The European Energy Community: Expectations of the Caspian Sea littoral states from membership prospective

The European Energy Community: Expectations of the Caspian Sea littoral states from membership prospective

As a major consumer of natural gas, the European Union (EU) is aiming to implement its fundamental strategy - full integration of the regional markets in the European internal energy market by strengthening its energy security through a diversification of supply sources and routes. The European Energy Community, which guiding principle is rather the import of the EU energy policy into non-EU countries, plays one of the most significant roles in this process.

The Energy Community celebrated its eighth anniversary on 24th of October, 2014. Established in 2006 to extend and fully integrate the EU internal energy market further to South-Eastern Europe, and to increase socio-economic stability in the region, and security of supply as a whole, it has set a good example of regional co-operation. Its members made commitments to liberalise their energy markets and implement the functioning of the European institutional framework in the fields of electricity, gas, environment and renewable energy. Members of the Eastern Partnership, such as Moldova and Ukraine, are the contracting parties of the Energy Community, while countries like Turkey and Armenia have the status of observers.

To this date, the Energy Community has established an effective institutional framework that would allow its contracting parties to harmonise their regulations with EU standards. Adoption of the primary legislation of the EU has helped them to open up their electricity and gas markets to competition on the basis of the Second Energy Package, including the general rules on market access and measures to improve energy efficiency. In addition, the contracting parties made a commitment to implement the Third Energy Package by 2015.

At this stage, the co-operation between the European Energy Community and the potential alternative energy suppliers, the Caspian Sea littoral states, is of key importance. Some of these countries, such as Kazakhstan, are major suppliers of hydrocarbons to the EU. However, despite the participation of Kazakhstan in the Customs Union with Russia, for which it pays excessive rates of transit, it has no direct access to European markets and depends on transit countries. Moreover, these countries export far less than they could. A lack of modern oil and gas infrastructure and weak financial support have made them mostly dependent on Russia and China, who aggravate this dependence by financing the construction of major energy projects in the region. Therefore, the co-operation with the EU can play a vital role in the countries’ efforts to strengthen their energy independence and diversification capabilities.

Azerbaijan

Compared with the other countries in the region, Azerbaijan has tightest political and legal relations with the EU. Its geographical location stimulates high interest from the EU, which offers Azerbaijan a broad spectrum of opportunities for progressive integration into the European energy market. As one of the most active counterparts in the EU’s Eastern Partnership programme, Azerbaijan pays special attention to the partnership and co-operation with Europe, and this ranks high amongst the country’s main foreign policy priorities.

Currently Azerbaijan exports its natural gas to Iran, Russia, Georgia, and Turkey, via Baku-Tbilisi-Erzurum pipeline (BTE or South Caucasus Pipeline), which runs parallel to the Baku-Tbilisi-Ceyhan (BTC) oil pipeline, and will become a major exporter to Europe through the Trans-Anatolian Pipeline (TANAP) and the Trans-Adriatic Pipeline (TAP) by 2018.

However, in the case of Azerbaijan, bearing in mind the limited capacity of TANAP (16 bcm/year), decreasing internal natural gas demand in Turkey and the much bigger supply capability (63 bcm/year) of the recent deal of Russia to build a new natural gas pipeline under the Black Sea to Turkey and the sweetening discounts on the export price of Russian gas, it is possible to foresee that all these could create competition to Azerbaijani exports. This scenario is possible, as nowadays Russian economy is hit by the Western sanctions and Moscow wants to strengthen its position and does not need the competitive flow of Azerbaijani gas to the European market. Moreover, there is a high possibility that Turkmen gas will follow Azerbaijani gas in the case of the implementation of the Trans-Caspian gas pipeline (TCP) and that could create even more competition. By strengthening its position in the Turkish energy market, Moscow could probably achieve its strategic objectives: preventing Azerbaijani and Turkmen natural gas from reaching the Europe, and thus remain its position as the key energy supplier to the EU, making it impossible to implement the Trans-Caspian project, and enable Russia to take control of competing source flows in the whole region.

Bearing this possibility in mind, to be able to diversify its export routes and gain more independence from Russia, Baku clearly knows that it should strengthen its long-term relationship with the EU. The attractive prospect of its membership in the European Energy Community may be a further crucial and significant step towards further development and securing of the country’s energy exports.

Furthermore, not only for Azerbaijan, but also for the other Caspian countries such as Kazakhstan and Turkmenistan, as well as Uzbekistan (a non-Caspian country), foreign direct investment in construction and installation works, drilling, upgrading equipment, and assistance in conducting geological works is badly-needed, as they still mostly use the depreciated oil and gas infrastructure built during Soviet times. In Kazakhstan, for instance, losses, which exist especially in the southern regions, total up to 30%, sometimes. In some of these countries, the organisational and engineering structures, capable of applying these investments, are just not available. For this reason, as potential Member States of the European Energy Community, they could expect more significant and proactive involvement of the Energy Community in these specific areas.

