This conference, The New Eurasia Energy Landscape, was co-sponsored by the Foreign Policy Research Institute, The German Marshall Fund, and Central Asia-Caucasus Institute.

By some measures, Eurasia’s energy landscape has changed more in the past several years than in the previous several decades. The price of oil remains at half its level of four years ago and shows no sign of rising. Natural gas is now just as easily transported by ship as by pipeline, opening new possibilities for obtaining gas supply. The pipeline network within Europe and between the EU and its neighbors is also in flux, thanks both to new pipeline projects such as TurkStream and Nord Stream II as well as new interconnectors between EU member states. Demands for decarbonizing the energy supply is driving big shifts in the types of energy in use.

The New Eurasia Energy Landscape conference, hosted by the Foreign Policy Research Institute and the German Marshall Fund on November 6th, examined these trends through three different lenses. The first session examined recent efforts, supported by the U.S. and the EU, to reform energy sectors in Black Sea states, notably but not exclusively in Ukraine and Georgia. Second, a panel of experts discussed the ever-shifting energy politics of the broader Eurasia region, from Central Asia to the Black Sea and beyond. The final session focused on the future of U.S. strategy for energy security in Eurasia.

Moderator Jonathan Katz began the conference by describing Eurasia’s current energy landscape. He said that the world’s current geopolitical uncertainty and increased economic and political pressure from Russia onto Europe has tied Eurasia’s future prosperity and security to deepened energy sector and technical cooperation. He added that the conference presented an opportunity to connect pipeline politics to ongoing multilateral energy sector reform goals in Eastern Europe.

Panel 1
The US, the EU, and Energy Sector Reforms in the Black Sea Region
Steven Burns, Will Polen, Janez Kopač, Jonathan Katz (Moderator)

Each panelist began by speaking about their interests and the challenges and emerging trends they see in the region. Janez Kopač, the Director of the Energy Community Secretariat explained the structure of the Energy Community, and then described how the organization faced a decision during the Maidan Protests in Ukraine: should it support the protesters or should it remain institutionally neutral. The Community ended up drafting a gas market law for Ukraine, which was included as one of the IMF’s conditions for a later financial assistance package for the country. The law was finalized in January, adopted in April, and began implementation in October. He cited this case as an example of how fast reform can proceed if there is genuine political will behind it. The Third Energy Package’s structure was “transposed” in both Moldova and Ukraine. Kopač said he hoped the reform plan would win approval from the Moldovan parliament in the first half of 2018.

He then turned to describe his other energy priorities in the region. Kopač said that Turkey had also planned to transpose the Third Energy Package itself, but after the attempted coup last year, reform efforts lost steam. He attributed the lack of reform in Armenia to political divisions. He also said that Belarus was now “very eager” to reform at least its electricity market, even though its gas market was “100%” owned by Gazprom. The Eurasian Economic Union, despite being inefficient, had its own energy market reform directives. It envisages opening its electricity market in 2019. Kopač predicted that this would not happen because these countries are not as eager as EU nations to reform.

He then described what he thought were Eurasia’s biggest energy challenge. In Ukraine, Kopač said he was concerned about gas sector unbundling. He had seen little signs of progress in this area. The biggest promoter of the Third Energy Package in Ukraine is Gazprom because it includes an arbitration procedure that could resolve a dispute between Gazprom and a Ukrainian gas company. Kopač expressed concern that after the arbitration between the two sides finishes at the end of the month, work on unbundling will slow down.

Kopač also said that the EU is “a little bit nervous” because Ukraine is not “really fully implementing the Third Energy Package” and because there is uncertainty about what will happen after 2019 when the existing gas transit agreement between Ukraine and Gazprom expires. Alternative gas routes will probably not be built by then, underscoring the need for Ukraine to faithfully implement the Third Energy Package.

