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Prospects for EU-Asia Cooperation on Energy Security

By Alana Fitzpatrick

18 December 2018

Alana Fitzpatrick is a Research Assistant at the EU-Asia Centre

There are few issues as important as energy security – the unwritten assurance by each state to its citizens that when you flick the switch, the lights do indeed come on, that trains, planes and cars move, that industry is powered and that our homes are heated in winter. Energy security is largely taken for granted in Europe and the developed countries in Asia.  Major sources of oil and gas are not situated where they are most consumed, or at least rarely in sufficient quantity to meet the regional consumer demands. This means that there is a major international market and supply chain in petroleum and gas products involving the sale and transport of these from producer country to consumer countries. Ensuring this seamless flow of energy and managing energy dependencies is also closely linked to the debate on climate change.

Europe

For the EU today over 70% of gross inland consumption of energy is derived from oil, coal and gas [1]. Of this, only one-fifth is produced in the EU, meaning that four-fifths of Europe’s vital energy needs have to be provided by imports from outside the European Union [2]. It is true that renewables are developing rapidly, but currently represent only about 15% of the EU energy mix [3]. Wind and solar energy cannot provide the essential consistency of supply nor match the seasonal requirements for power. Nuclear is a diminishing component of the energy mix post-Fukushima and requires very long lead-times and major investments to bring new capacity to production.oneenergy

Therefore, currently and for the foreseeable future, securing the supply of oil and gas to the EU is essential. But EU policymakers cannot consider this vital requirement in a vacuum. There are much broader issues of international politics and international security to consider.

Asia

Having outlined the position of the EU as a major importer of energy, let us examine the situation in Asia - and the USA.

China has enjoyed unparalleled levels of economic growth over the last three decades and, unsurprisingly, its requirement for energy has increased correspondingly. With a population of 1.4 billion people, it is the world’s largest importer of energy [4]. This is despite extensive national oil, gas and coal production, which enabled China to be a net exporter of energy up to 2000. Already by 2004, nearly 5% of China’s energy needs were met by imported oil and gas. By 2014, this proportion had tripled to 15% [5]. Current projections suggest Chinese energy demands will continue to rise at somewhere between 1% and 2% per annum year on year to 2040, depending on the level of economic transformation from an industrial to a services-led economy [6]. 

The Indian economy is forecast to grow at 7% and India’s population, currently 1.2 billion people, is expected to surpass that of China by 2040 [7]. Total energy supply virtually doubled between 2000 and 2016 from 440 MToe (Million Tonnes oil equivalent) to 862 MToe [8]. Energy demand is expected to grow by somewhere between a quarter and a third by 2040, indicating a future further increase in dependency on imported energy [9].

The profile for Japan’s energy requirements is similar to that of the EU: modest growth based on stabilising energy needs as the economy transitions to less energy-intensive and lower-carbon footprint. Nonetheless, at 94% of energy coming from imports, Japan has by far the highest dependency on imported oils and gas to fuel its economy and society [10].

twoenergyAll these major global economies are all heavily dependent on foreign imported oil and gas. But there is a surprising exception in the case of the United States. Despite high domestic demand, ‘Fracking’ has enabled shale gas production in the US to soar over the last decade, making the United States close to being a net exporter of energy. The US currently imports only about 5% of its energy needs, and that is on a steeply declining curve [11]. This fact creates a new asymmetry in geo-strategic position between the United States and the EU, in that the dependency on foreign oil is now different. The potential policy implications of this will be discussed later.

Dangers, Risks and Threats

We have established that the EU, together with China, India and Japan all share a heavy dependence on imported oil and gas. This presents a complex long-term energy security challenge to the foreign and trade policy of all these states. There are two further complications. Firstly, as in any market with limited resources, the customers are more or less in competition with one another. Secondly, when we examine where the sources of oil and gas are located, we reveal some problematic and challenging geographies. Of the top ten oil exporting counties, for example, which supply over 80% of exported oil, only one (Canada) could be considered low-risk. The others, in order of production are Saudi Arabia, Russia, Iraq, UAE, Kuwait, Iran, Venezuela, Angola and Nigeria [12].

