and cooperation will have in collective security. While high- lighting various energy-related clashes between Russia and the West, the author cautions against the exploitation of economic parochialism by the United States and Europe and instead calls for the establish- ment of a more collective and productive European energy sector in the face of Russian resistance. Transatlantic Security Task Force Series Policy Brief Transatlantic Energy Relations: Embracing Collective Security over Parochialism by Matthew J. Bryza German Marshall Fund of the United States-Paris 71 Boulevard Raspail 75006 Paris T: +33 1 47 23 47 18 E: infoparis@gmfus.org October 2014 Te U.S. energy transition could generate tension in the transatlantic community if economic parochi- alism is not held in check. But if the United States and Europe embrace the sense of collective security that forms the foundation of the transatlantic community, they could use energy cooperation to restrain Russian aggression and fnally secure a Europe whole and free. Te technology-driven boom in unconventional oil and gas has boosted U.S. oil production by over 50 percent during the past fve years. In 2014, the United States overtook Russia and Saudi Arabia to become the worlds largest oil (and gas liquids) producer at 11 million barrels per day. 1 Similarly, thanks to the shale revolution, the United States is now the worlds largest natural gas producer, and enjoys natural gas prices roughly half those in Europe and one-third those in Asia. Relatively cheaper natural gas has given energy-intensive industries in the United States a major advantage over their counterparts in Europe, leading U.S. President Barack Obama to declare in his 2014 State of the Union address that U.S. businesses now plan to invest $100 billion in new 1 http://www.bloomberg.com/news/2014-07-04/u-s- seen-as-biggest-oil-producer-after-overtaking-saudi.html factories that use natural gas. 2 Euro- pean leaders can ofen be heard at international conferences lamenting the loss of investment to the United States thanks to cheaper U.S. energy. Such economic parochialism is echoed in the United States, where outdated legislation prohibits export of U.S. hydrocarbons, including liquid natural gas (LNG), except to countries with which the United States has a free trade agreement. Consequently, the United States European allies are unable to import cheap U.S. LNG to reduce their dependence on Russian natural gas. Tough this U.S. legis- lation resulted from bygone price controls and the 1973 oil shock, key U.S. industries have successfully lobbied to keep such export prohibi- tions in place. Russia can be expected to exploit such economic parochialism to slow competition from shale gas and to generate disagreement between the United States and its European allies. NATO Secretary General Anders Fogh Rasmussen has accused Russia of funding European non- governmental organizations (NGOs) to aggravate fears of environmental and tectonic threats from hydraulic 2 http://www.whitehouse.gov/the-press-of- fce/2014/01/28/president-barack-obamas-state-union- address Transatlantic Security Task Force Series Policy Brief 2 fracturing, 3 mirroring Moscows unsuccessful cultivation of environmental NGOs in Georgia and Turkey to try to block the Baku-Tbilisi-Ceyhan oil pipeline during the late 1990s. Moscow is also trying to sow discord within the trans- atlantic community to prevent a frm response to its war against Ukraine, with energy playing an important role. Te timing of President Vladimir Putins rush to conclude an economically unattractive natural gas deal with China (and cave in to Beijings decade-long price demands) on May 21 4 suggests an attempt to frighten Europe into thinking Russia may take its gas elsewhere. Such fears contribute to dissonance on both sides of the Atlantic, with Washington appearing to drag along a reluctant Berlin and Brussels on sanctions toward Russia. Meanwhile, within Ukraine itself, Moscow is complementing its hybrid war of covert invasion, stoked insurrection, and propaganda with a threat to cut of natural gas to Ukraine unless Kyiv either: 1) accepts a doubling of the gas price, which will bank- rupt energy intensive industries and destabilize Ukraines political system; or 2) negotiates a deal that perpetuates Moscows ability to exploit vulnerabilities among Ukraines political elite, who are addicted to commercial relation- ships with Gazprom and shady Russian intermediaries. It is perhaps this second threat that is the most dangerous for Ukraine and its transatlantic partners. During the past two