Plea for a bold strategic energy shift: Brussels should bet on Beijing

July 11, 2011 | 00:00

Plea for a bold strategic energy shift: Brussels should bet on Beijing

The current European energy security strategy, based as it is on the fast-fading military and diplomatic power of NATO and the US, has proven a failure. To safeguard its worldwide energy interest, the EU should replace it with a radical new strategy: an energy consumer partnership with China. This new Brussels-Beijing Alliance would serve as a hedge against Russia and other large power producers, argues Matthew Hulbert.

In the past decade, since 9/11, there have been countless NATO workshops and conferences dedicated to energy security. Experts would talk about locking down vital energy infrastructure, preventing terrorists from blowing up pipelines, or pushing for enhanced cyber security of energy assets. Worthwhile efforts to be sure, but not what the core energy role of NATO in Europe should be about, namely, for Europe to be seen as a stable source of security for producer states straddling the European neighbourhood.

This is what a European energy security strategy should have been focused on: providing a “negative” incentive, keeping awkward regimes on the political straight and narrow, as well as offering a positive security pull for producers willing to look beyond their traditional external mentors. The Libyan disaster has made it clear that if the EU has ever had such a strategy, it certainly is not working anymore. “Post-Libya” it’s not so much a case of the cracks starting to show, but the entire edifice collapsing before our eyes.

Actually, the failure of the European energy security strategy, such as it was, has long been obvious in Central Asia – Russia’s backyard – where the EU has never been able to project credible influence. This has now become apparent in the Middle East and North Africa (MENA) as well, particularly in Libya, but also in Egypt and other countries across the region. This means that the EU has no credible presence in two of the four energy “corridors” it was hoping to open up from Scandinavia in the north, Russia and Central Asia in the East and MENA markets down south.

In other words, Europe has failed to align Brussels’ diplomatic means to NATO’s military ends to provide greater security of energy supply. What is more, this is a reality Europe has yet to fully wake up to. Brussels still believes that diverse suppliers will come to lucrative European markets on commercial grounds alone, not through additional political and security incentives. That may sound good in theory, but in the real world, it’s an illusion.

To be fair, from an economic perspective, the ‘diversification’ idea is sound. The idea is essentially to diversify supplies in order to reduce structural dependence on Russian volume and price. But the execution has been lousy. Military indecision, as evidenced for example by lack of “firepower” to topple Gaddafi, will cause Central Asian and Middle Eastern supplies to go elsewhere for “security of demand”, exacerbating European dependence on Russian hydrocarbons. Europe has demonstrated that it lacks the political stomach for geopolitical ‘fights’, which means that from Brussels to Berlin, Paris to Prague, Europe has no choice but to go ‘long’, very ‘long’ on Moscow to secure its vital oil and gas supplies.

Geopolitical dredging

‘Libya’ is of course just a symptom of Europe’s current energy situation. The real crux of the problem lies in America. The US is no longer willing to stand guarantor for European energy interests. This has been made clear in Libya, which, as Secretary of Defence Robert Gates put it, is ‘not a vital interest to

The failure of the European energy security strategy has long been obvious in Central Asia - Russia's backyard - where the EU has never been able to project credible influence
the US’, and Washington has treated it accordingly. The reasons for the new attitude of the US are not hard to find. Amid mounting fiscal woes, Washington is once again flirting with “energy independence”, and with good reason. Domestic shale gas, Canadian tar sands, and promising offshore prospects have boosted America’s supply potential. The furthest Washington is likely to go looking for oil these days is directly over the pond in West Africa. More “geopolitical dredging” is not required.

But what’s good for America, is bad for Europe. No US involvement means no serious security cover to reassure producers – either in Central Asia or the MENA region – that exporting West towards Europe is a smart thing to do.

Unless Europe decides to bulk up and go it alone – rather unlikely – it is high time for a strategic energy policy rethink. Instead of trying to get producer states over a security ‘barrel’ neither NATO nor Brussels can provide, the EU should try to work from the other end of the pipeline. That means talking to the major energy consumer of tomorrow: China.

To apply pressure on Russia, Central Asia and the MENA region, European diplomats have to make sure that the major economies on the buy side buy with a clear political purpose. That means the EU should stop pretending that it can muster the military hardware to secure wells, protect pipelines, or even dictate terms to politically battered producer states, and start forging a consumer consensus to safeguard demand side interests. The obvious way to do this is through a China-EU energy pact.

OPIC

This is not as far-fetched as it may sound. Brussels and Beijing have maintained an energy dialogue since 1994. Much like the EU’s ‘common energy policy’, these bi-annual talks currently dabble in renewables, smart grids, energy efficiency, clean coal, nuclear energy, and regulation. Important stuff for sure, but as far as foreign policy is concerned, they really should be focusing more on commercial issues: on arbitrage and interests. That means oil and gas.

Yes, China is a competitor, but like the EU, it is first and foremost an energy consumer. Now that the US is taking an energy back seat, Europe and China (alongside other Asian consumers) should look to forge something akin to an OPIC – an Organisation of Petroleum Importing Countries – that makes sure that ‘arbitrage’ rests on the buy side.

