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Germany, Turkey, and Russia: Strange Energy Bedfellows

The 70th Anniversary Of The D-Day Landings Are Commemorated In Normandy

Russian President Vladimir Putin (L), German Chancellor Angela Merkel and Ukrainian President Petro Poroshenko (R) attend the main international ceremony with 17 heads of state at Sword Beach on June 6, 2014 at Ouistreham, France.

German-Turkish-Russian ‘Energy Security Triangle’: Building Long-term Resilience while Defusing Geopolitical Tensions

The recent Munich Security Conference in the Bavarian capital brought together – as it does every year – important decision-makers in international politics, including heads of state and government along with foreign and defense ministers to discuss “hot” foreign and security policy issues. This year’s focus was on the topic of “the collapse of the international order” – very timely indeed in light of the continuous Ukraine crisis and the “cancer” of ISIL spreading in the Middle East. Given that this conference took place in Germany, it is no wonder that the Ukraine crisis seemed to dominate transatlantic discussions.

The Ukraine crisis exemplifies the signs of the times by merging energy geopolitics with energy economics embedded in an explosive security environment. Global energy markets are currently in disarray due to plunging oil prices precipitated by oversupply and a faltering demand picture.  Yet, it is safe to say that the sharp decline in oil prices since last June of about 60 per cent – currently the price of oil is retracing some of its losses – can be mainly attributed to financial innovation in commodity markets with supply and demand alone not justifying such a precipitous move over this short time span. Thus, instead of trying to figure out which of the above factors is mostly responsible for the volatility in oil prices, one could just recognize two things: the increasing interconnectedness and complexity of global energy issues and, as a result, that energy security needs to undergo some rethinking.

In this context, a panel discussion entitled “Rethinking Energy Security: Independence in an Interdependent World” was held at the Munich Security Conference in cooperation with the Earth Security Group (ESG). ESG “provides intelligence for navigating sustainability risks in an age of inter-dependence” and ESG CEO Alejandro Litovsky presented a case study from “The Earth Security Index 2015 – Managing Global Resource Risks and Resilience in the 21st Century” report. “Navigating the opposing forces of regionalisation and globalisation, while managing inter-connected resource risks, is key to 21st century market opportunities and sustainable development goals,” Mr. Litovsky stressed when providing an interesting exemplary “framework on managing inter-dependent risks and opportunities” in the relationship between Germany, Russia and Turkey.

Note, Russia continues to play a critical role in supplying energy to Europe, at least for the medium term. If the EU is willing to start funding necessary infrastructure projects now it may be able to become less dependent on Russian energy over the longer term. A notable feature of the report is the so-called “Earth Security Index Diagram” (ESI), which is a radial diagram to bring “analytical simplicity to a complex set of pressures associated with a country’s resource security” (Learn more about ESI here).

Potentially Positive Impact of Germany’s ‘Energiewende’ on Russia and Turkey roman ESG

Source: The Earth Security Group; See large version (pdf.) provided by The Earth Security Group here

The above graphic illustrates how these three markets are connected and where to find the strategic ‘win-win’ opportunities. In this case, the ESG report’s major finding is that Germany’s energy transition – the ‘Energiewende’ – can “help Europe improve its long-term leverage over Russia while strengthening energy transit hubs such as Turkey, which are strategic to Europe’s energy future.” Interestingly, a domestic energy policy – driving improvements to energy efficiency as well as integration of large amounts of renewables into the grid – is envisioned as a ‘strategic tool’ that can be used to gain a long-term strategic foothold in two key investment markets.

“Russia and Turkey must strengthen their domestic electricity infrastructure in order to modernize,” the ESG report states and explains further: “Energy blackouts, like the one that paralysed Moscow in 2005, will be more likely due to Russia’s exposure to weather extremes. Its domestic energy infrastructure, which largely dates back to Soviet times, loses over 10% of electricity through distribution alone and has a carbon-intensity 3 times that of Europe. (…) By investing in Russia’s improved infrastructure, Europe will grow its influence over Russia’s energy security.

With respect to Turkey, the report identifies the country as a future transit hub for Europe (read Breaking Energy on the significance of Turkey for the EU Energy Union) “to access gas in Central Asia, Iraq, the Eastern Mediterranean and Iran.” How to wrest Turkey away from Russia? The ESG report uses an interesting line of reasoning: “[Turkey is] acutely energy import-dependent, with Russia supplying approximately 60% of its gas imports. Because of its external dependence, the efficiency of Turkish energy consumption is vital to its future position as a reliable transit partner. Turkey’s energy demand is set to grow at 6% over the next decade. The government’s bold commitment to renewable energy targets and efficiency provide a unique opportunity for extending the presence of technology-intensive European energy companies in the Turkish energy market.”

Note, what this report suggests would actually be a viable strategy even in a ‘prolonged sanctions environment’ because the current sanctions regime in place is meant to hurt Russia’s long-term sustainability of new oil and gas developments – i.e. offshore in general as well as especially onshore shale due to specialized technology restrictions – without taking a real toll in Europe in terms of security of energy supply in the short to medium term. This is underscored by a very recent Bloomberg report that “Germany imported the most coal from Russia in at least nine years [2006], just as the European Union is trying to reduce its reliance on energy supplies” from Russia. Obviously, coal is not impacted by the West’s sanctions regime.

Read the entire ESG report with other interesting so-called “blueprints” that suggest how to manage inter-dependent resource risks and opportunities.

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