THE ATLANTIC COUNCIL OF THE UNITED STATES
ROADMAPS ON INTERNATIONAL ENERGY COOPERATION IN SOUTHEAST EUROPE
DIRECTOR, DINU PATRICIU EURASIA CENTER,
THE ATLANTIC COUNCIL
DIRECTOR OF PROGRAMS, DINU PATRICIU EURASIA CENTER,
THE ATLANTIC COUNCIL
ENERGY CHARTER SECRETARIAT
AMBASSADOR-AT-LARGE FOR ENERGY SECURITY,
HUNGARIAN MINISTRY OF FOREIGN AFFAIRS
TUESDAY, MAY 24, 2011
Federal News Service
ROSS WILSON: Good afternoon. My name is Ross Wilson. I’m the director of the Atlantic Council’s Dinu Patriciu Eurasia Center. Welcome to all of you, and thank you for joining us today.
Today’s event focuses on the European energy scene and matters of energy security as seen from two important perspectives. One will be offered by the secretary-general of the Energy Charter, Ambassador André Mernier. The other will come from Hungary’s ambassador-at-large for energy security, Anita Orbán. We’re particularly pleased and honored to have them with us today.
For 50 years the Atlantic Council has promoted trans-Atlantic cooperation on the most crucial foreign defense and security challenges that the United States and our European allies have faced. Energy has long been an important part of this organization’s work, as reflected in the Energy and Environment Program headed by my colleague here, Dr. John Lyman, who unfortunately cannot be with us today. A specific set of energy issues related to the Caspian and all of the knock-on effects that Caspian energy has for Europe were reasons for the establishment of the Dinu Patriciu Eurasia Center. Indeed, it was initially called the Eurasia Energy Center, although we now have a more expansive idea of our center’s work that includes politics as politics, not just energy politics, and also broader economic trends and issues. And that is reflected, among other things, in the Atlantic Council’s annual Black Sea Energy and Economic Forum, the third of which will take place in November this year in Istanbul.
Those of those whose – and there’s probably only a couple of us – those of us whose careers started in the Cold War have seen lots of changes in our time. Before and after the fall of the Berlin Wall – and perhaps for different reasons at different times – a number of centrifugal forces have seemed to pull Europe or sections of Europe apart from one another. These international complicators, to use a word I like very much – a good example is the still-unfolding European financial crisis have divided the continent, demanded new forms of multilateral cooperation and, at the same time, seem to defy such cooperation, or at least make it much more difficult.
Energy has been one of those push-me/pull-you issues, and it still is. In the 1990s and the very first part of this decade, the United Kingdom and the United States worked closely with Azerbaijan, Turkey and Georgia to facilitate the development of Caspian offshore – of Azerbaijan’s Caspian offshore oil well, from the infrastructure to get it to market, against the antipathy, to say the least, of Russia and despite the disinterest of a number of countries in Europe. Gas cutoffs to Ukraine by Russia have roiled energy markets not only in that country but also further downstream, having consequences that the Kremlin may not have predicted.
Energy struggles remain, to paraphrase Clausewitz, the waging of politics by other means. But the Energy Charter and new-found efforts by the European Union to forge a more effective and more interconnected energy strategy among its members reflect, I think, two countervailing phenomena. As the charter’s website itself notes, nowhere but energy are the prospects for mutually beneficial cooperation clearer than in the energy sector, based on interdependence amongst suppliers and consumers, real open and competitive markets, and the need to foster sustainable development strategies.
Of course, national perspectives in the more – in the broader perspective of the European Union are also important. Those Russian cut-offs of gas affected to – Russian cut-offs of gas to Ukraine affected Hungary, of course, among others. And while I was serving as American ambassador overseas, I was struck by how much more interested Hungarian diplomats became in energy security after those events. I think that Hungary is – has been one of the important catalysts for a more effective EU energy strategy, and that’s a very good thing.
To talk with us about the Energy Charter and global trends and multilateral cooperation on energy issues on the one hand, and about the national perspective on energy on the other, we’re pleased to have with us today two guests.
Ambassador André Mernier became secretary-general and head of the Energy Charter secretariat in January 2006. Before taking up this role, Ambassador Mernier headed up energy-related diplomacy in the Belgian foreign ministry. He enjoyed a distinguished career in the Belgian Foreign Service, including appointments as ambassador in Geneva in 1996 to ’99, and in Moscow 2000 to 2004, where he was dual-accredited to Belarus, Moldova, Armenia, Georgia, Uzbekistan, Tajikistan, Kyrgyzstan and Kazakhstan. And I’m sorry that you were not also accredited to Azerbaijan, where we might have met at that time.
Dr. Anita Orbán is ambassador-at-large for energy security in the Hungarian Foreign Ministry. In 2008 to 2010, she served as director of the Constellation Energy Institute, a think tank – and we have a fond spot here for think tanks – that promoted, and I assume still promotes, energy sector cooperation in East Central Europe. Before that, she was executive vice president of the Budapest-based International Center for Democratic Transition, and editor of the world section of the Hungarian political weekly Heti Valasz. Dr. Orbán earned her doctorate from our very own Fletcher School of Law and Diplomacy in 2007, and she is the author of “Power, Energy and the New Russian Imperialism,” published by Praeger in 2008.
Our format today is that Ambassador Mernier will speak to us about the charter, about the – some of the broader perspectives and issues on energy. Then Dr. Orbán will speak about the Hungarian perspective and perhaps also the EU perspective. And then our very own Eurasia Center director of programs, Dr. Boyko Nitzov, will moderate a discussion among the two of them and with all of you.
So with no further ado, please join me in welcoming Ambassador André Mernier. (Applause.)
ANDRÉ MERNIER: Well, thank you very much for being here today, and thank you for inviting me to say a few words about not only the Energy Charter but energy in general. But let me start by the Energy Charter because, after all, that’s my bread and butter. The Energy Charter is the only existing multilateral treaty in the field of energy. It has 51 members, and it’s mainly Euro-Asia. It’s not dealing with the American markets, I mean, neither Latin American, neither North America. And it has been negotiated – started to be negotiated at the time of the U.S. – (inaudible) – and the EU at that time will trust 12 countries.
And it has four pillars. The first pillar is of course protecting investment, securing transit and offering some, let’s say, dispute settlement mechanism. Energy efficiency is also very important to us. So it’s the only existing treaty and it’s a very limited treaty. But it was the only thing that could be achieved, given the (circumferences ?) in those days. And now it’s even challenge, certainly by Russia, Russia saying the world has completely changed; we are on our own; energy is much more prominent; prices are completely different. And the EU is not 12 countries, but 27. So that is – that – these arguments need of course to be addressed. They need to be addressed because the world of energy, as Ambassador Wilson said, is certainly now a major factor in the security, absolute security of all members of the international community.