The EU countries are already part of a consumers’ club of course, called the International Energy Agency (IEA). China and India, however, remain outside the IEA – although the agency is trying to get them involved. The fact that the IEA was able to strike a bargain recently with price moderates from

From Brussels to Berlin, Paris to Prague, Europe has no choice but to go 'long', very 'long' on Moscow to secure its vital oil and gas supplies

OPEC (most notably Saudi Arabia, Kuwait and the UAE) to oversee a 60 million barrel release of oil from the IEA’s Strategic Reserve, would have been far more significant if China had been on board. What is more, the IEA drawdown failed to paper over the cracks, benchmark prices are already back at over $110/b. The upshot is that unless a bargain can be struck between the core consumers in the East and in the West, consumers will stand little overall chance of success in taming energy prices.

Politically pretty

For Europe, the choice is thus between make-belief energy ‘security’ and credible energy politics. But why would China go along? Like the EU, China has taken a free energy ride at US expense for years. Unlike the EU, however, China has demonstrated it can play and win in Central Asia and MENA and even in regard to Russia. Why? Because instead of pitching governance reforms and pithy financial incentives, China played on its growing clout to break the Russian mould in Central Asia. In this way it managed to develop oil and gas pipelines from Kazakhstan, Uzbekistan and Turkmenistan. The promise of unfettered demand has changed the Middle East into a ‘Chimerican lake’ of ebbing US power and increased Chinese prowess.

Arbitrage, in short, is the only reason Central Asian leaders dared to go against Moscow’s long held strategy of monopolising Eurasia supplies for (re)export purposes. It’s also the only reason the Gulf States are less concerned about a life ‘beyond’ US demand and military supply. None of this is politically pretty, but it is realistic as to how global energy supplies are panning out.

Compared to China, the European strategy has been an obvious failure. Europe never secured major supply agreements with Central Asia; it hasn’t cemented its position in North Africa (let alone the Gulf); and hasn’t managed to strike credible transit deals in third countries. It has not even considered the consequences of Gazprom’s creeping internationalisation strategy, which could lead to price collusions at the expense of Europe.

The bad news for the EU: the US is increasingly less able or willing to secure Europe's energy interests in the world (photo: Reuters)

Chinese support for European upstream ventures could be crucial to re-establishing a European stake in the energy world. Beijing is Brussels’ best energy bet, and yes, the EU is the junior partner, but that’s just the way it is. China is already ahead on the arbitrage game. Chinese forays in Africa and Latin America have generated a lot of publicity, but what is often forgotten is that Beijing has also been very smart diversifying its options closer to home – both from the Middle East and Central Asia, to hedge the political and price risks involved. Contractual relations have been remarkably stable as a result.

Some of these contracts will come in handy once China starts sourcing larger amounts of hydrocarbons from Moscow. No doubt East Siberia will ultimately become the mainstay of China’s Eurasian supplies, but the Chinese want to secure those supplies at the best price they can get. Here is where Europe can come in. China’s hedging strategy would be boosted significantly if it can draw Europe into the game. Beijing will not get Russian supplies on Chinese terms so long as Europe continues going cap in hand to Moscow for hydrocarbon supplies. Russia will obviously leverage its market position between East and West to maximise economic (and political) rents.

Regional dominance

This underpins why Beijing and Brussels have an engrained energy relationship. Their ‘affair’ will also play out in Central Asia, where China’s self-interest dictates that it could and should encourage any upstream deal that gives the EU leverage against Moscow in order to reduce the prospect of price

The important point to realise is that energy security is no longer achieved through military dominance, naval force projections or even boots on the ground
collusion between Russian and Central Asian producers. Ensuring China has a seat in the nascent Caspian Development Corporation (CDC) would be a good start (irrespective of the merits of the CDC itself). Making Central Asian markets work for the EU might even help avert a Sino-Soviet power tussle for regional dominance. Beijing certainly knows that ‘triangulation’ beats ‘binary’ power plays in combustible environments.

Although something of a subplot with different players and more complicated arrangements, a similar narrative applies in the Middle East. A European demand cushion would attenuate Sino-US rivalries and offer both sides a geopolitical safety valve; the resulting elasticity of supply would further narrow the relative bargaining position of Russian and Central Asian supplies.

Thus the new name of the game is consumer hedges across the board – it’s the only way that Brussels and Beijing can keep producer states ‘on message’ and safeguard their energy interests once the US recoils into domestic energy bliss. Going it alone might look like an attractive option for China, but at the end of the day, the Chinese too will have to secure both ends of the consumer pipelines if their energy policy is to hold up. They are already struggling to nail Russia down on consistent oil and gas pricing.

Silver lining

The important point to realise is that energy security is no longer achieved through military dominance, naval force projections or even boots on the ground. That age is coming to a close. For Europe, energy security depends on its ability to exploit Chinese influence in Central Asia as a hedge against Russia, while working toward a consumer-driven market to enhance security of supply from the Middle East and beyond. This will mean accepting Beijing’s commercial rules in return for political support, a ride that any consumer state should consider taking.

And this isn’t just a policy option for Europe – it’s fast becoming a categorical imperative. US security cover appears to be rapidly shrinking, Chinese commercial clout rapidly growing. NATO has run its course on energy. The Libyan debacle could yet have a European silver lining, but only if Brussels accepts that it has to turn to the East to tackle the EU’s energy dilemma. A strategic shift that is certainly as bold as it is necessary.

 

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