Queen's Speech

Lord Truscott Excerpts

Wednesday 2nd June 2010 Lords Chamber

[Lord Truscott]

My Lords, I, too, congratulate the Minister on her well deserved appointment. As Energy Minister in the former Department of Trade and Industry I had the privilege of working opposite the noble Baroness, Lady Wilcox, whose intelligence and tenacity I always admired.

Today I should like to address the issue of energy security, which was mentioned in the gracious Speech, and I look forward to seeing the proposed energy security and green economy Bill. I am pleased that it was included in the coalition Government’s programme for government, although I am still not clear how Ofgem is supposed to guarantee energy supplies—it would require a very long reach indeed—and I look forward to being enlightened when the debate is wound up. I refer noble Lords to my relevant interests as laid out in the register of interests.

As I documented in my recent Royal United Services Institute report on energy security, the European Union is becoming increasingly dependent on Russian supplies of gas as its mature fields in places such as the North Sea basin face decline and depletion. Short-term boosts such as the current gas price and potentially plentiful supplies of LNG or shale gas will not alter this basic fact although they may mitigate its impact.

Russia, as one of the world’s current three largest emitters of CO₂, behind the US and China, is part of the climate change problem and so must be part of its solution. However, despite the recent passage of the new energy saving and energy efficiency law, the Russian Federation is one of the most energy intensive economies on earth, projected to approach the US as the world’s top emitter by 2030.

There is an urgent need for EU member states to engage in coherent energy diplomacy. It is vital that the political and diplomatic status of energy security, which is closely related to climate, food and water security, is elevated to the top of the foreign policy and security agenda. Europe has woken up late to a new great game over energy. Playing out from central Asia to the Gulf of Guinea in capital cities and energy ministries, we are seeing producers pitted against consumers in a scramble to secure energy supplies.

“The rules of this game”,

suggests economist Joseph Stanislaw,

“are still being written, but its broad outlines are already clear. It is no longer confined to Central Asia—as was the original Great Game of the 19th century, pitting the British and Russian empires against each other”.

The Russia-Ukraine gas supply spats of 2006 and 2009 were a belated wake-up call to European politicians to the importance of energy security. Nothing concentrates politician’s minds more than when the lights go out.

Europe’s main gas suppliers are Russia, Norway and Algeria. Together they supply 84 per cent of gas imports into the EU. Russia is the most important single supplier. Oil and gas now account for 61 per cent of Europe’s energy inputs. Left unchecked, projected rates of consumption would see energy dependency on non-European sources grow from 50 per cent in 2000 to 70 per cent by 2030. By 2030, 90 per cent of oil consumption would have to be met by imports; gas dependency would rise to 80 per cent, with projected imports from Russia expected to reach 60 per cent; and two-thirds of coal usage would be met from foreign sources. Russia has the largest proven gas reserves in the world and the second largest coal reserves, and it is the planet’s second biggest exporter of crude oil.

Having first launched talks in October 2000, the EU and Russia have repeatedly attempted to establish an energy dialogue that will cement long-term Russian access to European consumer markets and European security of supply. This dialogue has struggled to advance.

In 2006, oil and gas accounted for nearly 50 per cent of Russian federal budget revenues, more than 60 per cent of exports and 30 per cent of GDP. Unlike Moscow’s Commonwealth of Independent States’ customers, the EU pays world prices for its Russian supplies. These have provided Russia with the bulk of its foreign exchange earnings. Europe also provides an important source of foreign investment in Russia and is an important market for expanding Russian companies.

However, Russia’s refusal to ratify the energy charter treaty and the transit protocol, a set of international rules for investment and trade in the oil and gas sector, has undermined European confidence in Russian energy markets as a stable source of supply. This was compounded by the fallout from Russia’s pricing war with Ukraine, which led to supply disruptions for downstream EU member states.

The best hope for the EU is to try to enshrine the principles of the ECT and transit protocol in a new partnership and co-operation agreement, whose tortuous negotiations have already restarted following the conflict in Georgia. Fears that Russia will seriously diversify away from the EU to other markets, principally China, look largely misplaced. Given Russia’s reliance on European consumer markets, the ability of Moscow to use energy as a weapon is severely undermined.

Europe should continue to press for liberalism at home, but within a rubric structured on areas of mutual interest; that is, energy, trade and investment. It is in these areas that the EU will get Russia’s attention and have most scope for shaping a pro-Western outlook. In this context, the EU should continue to support early Russian membership of the WTO and, later, the OECD to encourage Moscow to play by the international rules of the game, embracing market principles, free trade and reciprocal investment and legal rights.