Political threats to supply

The potential political risks are for regional instability (Middle-East and Gulf States), national instabilities (e.g. Venezuela) or international conflict (e.g. Russia-Ukraine). Even given conditions of relative stability, if there were to be an international political crisis, regional producing states could choose to alter policies, reduce supply or embargo oil as they have done in the past (OPEC in 1973 and 1979) and cause an ‘oil shock’. The probability of disruption of supply at some point in the next 20-30 years cannot be easily discounted. The EU has a policy against short-term oil shocks, requiring all Member States to stock the equivalent of 90 days of net oil imports, as emergency supply. 

Iran

The potential economic risks to the EU and Asia today lie mainly in the area of US sanctions on Iran. These US sanctions are essentially extra-territorial in nature since, although not legally applicable within the EU or Asia or to EU or Asian registered companies, in practical terms they do affect EU or Asian businesses with operations in the US (e.g. Total, Mercedes-Benz, Airbus – all have withdrawn from business with Iran). The risks of ignoring US sanctions are apparent in the recent arrest of the Huawei CFO while on a stopover in Canada. Despite business with Iran being legal for Chinese companies under Chinese law, this has not protected Huawei from a combination of the US Justice, Trade and Treasury Departments.

In a similar way, EU and Asian countries, in practical terms, cannot purchase oil from Iran unless they benefit from a waiver granted by the US administration. US Secretary of State Mike Pompeo has stated that 8 countries will receive a waiver, and therefore will be allowed to continue importing Iranian oil. The list of the 8 countries has not (yet) been made public but speculation is that the list will include China (currently buying one-quarter of all Iranian output [13]) and Japan, and possibly Italy, Turkey and South Korea.

Military threats to supply

It is also, unfortunately, not beyond belief that by accident or miscalculation a state or non-state actor takes unilateral military action to secure, deny or restrict access to oil and gas. Pipelines can be closed or interrupted, as we have seen in Syria and Iraq. International waters and freedom of navigation could be contested e.g. Straits of Hormuz, or South China Sea. Oil producing countries could be attacked, invaded, coerced, undermined or destabilised e.g. Iran, Kuwait, Iraq, Libya and Qatar. 

The nature of energy security is to ensure a constant production and supply. It is in all sides’ interest for the oil to flow from producer to consumer. However, it is in situations of major military or political dispute that the energy flow is jeopardised. For example, at the height of their power, the so-called ‘Islamic State’ had control over important oil fields in Syria. Profit from oil sales was the group’s main source of revenue. Instead of being controlled by the Syrian government, oil sales from these fields were sold mainly to ISIS-controlled villages or smuggled into Iraq or Turkey [14]. 

Opportunities for co-operation

Given the long term planning that must be made by policymakers to take into account evidence of past historical perturbations and future risks, it would seem wise for the major oil and gas importers to cooperate more closely on such policy making that maintains stability and access to such vital natural resources. In particular the EU and Asia share many common interests in this regard. The EU, China, India and Japan all have a major common security concern: how to secure sustained supply of foreign oil for the foreseeable future. A strategic long-term policy alignment between the EU and Asian countries could serve to enhance energy security for all.

After the 2008 ASEM Summit (the Asia-Europe Meeting) the EU hosted the first ministerial meeting dedicated to energy security. Between the 45 European and Asian partners present, they affirmed a shared concern for current energy security. Despite this initial success, there have been no more energy ministerial meetings since. Renewing an ASEM energy dialogue could open the discussion on managing similar dependency energy flows.

The EU and China have an annual Energy Dialogue, based on the EU-China Energy Roadmap (2016-2020), which covers political, technical, economic and scientific cooperation on energy policy. The EU-Japan Energy Dialogue is also in place, covering topics of energy supply, as well as renewables and diversification. The EU-India Energy Panel, as part of the EU-India Strategic Partnership, discuss similar topics, such as renewables and energy efficiency. The EU’s international cooperation on energy tends to focus more on climate change, renewables and energy efficiency, rather than cooperation on fossil-fuel energy flows.

In general, enhanced measures could be taken collectively, within an appropriate international framework, to further support initiatives for conflict resolution, economic development, the development of civil society and free trade. More specifically there are three areas in which EU-Asia collaboration on policy could be particularly helpful.

