Energy revolution from East to West

Disclaimer: all opinions in this column reflect the views of the author(s), not of PLC.
Bruno Maçães, Portugal’s State Secretary for European Affairs [Photo: Bruno Maçães's office]
Bruno Maçães, Portugal’s State Secretary for European Affairs [Photo: Bruno Maçães's office]

An energy pact between the EU and the US could easily be extended to Canada, Mexico, Norway and perhaps even Brazil, forcing Russia to embrace a transition eastwards of its own, writes Bruno Maçães.

By Bruno Maçães, Portugal’s State Secretary for European Affairs.

My recent proposal for a transatlantic energy pact was based on two different sets of considerations. First, there is the economic case. There remain deep discontinuities in price between the American and European markets. These will tend to diminish as we move closer to a global spot market in gas. We can lead this process and set the terms in which it happens or we can adjust later, perhaps more suddenly than we think.

It was also apparent to me that the progress we can achieve towards a transatlantic energy market would also be beneficial for the American economy. Europeans will have access to cheaper American gas, but an energy alliance would be just as valuable for the U.S.

Allowing American companies to export gas and oil would bring enormous gains to the U.S. First, it would be a boost to further exploration and production. Second, energy production would be able to take full advantage of specialisation patterns, which are particularly significant in a technology-driven sector. In the case of oil, even American consumers stand to gain from greater global market integration by way of lower domestic gasoline prices. It also seems to be the case that artificially depressed gas prices in the U.S. domestic market are creating a serious new risk: lack of diversification, as all energy alternatives are pushed out of the market.

Then, there is the security case.

It is obvious to everyone that European energy dependency on a single external supplier is the greatest systemic challenge to EU foreign and security policy. The answer is not confrontation, but reorientation. At this juncture the European Union finds itself deeply dependent for its energy supply on routes crossing its eastern borders. Supply flows from east to west. Even interconnectors are on the whole unprepared to work in the opposite direction with permanent reverse flow – or, in the case of electricity, to bring a lot more power from solar all the way from Portugal and Spain – or Morocco in the near future.

This is dangerous for both security and economic reasons. The more the EU looks to the east the greater its dependence on Russia and the less it will be able to profit from global value chains. The world continues to shrink, so why is Europe not turning more decisively towards its natural gateway to the global economy? When it comes to energy the internal market is important, but so is access to the global market and new supply routes. If we are not able to move fast enough those supply routes may well be monopolised by Asian buyers, currently busy ensuring that the new locks of the Panama Canal can accommodate the largest LNG carriers.

Consider the missed opportunities by sticking with a one-sided energy strategy:

Algeria is the most promising alternative supplier of gas to the EU. The country's reserves of both conventional and unconventional gas are some of the most significant in the world and remain largely unexplored. Infrastructure already exists and could easily be expanded. Geographic distance is in this case an obvious asset. But all this depends on a renewed focus on investment in the region, while building stronger economic and political links. Needless to say, building closer links to a strategic partner like Algeria is of crucial importance for reasons that go far beyond energy, but which can be promoted on the energy front.

The case of Nigeria is equally striking. The country is forced to flare a large percentage of it gas production for lack of adequate infrastructure. Once Europe is able to reorient its energy policy towards the Atlantic, private investors should be ready to come in and have a quick impact.

Canada has been moving quickly to develop its LNG export capacities. When completed the industrial complex in Goldboro will seek to be the first large transatlantic energy hub. Investment there is further proof that American and Canadian gas can reach European shores at a competitive price. Some gas pipelines linking Canada and the U.S. may soon benefit from reverse flow. Just as with the TTIP and CETA, no discussion of transatlantic trade should ignore developments in Canada, in many respects moving faster than the US to explore Atlantic trade routes. As Thomas Grennes and Andris Stradzs pointed out in their response to my original proposal, an energy pact between the EU and the U.S. could easily be extended to Canada, Mexico, Norway and perhaps even Brazil.

These examples show how important the geostrategic choice really is. Europe can link its economic destinies with some of the most dynamic regions in the world, or it can bet everything on the struggling economies of its eastern neighbours. It is interesting to note that this movement westward would force Russia to embrace a transition eastwards of its own. It remains to be seen who leads the process and who, on the contrary, will be forced to adjust.


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