And so I will leave the narrow sector of Energy Charter and tell you a bit how we see the picture of energy in the world today. And I think the first thing that we have to keep in mind is the population growths. There are things that you can do in the planet with 1 million – 1 billion habitants but do – you cannot do with 9 billion inhabitants. So I think that’s a major development. And it’s a major development certainly because the growth – the population growth, nowadays, is in underequipped countries. So those countries like China, India, but all the others, the Africans and so on, they will want to be equipped.
For OECD countries, it’s not so urgent, because we are equipped. We are mature markets in energy, like in many other aspects. So they – not only the population is growing, but the revenues of those nonequipped countries outside of the OECD are certainly growing as well. So that means more electricity and more energy demand. And that has an influence on the so-called energy mix. For the moment, the energy mixed – and that is important for the future – the energy mix is dominated by two energy – sources of energy. The first one is oil. And oil is still the only – at short-term at least, and even at mid-term – the only source of energy for transportation, and that will not change for the moment. Certainly, you can imagine all kind of scenarios, but for the moment, transportation relies mainly on oils – not only on coal – on oil. And certainly that will stay that way, because forecasts tracks but also for maritime traffic and for planes, oil is still dominant.
The other thing is electricity. More electricity is what people are – needs, for instance, in Africa. But electricity for the moment is still dominated by coal, and that will stay that way for the moment, although there the change – the visible change is coming. And I will give you a few figures. For the moment, 46 percent of electricity in the world is produced by coal, but that varies from one country to another. For instance, coal is still important in Germany. It’s dominant in China; 80 percent of the electricity in China is produced by coal. And that will stay that way also because it’s cheap and it is their coal. It is – so there is a strategic aspect to it that no government can ignore.
So I don’t see major developments on that, although what we see, not only in OECD countries but also elsewhere, is coal progressively being replaced by gas.
The other hope, I would say, to diminish the growth of CO2 ¬is to have better energy efficiency. So if you consider OECD countries in Europe, for instance, for one point of GNP, you need in Ukraine – if one – for one point of GNP, you have – in Switzerland, for instance – you need three times more energy to reach that level in Ukraine, for instance. So that means that there, they have to modernize their equipment, and that means, again, investment.
The globalization is certainly, in energy, must more visible than it is in other sector. And certainly, again, energy efficiency is even for OECD country the only way to go. I think that we have outdated – in many ways, outdated equipments, not only in Eastern Europe, new democracies, but also even in country like the Benelux, we can do much more.
And there, I would say that the key is the price. And when you look at the situation in the U.S. and the situation in Russia, it’s almost the same situation – energy is almost for free. And there, there was no incentive to spare energy or to make energy efficiency investment. And that explained a lot, you know, in most of the European countries – why did people insulate their roof, why did people buy new fridge, why did people have smaller cars and so on? Because of the price of energy. Price is key.
I would say that in any energy equation, you have three parameters: The first one is geology; the second one is geography; and the third one is the price. So that is something that we cannot forget, then.
Economic growth – certainly, we are continuing to growth in OECD countries. But during the last 20 years, growth outside the OECD has been much more visible and important, and it will go the same way. The expectation is that for the 20 years to come, 6 percent will be the growth in OECD countries, but 45 percent outside the OECD. So that means that the need for energy will be much more pressing in non-OECD countries.
The energy mix is, of course, influenced by all those developments and all those new situation. Let’s summarize then that we have three major sources of energy: gas, coal and oil. And according to most of the scenarios, in 2030, they will all be 22 (percent), 25 percent – equal share for oil, gas and carbon. Oil will diminish. But as I said, it will not diminish in transportation. Where can it diminish in power production? That’s the only way. That’s the only niche where we can have less oil and more gas probably, but also more nuclear. I’m still convinced, even after Fukushima, that nuclear is part of the solution. It’s not THE solution. In energy, there is no silver bullet. In energy, you have – you make choices. You have to make your choices according to your own situation.
Of course, electricity is growing much more than other industrial sector, because electricity is at the basis not only of, let’s say family comfort, but also at the basis of industrial apparatus. And that goes with CO2. If electricity is produced today with 45 percent – 45 percent of electricity is produced by coal, what do you have? You have more CO2. And there, in the OECD, we try to find solution to replace coal by gas, to have CO2 capture and storage. But that’s not easy. And to make a small apparatus is CO2 capture and storage. That’s fine. It looks – it sounds good, but you have to transport it. You have to store it. So transportation – if you capture the CO2 at one power station and you have to store it at 200 kilometers, then you have to build new pipelines. And I heard here three years ago at the Energy Day of the U.S. that the amount, the kilometers of pipeline needed to – if you fully capture the CO2 would be the equivalent of the existing pipeline in the U.S. And that will increase the price of electricity, because this – every single surprise – this will increase the electricity by 45 percent, which is not an easy choice from a political point of view.
Let me say a few words about oil. It is – there is no easy oil, but there is still a great need of oil. So what we will see is more and more difficult and very expensive site of exploitation. And the example – first example is, of course, what happened in the Gulf of Mexico, but also all the projects in the Baltic Sea with Russia – difficult project, expensive, and it’s not yet sure that those project will materialize.
One has also to realize that for the moment, OPEC will stay as the main source of oil. There is no other solution. And that means that not only will they – do they have the resources, but they are also the master of the price by the volume – by playing with the volume. And that’s very difficult. That’s very difficult. But, of course, Russia plays a role also. For the moment, 30 percent of our oil import comes from Russia in the EU, which also is a political fact. I’m sure – I still have 10 minutes? Yeah.
Let me make a parenthesis about Russia. Russia is not only a major supplier of gas but also of oil and also of coal. Twenty-five percent of coal imported in the EU comes from Russia, and the same with uranium. The first supplier is Australia, which must be 20 percent, and Russia 21 percent. So that means whatever we say, whatever we do, Russia by geographic, by history, by similar mentality will stay a major supplier for Western Europe.
China is, of course, a main – a main question mark for the future. What will happen with China, and what will happen with shale gas in China? For the moment, we have only one pipeline, modest one coming from Turkmenistan going to China. That’s through ECBM . That’s no big deal. But it’s a beginning. It’s a beginning, provided China doesn’t compensate by developing shale gas. They have such a vast country. They have such a geology that at some point, they might consider developing shale gas. And that will be maybe the beginning of the end of the ambitions of Central Asian countries. So still much question mark.
How about CO2? Certainly what China can do and I hope will do is to reduce the role of coal in power generation. Is it feasible? It’s difficult. It needs major investment. And they need more and more electricity. So even if tomorrow they have, let’s say, 10 new nuclear power station, the growth of need will come – wipe out the benefits of those new power station. So CO2 is a major problem. If you have been in Beijing recently – I was in Beijing three months ago, and I didn’t see the sun during one week, and I was in a mist of yellow dust, I would say, which is very, very depressing. And that is something that where we are also a bit responsible, because what we have done in the U.S. and in Western Europe is to have all thing made in China. So part of the industrial production in China is for the benefit of the OECD countries.