Kopač then added that while the wholesale gas market in Ukraine had been reformed and was “functioning,” the retail gas market is “completely monopolized.” He added that 75% of the market is controlled by Dmytro Firtash, an oligarch awaiting extradition to the United States. He said that the Ukrainian government is defending Firtash’s interests and that he is “struggling” in tandem with the World Bank, IMF, and European Union to improve the situation, with little success.

Kopač also said that the Ukrainian electricity market is “below the radar” of the international community because it has its own system that limits transnational trade. Though an agreement was signed to improve synchronization within six years, a similar agreement with Turkey (where reform efforts were more organized) took fifteen years to implement. Kopač said that, in light of the Turkey case, he does not expect significant electricity reform within the agreed six-year timeframe. Still, he thinks linking Ukraine’s electricity market to the rest of Europe would be a “game changer.”

He then turned to Moldova. The only solution he saw was interconnection with Romania because Gazprom is a monopoly in Moldova’s gas and energy sector. He recommended the government trade electricity with Ukraine because both countries are in the same synchronous area.

He said Azerbaijan and Georgia have “perhaps a bright future” in their electricity trade with Armenia and Turkey, depending on those countries’ willingness to make reforms. He was broadly critical of the overall pace of reforms in these countries, saying “all countries [have been] very, very slow” in implementing energy efficiency directives.

Kopač also said there were challenges to reform coming from the EU side. Informally the “legal gap” was growing between it and the countries targeted for reforms. The EU had developed its rules “to the last details,” but it didn’t propose them to Energy Community partners to transpose them. To resolve this, the Energy Community proposed amendments to its treaty to further integrate itself with member states, but the process has been moving slowly.

Overall, he said that “things were happening,” but that progress was limited by pushback from interests group, particularly in Ukraine and Moldova. He also said that the non-coordinated approach of Western partners was also raising technical barriers and slowing down reforms. Kopač said that despite these problems, he is still optimistic (though less optimistic than he used to be).

Then, Steven Burns, the Chief Director of Energy and Infrastructure for Europe and Eurasia at USAID, gave an overview of the Eurasian energy landscape from his perspective. He noted that the role of USAID in the region has shifted over time. At first, it was basic assistance provision—getting basic utilities back online, for example—but now, the agency is focused on advanced market structuring. He said that the relationship between USAID and the Energy Secretariat was roughly analogous to building a house: the Secretariat provides the framing and plumbing, while USAID provides the fixtures and makes the home functional.

Overall, he said he saw the Black Sea area as a “buffer region” between central Europe and “some unstable areas surrounding it.” Burns said it was important to “improve the buffer” by integrating Black Sea countries more closely into Europe.

In terms of donor coordination, USAID’s goal was not to get overly focused on mega-projects. Burns noted, “If you don’t have transparent market structures in place, you are just furthering oligarch control.” Burns added that his team at USAID follows two rules: favor engagement over singular projects and “do the technical and wait for the politics to catch up.” He believed that while there was room to condition aid, USAID needed to coordinate with sector stakeholders even before countries are ready to politically integrate with the rest of Europe.

Burns said that USAID has three major energy focuses. First is market development. The region has many frozen conflicts and isolated markets. Bringing countries in the region into a larger, well-integrated market would improve energy security. Second is infrastructure development. Eurasian countries are not synchronously interconnected with Europe. USAID wants to alleviate this problem to make it easier to link Eurasian markets to Europe. Lastly, USAID prioritizes expanding the Eurasian institutional capacity. Achieving these three goals is key to “bringing these countries into Europe.”

Then, Will Polen of the United States Energy Association, which collaborates with USAID, spoke about what it’s like to work with the actual utilities and regulators in the field.

He said that one of the most important stories of the post-Cold War world was how the United States and its European allies disconnected Central and Eastern European countries from Soviet power networks and joined them to the Western European grid. Reconnecting these countries required overcoming substantial legal and technical hurdles. USAID and its European assistance allowed these countries to eventually synchronously connect to the Western European grid, which was an important boon for their energy security.

