EU meets Russia, Ukraine and Turkey in effort to mitigate energy supply risk

The European Union is well aware of this risk and recently adopted an ambitious new energy strategy. The plan is designed to secure supply, reduce the vulnerability of European businesses and consumers on supply from external providers and up investment in renewable energies. The EC recently revealed that in 2013, the share of energy from renewable sources in gross final consumption of energy reached 15% in the EU, compared with 8.3% in 2004, the first year for which the data is available. Europe’s corporate risk management community should welcome the adoption of such long-term strategies to secure the future of energy supply.hideBut for now they will be pleased to see that the EC is busy working on the short-term threats to supply through political action in key supply areas such as Ukraine and Turkey. The really pressing matter is clearly the ongoing conflict between Ukraine and Russia. European markets receive about 20% of their natural gas needs from Russia and most of that gas runs through the Soviet-era transit network in Ukraine. Contractual rows between Kiev and Moscow resulted in gas supply disruptions for Europe in 2006 and 2009. It is arguably the root cause of the current conflict. The need for action by Europe was stressed in no uncertain terms by EU Climate Action and Energy Commissioner Miguel Arias Cañete in mid-February when he told policymakers in Brussels: "Without swift and decisive action, member states will remain dependent on a single supplier that views the sale of gas not simply as a commercial matter, but as a political weapon." Tomorrow in Brussels the EU, Russia and Ukraine will meet to follow up the recent agreement on the gas Winter Package agreed in Minsk in February that secures supply of gas to the EU via Ukraine. Meanwhile, on Monday, EU Vice-President Maroš Šefčovič and Turkish Energy Minister Taner Yildiz launched a new High Level Energy Dialogue between the EU and Turkey. Turkey is important because it potentially provides a key risk mitigant for Europe through the creation of a series of alternative pipeline options based on a string of projects dubbed the ‘Southern Corridor’. On Monday and Tuesday of this week (thus significantly only a few days before the trilateral talks with Russia and Ukraine), Vice-President Šefčovič travelled to Turkey to attend the opening ceremony for the Trans-Anatolian natural gas pipeline (TANAP) and meet Turkish President Erdogan and Azeri President Aliyev. The symbolic laying of the pipeline marked the start of the construction works. TANAP will be a central part of the Southern Gas Corridor that will connect the gas fields in the Caspian Sea region with the gas consumption markets in the EU. By the end of 2019, TANAP will hopefully transport some 16 billion cubic meters of gas to Turkey and Europe from the Shah Deniz II gas field in Azerbaijan that contains one of the largest gas deposits in the world. “The launching of the High Level Dialogue [with Turkey] also clearly underlines the commitment of the European Commission, as reflected in its recently adopted Energy Union Framework Strategy of 25 February, 2015, to establish strategic energy partnerships with increasingly important energy producing and transit countries,” stated the EC. The political and economic significance of the trilateral talks in Brussels tomorrow between Vice-President Šefčovič, Russian Minister for Energy, Mr Alexander Novak and Ukrainian Minister for Energy and Coal Industries, Mr Vladimir Demchyshyn, could not be greater from an energy risk perspective. This was laid bare by the comments made by the negotiators after the Winter Package was agreed on 2 March. Vice-President Šefčovič, who chaired the meeting as mediator and to secure the EU’s interests, said at the time: "I am satisfied that we managed to safeguard the full application of the Winter Package for the supply needs in Ukraine. We also agreed to take up trilateral negotiations on the follow-up to the Winter Package. I am reassured that the supply of gas to the EU markets remains secure." The details of the package agreement made clear that the basis of this deal, and arguably the wider conflict between Ukraine and Russia, is about security of supply and price, not Russian national pride or the fate of Russian-speaking minorities resident in Ukraine as President Putin likes to portray the conflict. This was a deal between Naftogaz, the national oil and gas company of Ukraine, and Gazprom, the massive Russian gas company that was privatised in 1993 after its chairman Viktor Chernomyrdin was named President Boris Yeltsin’s prime minister in December 1992, but in which the Russian state still holds a majority stake. EC Vice-President Šefčovič summed up the outcome of the last trilateral meeting in the following way: - Naftogaz will pre-pay and order from Gazprom sufficient quantities of gas to ensure covering all domestic consumption by Ukraine in March; - Naftogaz continues to guarantee an undisrupted transit of gas to the EU; and, - Gazprom will deliver up to 114 mcm per day of pre-paid and ordered gas quantities to mutually agreed delivery points. “By living up to these obligations the parties will demonstrate their reliability respectively as an important supplier of natural gas to the EU and as a key transit country for Russian gas to the EU,” stated the EU vice-president. Europe’s corporate risk managers must hope that Mr Šefčovič can do the business with Mr Novak and Mr Demchyshyn again tomorrow and extend the deal. Let us hope that Mr Šefčovič has slept well this week because he has had a lot on his plate as he attempts to secure Europe’s energy supply. During the meeting with Turkish Energy Minister Yildiz that launched the new High Level Energy Dialogue earlier this week, both agreed to hold the High Level Energy Dialogue at ministerial level on a more regular basis, at least once a year. The EC stated that the next Dialogue will include all relevant energy sectors such as gas, electricity, nuclear, renewables, energy efficiency and climate action, in particular with a view to the preparation to COP21, The United Nations Climate Change Conference that kicks of on 30 November in Paris. The negotiations with Turkey of course also have an important political backdrop to consider: Turkey’s potential membership of the European Union. Surely Turkey’s application will be more favourably looked upon in Brussels if the Southern Corridor is secured? The EC’s statement detailing the dialogue makes that pretty clear. “Both as a candidate country currently engaging in accession negotiations with the EU and a contributor to the EU’s energy security, Turkey has made an important progress in aligning its legislation with the ‘acquis communautaire’ [the body of European law],” stated the EC. “The screening of Turkey’s energy legislation against the ‘energy acquis’ has been completed. In this regard, parties have both agreed to improve cooperation and their policy dialogue in the energy sector, which plays a key role in their relations,” added the EC. “The launching of the High Level Dialogue also clearly underlines the commitment of the European Commission, as reflected in its recently adopted Energy Union Framework Strategy of 25 February, 2015, to establish strategic energy partnerships with increasingly important energy producing and transit countries,” it concluded. So who says that politics doesn’t matter to business?

EU meets Russia, Ukraine and Turkey in effort to mitigate energy supply risk

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