So we have displaced the problem. And I don’t know. I don’t know what will happen, but certainly it’s a major, major question mark for the future. I think that China, like – for the midterm, China like Korea, like Japan, will rely on many source of energy coming from the sea. LNG is important, and maybe gas from – (inaudible) – at some point. Nobody knows.
Now, let me say a few words about the oil problem for Europe. I think that for the moment, it’s – for the charter, it’s not a problem, although it’s really among the problems that we have to tackle. Oil is a spot market. It’s a global market. Gas is a fixed market, fixed infrastructure. And there we have a role to play. But there are major development in – that we can expect in all, coming from Iraq, coming from Iran at some point, if the political situation allows that. But that’s not – even if tomorrow Iraq is stabilized, will that oil be for us, or for that oil be for the Iraqi population? I think there is a choice to be made at the level of the government, and it’s not an obvious choice, because at the same time they need the currency coming from the export of oil. But for political stability, they need to satisfy electricity needs of the population.
Iran, the same thing. Iran has a lot of gas, has a lot of – but the situation makes it nearly impossible for the moment. And even if tomorrow there – we would have a blue sky in our relationship with Iran, you will need to build infrastructure. The resources are far from the border with Turkey, and so on.
So let me finish by saying a few words about shale gas. Shale gas, of course, as everybody knows, has made the U.S. market very independent; I would say, self-sufficient, and could be a major factor in the development of new markets in Europe and in Russia. In Europe, frankly, tomorrow – today, I don’t see that, because population density makes it almost impossible, because of the noise, because of the traffic of shale gas. I don’t see that. But technology will evolve. And God knows what the situation will be in five years’ time. Five years ago, nobody spoke about shale gas. And certainly for the moment, only Poland has maybe a limited possibility for shale gas. For the moment, it’s impossible. But in the future, nobody knows. And certainly, the Russians – they have a lot of shale gas. And maybe they might switch from very difficult project in the – up north, to shale gas, which would be easier. There again, there is no investment for the moment, so they have to find the money for investing.
And I would like to finish too, by saying a few rods about the diversification. In Europe, the diversification is key, is key because we don’t have much resources. And the resources that we have in gas, for instance, as everybody knows, are depleting very, very rapidly. The way to improve that situation certainly is to diversify the – (inaudible) – as I spoke about it, to diversify the suppliers – and there, I think we have a good diversification – and to diversify the root.
And maybe I will have another point of view, as many in the room, but the two crises that we had in 2006 and 2009, we had a transit crisis. They were not supply crises. They were transit crises. And so the reflection in most of the European chancelleries was that certainly the problem was with transit. And when you see North Stream, what North Stream is trying to do is to avoid transit. Transit is considered by companies, by governments as a source of problems. And when you see South Stream, you see even Nabucco is different – we want to have non-transit solution.
And to conclude, I would say that the little war that exists de fact between Nobuko and South Stream is a very good example of that. South Stream has two main advantages. The Russians have the gas, and there is no transit. But it’s very expensive. And I would say that it has – it is mainly a political answer to Nabucco, which was in a way very political itself at the beginning. But even if any major project in energy is always political, the economics must work. And I’m not sure that I would have said before Fukushima it would not work. Now I don’t know, because certainly the reluctance to engage in new nuclear project is a boost for gas, and it’s a boost for Nabucco and for South Stream. What will happen to those two? I don’t know, because the nagging question with Nabucco has always been, where is the gas? And there is a promise of 10 BCM (billion cubic meters) coming from Shah Deniz II, but you have to find the money to develop Shah Deniz II. And the Russian – I’m not sure that they have themselves the money for South Stream, because South Stream is very expensive, and the finance of Gazprom are not in the better shape for the moment.
So for the moment, I see that as a political game, but do they have the money and do they have the political support to do it? I don’t know. And I leave you with those questions. (Chuckles, applause.)
MR. : Dr. Orbán.
ANITA ORBÁN: It’s OK. Let me start saying, first of all, thank you very much for the generous invitation of the U.S. Atlantic Council. And I would like to greet all my colleagues being here, Hungarian colleagues, as well as colleagues from neighboring embassies – I mean, not neighboring embassies here, but neighboring countries’ embassies. And thank you for your continuous interest to be here today.
I would develop further the thoughts which were raised here as the global level, and I would narrow the discussion and the focus to Central Europe, Central-Eastern Europe, and the issues and discussions which we are having there. And how do we translate all of these variables and uncertainties on the global energy market into policy decisions, which we eventually have to make?
And let me show you just very quickly a couple of charts about generally Central Europe’s energy situation. On this first chart, you will see that the energy dependence of Central Europe is pretty high. Of course, it varies, the level, from country to country. But there are two countries, Hungary and Romania, which are importing over 60 percent of their energy from abroad, which means a pretty high dependency on import sources, which –
MS. ORBÁN: Yeah. Maybe I missed the – it’s Hungary and –
MR. : Slovakia.
MS. ORBÁN: And Slovakia – (inaudible, off mic) – a lot of – (inaudible) – resources, and of course, Bulgaria. But the situation varies when it comes to the different source and the different dependence on the source.
On this chart, you can see exactly those primary energy sources, which were just mentioned by the ambassador before. We hold a varying degree of reliance on different sources. And when we are talking about Central Europe, one of the primary topic of discussion is natural gas, exactly by the reason you mentioned of the difference of the natural gas markets from the oil market. And this is what creates for us a lot of issues when it comes to dependency as well as monopoly pricing.
You can see that in case of Hungary, the dependence on gas is over 40 percent in the energy mix. As a comparison, the overall EU average in the energy mix is 24 percent.
Romania has a high dependence on natural gas as well, but the difference – that Romania has more indigenous production.
If you look at the other end of the chart, Poland and the Czech Republic have a high reliance on coal when it comes to their electricity generation. This shows also that even those structurally Central European countries have similar issues. But when you look at the individual country, of course, the Czech and Polish problems differ from the Hungarian and Romanian one when it comes to energy mix and reduction of the carbon emission and local indigenous sources.
We all use nuclear. And we all use, of course, renewable. And if we focus on the differences in the use of natural gas, this chart shows that how much percentage of the individual countries natural gas use is imported. And the import source is mostly for the large – for the vast majorities, one source is Russia. And as you can see from the chart, we can say that the vast majority of the imported gas in all these countries is coming from this single source.
I would just show one more chart. This is the use of renewable in the different countries’ energy mix. And you can see that in these – renewable, at the moment, Romania looks the best among all the countries with the highest percentage of renewable at the current energy mix.