Turkmenistan: Strengthening the Co-operation

Turkmenistan is extremely interested in the development of a wide network of export routes. This makes the common interests of Europe and Turkmenistan in the energy sector today, look both natural and justified, economically, as well as commercially. Building a sound relationship with energy-producing countries, the European States and companies offer mutually-beneficial partnership conditions and reasonable prices for the supplied energy. This is consistent with the approach of Turkmenistan, which is based on geographic diversification of natural gas exports. In this context, the co-operation between Turkmenistan and the Energy Community could be a “break-even point” and a major step towards the country’s energy independence and supply diversification. Though the substantive discussion of opportunities for co-operation in the energy sector between Turkmenistan and the EU still remains relatively weak, the former is probably expecting an high level initiative to be presented, at some point soon, by the latter.

Kazakhstan

Kazakhstan is the country where significant efforts towards more energy market convergence have been the strongest. It is the first Central Asian country to have concluded an Enhanced Partnership and Cooperation Agreement with the EU. The new agreement will replace the older Partnership and Co-operation Agreement and will give EU – Kazakhstan relations a new, up-to-date, and stronger foundation.

Possible Expectations

Going back to the possible expectations of the Caspian Sea littoral states from their membership in the European Energy Community, it could be translated into:

  • sharing the Energy Community’s deep expertise in improving the management and regulation of the region’s energy sector, both at national and international level, in accordance with the terms of the market economy;
  • more high-level intergovernmental visits and talks initiated by the EU;
  • strengthening energy solidarity mechanisms, guaranteeing further political support and integration in improving the energy supply, under economically and environmentally-viable conditions;
  • co-operation in promoting energy-saving measures, energy efficiency and other environmental aspects;
  • greater assistance in modernisation and protection of strategic energy infrastructure, power plants, electricity networks and developing modern and efficient transmission technologies (e.g. extension of the scope and objectives of the programs like TACIS (Technical Assistance to the Commonwealth of Independent States), INOGATE (Interstate Oil and Gas Transportation to Europe Programme) and TRACECA (Transport Corridor Europe-Caucasus-Asia);
  • sharing the EU’s expertise in building up the strong energy management and technical training of personnel involved in the energy sector;
  • long-term guarantees of buying, transporting and transiting of energy materials and products;
  • introduction and implementation of the EU’s broad organisational, legal, and fiscal laws, which are necessary to encourage energy trade and investment through consultation and technical assistance, as well as the convergence of energy markets on the basis of the EU legislation;
  • more involvement in assisting the development of hydropower and other renewable energy sources in the whole Caspian region; and finally, assistance in investment attraction.

Difficulties

Nowadays the Caspian Sea basin is not only an area with huge potential of co-operation - which depends primarily on the co-ordinated efforts of all stakeholders - but also a place for conflicts of interest of major political players. One of the arguments, which, according to numerous experts, was designed by Russia and Iran to cast doubt over the legality of the Trans-Caspian pipeline, is the unresolved legal status of the Caspian Sea itself. It is worth noting that the legal status of the reservoir has been discussed for almost two decades. A possible major expectation of the Energy Community’s potential Member States could be the EU’s direct involvement to address this very debatable issue of security and reconciliation in the name of the Energy Community.

Conclusion

After all, at the time when control over the energy transit corridors from Caspian region to Europe becomes vital, the above-mentioned countries should not only focus on strengthening energy co-operation with Russia and China, but they also should pay more attention to strategic co-operation and bolstering the relations with the EU, which could play a crucial role in strengthening and securing their energy independence and diversification capability in the long-term. An active partnership with the EU could also secure their position in the global energy market, ensure the stable development of their domestic oil and gas industries, and boost the upgrading and reconstruction of the hydrocarbons transportation system. In this respect, Caspian Sea nations need to pay specific attention to their foreign policy strategies, including decisions regarding the direction of future energy routes, and their development in an independent and secure way.

On the other hand, active participation and input from the Caspian Sea powers is not enough. For the EU, an important factor in the coming years will be the need to maintain the political momentum created during the past few years, namely by strengthening institutional co-operation, raising awareness of the EU in the region and increasing financial resources. Further co-operation and mutual trust are the crucial aspects to achieve the ambitious goals of strategic partnership.

Eldar Latypov is an Energy Policy Analyst at Central Europe Energy Partners, Brussels. He is also currently studying for a M.Sc. in European Political Economics at the University of Trier, Germany.