Today, Western countries are attempting to replicate this process in Eurasia, but are running into more serious problems. These countries suffer from a much stronger legacy of centralized planning and a lack of human resource capacity in economics, civil society, and journalism. Polen said that those who suggest the pace of reform has been too slow should keep a historical perspective. “We are putting these countries on a treadmill that’s running much more quickly than we put ourselves on,” he added. Electricity sector reforms took 120 years in the United States, even though it started with a democracy and strong civil society. Expecting these countries to accomplish the same in 10 to 15 years is “more than we would ever ask ourselves to do.”

Implementing the reforms requires a consensus-building, painstaking process to be effective. Polen cited the USAID-funded Black Sea Transmission Planning Project. It started in 2004 with an agreement amongst Black Sea countries. Though these countries all border the Black Sea, they had no way of communicating with each other about how to plan their electricity grids and lacked the software and personnel to effectively implement those plans. The project endows the countries with a regional planning capacity, allowing them to model how an investment in one country’s grid would affect others. If there weren’t connections between these countries, the project would allow them to determine how they could develop links to each other and Europe most efficiently.

Developing this model requires time and expertise. Asking countries to do this while concurrently attempting to reform their markets is a significant undertaking, and results should not be expected within just a few years, Polen argued.

Because of the long-term engagement, Polen’s team has had with its Eurasian counterparts, things previously thought to be impossible are now being considered. They are planning a region-wide system adequacy study, which will determine whether the region’s networks will be robust enough to incorporate high levels of renewable energy and European trade in 15 years. Additionally, building a connection between Georgia and Armenia is now feasible because of German funding and Energy Association technical expertise. “If we let up now,” Polen said, “we’re going to snatch victory from the jaws of victory.”

With that, the discussed turned to a moderated Q&A session.

Panel 2:
New Dynamics of Pipeline Politics in Eurasia
Ed Heartney, Robert Scher, Mamuka Tsereteli, Svante E. Cornell (Moderator)

Svante Cornell began the panel by introducing the panelists. Following that, Ed Heartney, the Acting Director of the Office of Europe, the Western Hemisphere, and Africa in the Bureau of Energy Resources at the State Department, gave his explanation of what he saw as U.S. policy towards the Eurasian energy landscape. He described promoting European energy security as “a hallmark of our transatlantic relationship since the Cold War.” Heartney mentioned that in recent years the U.S. has worked directly with European partners to create the European Energy Union and the Third Energy Package. Heartney said America’s goal was to ensure countries outside Europe cannot use its energy resources as a geopolitical weapon. He said the Trump administration’s energy policy has three pillars: removing barriers to energy development and trade, promoting U.S. energy exports, and ensuring economic and energy security for the U.S. and its partners. Thus, he said, America seeks “diversification of energy sources, energy types, and energy routes” for Eurasia, a goal he said is shared by the European Union. Heartney added that while the U.S. does not seek to “eliminate Russian gas from the market,” it is concerned about the effects Nordstream 2 and Turkish stream would have on European energy diversification.

Heartney said that energy security is a top priority for Europe, noting that “13 European countries are dependent on Russian gas to meet more than 75% of their annual gas imports.” Heartney also noted that European countries remember “vividly” Russia’s cut off of gas supplies to and via Ukraine in 2009 and 2013, and thus see energy independence as a national security issue. These countries he said, are seeking to diversify their energy infrastructure, through pipelines, electric grids, nuclear energy facilities, and more. He said America’s final goal was to create a “single European gas market” that “allows gas, no matter where it comes from, to circulate through Europe and meet any contingency.”

He also said that U.S. natural gas exports also support global energy security by creating more liquid, competitive, and connected gas markets. In addition to infrastructure, Heartney also said that the U.S. supports the European Union’s Third Energy reform package. He also made clear that the U.S. supports “projects of common interest” with the European Union not because they necessarily benefit the American economy, but because they support European energy security.

