Introduction to Energy Geopolitics

So ladies and gentleman, let's get started. Our first keynote speaker is Dr. Agnia Grigas. She is a senior research fellow at the Atlantic Council, Washington, DC. She's an energy and political risk expert within the field of energy and foreign policies in the U.S. and Eurasia. She just recently published a critically acclaimed book called, “The New Geopolitics of Natural Gas,” and that is exactly the topic of today's presentation. Ladies and gentlemen, please welcome, Dr. Agnia Grigas.

Good morning. First, it's a real pleasure for me to be here in Copenhagen and in Denmark this morning. Actually, it's my second time in Copenhagen this year so I'm starting to feel like a real local, and even more so, given that I took a brisk 30-minute walk to get here this morning. So I feel really local. It's also very exciting for me to be in Denmark today because Denmark has been an important country in natural gas development historically. And it's also center stage today in important decisions regarding European gas markets.

So my talk today is on natural gas, as you've heard. Why natural gas? Certainly there are exciting developments in renewable energy, and here, Denmark is a leader. And there are also I mean, the oil markets have also always been important. In my view, we are currently in a historical transition in the gas markets. Something that could be comparable to what was experienced more than a hundred years ago in the oil markets when they first went global. So my talk today, my talk today will take a global perspective on the gas markets. Particularly from also a geopolitical perspective and of course I will also bring in some views from Washington. So, let's get started. I will be, my remarks will be based largely on my newest book, which was released by Harvard University Press just at the end of last year. And the book’s starting point, is really a focus on the transitions in the gas market. And based on those transitions and then I make arguments what I anticipate will be the changes in the political relations, and geopolitical relations, between the key importing and exporting states. So what are these market changes that I'm talking about? And I'm sure the audience in this room knows these market changes very well.

But the ones I focus on in the book that I think are key is really the growth in LNG trade that we have been experiencing over the last 10 years, really probably since the Fukushima disaster, that really made the LNG markets global. And then of course the shale revolution, the North American shale revolution that has unlocked particularly for United States, its unconventional oil and gas reserves. And that has established the United States, now, as a major, major energy producer. Another factor is really the greater interconnections, the build-up of gas interconnecting infrastructure, across the world and also particularly in Europe - pipelines, LNG import terminals, connectors, reverse flows, and so on. And then finally, but certainly not least, we have climate change concerns which have been growing the appetite for natural gas both in Europe, both in the developed economies, and particularly in developing Asia, in the developing Asian economies.

So all of these changes together point, in my view, to a globalizing gas market. And, in fact, I think we can even call it a global gas market today. Although here I'll say the academics still debate this point quite vigorously. But I think maybe we're, here we can be a little bit more free and we won't get too upset about it if we call it a global gas market. And I think we're also seeing these changes are pointing increasingly to a buyer’s market, as well. So, you know, coming to, well, the big elephant in the room. Or, what are we willing to call it? The new energy superpower, as they call it in my work, it's the United States. The shale revolution really has established the United States as an energy superpower. It has created, made the United States the largest natural gas producer in the world, surpassing Russia. And that is a very significant development. And we also see the United States emerging as a leader in oil production. So again, very significant developments for a country that not only has a vast demand for energy resources, and one that until recently, anticipated to be importing a lot of its energy needs. So now, not only the United States anticipates to be self-sufficient, but it's also poised to be an LNG, a leading LNG exporter. It started exporting liquefied natural gas in 2016, with these American cargos going all over the world. And in a few years time, the United States is expected to take third, and then subsequently second place as the largest LNG exporter in the world. Again, dramatic, dramatic changes in the United States. And of course we see the leadership of the United States that is also very intent on using this energy diplomacy potential. And, whether we like the rhetoric or not, so, just to give you a little glimpse here, currently the United States has three operational LNG export terminals.