The first, which would have been considered a prerequisite until recent events, is the maintenance and support of the post World War Two rules-based international system. This includes respecting and actively upholding treaty obligations, international law and international norms. 

After the 1973 oil shock the International Energy Agency was founded to facilitate multi-lateral coordination between states in times of major energy disruptions. Since the WTO does not cover trade of energy, the IEA has become an important platform for energy security monitoring and analysis. There are currently only two Asian member states: Japan and South Korea. Attracting more Asian countries will increase international energy security cooperation through this existing platform. 

The second would be the renewed commitment by all the international law of the sea, or freedom of navigation on the high seas (Mare Liberum). Since much of the oil and gas in transit must pass maritime ‘choke points’, or lies near to the continental shelf, these principles require safeguarding. One example of such geography is the Straits of Tiran, which lies between Egypt and Saudi Arabia, separating the Gulf of Aqaba from the Red Sea. It also links the vital Israeli port of Eliat to the Red Sea. In 1967, the Egyptians temporarily blockaded the Straits, halting Israeli oil shipping. International cooperation and dialogues can mitigate unilateral action through agreed shared norms and principles. 

The third area of cooperation could be to develop new financial infrastructures to reduce dependency on the US as a broker of international payments (for the dollar area). The Iran sanctions conundrum, with the EU continuing to support the Joint Comprehensive Plan of Action (JCPoA), despite US withdrawal, highlights the need for an alternative payments system independent of the US dollar, so that international payments which are considered legal in the EU and Asia, can continue to be conducted without falling foul of United States sanctions. A recent speech by Climate Action and Energy Commissioner Arias Cañete shows a strong will for a Euro-based system, with research underway to increase the role of the Euro in energy transactions [15].

Conclusion

With the US now close to being a net exporter of energy, the highly import-dependent EU and Asian nations share a strong and common strategic incentive to cooperate on energy security. This is not just to secure their own access to supplies as much as is possible, but also to uphold the international rule based system and ‘level playing-field’. While the current reality demands that co-operation focus on fossil fuels and risk-avoidance, this joint policy framework could equally serve as a platform for research, investment and diversification into future technologies for renewables and greater energy efficiency.

Appendix

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References

[1] EUROSTAT (2015) The EU in the World – Energy, available at: https://ec.europa.eu/eurostat/statistics-explained/index.php/The_EU_in_the_world_-_energy 

[2] Ibid. 

[3] EUROSTAT (2016) Renewable Energy Statistics, available at: https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Renewable_energy_statistics

[4] IEA (2016) Atlas of Energy, available at: http://energyatlas.iea.org/#!/tellmap/-1002896040/0

[5] World Bank (2014) Energy imports, net (% of energy use), available at: https://data.worldbank.org/indicator/EG.IMP.CONS.ZS?end=2015&locations=US-IN-CN-JP-EU&start=1992 

[6] EIA (2018) International Energy Outlook 2018, available at: https://www.eia.gov/outlooks/ieo/china/?src=-b2

[7] EIA (2018) Annual Energy Outlook, available at: https://www.eia.gov/outlooks/aeo/pdf/AEO2018.pdf

[8] IEA (2016) Atlas of Energy, available at: http://energyatlas.iea.org/#!/tellmap/-1002896040/0

[9] EIA (2018) Annual Energy Outlook, available at: https://www.eia.gov/outlooks/aeo/pdf/AEO2018.pdf

[10] World Bank (2014) Energy imports, net (% of energy use), available at: https://data.worldbank.org/indicator/EG.IMP.CONS.ZS?end=2015&locations=US-IN-CN-JP-EU&start=1992

[11] Ibid.

[12] CNBC (2018) China keeps buying Iranian oil, and the trade war adds a reason to defy US sanctions, available at: https://www.cnbc.com/2018/07/23/how-china-can-use-iran-oil-sanctions-to-gain-concessions-in-trade-war.html

[13] Ibid. 

[14] For further analysis, see FT (2016) Inside Isis Inc: The journey of a barrel of oil, available at: https://ig.ft.com/sites/2015/isis-oil/

[15] For full transcript, see ‘Press remarks by Commissioner Arias Cañete on the International Role of the Euro in the Field of Energy,’ 5/12/18, available at: http://europa.eu/rapid/press-release_SPEECH-18-6683_en.htm