decades, Ukraines oligarchs (including top politicians) have generally amassed their fortunes by buying Gazprom gas cheaply (via privileged connections) and selling it in the EU for double or even triple the price. Tis was possible because Ukraine never installed gas meters on its border with Russia, making it impossible to determine how much gas enters Ukraine. Consequently, Ukrainian and Russian schemers have been able to pad gas deliveries to EU customers and sell undetected additional volumes through shady intermediaries for billions of dollars. Te most famous such deal resolved Russias January 2006 gas cutof to Ukraine. It was brokered by Russian orga- nized criminal Semyon Mogileyevich 5 on behalf of a shady Swiss company called RosUkrEnergo, which was jointly controlled by Gazprom and one of Ukraines most powerful 3 http://www.theguardian.com/environment/2014/jun/19/russia-secretly-working- with-environmentalists-to-oppose-fracking 4 See Ilya Zaslavskiys analysis for Chatham House of how politics trumps the economics of the Russia-China gas deal. http://www.chathamhouse.org/expert/ comment/14633#sthash.RCsl3hfB.dpuf 5 At the time, Mogileyevich was on the FBIs Wanted List; in 2009, he was elevated to the FBIs Top Ten Most Wanted List. oligarchs, Dmitriy Firtash. Under U.S. federal indictment for bribery, Firtash has been a key donor to virtually every top Ukrainian politician since 1991 (perhaps with the exception of current President Petro Poroshenko). Te RosUkrEnergo deal thus underscores the nexus of natural gas, Russian organized crime, and Ukrainian politics, which has generated legal and political vulnerabilities Moscow continues to exploit. Te EU must end these schemes if it is serious about helping Ukraine defend itself and deterring further Russian aggression. Tis will require that EU member states main- tain solidarity and secure the following concessions from Moscow (and Kyiv): a gas metering station on the Russia- Ukraine border; oversight and/or operational control of Ukraines gas transit system; and a single price for Russian natural gas at the Russia-Ukraine border, which will deny Moscow the ability to divide-and-conquer within the EU by ofering individual member states preferential (or discriminatory) natural gas deals. If EU member states secure these demands, Ukraine may emerge as a stable and prosperous country that is less vulnerable to manipulation by Moscow. If not, Russia will be tempted to pursue similar economic and military aggression beyond Ukraine, perhaps in the Baltic States, which face their own energy and political-military vulner- abilities. Estonia, Latvia, and Lithuania remain energy islands, entirely dependent on Russian natural gas supplies. Teir electricity systems are synchronized with northwest Russias electricity grid rather than the EUs. Russia has exploited these vulnerabilities. In 2012, Russia punished Lithuania for implementing the EUs own directives for strengthening energy independence from Russia, unilaterally imposing a gas price of $497 per thousand cubic meters (tcm), which was 15 percent higher than Germanys and 30 percent higher than Europes average. Gazprom Vice President Russia will be tempted to pursue similar economic and military aggression beyond Ukraine, perhaps in the Baltic States. Transatlantic Security Task Force Series Policy Brief 3 Valery Golubov bluntly explained in February 2012 that Gazproms price gouging in Lithuania was justifed by Vilniuss inadequate behavior while restructuring the gas sector to reduce Gazproms monopoly leverage. 6 Te Baltic States are working with the European Commis- sion to reduce such vulnerabilities by integrating into European energy networks. Besides two undersea elec- tricity cables connecting Estonia and Finland, several other key infrastructure projects (e.g., LNG terminals and gas and electricity interconnections) are under development ofen with EU fnancial support. Lithuania is working most actively, with Estonia not far behind. Latvia, however, is moving more slowly, refecting the penetration of the countrys energy sector by Russian political and business interests. Latvia could be particularly vulnerable to the hybrid warfare tactics Russia has employed in Ukraine. A worrisome scenario might involve Moscow exploiting energy-related corruption among political elites, agitating Russian-speaking communities, invoking Russias right/ duty to protect these communities, then covertly deploying Russian special forces to occupy a swath of Latvian terri- tory. As extreme as this scenario may sound, Russian Ambassador to NATO Alexander Grushko warned