May 2015 - Energy : European law and the global marketplace

In his opening speech to the 3rd Global Baku Forum, which brought together fifty recent former heads of state and prime ministers in late April 2015 to discuss economic and political issues and the new European and global order[1], the President of Azerbaijan, Ilham Aliev, stressed the policy of geopolitical independence that his country has followed for the last quarter century, in particular due to its control of vast natural resources, and the potential role it can play to improve Europe’s energy security, with one reinforcing the other.
The two Shah Deniz natural gas fields - the second of which is the size of Manhattan Island, are some of the world’s largest, and the most important fields BP has discovered since the one at Prudhoe Bay in Alaska - will be in a position to supply an additional 16 billion m3 to the European market from 2019 onwards when the Southern Gas Corridor has been completed. The European Commission has just granted investors in the TAP gas pipeline (across the Adriatic from Greece to Italy, an extension of the one linking Azerbaijan and Georgia to Turkey) operational exclusivity for 25 years. This exception to EU rules recognises the risks the investors have taken, and also signals that Gazprom will not be able to use the corridor. Since the beginning of the crisis between Russia and Ukraine – currently contained by what is only a provisional armistice - Brussels has at long last begun to explore ways of diversifying its sources of energy to reduce its dependence on Russian suppliers.
In a parallel development, on 22 April Margrethe Vestager, the European Commissioner for Competition, launched an antitrust probe into Gazprom’s alleged abuse of dominance in gas supplies to the markets of eight Member States in Central and Eastern Europe. Gazprom has twelve weeks to respond to the Statement of Objections (a strategy to partition gas market by reducing its customers’ ability to resell the gas cross-border; unfair pricing; obliging wholesalers to invest in infrastructure). The Russian Foreign Ministry called the charges “unacceptable” and suggested that they were geopolitically motivated, but this in no way undermines the fact that the Commission’s case is inspired by competition law, as was the one it brought against Google on 15 April. It is worth reminding ourselves that the European Union is above all a community based on the rule of law. This is one of its great strengths and a major instrument of international influence. This law-based approach is good news for European business and international investors alike.
Together, the force of the law and the rules of the free market mean that energy has a decisive impact on the rate and quality of economic growth, as demonstrated by three on-going scenarios. First, as Russia looks for alternative markets to Europe, China is trying to strike a deal at (low) market prices; as a result, the major joint projects announced not long ago by the two countries have come up against market realities. Second, a 25% cut in expenditure on exploration for sources of unconventional oil in the United States explains why American economic growth fell by 0.4% in the final quarter of 2014, although the U.S. is sticking to its political goal of achieving energy independence and this will set the long-term agenda. Third, and last, there is an economic upturn in Europe due, in part, to the weak euro and lower energy prices.
Structural oversupply is likely to continue now that the House of Saud has retained Ali Al Naimi as Minister of Petroleum and Mineral Resources, a strong signal that it has no intention of reducing production to support prices. It will pursue a policy to protect its market share and resist competition, while also combatting attempts to replace fossil fuels with alternative sources of energy. The current increase in Iraqi production and an expected rise in output in both Iran and Libya will have a similar impact on the market. We should probably expect a long period of relatively low or moderate prices in light of the fact that each cycle since 1970 has generally lasted for fifteen years[2].
If the first part of the Saudi strategy is likely to benefit the European economy at a time of tentative growth, the second part, which might sap investment in renewable energy, doesn’t seem to have hampered its development so far[3]. Renewable energy has come of age, with a 17% rise in investment to $270 billion in 2014[4], most of it in Europe, which accounts for half of worldwide photovoltaic capacity[5]. This will lend credibility to the European states’ approach to greenhouse gas reduction during the fresh round of negotiations leading up to the UN Climate Conference (COP21) in November 2015, when no fewer than 57,000 participants are expected to converge on Paris. The EU’s promises are dependent on its improving its energy self-sufficiency and independence in the global marketplace.

Michel Foucher
Former ambassador
Senior Advisor

[1] The author chaired the plenary session on the effects of EU policies on its southern and eastern neighbours.
[2] See Security of Oil Supplies by Giacomo Luciani (2013).
[3] The energy generated by renewables (sun, wind, geothermal, biomass, waste, etc.) and consumed in nine EU countries reached 91 MTOE.
[4] Source: UNDP, March 2015.
[5] Over 80 gigawatts out of 139.