Then, he specifically addressed Nordstream 2 and Turkish Stream. He said the two projects would “reinforce Russian dominance of gas markets, reduce opportunities for diversification of energy sources, and advance Russia’s stated goal of ending Ukraine’s role as a transit country for Russian gas exports to Europe.” He rejected that these projects were purely commercial, saying they would reinforce Moscow’s ability to project power in Eastern Europe and Ukraine.

Specifically, Heartney expressed concern that a multiline Turkish Stream would deprive Ukraine of up to $2 billion in annual transit revenue. Despite this, he was upbeat about Ukraine’s progress: with American assistance the country has improved its energy significantly. Thanks to reverse flow agreements with Poland, Slovakia, and Hungary, Ukraine hasn’t imported any Russian gas since November 2015. The U.S. has specifically helped Ukraine fight corruption in its energy sector.

Heartney then passed the microphone to Robert Scher from BP. Scher spoke about his company’s perspective on Eurasia’s current energy landscape. He described the Southern Gas Corridor as “an integrated gas value chain” of arguably four integrated projects. He said it is a huge project both from an engineering perspective, and from a political and cooperative one: it involves 7 countries, 11 shareholders, and agreements from 11 gas buyers. The goal of the project is to build an integrated European gas supply, where gas can flow “from anywhere to anywhere.”

Scher praised the project’s safety record and provided statistics about the project. The pipeline is 3500km long, with 500km being below the surface. It will bring 16 bcm of gas per annum in 2020 to Europe (of that, 6 will go to Turkey). He is expecting the first gas to flow through the first part of the pipeline in 2018, and described progress on it as “great.” The last stage— the Trans Adriatic Pipeline—is on track to have first gas in 2020, though it still has some permitting hurdles to climb. He concluded by saying that BP was happy about the project because it helped fulfill the EU’s energy security goals while advancing U.S. policy.

Mamuka Tsereteli, a Senior Research Fellow at the Central Asia-Caucasus Institute and Silk Road Studies Program Joint Center, then began his talk, which emphasized the role of developing advanced connectivity between the Black and Caspian Sea countries to resolve the long-term energy supply problems for the Black Sea region. He said the importance of Scher’s project “cannot be exaggerated – it will be the first connection of Caspian resources directly to European markets.” This progress was the result of earlier cooperation between producer and transport countries over many years, citing the construction of the Baku-Supsa pipeline between Azerbaijan and Georgia as an example. He said this collaboration has allowed supplier and recipient countries to become both closer partners and more energy secure.

Tsereteli said that the Trans-Caspian pipeline, which would bring Turkmen gas to the south Caucasus, Turkey, and the European markets, was not an early emphasis of American energy security efforts and was a key piece missing from today’s energy markets.

Then, he pointed out that Gazprom would have record sales of natural gas to Europe and Turkey this year. He used this fact to highlight that, despite increased American exports, countries like Serbia will be reliant on Russian gas for the foreseeable future. This dynamic, he said, poses a long-term strategic challenge to the U.S. in Eastern Europe and gives Russia considerable leverage over those countries. The development of TANAP could serve as the basis to replace some Russian gas with Turkmen supply. This would require, according to Tsereteli, a “political security solution” by Turkmenistan and additional infrastructure investments later. He said that the Trans-Caspian pipeline hadn’t been built in the past because Russia introduced borders to the Caspian Sea and because of tensions between Azerbaijan and Turkmenistan. He predicted that Russia will remain an important obstacle towards the creation of a successful Trans-Caspian pipeline.

To address the Russian threat, some countries are joining the European Energy Community. He criticized the European Union for not pressing Russia to reform its energy practices. He added that the construction of Nordstreams 1 and 2 and Turkish Stream were giving the European Union, and Germany in particular, incredible leverage over Russia. These projects would give Germany much more transit capacity, at the expense of a loss of transit through Ukraine. He proposed an agreement (that he admitted was “wishful thinking”) to get Russia to allow the construction of the Trans-Caspian pipeline.