during an open session on Ukraine at GMFs Brussels Forum on March 22, 2014 that hundreds of thousands of people in the Baltic states have their human rights violated simply because they choose to speak Russian. Te potential consequences of this scenario are chilling. Latvia would likely invoke Article 5 of the North Atlantic Treaty. Confronted by the prospect of full-scale war with Russia over a handful of felds and towns in eastern Latvia, several NATO member states may refuse to join a consensus to respond militarily. As a result, President Putin might be able to undermine Article 5s credibility and efec- tively dismantle NATO without fring a shot. Te United States and EU thus face a shared and urgent need to eliminate energy and military vulnerabilities in Europes East. Tough the EU must take the lead, the 6 Gazprom Vice President Valery Golubov admitted in February 2012 that Vilniuss determination to its vulnerability to Moscows monopoly power justifed the price increase. [Aleksey Gribach], : Lietuvos Dujos [Gazprom deputy chairman Valery Golubev: The price of gas for Lithuania does not depend on the composition of the board of Lietuvos Dujos], [Moskovskie Novosti], February 11, 2012, http://www.mn.ru/busi- ness/20110211/300430801.html. United States can help in two key ways. First, Washington can enact legislation enabling LNG exports to its European allies (assuming such exports make commercial sense), then enshrine them in the Transatlantic Trade and Invest- ment Partnership. Second, the United States can strengthen its support for EU eforts to establish a single and unifed European energy market with diversifed supplies of natural gas. Central to this efort will be expansion of gas trading hubs, like the United States own Henry Hub, where prices are deter- mined by supply and demand via liquid trading among competing suppliers. In recent decades, several such hubs have emerged in the North Sea Basin, which form a genuine though regionalized natural gas market. Expanding trading hubs to the Baltic States should be the EUs next major step. Te United States should provide support to European political leaders and regulators to counter Russian resistance to the spread of gas trading hubs, just as Washington has done since the mid-1990s for oil and natural gas imports to Europe from the Caspian Sea. In summary, the United States and Europe need to suppress economic parochialism and embrace a spirit of collec- tive security to spread market forces throughout Europes energy sector. If successful, the transatlantic community will fnally secure a Europe that is whole and free, and deter a revanchist Russia from challenging NATOs very exis- tence on the Alliances eastern frontier. The United States and EU thus face a shared and urgent need to eliminate energy and military vulnerabilities in Europes East. Transatlantic Security Task Force Series Policy Brief 4 Te views expressed in GMF publications and commentary are the views of the author alone. About the Author Matthew Bryza is a non-resident senior fellow with the Atlantic Councils Dinu Patriciu Eurasia Center. He is the director of the Inter- national Center for Defence Studies in Tallinn, Estonia. He resides in Istanbul, where he also works as a business consultant and board member of several private companies. His last assignment within the U.S. diplomatic corps was as U.S. ambassador to Azerbaijan from February 2011 to January 2012. About GMF Te German Marshall Fund of the United States (GMF) strengthens transatlantic cooperation on regional, national, and global challenges and opportunities in the spirit of the Marshall Plan. GMF does this by supporting individuals and institutions working in the transatlantic sphere, by convening leaders and members of the policy and business communities, by contributing research and analysis on transatlantic topics, and by providing exchange opportunities to foster renewed commitment to the transatlantic relationship. In addition, GMF supports a number of initiatives to strengthen democracies. Founded in 1972 as a non-partisan, non-proft organization through a gif from Germany as a permanent memorial to Marshall Plan assistance, GMF maintains a strong presence on both sides of the Atlantic. In addition to its headquarters in Washington, DC, GMF has ofces in Berlin, Paris, Brussels, Belgrade, Ankara, Bucharest, and Warsaw. GMF also has smaller representations in Bratislava, Turin, and Stockholm. Contact Dr. Alexandra de Hoop Schefer Director, Paris Ofce German Marshall Fund of the United States Tel: +33 1 47 23 47 18 Email: adehoopschefer@gmfus.org