And not all of us, of course, have the renewable and environmental protection as a driver for energy policy, which we all need to incorporate when we are making all decisions on our energy mix and energy policy.
What are the drivers of the Central European countries’ energy policies? We always say that, you know, there are three pillars, of course, of energy policy. This is the geopolitical aspect of the energy, the sustainable growth aspect, as well as the economic aspect, having competitively priced energy. This is true for all the countries. But in case of Central Europe, of course, increase – we have, as a high priority – and it has been a high priority for energy policy, decreasing (oil ?) energy dependence.
In terms of environmental protection, as I mentioned, of course, we have all over obligations to meet our renewable targets. And when it comes to economic aspects, we need to take into consideration that we – that the price of energy – we can say that it’s larger in Central Europe than in many of our Western European countries. It’s largely due to the fragmentation of the markets and the monopoly pricing.
Additionally, when it comes to the economic aspect of what energy we use, we have to consider the fact also that a lot of traditional energy infrastructure – pipeline, power generation and nuclear facilities – are pretty old, and there need investments.
So when we are making our choices for the future when it comes to energy policy, we need to take into consideration that pretty substantial investments are needed also in the traditional infrastructure in Central Europe.
And I would add one more layer to these basic considerations, and that’s – I call it “societal” aspect, or we may call it otherwise. What I mean on it is that in Central-Eastern Europe, many countries, the price of gas is subsidized because of considerations of the economic situation of the population, which of course puts a big strain on the policymakers’ decision. And that, I would say that is also comes almost equally important consideration with the other three when decisions are made.
Let’s see what are the further characteristics of the Central European, and especially natural gas market. We are talking here about pretty fragmented markets, which means that these countries have their markets in their own. There is a lack of interconnectivity between these countries, which creates a lot of vulnerability when it comes to supply security. But it also creates high energy prices, of course, because we are talking about relatively smaller markets. And we don’t have alternative sources and routes. These characteristics are peculiar for this region, and these are also the drivers of our energy policy and considerations.
Let’s see what kind of answers we are given in the Central-Eastern European region for all these issues. What we have done – and Hungary is now also in the seat of the EU presidency – and what we have done recently is after the 2009 January crisis when it was clear that the vulnerability of the region is higher than that of Western Europe, and this is exactly due to those factors which were on the previous chart.
The European Union decided to regroup some money for the so-called European Economic Recovery Plan. And in that money, there are a couple of infrastructure developments which were financed, or at least the seed money were given, for a couple of infrastructure developments in the Central-Eastern European region in order to make those interconnectivity between the countries and thus create the prerequisites of the internal energy market.
And this is what we have been following during the presidency in these footsteps. And during the February energy summit, we accepted council conclusions which mark as a deadline for the creation of the internal energy market 2014.
There is also unanimous consensus on leaving no country behind after 2015, which means that every single country should have two supplies, at least two supplies, of energy – oil, gas and electricity – after 2015. This mostly targets, of course, these “energy islands” – I’ll usually refer to this expression for the Baltic countries.
And we also launched at the – before the energy summit in early February the so-called North-South energy corridor. And I would say that this is one of the biggest achievements when it comes to energy policy of the Hungarian EU presidency. This North-South energy corridor has, of course, some precedent – lot of precedents.
During the Hungarian V4 presidency, it was a Polish initiative to set up a high-level group which is working on energy issues. And we did that. Then, in 2010 under the previous government in February, there was a big V4-plus summit, which included the Visegrád countries, but that also reached out to countries of Romania, Bulgaria and also countries of Southwestern Europe. And that was a remarkable step towards considering the region in a wider scope from the Baltic to the Adriatic and the Black Sea.
This marked the next step, which was done by the Slovak Visegrád presidency when the Visegrád countries signed a letter together addressed to Commissioner Oettinger last fall, and pretty much enumerating a list of projects which would be absolutely needed to have an internal energy market in Central-Eastern Europe.
And then, of course, the ministers met in January. But the big step was that this North-South energy corridor project was launched, and it was launched at the highest level possible. It was launched by commission president Barroso inviting the Visegrád Four countries and Romania and Bulgaria, as well as Croatia as an observer.
And what does this North-South energy corridor has as a goal? This map is illustrative, so please don’t think that this is the map of the North-South energy corridor. The project of making an action plan was launched in February, and the high-level group needs to submit an action plan to the commission by the end of this year, by October.
And what should this action plan contain? It should contain all of the project proposals – infrastructure as well as regulatory advice in gas, electricity and oil, which are absolutely necessary for this region from the Baltic Sea to the Adriatic and the Black Sea to have an internal energy market.
So the work is in progress of all the working groups, and we are expecting that they will submit a document by the end of this year.
On this map, we just draw a couple of lines. And these red lines are showing couple of infrastructure, which is still missing or has already been done. Let me tell you that when it comes to Hungary, we already inaugurated in October an interconnector between Romania and Hungary with a capacity of almost 2 billion cubic meters and the potential to be enlarged to 4 billion. As a comparison, Hungary’s total consumption is 12 billion.
We inaugurated the Croatia-Hungary interconnector; that’s 6 billion cubic meters. And the total consumption of Croatia is 2 billion; Hungary’s is 12 (billion). So it’s pretty significant; it’s of course not meant for – necessarily for bilateral – it’s meant as a regional project. And we are about to make investment decision about the Slovak-Hungarian interconnector, which would have also – and over 4 billion cubic meters of capacity.
But other developments are going on in the region also between Romania and Bulgaria. There was – a pipeline near, near river (also ?) between Austria and Slovakia, and also between Czech Republic and Slovakia. And there is a smaller pipeline capacity under construction between Poland and Slovakia – oh, and the Czech Republic.
And the goal is that at the end of this pipeline infrastructure, there will be energy terminals in Świnoujście, Poland, in Croatia, and also in Romania, securing alternative supply of natural gas to the region if we concentrate on gas. But I have to tell you again that this project includes also oil and electricity.
And let me stop here for a little bit and touch upon what you also mentioned – that the situation or the variables which are in the energy field when we are making our decisions are numerous, and they just became more numerous after Fukushima and after the events in North Africa.
So we have to cope, of course, with all the impact of all this – what it will mean for the future of nuclear in the region, what it may mean for the future of the nuclear in Germany because the two are not necessarily the same. And that may directly affect the nuclear investment boost or potential in the Central European region.
We also saw, of course, that both Fukushima and the North African events affected LNG gas price immediately. But because we have bilateral treaties with Russia, long-term treaties – and the setup of it is that it is indexed to oil price with a nine-month differentiation – it means that of course the oil price rise will have an effect on the gas price in the middle of the winter all over Central-Eastern Europe.
And of course, you need to ask the question, how all this – the fate of nuclear, how it will unfold and how much – how it will impact the future of gas, whether there will be a gas renaissance, we are starting to talk about or not, and how will it have an impact on all the infrastructural developments in the region.