Cornell then asked Heartney what the United States was doing to support the addition of new Caspian resources to the European market, particularly from central Asian countries. Heartney replied by reaffirming U.S.’ support for the Southern Gas Corridor, but highlighted the challenges of bringing the Trans-Caspian pipeline to fruition. He mentioned specifically Turkmen reluctance to address necessary border issues as an obstacle preventing construction from getting underway.

Cornell followed up by asking whether Heartney viewed the Trans-Afghan and Trans-Caspian pipelines as complementary to each other, or as a place where American and European interests diverged. Heartney said executing the Trans-Afghan pipeline would be difficult given that it would have to traverse a war zone, but said that he would have to look specifically at the gas export potential to see if both would be feasible, but added that he would be happy if the Europeans moved forward with just one of those projects. Scher said that from a technical perspective there are other resources in the Caspian region outside of Azerbaijan, but that it’s an open question whether exploiting them would be commercially and politically viable. Tsereteli added that China loomed over the other panelists’ discussion; it is an increasingly large natural gas importer and the only significant export market for Turkmen gas. He suggested its interest in well-developed trade connectivity between the Caspian and Black Seas and U.S. policy towards China’s Belt and Road project would be major determinants of the region’s future energy export potential.

Panel 3:
Lunch Roundtable
Jonathan Elkind, Douglas Hengel, Chris Miller (Moderator)

The discussion centered on the Trump administration’s perspective of Eurasian energy issues.

Hengel, a Senior Fellow at the German Marshall Fund, began the discussion. He said that when the political party in power changes, it leads to “anxiety” about changes in policy. In terms of the Eurasian energy issues, however, he thought that the Trump administration was largely bringing “continuity” to American policy in the region, specifically with regards to pipelines and Eurasian energy security. Hengel added that Wess Mitchell, the new Assistant Secretary of State for European Affairs, “understands what we are dealing with vis-à-vis Russia,” and that U.S. assistance to the region will continue.

Elkind, the Assistant Secretary for the Office of International Affairs at the Energy Department, added to those comments by addressing concerns about policy uncertainty. He said that this has been a challenging time on two levels. One has been slow personnel appointments. The State and Defense Departments are finally getting key personnel confirmed. This is important because when career officials fill those roles, “they operate on the basis of the existing policy until the policy changes,” and, particularly at the beginning of new administrations they have, “a tendency to pull the punch a little bit and soften things.” Recent policy ambiguity has been exacerbated by the slow rate of new confirmations because it has left many career officials in temporary political positions.

The second source of policy ambiguity Elkind noted is that fundamental American policies have been called into question. He cited U.S. support for free trade and its allies as examples of places of traditional clarity that have been muddled under the new administration.

Miller, the Research Director for Eurasia Program at FPRI, then asked the panelists whether they thought the administration was striking the right balance between pressure and support for countries in the Eurasia region. Elkind said that it’s important that the U.S. continue to invest in bringing positive change to Eurasian countries, but it should take a stand when it needs to. For example, Elkind said that if Ukraine moves “inexorably into the direction of further dividing up spoils and not continuing some of the very encouraging shoots Ukraine has been planting,” pressure should be considered. Hengel added that it seems that “our assistance to the region is going to continue as a priority on these issues,” and “in the end, these countries have to want to make the changes.” He said that when he served in the Czech Republic and Slovakia, changes were “full steam ahead.” Though we can attempt to push and incentivize these countries to make our preferred reforms, ultimately success will hinge on their intrinsic motivation to change.

Miller then asked the panelists if they thought the Trump administration had a clear Nordstream policy, and, if so, what they thought it was. Hengel said it was “quite clear” that U.S. concerns about Nordstream would remain the same: it would increase European dependency on Russian gas and damage Ukraine. On the sanctions issue, Hengel said it was clear that the U.S. would not be sanctioning Nordstream 2 or Turkish Stream, but that the door was open to further action if necessary. Though Congress authorized such measures through legislation, the president already had broad authority to impose sanctions for national security purposes. “The potential is the there that [the policy] could be reviewed at some point . . . should the Russians increase their bad behavior in Ukraine, for example.”