But, I'm just giving you a snapshot of one region in Louisiana. Just one region, which currently has about ten, you know, ten projects in the works and of course various stages of development, but ten projects for LNG export terminals. So again, very significant, you know having gone from, well, since the 1960's there was essentially just one LNG export terminal. Then in 2016, we had a second one open, this year, a third one, but ten in the works just in Louisiana. And a lot of the focus now today in the media is about American LNG exports, their actual volumes. Where they're going to go? Are they going to go to Europe? Are they going to meet Europe’s demand? Are they going to go to Asia? But I would say maybe what's maybe even more significant today is not just the actual volumes or exports of American LNG, but actually the impact of American industry, American gas industry, on the global gas trade, particularly the way of doing business and the terms that American energy companies are prepared to offer. So, particularly a move away from oil-linked gas pricing. Move towards more hub-based pricing, and move away towards long-term contracts, towards more medium-term contracts, and even spot trading short-term contracts, and so on. And no destination clauses, of course. That's something that has been already, you know, a regulatory factor in the EU. But the U.S. is offering those conditions across the globe. And again, the growth of LNG versus piped gas. So, all of these conditions, and this way of, let's say, America’s, an American energy company’s, way of doing business, I would say, also support the idea of a buyer’s market currently.

So this brings us to the other energy superpower, Russia naturally, and also here I'll step in with my area of expertise is really global energy markets, and as well with a focus on Eurasian security issues. So I also work on Russian foreign policy, and I have published a couple of books on the subject. So from my perspective, and there are different ways we can interpret it, but you know has Russia been just simply a supplier of energy to Europe? Has it used it as a source of influence? As a source of political leverage? Even has it used energy as a political weapon? Of course, I know this is a hotly debated topic. I would actually say all of the above. Russia has certainly used all of these tactics. So some of the examples are, of course, as you see on the on the slides, gas halts, political gas pricing, price hikes, threats of gas price hikes, particularly towards countries that were highly dependent on Russian gas imports. Countries where gas generally had a monopoly or near monopoly. Also gas has been for Russia not only a source of revenue, but I would say even more significantly, it has been a source of political influence. And the basis for doing, you know, diplomacy, for establishing friendships, and sometimes a little bit more than friendships.

And so we see a few, a few examples of European political leaders that have had very close relations with Vladimir Putin, often times in relation to gas pipeline deals being made. So of course we see former Chancellor Gerard Schroeder and the infamous Nord Stream pipeline project. We see Berlusconi and Erdogan regarding the South Stream and Turk Stream projects in the past. And then we see more recent Victor Urban of Hungary also has a close friendship with Vladimir Putin. And also you know has said he would love to see more Russian gas in Europe. So given what I had outlined earlier with the US now being an energy superpower, the largest natural gas producer in the world, does that mean that Russia is a declining, you know, declining energy power? And here I would say a little bit, well let's you know, let's hold our horses. Russia still is the largest gas exporter in the world. It still holds that position. It certainly has vast resources. And though in terms of LNG markets its, its position, and it's been trying to ramp up that position, but it's coming from you know catch up phase. Let's say it's in a catch up phase. So currently it is about number seven in in terms of LNG exports. And you know World Rankings, now Vladimir Putin has said that personally, he said that he'll make Russian a number one LNG exporter. Now of course he didn't give a timeline for that. I may be a little bit skeptical to see that in the very immediate term. But certainly we will see Russian LNG becoming very competitive in Europe, I think, really within the next year. And of course there are plans for new pipeline projects.

So there are two important pipeline projects right now that Russia is pursuing. One is Nord Stream 2 and the second one is the Turk Stream project. I view both of these projects as an effort by Russia to hold on to the European energy markets. And if you look at these two pipelines and their trajectories, they also signal which markets are very important, of course, for Gazprom. So the Nord Stream 2 pipeline project goes directly to Germany, and Germany is in fact, Gazrom’s largest European gas importing market. So naturally they want to pursue and maintain this market. In a way, I would say even lock it in, given the changes that we’re experiencing in the global gas markets, the greater competition, the moves to LNG, and so on. This pipeline again, is it just, is it just an exporter of natural gas, or is it an exporter of more friendships, political alliances, and even potentially corruption? I just came yesterday from Hamburg and Rostock. Rostock is the area where the Nord Stream 2 pipeline would be expected to land. And Germany is also watching Denmark's decisions very carefully regarding this pipeline. There though, of course, they have the impression somehow that it's a done deal and Denmark would do nothing about this pipeline. Certainly that is not the case. I'm sure the folks in this room know that very well. There's still a lot of decisions to be reached, and there are there a lot of problems with this pipeline and its implementation. Not least of course, is America's position. And maybe we'll get a little bit more into that into the discussion, but I can say now that the United States is quite serious about potentially sanctioning this pipeline. And thus, the companies that are involved in this pipeline as well. Currently, there are five bills that have been passed between the Senate and Congress that all directly would implicate Nord Stream 2 into a set of type of sanctions. You know, sanctions regime. So if even one of these goes into law, you know, so you see there's quite a bit of appetite and quite a bit of bipartisan support in the United States for sanctions on this pipeline project.