Because the biggest question we are missing here now – who is going to pay the bill? Because it’s nice that we will draw all the project proposals which are needed, but the commission estimates that the market won’t necessary (ph) work in many of the cases.
And the council conclusion of February leaves room for European funding for some projects. And the council asked the commission to submit a proposal this June about the different funding structure for all those infrastructure projects which are absolutely necessary for the region, but the market won’t necessarily work.
But we – I think it’s still too early to say what will be the impact of North Africa as well as Fukushima, but we may even see, which will be very good, a boost by the investors for infrastructure investments, pipelines and LNG terminals, which would then eventually result in a gas-to-gas competition in Central Europe.
We cannot avoid not talking about the shale gas. And I would like just here focus on two – on the two sides very briefly. One is the impact of the American shale gas development on the LNG market, and the impact on Europe. Of course, we expect that it may create – LNG freeing up on the market or increased amount of energy, LNG arriving to the market. That could also be a good impetus for LNG development in all over the region.
But the other side of the coin, whether the shale gas revolution of the U.S. can be repeated in Europe or not – and you can see on the chart that the estimate for the Central European shale gas potential is about 550 (trillion), (5)60 trillion cubic feet. And the basins in Central Europe are mostly in Poland, in the Austrian, the Viennese basin, in Ukraine, Romania, and also in Hungary.
Of course, the furthest (interest ?) of development, the drilling is going on now in Poland. And we hear that according to the most optimistic estimates, we hear that we will know with certainty whether shale gas is commercially viable in five to seven years. But there are more pessimistic estimates who are saying that it’s rather longer, in 10 years or more.
The question is whether the timing, whether the decisions about all the energy policies and directions the Central European countries have to make will have to be done most likely before. So most likely, all the nuclear investments, all the North-South infrastructure investments – of course, all the Nabucco investments and so on are expecting these decisions before.
But if the shale gas would come through, that would certainly enhance very much the North-South interconnectivity, and the internal energy market aspect of the Central European region.
Let me also focus a tiny bit on the external relations. As you know, we are very much interested – our priority project is Nabucco – to diversify Hungary’s natural gas supply source and route. And in terms of the external relations, we are expecting that the commission will come out with a communication later this year about the future of the external dimension. And we are expecting that our Polish friends, during the second half of the year during their EU presidency, will focus on the external dimension of the European Union’s energy policy.
In the life of Nabucco, the big next step is, we will sign the project support agreements in early June in Turkey with the formation of the Nabucco committee. The next big step is afterwards of the Shah Deniz decision, which is expected later this year. And then, the open season can start, and Nabucco is expected – the Nabucco international coalition – to make an investment decision next year. The construction is expected to start in 2013, with being operational in 2017 in line with the supply source of the Shah Deniz II being on the market.
What is the answer of the Central European countries for all the uncertainty in the energy market? I would agree with the previous speaker that the answer is a diverse answer – it’s enhancing our energy efficiency, creating an integral energy market interconnecting all the countries, diversifying our energy mix, and when it comes to natural gas, of course, diversifying our source and route of energy. So we need to have a diversified energy mix.
Of course, the variables are numerous, and even more numerous than they were a year ago. But the decisions about the infrastructural developments and everything need to be made now.
Thank you. Thank you for your attention. (Applause.)
BOYKO NITZOV: Hello, I’m Boyko Nitzov. I am the head of programs in the Dinu Patriciu Eurasia Center, and so I’m supposed to moderate the discussion. I have a long list of questions of my own. For example – how do you plan to deal with the uncertainty in a multilateral environments, or within the European Union, or in Central Europe? What kind of relationship do you foresee between – well, from, the third liberalization package and multilateral initiatives? Will there be any impact, and so on and so on? The list is long.
But since time is also getting ahead, I will open the floor to discussions. Please. If you don’t mind naming yourself and telling us your affiliation so that we can reflect properly this in the record – (inaudible).
Q: Eliot Sorel, professor of global health at George Washington University. Ambassador Mernier, I appreciate very much your systemic references to population growth, which is a keen interest of mine and it – (audio break) – connection. Appreciate Ms. Orbán’s excellent presentation on the generation of the markets that are necessary to be integrated.
The question I have for both of you – has anyone done an analysis of the return on the investment? Because the investments that are going to be needed are huge. Is there an analysis of the return on such investments? (Audio break) – very much.
MR. NITZOV: Who would like to start so – Ambassador?
MR. MERNIER: But first, I would have to say that investment are mainly coming from private business. So private business, they calculate their return on investment on a commercial basis. And for instance, in Africa, where there is a need for electricity, huge need for electricity, but of course, the return on investment is zero. And so there is no investment. Who will invest in a country – in a continent like that?
And in addition, I would say that, you know, return on investment needs security of demand upstream. And security of demand and security of supply are closely link. And give you an example: In Russia, Russia has always tried in big investment, like North Stream, which is infrastructure, but also exploration in the Baltic Sea – has always tried to attract Western companies in it.
And for instance, the North Stream is, of course, a Russian project. They have 51 percent of the share. But the rest is Dutch and German. Why is that? Is that – they want to have the risk shared by others; that’s obvious. And that is not possible in many poor countries.
So I would say that return on investment is almost guaranteed in certain markets, and almost zero in other markets. And that’s a pity; that’s a pity.
MR. NITZOV: Would you like some – make some comments, please.
MS. ORBÁN: Thank you. I agree with the previous speaker that, of course, it’s in – it always starts – these projects – when companies are making decisions – and also for the interconnector pipelines or for the LNGs, you know, they have to make the decision. They call an open season, or they make the investment decision; they calculate the return on the investment. And if it seems profitable, then they do it and go ahead. That’s the easier side of the story.
But what happens when, for example, there is a plan like building an LNG terminal in Croatia, but the consortium decides that along the current circumstances there is economic recession – there is – we are talking about last year summer – there is economic recession, plus there is a lower demand for gas, and they postpone the project? What happens then, you know?
And we have – we are talking about governments which are pretty short on cash. Well, what happens when you want to be an interconnector between two countries? And of course – (unintelligible) – is absolutely essential, or the market doesn’t work; the open season is not successful. Then you either – when it comes together, you either build it into the tariff or you find another different funding source.
But then further questions arise in the region, that there is, for example, you need to interconnect the two grids. It’s hundred kilometers, and it happens that on one side, it’s five-kilometer investment needed; the other is 95. How do you share the cost? We are talking about, you know, two governments. Is it benefit-sharing? Do we calculate whose energy security, supply security benefits more? Who will have a better negotiating position? You know how it will affect the price of energy in that particular country? Or we do territorial-wise-base, or just 50-50? So these are the questions.