Miller asked Elkind if he thought the administration would succeed in stopping Nordstream from being built. Hengel said that Nordstream 2 is in the interest of certain European companies and the Russian government, but does not align with the European Commission’s stated goal of energy diversification. “It’s not the passport of the molecules of gas that makes this bad. It’s that there are a number of well-established business models that have been employed in the European marketplace in the past that raise questions whether the fundamental motivation at the end of the day was commercial or political,” he said. Specifically, he found it “revealing” Russian energy importers were treated differently based on their support for Russian foreign policy. Overall, he said “lots of nuance is called for here,” and that “saber-rattling towards our European partners will not be productive” and that they ultimately need to make the decision themselves.

Hengel said that while the United States shouldn’t saber-rattle, it should “get [its] points across clearly.” He noted that the countries of Central and Eastern Europe had historically felt disadvantaged in Brussels and that the U.S. could provide a useful boost to the salience of their interests. Elkind pointed out that the European energy union isn’t “an established thing” yet, and European leaders have many other issues dividing their attention. He said that the “relationships—including between and among different member states, where the prerogatives sits and who makes decisions—it’s not well established. And that is an additional challenging factor in this picture.”

Miller then asked Hengel whether American natural gas exports could be a substitute for the gas that would be delivered by Nordstream 2. Hengel said its “unfortunate” that American gas exports have gotten entangled in the conversation surrounding Eurasian energy security. He said that U.S. support for European energy independence began well before it ever considered exporting natural gas. He said “it’s a bogus argument” that U.S. opposition to Nordstream 2 was “commercial diplomacy to sell our gas.” Hengel said that there is a lot of underutilized regasification capacity in Europe already, which would allow natural gas to enter Europe from many non-American sources.

Elkind said that he was not a fan of the “energy dominance” idea. He said he never encountered a counterpart of the United States government that wished to be “dominated.” Rather, they were looking for a consistent and mutually beneficial partner. He said it would also be “an extremely unfortunate thing” to link Europe’s self-interested energy security decisions to our secondary interest in promoting American exports. Linking these issues would leave both the U.S. and Europe in a worse position. That said, he agreed that U.S. natural gas can make a difference in the European market and that it already has. For example, he said that the Klaipeda regasification facility caused Gazprom to lower its price in Lithuania by 20%. Overall, U.S. natural gas exports have facilitated more competition and choice for consumers in Europe.

Hengel also emphasized the importance of introducing increased competition. He said that Gazprom has had to react to this newly competitive reality by auctioning off more gas. Hengel also said that a pending antitrust case against Gazprom was “critical” because of how politicized its supply has been. If Gazprom abides by competitive norms, it would lessen Russia’s ability to use gas to influence its neighbors.

Miller concluded by asking the panelists whether they detected a change in how the Trump administration is approaching the balance between supporting democratization and getting access to energy. Hengel said that “we are able to walk and chew gum at the same time” and the U.S. always balanced multiple interests when handling its bilateral relationships. Taking Azerbaijan as an example, Hengel said that there are some issues where the two countries agree and others where they do not, yet the U.S. still tries to advance its agenda “in a positive way.” Elkind said that “it is incumbent on us if we wish to have a reputation with these countries for serious engagement and sustained engagement then we have to actually do that.” That means being supportive of a host country’s policies in one area, and, in a constructive and clear way, being critical as the circumstances merit.

In sum, the conference covered all aspects of Eurasia’s changing energy dynamics. Speakers representing government, NGOs, and the private sector all gave their perspectives on what challenges the region faces and what obstacles need to be overcome for true reform. Overall, one message was clear: American support has been and will continue to be necessary for the region’s prosperity and security.