So the second one I touched on briefly, as well this is the Turk Stream pipeline. And Turkey is for gas the second largest European gas market. And again an effort to build the, and of course that growing, a growing market for gas with a lot of demand. So there is also an interest to maintain this market as competition, is heating up. And also Turkey then serves as a gateway to southeastern Europe. And these gas markets for Gazprom this is where Gazprom still maintains a monopoly position in many countries. So in terms of energy, energy diversification in Europe over the last few years, given these changes in the markets in terms of more liquidity, more competition, more LNG, we've seen some countries really grasp these opportunities. And I think some of the success cases are Poland and Lithuania. For example, that went from being 100% dependent on Russian gas, and countries that had experienced numerous interruptions to their gas supplies. In fact, Poland during the winter of 2008-2009, when Gazprom cut supplies to Ukraine. And because they’re further, you know, downstream the pipeline. In that cold winter, they in fact even had citizens freezing to death because it was so cold. They had about eleven casualties so you can imagine this is a highly sensitive political issue. If you have your, you know, citizens experiencing casualties actually because of a gas halt.

So Poland and Lithuania are countries that have built their own LNG import terminals. Lithuania, a floating terminal, a small-scale terminal to meet its, you know rather small demand. And Poland, as well, these are new developments. But the countries have already been importing Norwegian LNG, and last summer the first cargoes of American LNG. So also that was maybe a not so significant perhaps from a market perspective, these were one-off delivery’s. Although subsequently Poland has signed a new gas deal for 20 years with an American supplier. But from a political, from a symbolic perspective this was very important for these countries.

Croatia is another case there are plans for Croatia to build an LNG import terminal. We'll see how that goes through because Croatia was earmarked a hundred million from the European Union of funds to build this terminal. But literally as those funds were earmarked, Gazprom signed a 10 or 20 year deal with the local gas company to essentially meet all of Croatia's gas demand for the next 10 or 20 years. Essentially eliminating, you can see, the appetite for this LNG terminal. Nonetheless, the terminal has significance beyond Croatia’s local market because it would be a gateway from other southeastern European countries further down the line that don't have access to the coastline, the lovely coastline, that Croatia has. So we'll see. This is an important project. We'll see how it goes, how it goes ahead.

Here I'd like to discuss a little because our focus was quite a bit on Europe, but on developing Asia, particularly China. There were a lot of discussions post 2014, you know really when there was a deterioration of relations between Russia, and well, Europe and the United States following the annexation of Crimea. And then with much, I would say, pomp, Russia made this type of a turn towards the east. A pivot towards the east, and a pivot towards eastern markets. At the time many discuss whether this even signals a political alignment, or, you know, when you will kind of access them. At the end of the day I don't put that much stock in it, though the power of Siberia pipeline will open at the end of 2019, or you know, roughly in that time period. And will start delivering Russian piped gas to China. We can see from those negotiations that really even those discussions that started, you know, almost a decade ago, that at the end it was Beijing that dictated a lot of those terms rather than Moscow.

And China has a very well diversified and very, I would say, thought-out energy strategy particularly based on room with a focus on their energy security. I think they've learned some of the lessons from Europe, from not to get over dependent on any particular supplier. And in fact, I, in my book, I argue that they use their kind of power of demand quite well. So, in fact, your vast demand puts them in a strong negotiation position. So of course they'll have deliveries, piped deliveries, from Central Asia and Myanmar, Russia, they will also import LNG from all over the world. They are also pursuing very aggressively their own domestic gas development program both conventional and unconventional. In fact they are one of the only four countries in the world today that have a commercial shale fracking program. So I mean that's the United States, Canada, Argentina, and China. And they have expended vast amounts of money to pursue this shale program. And I would say, while many have been skeptical, because maybe their results didn't quite match, you know, the efforts and the investments. Still, it's only a matter of time given that it's such a political project for Beijing, and such a necessity that they will break through. And they will be producing significant, significant volumes from both their conventional and unconventional gas development programs.