But of course, we are analyzing very much the return when it comes also public investment, as well as – as well as private.
MR. MERNIER: I would like to – just following what you just said, it’s not always 100-percent business. Governments have a say in this respect. And after the crisis with Ukraine transit, you know, we have seen within the EU a really – real political will to change the market, first to have reversible flux – otherwise gas is flowing in one direction, so that means that you have to work on the computers. We have more storage; we have done a lot on the – at the initiative of the commission.
And that – but finally, the money must come from business and from governments. But this has nothing to do with a big project like North Stream, for instance.
MR. NITZOV: Maybe one of the most interesting aspects one can point out in relation to this question – and I hope that you can answer a little bit for the comment – is, that quite a lot of the existing projects – and that’s the long-distance pipelines, and that’s something which usually costs billions and billions – have extremely long periods of any return on the investment, if any.
And for example, as far as I know, the first pipelines which were built from the former Soviet Union to Central Europe, all they were able to – the payback period was probably about 20 years. And it is the same kind of periods that you’re looking at certain nuclear plants – projects – certain projects which have not been successful at all, that rumors, at least – which, as far as I know, are more on the truthful side than just being rumors – that some of the underwater pipelines, major pipelines from the former Soviet Union, will not have any reasonable return anytime soon.
And they’re not seen as parts of an investment by itself; they’re seen as part of an investment which assures access to markets which avoids certain other difficulties. So the cost-benefit is different from the rate of return quite often.
Q: My name is Jim Bartis, and I’m with the RAND Corporation. My question, you know, regards the Nabucco pipeline – (inaudible) – Turkey. To what extent do you believe that Turkey is prepared to provide a reasonable investment requirement for that pipeline? I’m concerned that Turkey has idealistic expectations to build – (inaudible).
MR. NITZOV: Please. Any more questions?
MR. : (Chuckles.)
MR. NITZOV: I suspect there will be an answer, not question – (laughter).
MR. WILSON: I know a little bit about Turkey and Nabucco. Like all of the transit countries, or all of the countries through which any pipeline goes, Turkey is determined to make money. And that’s true, I think, of all of the Nabucco partners – they’re in it to make money. They’re in it to get gas, but they’re in it to make money. So that’s one – I think that’s one factor.
A second factor is, Turkey needs gas. And it is determined to use the leverage that its geographic location provides to get gas. To put it – to put it in a different way, it’s politically unsustainable for Turkish leaders to have a gas pipeline that operates like a straw across its territory when there are energy shortages that affect its own economy. I think that’s almost obvious.
Third, though, I think that the Turks – the Turkish leadership understands that Turkey’s role as a transit country can be a powerful lever, lever that has to be carefully used, but a powerful lever over time to help spur along its European Union accession bid. And that affects the calculations about the rent that Turkey will seek as part of this pipeline. It affects some of the specific negotiations that concern Shah Deniz and the price of gas from Shah Deniz phase one and the price of gas phase two, and what share is going to be there.
It ends up being an extraordinarily complicated rug that’s being bargained over. And you know, it’s five- or six- or seven-dimensional chess, if you can imagine, because what Turkey is doing is fundamentally the same thing that every other country that’s involved in this project is doing, in my personal opinion.
MR. NITZOV: I’m left with the option to ask our distinguished speakers whether they agree or not – (laughter). Would you like to –
MS. ORBÁN: Yeah, absolutely.
MR. NITZOV: Excellent.
MS. ORBÁN: Absolutely. And I think that the big – we may see big developments between Azerbaijan and Turkey in terms of transit agreement, which could be a very important step on the agreement between the two countries on how Turkey is transiting Azeri gas.
MR. MARNIER: I would say that I agree. But this agreement must be qualified, in a way. I think one of the plus point for me as European – but I’m from the energy charter point of view, and completely neutral – one of the plus point of Nabucco is the cost; the cost is reasonable. It’s not only – not only diversification of route, it’s also diversification of supply. It’s not Russian gas; it’s gas from the Caspian, and maybe tomorrow from Iran, from Iraq and so on. I have my doubts because you have to remember that historically, when we switched from –
in the ’70s from the Middle East to Russia, it was because the Middle East was considered unstable.
I would not say that the situation has changed much. So that’s one point.
The negative aspect of – fine, the question mark for Nabucco is still this remaining uncertainty about where is the gas. If you have 30 – the capacity is almost 30, 35 BCM – you have a promise on the condition that Shah Deniz is developed for 10 BCM. But Nasirov, who is – the guy said, we are going to give you 10 BCM under this condition, but we are not going to pay to have the – or decent return of investment. You must find gas elsewhere so that everybody pays for the transit, for the pipeline.
So there are still question marks. And compared to South Stream, South Stream’s diversification of route, avoiding transit – which is very important – but it’s Russian gas, again. And the cost is huge. And I’m not sure that it can afford it.
You know what for me is uncomfortable, is that there’s too much politics in Nabucco, and this is only politics in South Stream.
MR. NITZOV: Thank you. Any questions, comments? Please.
Q: Hi. I’m Colonel “Mac” McKernan. I’m an Army fellow with ExxonMobil. One of the things that I’ve looked at over the past year is really some of the ways that we’re trying to make some of the greener energy sources more attractive.
And I’d like to know two of your thoughts on whether or not you feel things like carbon taxes or a flat tax on some of the coal, for example, is going to, in fact, spur new developments in other energy sources, or do you feel that that will, you know, further impact the ongoing situation that we have economically throughout the world right now?
MR. NITZOV: Would you like to –
MR. MERNIER: Well, you know, we haven’t spoken much about renewables and clean energy, and so on and so on. I would say that I believe in carbon trading. But a price to avoid carbon must be high. And for me – and I will shock people – the prices of energy is too low.
I think renewables – when we make decisions about renewables – let’s say, five, six years ago, the situation was completely different. If you have oil barrel at, let’s say, 100 (dollars), 110, you have to subsidize renewables. Otherwise they are not profitable. So that’s a major political decision; that’s an investment in the working because this electricity from renewables is very difficult also to manage. You have to modernize the grid because the grid cannot accept this kind of electricity just like that. So there is a lot to be done.
I believe in carbon trading. I’m not sure that carbon capture and storage is feasible for old infrastructure. I’m sure it will be done for new infrastructure. But still, as I said, the question of transportation and storage is still there. And this has a cost.
So I would say that the price of energy in the U.S., in Russia, in many countries must go up. And the price of oil, because of its impact on other sources, must go up as well. And I – but it has an impact on economic growth, so these are very difficult arbitrage – arbitration to be made by governments. Not easy question. It varies from one country to another.
MR. NITZOV: Ambassador Orbán?
MS. ORBÁN: That will be my message also, that it varies from country to country. And in Central Europe, everybody is trying to figure out what’s the best solution on how to deal with renewable and how to reach the targets.
