more difficult to proceed with both projects. For Nabucco, the most serious obstacle is the lack of gas. As Putin said, “you can only build a pipeline if you have gas to fill it”. Russia has made it difficult for the EU to obtain Caspian gas by signing more gas supply agreements. In addition to shear political pressure being exerted on the Caspian countries, Russia has a competitive advantage over the EU when negotiating deals in the region, as it has no incentive to keep gas prices down. If it maintains the gas monopoly, the European countries will have to pay any price Russia negotiates with the gas suppliers.

Under these circumstances, the EU (and the West in general) needs to launch four parallel initiatives:

1. Re-orient the Nabucco pipeline to include more access to Iraqi gas: After all, the name of the pipeline is an inspiration from Verdi’s opera “Nabucco” (the tale of Nebuchadnezzar, King of Babylon) indicating that Iraq may provide some of the gas to the pipeline. Iraq’s natural gas reserves (3.2 tcm) are of the same order of magnitude with Turkmenistan (3 to 7 tcm). If the political situation in Iraq stabilizes, it should provide significant amount of gas. Also, it will provide access to more gas reserves in other countries of the gulf (Kuwait, UAE and Saudi Arabia). Of course, stabilization of the situation in Iraq is a significant uncertainty and stability in the Kurdish region needs to be considered, but the other energy supply options are not less problematic.
   
   
2. Improve relations with Iran: It must not be forgotten that Iran provides the easiest route for Caspian energy resources to western markets. Also, Iran itself has the second largest natural gas reserves (23 tcm) after Russia (47 tcm). While I do not underestimate the issues associated with the leadership of Iran and its plan to pursue the nuclear option, geopolitical interests of the West and Iran are aligned and provide a basis for some arrangement of mutual interest. If the West does not improve its relationship with Iran, others will- and are.
   
   
3. Improve relations with Russia: Over the last few years, the relationship between Russia and the West has been deteriorating steadily. Certainly, NATO’s continuous expansion eastward has not helped and, as many experts point out, the West has missed an opportunity to offer full membership to Russia and make it part of the Western alliance. A bold move to offer full NATO membership to Russia may need to be considered. Membership to Georgia and Ukraine may also need to be postponed or packaged together with Russia’s.
   
   
4. Develop strategic technological options, such as GTL, small-scale LNG and CNG technologies:

• Gas-To-Liquid (GTL) technologies produce liquid fuels (all grades, from diesel to kerosene) from natural gas; these products are much cleaner than similar products from crude oil. GTLs are ideally suited for the transport sector, which needs to reduce urban pollution. Also, GTLs do not need a new transport and distribution infrastructure as they can be transported and distributed with the existing oil infrastructure.
  Liquefied Natural Gas (LNG) is commercially available, but more suitable to large natural gas reserves and large consumers of gas who sign long-term LNG supply agreements. This leaves many smaller gas reserves (“stranded gas”) untapped. Also, smaller users can not afford LNG. The industry started developing smaller (even floating) LNG production facilities, but this needs to be accelerated.
  
  
• Compressed Natural Gas (CNG) technologies make it possible to transport gas in compressed form, suitable for short distances. Many such markets exist including: the Black Sea region; from north Africa to Southern Europe and Turkey; from Sakhalin Islands to Japan/Korea/China; from Colombia and Venezuela to Caribbean countries and Florida/Texas; from Indonesia to SouthEast Asia, etc.. So far, the main obstacle for the development of CNG has been economics. Steel, the material suitable for CNG containers, is too heavy and project economics are not favorable. However, synthetic lightweight materials (such as carbon fiber) can be used instead. Such materials have been used extensively in the U.S. Space Program and they are in an early commercialization stage. A number of companies have started developing CNG using carbon fiber, but without government support, CNG will not become commercial anytime soon.
  
  GTLs and CNG are particularly important because they increase the transport flexibility of natural gas. All these options need some government support to go through development-demonstration-early commercialization (the “valley of death” which is typical to the development of most technologies); these are strategic options and should not be evaluated only based on short-term economic considerations.

The first three initiatives fall in the sphere of geopolitics and are clearly politically challenging to pursue. What is needed is unity among the EU countries (something that has proven challenging for the EU so far) and collaboration with the US, which shares some common interests in the region. The development of GTL, CNG and small scale LNG technologies can be pursued unilaterally. Governments need to play a critical role, sometimes by taking the lead and at other points by supporting the private sector through Public-Private-Partnerships. The time to act is now.