India, another country in developing Asia where really we can see the future of gas demand. Both China and India will probably be setting that, setting the future of global gas demand, quite differently I would say than China. India, hasn't had such a maybe carefully thought-out and pursued a gas import strategy. Or get, you know, a gas program. For a long time they didn't have a lot of the infrastructure both internally for gas transit and gas imports. They're trying to ramp that up. But you can also see that from from a different position really, India had than China, in terms of their negotiations, I would say a weaker position up until this date. Though, there are now new efforts to renegotiate in Indian and their Galle company their gas terms and gas import supplies, of course also a large importer of LNG in the years to come.

So, this new geopolitics of gas and where I will say I will put here, the United States, in the center-front as this new emergent power, and of course with president Trump's proclaimed policy of energy dominance, and of course LNG diplomacy. This position, I think, sometimes raises some eyebrows and maybe some smiles in Europe. And I see that in the audience even as I say these words but here you have to realize that in fact but and also you can say today there's a lot of discussion, well is America only pursuing, potentially pursuing sanctions against Nord Stream 2 because they have their own LNG to sell? You know is it only a new commercial interest? And here I would point that if you look go back to the 60’s, really as far back as the 60’s, America’s and Washington's position on this topic has been unchanged, very consistent, and in fact, values driven. So since the 1960's the United States has been very cautious about its European allies becoming over dependent on, well at the time Soviet, and subsequently Russian, gas. Naturally, as NATO's largest power, and let's face it as a security guarantor for a lot of the European states, the United States is directly implicated in the energy security considerations or risks of its allies.

So again since the 1960's they've tried to dissuade their European partners from pursuing and importing Russian gas. In the early 80’s, President Reagan sanctioned a pipeline that was being built at the time. The sanctions didn't go far. There was an economic downturn, and also they didn’t, United States didn’t, have much to offer as an alternative. Again looking since after the Cold War the United States has supported projects like Nabucco the southern gas corridor. So it would bring alternative Caspian gas to the Europe, the European Union again not American gas. It has also tried to dissuade Germany from building Nord Stream I, but I think what has changed today really is the fact that the United States said it has gas exports and it now is no longer worried about its own supply. It has a surplus and it can export that to its allies not only in Europe, but also in Asia. Many of which also tend to be energy import dependent. And even if we look at Asia, Japan, historically Korea, you know, very energy and particularly gas import dependent countries.

So here again I was, as you raise your smiles and eyebrow, add this new energy dominance and diplomacy. Do consider that this has been a very long-standing American position. So given these changes in the energy markets, given as I said, now importing countries have more options. They have, there's more liquidity in the market. There are new players with you can say fairer, perhaps, terms like the United States. And potentially a buyer’s market so should we still be concerned about energy security or energy risks? And here I just put out some thoughts from a recent study I did from the hybrid COE Center which is a new center focusing on hybrid warfare threat risks that was recently opened in Finland by NATO and EU member countries. So, in fact, risks remain. And in these globalizing markets there's more infrastructure that we have to worry about, and more new infrastructure and their security. In the cyber and digital age. of course, they're more risks from state and non-state groups in terms of hackings or cyber attacks on our energy sector and our infrastructure.

And there's also the role of propaganda and information warfare that many of us maybe don't think about when we think about the energy sector. But we see it increasingly over over the last, you know I would say, decade. There was one instance there was quite an interesting case in the United States in the Columbus chemical plant where there was a media type of operation, a false operation, seemingly connected to, you know, to Russia, that argued that there had been an explosion in this chemical plant in the United States. And there were these types of messages and social media and so on, causing a public panic essentially in the region. So again, maybe we don't think of propaganda as something is that important energy sector, but increasingly with social media and our digital information age it can become, at least a you know, at least at risk, least a source of concern for the public.

Questions of corruption, a case that Denmark I think, has recently been more focused on in terms of the Danske Bank case. Cases for using energy for different interest groups for foreign influence. So again we're not, even though we're in an era of globalization, greater liquidity, more supply, and better terms, we're really not in an era of post energy security.

So I will leave it at that and I think we'll have a few questions and I hope to get some questions from the audience. You can always reach out to me or follow me on Twitter, and I put up also some of my past work, my past books, on the slides. So you get a little bit of an idea of my area of work. Thank you. [Applause]