In the case of Hungary, we are expecting that we will have our energy strategy accepted in June, which will also have a clear roadmap of where we would like to go when it comes to energy mix, and what kind of renewable we will use.
When it comes to the endowment of renewable in the region, it varies from country to country, and it is also reflected in the target numbers, of course. And Hungary is not a coincidence; it’s the lowest because it’s acknowledged that we have the least – we are the least-endowed when it comes to renewable, and Romania is the best-endowed.
In all of the countries, we have biomass as a potential. But in Hungary, for example, we have very little wind or solar, or no hydro – or very little. But we have some geothermal.
And of course, you have to incorporate – when you are talking about renewable, you have to incorporate also to take – what’s the alternative? Of course, that’s gas, nuclear or anything else. You have to see – and this is a very important factor – that the more renewable, the bigger the impact on the grid, the electricity grid, as well as you will need also equalizing power stations, the pumping power stations.
And if you look at Hungary, that’s almost certain that you will do it outside. So we need to work strongly with another country. And we are here, again, arriving at the regional market aspect.
And when you are talking about Central Europe, you also need to incorporate (CNC fee ?) will have an internal energy market; what kind of decisions will be made in the consumer markets like Germany, whether nuclear will stay or whether there will be substantial renewable generation, also that.
And I think this all will impact into one. And when you are making a decision on renewable, you have to incorporate all the three aspects which I mentioned: It’s as – that it’s indigenous, so it’s local; that’s why it’s good from general political perspective, of course. Economically, it seems to be not the best solution, but from the environmental point of view, again, it’s a good solution.
But you need to ask also the question, which is – comes one more layer: that’s employment, how much employment it generates, how much technology, innovation it generates, how much spillover effect it has for other technologies.
So I believe that I think that we need to – so you cannot consider, you know, just one aspect, but you need to ask comprehensively. And I have to admit that from my job description, I am not a specialist on the carbon tax or the flat tax – (inaudible, chuckles) – I try to point out what are the things which we need to take into consideration.
MR. NITZOV: And in this question, it seems to me that there’s an elephant hidden in the question. And that is, is it feasible to achieve the green energy targets without great re-use of natural gas?
That’s something which – basically, there are two opinions – maybe, one, that natural gas is a transitionary (ph) fuel allowing a certain period of time where more filthy energy is being displaced by natural gas, and then everything is taken over by renewable, clean, green energy; or, maybe, it is the 200 year of fuel. It is the fuel of the 22nd century, maybe – some say – because there’s so much of it. And we saw in one of the slides, the quantities are just mind-boggling.
Please, Ambassador Mernier.
MR. MERNIER: No, I would say that I completely agree with you – gas is the obvious choice for the moment. It’s abundant; it’s affordable; it’s also politically accepted everywhere. You have never seen demonstration against gas like you have seen against nuclear or –
MR. : (Off mic.)
MR. MERNIER: No, but even, you know, onshore windmills are not real easily accepted because it destroyed the landscape. It’s noisy; well, it’s no good. People do not accept it. And it’s also relatively cheap as an investment.
And to give you a few figures, upfront investment: If gas is one, coal is three. Nuclear is five. Onshore investment is 10, and offshore investment is 15. So for a company or government, gas, of course – yes. Sure. Certainly for a country – not for a country like France or mine where we rely on nuclear anyway, but for – not even for Norway, where they have all hydroelectricity. But they are blessed by the gods; we are not.
MR. NITZOV: Well, I see at least four more hands up in the air. We’ll start there and then go from front to back. On my left.
Q: Thank you. Kevin Massy with The Brookings Institution. I had a question, but during the course of your most recent comments, I have another one. So I wonder if I might ask that first.
The EU 2050 roadmap has almost total de-carbonation of the power sector as a target to meet the 80-percent reductions in CO2 emissions by 2050. If natural gas is the short-term answer, doesn’t it – isn’t there a risk of investment that would have gone into renewable energy, which requires learning curves and scale to be deployed – commercially viable rates? Isn’t there a danger that investment in natural gas will be diverted away from that renewable investment, and therefore the natural gas bridge will just be a bridge to more natural gas, and natural gas won’t serve as the – as a low-enough carbon source of generation to meet the EU’s targets for total de-carbonation of the power sector?
My second question is more specific. It’s to Ambassador Orbán – what is the status of, and the prospects for, shale gas development in Hungary? The Mako Trough has got much attention. But I understand it’s very deep. And what are you doing with the U.S. State Department’s Global Shale Gas Initiative to develop it?
MR. NITZOV: Would you like to start, or any comments? Ambassador Orbán?
MS. ORBÁN: Yeah. I would just point out what you said for the very first, which wasn’t for me, but – (unintelligible) – knows that 2050 is 40 years from now. So if we look back how the energy mix and the investment looked like 40 years ago, I think that a lot of things can happen.
But regarding the shale gas, specific Mako, yeah, that’s right, that was a very prospective field of shale gas development in southeastern Hungary. And there were three companies which were doing the exploration: It was the Hungarian national company MOL; it was the U.S. ExxonMobil; and there was another company called Falcon, also registered in Denver. And these three companies did the drilling, and they did couple of drillings. And afterwards, the Exxon and MOL partnership decided to – and for the moment to stop the explorations because the results were not as promising as expected. But Falcon continues to be in the field, and they continue to do the drillings.
According to experts, what we hear is that the question is not whether, but when. So the question is not whether we will ever explore, but the question is when it will be commercially viable to explore. The terrain is extremely difficult; we understand that it’s one of the most difficult terrains as far as we know currently in the world. It’s 6,000 meters deep, and – I’m sorry, most of – as are Europeans, I guess I can’t translate it now –
MR. : 30 –
MS. ORBÁN: Convert it. It’s very deep; thank you. (Chuckles, laughter.) And I’m not a geologist, but I understand that additionally, it’s in a moving sand, geologically, which further complicates the drillings.
We have known about this field, of the abundance of gas there, in the 1950s. So we have always known that. But again, it’s – cutting-edge technology is needed. The question: when the technology will be there.
MR. MERNIER: On gas, I would say that view from a government point of view – I think they will go for gas. They will go for gas for the reasons I already explained, but also it’s relatively green. It’s twice less CO2 than coal. Most of the coal that they use is bad coal, lignite, which is really the dirtiest one. OK.
And the government, for renewables – windmills, for instance – they have to subsidize that. They don’t like it. If there is gas, well – that’s private business. And gas, again, is abundant. So I would bet that gas is really the best answer for the moment, also because that’s an investment where you have quickly a return on investment.
If you go on hydro or nuclear, you must count 10 years in an average. You see the major Tajik development of a dam; it’s already 30 years. Of course, it’s gigantic. It’s absolutely frightening when you see the work. But still, a little dam – it’s 10 years.
