European Energy Security after Libya: Beijing Calling

By Matthew Hulbert and Christian Brütsch - 19 May 2011

The Libyan fracas has been a major wakeup call for those hoping that a High Representative for Foreign and Security Policy, an External Action Service, and ‘rapid reaction’ Battle Groups would transform Europe into a serious regional power. The point is barely worth making. What’s less obvious is that Tripoli’s toils will change the upstream energy landscape around Europe. Not because the EU has lost around 1mb/d of sweet oil production and 3% of gas imports – but because the West, and more notably NATO, has shown how weak its energy hand really is. Europe’s hard power projections are too soft for upstream producers, energy competitors and even allies, to take seriously. Instead of trying to attract producer states by offering a security guarantee the EU can’t provide, Brussels should work from the demand side of the pipeline: most notably with China. That’s how a strategic energy policy can be forged, through an ‘ASEUN’ Asian-EU consumer partnership, not relying on the broken security architectures of old.

For all NATO’s talk of locking down energy infrastructure, preventing terrorists from blowing up pipelines, or pushing for enhanced cyber security of energy assets, it never really understood the real energy role it had to play for the United States’ allies: namely, being seen as a stable source of security for producer states straddling the European neighbourhood. Credible security blocs have always provided the backdrop to Brussels’ attempts to make commercial games play out for the common market. ‘Post-Libya’ it’s not so much a case of the cracks starting to show, but the entire edifice collapsing before our eyes. The Alliance clearly can’t backstop the EU’s failure to provide the security blanket it would need to project European influence across adjacent hydrocarbon states. This has long been obvious for Central Asia—Russia’s backyard—and now goes for the MENA region, effectively blocking two of the four energy ‘corridors’ Brussels were hoping to open up.

The Commission’s original idea was evidently sound: diversify supplies in order to reduce structural dependence on Russian volume and price. But the execution has been verging on the reckless. Political posturing, military indecision, and the last minute Franco-British ‘humanitarian’ gamble will exacerbate the EU’s dependence on Russian hydrocarbons. Central Asia and Middle Eastern supplies will almost certainly go elsewhere for ‘security of demand’. From Brussels to Berlin, Paris to Prague, Europe no longer has a choice but to go ‘long’, very ‘long’ on Moscow to secure its vital oil and gas supplies.

The crux of Europe’s problem starts in America of course. The US is no longer willing to stand guarantor for European energy interests. As Secretary of Defence Robert Gates put it, Libya is ‘not a vital interest to the US’ and Washington has treated it accordingly. Amid mounting fiscal woes, D.C. is once again flirting with ‘energy independence’, and with good reason. Domestic shale gas, Canadian tar, and promising offshore prospects have boosted America’s supplies. The furthest Washington is likely to go looking for oil these days is directly over the pond in West Africa. ‘Geopolitical dredging’ will not be required. But what’s good for America, is bad for Europe.

Unless Europe decides to bulk up and go it alone, it’s high time for a strategic rethink of its ‘common’ energy policy. But strategic must mean strategic. Instead of trying to get producer states over a security ‘barrel’ it can’t provide, Brussels must 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 stop pretending that Europe can muster the military hardware and resolve to secure wells, protect pipelines, or shore up wobbly producer states, and start forging a consumer consensus to safeguard demand side interests. It’s goodbye to NATO, and hello to an Asia-EU pact—at least on the energy front.

Security out, politics in

Farfetched? Perhaps, but not unthinkable. Brussels and Beijing have maintained a ‘constructive’ energy dialogue since 1994. Much like the EU’s ‘common energy policy’, the bi-annual sectoral 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 arbitrage and interests. True, China is a competitor and the world’s largest emitter of greenhouse gases, but just like the EU, first and foremost it’s an energy consumer. Given the US is taking an energy back seat, Europe and China (as well as India and Japan) should look to forge something of an OPIC (Organisation of Petroleum Importing Countries) that makes sure that ‘arbitrage’—political and economic—rests on the buy side, whatever its creed. For those thinking the IEA already performs such a role, think again. India and China aren’t even members, nor are they likely to be any time soon. Unless a bargain can be struck between the core consumers in the East and those still left playing ‘interdependent’ energy games in the West (i.e. the EU) consumers will stand little chance of success: irrespective of whether they are drawn from OECD or emerging market ranks.

For Europe, the choice is thus between make-belief energy ‘security’ and credible energy politics. Like the EU, China has taken a free energy ride at US expense for years. Unlike the EU, China has demonstrated it can play and win in Central Asian, MENA, and arguably, Russia. Why? Because instead of pitching governance reforms or promising ‘everything but institutions’ China played on its growing clout to break the Russian mould in Central Asia opening up oil and gas pipelines from Kazakhstan, Uzbekistan and Turkmenistan. The promise of unfretted 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.

Conversely, Europe hasn’t just lost its security credentials. It never got an upstream stake in Central Asia; it hasn’t cemented its position in North Africa (let alone the Gulf); it hasn’t managed to strike credible transit deals with Turkey, or indeed considered bilateral price collusion implications that Gazprom’s creeping internationalisation strategy could entail. No matter how much the EU would like to teach China about energy, it would be better advised to play smart and get a free hitch from Beijing. Chinese support for European upstream ventures will be crucial to re-establishing a European stake in the energy world. Beijing is Brussels best energy bet, and yes, we are the junior partners. Get over it, and more importantly—get on with it.

China is already ahead on the arbitrage game. Despite all the headlines about Chinese forays in Africa and Latin America, Beijing has been very smart diversifying its options closer to home – both from the Middle East and Central Asia to hedge the political and price risk involved. Contractual relations have been remarkably stable as a result. What China also gets, is that some of these contracts will come in handy once it starts sourcing larger amounts of hydrocarbons from Moscow. East Siberia will ultimately be the mainstay of China’s Eurasian supplies.

So, a straightforward case of Russian supply, Chinese terms then? Not quite; China’s hedging strategy hinges on its ability to prevent Europe from heading in the other direction at the other end of the pipeline. Irrespective of however physical logistics play out or how many concessions China manages to sign up on bilateral books, 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 leverage its market position between East and West to maximise economic (and political) rents. That’s what producer states do.

Relationship management

This underpins why Beijing and Brussels have an engrained energy relationship, with Russia filling in as the awkward Madame. Their ‘affair’ will play out in Central Asia though, 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 collusion between Russia and Central Asian producers. Ensuring China has a seat in the nascent Caspian Development Corporation would obviously be a very good European start in the right buy side direction. 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 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 as a geopolitical safety valve; the resulting elasticity of supply would further narrow the Russian and Central Asian supplies. The new name of the game is thus 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’. Obviously going it alone might look like an attractive for China, but at the end of the day, it will have to secure both ends of the consumer pipelines if its energy policy is to hold up.

And that’s really the whole point here: 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. But this isn’t just a policy option for Europe; it’s a ‘categorical imperative’. US security cover is rapidly shrinking; Chinese commercial clout is 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 West’s energy dilemma. That means trading supposedly ‘guaranteed’ returns of European ‘security’ for the potential gains of Sino politics. A strategic shift that is as bold, as it will prove necessary.

Matthew Hulbert, Senior Fellow, Energy & Political Risk, Center for Security Studies, ETH Zurich, lead columnist, European Energy Review, (Amsterdam)

Dr Christian Brütsch, Senior Lecturer, Institute of Political Science, University
of Zurich