And to say a few words – (chuckles) – about the gas, gas is the most dangerous fuel we have. But of course, it’s two deaths there, 10 there. And it’s accepted by the society because it’s like car accidents – but if you compare nuclear, coal and so on, the most dangerous is gas. That’s for sure.
MR. NITZOV: We have still a few hands up in the air, and few minutes remaining. So please formulate your questions briefly, concisely –
Q: I will promise –
MR. NITZOV: – succinctly.
Q: I’m Dan Milstein from the U.S. Department of Energy. My question is about the dog that hasn’t really barked – energy efficiency, particularly in the region. It seems like the best return on investment would be in energy efficiency. Why have we not seen more public investment in energy efficiency, particularly in countries where gas and other energy is subsidized?
MR. NITZOV: Ambassador –
MS. ORBÁN: I can very briefly answer this, that we are looking at this very closely. And the two aspects that we identified, where we could save the most of energy, is transportation, and the other is the insulation of the buildings – buildings, public buildings, as well as private buildings.
The biggest chunk, what needs to be done here, is the block buildings, which were inherited, you know, and built during the Soviet times – three, four prototypes all over the region. And they are absolutely very energy-inefficient, and not in also in their lack of insulation, but lack of metering. So pretty much, individuals cannot meter how much they consume, and as a result, they cannot also regulate how much they consume. So they don’t have control, of course, many times about the energy they use.
So we are looking at it closely also in individual countries, members at national level as well as in different regional foras. And this is absolutely considered as one sector where of course we can decrease our dependence, outside dependence, but it can create a lot of jobs as well. And this is part also of Hungary’s new economic plan as well, to use energy efficiency also as job-creating initiative.
MR. NITZOV: Ambassador Mernier?
MR. MERNIER: A brief comment on energy efficiency, let’s say in Eastern Europe, ex-communist country: If you look at Russia, Russia is still dominated by district heating. And district heating, that means hot water produced somewhere and circulated among the buildings. When it was conceived and built, it was relatively efficient – it was considered the best solution.
But of course, in Russia, they have not invested since Brezhnev time. So that means 30, 35. And you have, for instance – they have jacket around the tubes. But there is no jacket anymore; so you just eat more water, and that’s the way it is. But it’s very difficult; it’s very challenging because that means that you have invest in innovation of almost everything: the buildings, the roads, the industrial infrastructure and so on.
And that’s why when we negotiated in 2004 accession of Russia to WTO, that why the double pricing was accepted, which is really radical for the WTO, that you have gas price for internal use in Russia and for – and gas price for external use, and for industry, which are exporting fertilizers, for instance.
So it is energy efficiency – it’s working when you live in Moscow. You see all those Russians with new doors and new – but they do themself because the doors were poor quality; now they have the choice and so on. But still, you know, when you go to Tolyatti where they make cars, you have gigantic factories, and you have to innovate that. That’s a lot of money – a lot of money. Two-thousand-two kilometers of car-building row, if I may say so. So it’s not – it’s really – it will take 20 years. And they have done already a few things. But – (makes expressive noise).
MR. NITZOV: I think this sums up very nicely how uncontroversial energy efficiency is. I have yet to live to see any person who is against energy efficiency. Anyone here against energy efficiency? Well, I don’t think so. Everybody is for it, and it’s still very difficult to achieve it. So there is actually, to my knowledge, not a single definition of energy efficiency. So you have to define what you mean by energy efficiency, and then look at the details.
Please, the next question on the left here. We have two more, I believe, and then we will have to really close this session.
Please be brief.
Q: (Inaudible, off mic) – integrated market in 2014 will create the premises for departing from oil index – priced on gas? Thank you.
MR. NITZOV: Could you repeat the question? Because it was not very well-heard here.
Q: The premises to create an EU-integrated market in 2014 would create also the premises to slowly depart from oil index price to gas?
MR. NITZOV: It’s about a different mode of pricing to – of gas, whatever the prospects of –
MS. ORBÁN: (Off-side) – the commitment to have – (inaudible) – market in 2014, whether it also comes with a commitment not to have oil-indexed as possible.
MR. MERNIER: You know, the pricing of energy is a very complex question. And most of the supply of gas coming to EU is on long-term contracts. But the contracts, they don’t fix the price; they fix the volume, the quality, and – (unintelligible) – and so on. But the price is made dependent on other commodities, mainly oil. But it happened in the past that it was coffee or whatever.
So this connection between the prices is for the moment under pressure. Why is that? Because of: Shale gas closed the U.S. markets; U.S. – then LNG, which was supposed to go to U.S. market, tried to find another market. And so there is a pressure. And there is a beginning of a spot market for gas. It’s not insignificant, but it’s very anecdotical (ph) for the moment.
It’s – trading of gas is 6 percent worldwide of LNG, compared to bad gas. But it will grow to, maybe, 12 percent in 10 years’ time. So my assumption is that this connection between oil price and gas price is under every pressure. And we have seen last year that this part, which was considered – it was agreed as negotiable, this part of the supply – has been negotiated.
But you know, it’s always the same thing. If you want to have security of supply, you must invest upstream. No investment, no gas in 20 years. And so you have to satisfy your supplier at some point. You have to share the risk of investment, and so on. But I think this connection of gas will at least be modified.
MR. NITZOV: All right, last question. And we will close the session.
Please, very briefly.
Q: I’m Aton Weber (ph); I’m with the Kurdistan Regional Government. Has there been any discussion in this ongoing search for funding for these various projects – has there been any discussion of attaching – and I know this has sort of been a problem – but attaching politics to it, and saying – you know, almost making them into categorical grants – saying, perhaps, if Iraq is going to be benefitting this much from the construction of this pipeline, then the United States will have the incentive to invest in it if they secure free and fair elections, or something of the sort, or improved infrastructure – this percent of the revenues used for that?
MR. NITZOV: Any comments?
MR. MERNIER: I don’t know.
MS. ORBÁN: I don’t know. (Laughter.) It’s a good note to end. (Chuckles.)
MR. NITZOV: All right. Well, thank you so much. It was nice to meet you.
MS. ORBÁN: (Inaudible) – ambassador –
MR. WILSON: Please stay for one second – the politics of gas are complicated enough without introducing politics – (laughter).
I want to thank all of you for being part of this discussion, and I want to thank Boyko Nitzov for moderating. A special thanks to the people who did the actual work to put this together: Sarah Frese, Katherine Zylinski, Rafael Santanov (ph). Thanks to John Lyman, who, as I noted earlier, can’t be – could not be with us today – Mihaela Carstei of his staff – and to Jason Crusson, the technical guru who managed all the microphones.
A special word of thanks to our two guests, Ambassador Orbán and Ambassador – and Ambassador Mernier. It was a very interesting discussion, and we’re very grateful to you. Please join me in thanking our guests.