January 11, 2020

Shattering the “Ring of Fire” – An Interconnectivity Strategy for European Energy Security

By Leon Donadoni

Executive Summary

The energy transition’s uncertain outcome, coupled with the current instability of the Middle Eastern, North African and Eurasian geopolitical landscape, has paved the way to newfound challenges for the European Union’s energy security policy. Among these challenges are several geopolitical risk trends that breed commercial uncertainty, hinder investment and planning and have the potential to spill beyond the economic dimension to adversely impact political relations. To transform challenge into opportunity, the European Union must embrace multilateral interconnectivity and cross-regional dialogue. Only by speaking with a single, coherent voice will Europe be able to mitigate the numerous structural risks associated with its current energy security dilemma.

The EU’s Energy Security Dilemma: A “Ring of Fire”?

For the European Union, energy issues are inevitably intertwined with “hard” and “soft” security, economic and financial health and environmental concerns.1 This is primarily due to Europe’s role as a leading energy importer that heavily depends on energy-producing and transit countries for 53% of its domestic energy consumption. Today, the EU accordingly imports 90% of its crude oil, 66% of its natural gas and 40% of its solid and nuclear fuel.2 Russia, Norway and Algeria alone provide for over 80% of the EU’s energy imports, with Ukraine, Belarus and Turkey being vital transit countries through which European energy travels. Because of Europe’s burdensome energy dependency relations, “changes in political, military, diplomatic, and economic policies and strategies directly relate to the energy challenges and opportunities which shape the global energy landscape.”3

In the past decade, the geopolitical volatility of the European neighborhood has undoubtedly brought more challenges than opportunities. The European Union now finds itself encircled by a “ring of fire.” In the east, Russia’s annexation of Crimea and its on-going destabilization of Ukraine has severely compromised the first’s trustworthiness as Europe’s leading energy supplier and the latter’s role as a stable transit country. Further aggravating the situation have been the seven rounds of sanctions between Russia and the EU, which have caused gas cuts in Slovakia, Austria, Poland and Romania, increased risk premia and threatened shortages in the rest of Europe. This is particularly true in light of the development of the Nord Stream II project and Gazprom’s monopoly over the gas sector in six EU Member States, both of which leave Europe more vulnerable to Russian energy blackmail.

The situation in the southern neighborhood is no better. Turmoil in the Middle East and North Africa stemming from “leadership transitions, civil war, demographic challenges, migration and insurgency” has largely jeopardized the stability of a region that has historically been crucial for EU energy supply.4 The oil supply chain from Libya, the largest petroleum reserve in Africa, has been extensively damaged by the ongoing civil war in the country. Deeper trade, business and investment relations in energy-rich Egypt and Algeria seem unlikely considering the political and economic uncertainty affecting the two countries. And Turkey, traditionally a stable gas hub connecting the European and Central Asian markets, has now abruptly transmuted into a volatile and inconvenient partner driven by geopolitical self-aggrandizement and domestic power struggles.

Last, in the east grows perhaps one of the biggest and most overlooked potential causes of European energy insecurity. China’s ambitious expansion outwards, driven by its “One Belt, One Road” initiative, poses a severe threat to the EU’s competitiveness in Central Asia. The People’s Republic’s critical role in the creation of new energy corridors in the region has the capacity to reorient energy trade away from Europe and underscore the EU’s energy security architecture in Central Asia and the Middle East. Being the largest energy consumer in the world, China’s competing set of regulatory guidelines and frameworks will undoubtedly pose a major challenge to the EU’s ability to shape the standards and patterns of “energy trade, technology and exchange in the wider neighborhood”.5 China’s westward expansion, if left unchecked, will thus further damage the EU’s already minimal influence over international energy prices, therefore leaving Europe with little to no voice on the issue.

Mitigating Risks and Securitizing Supply: Multilateralism and Interconnectivity

These shifts in energy and geopolitics serve as a wakeup call for the European Union to formulate a more strategic approach vis-à-vis its external energy policy. Given Europe’s burdensome energy demand, achieving European energy independence by investing in renewables on the short-to-medium run is, unfortunately, unattainable. On the other hand, as energy-related risks stem mostly from geopolitical cross-border issues, enhancing energy interconnectivity will unquestionably make the sudden failure of Europe’s interdependence less painful. Consequently, broadening (rather than deepening) connectivity is imperative if the EU wants to securitize its energy supply chains and shatter the “ring of fire.” Increasing multilateral governance and cross-regional dialogue will result in the improved affordability, security, efficiency and sustainability of Europe’s energy policy.6

To ensure connectivity, EU members should be more aware of the risks associated with higher intra-European energy fragmentation. By offering competing sets of technical norms, standards and preferential trade benefits to unstable partners, EU Member States only but increase their vulnerability to external supply shocks. Seemingly, a disjointed European energy strategy is only likely to devolve into greater divisions among different economic blocs, market orders and regional groups. To address such issues, European energy policy should be delegated to multilateral, unitary actors capable of upholding competitive rules and norms that provide a minimum level playing field for energy suppliers across the Middle East, North Africa and Eurasia. Given the current fatigue and restraining dissensus affecting the EU, there is little impetus to achieve so through the creation of new organizations. Hence, the only alternative to enhance interconnectivity is to reinvigorate and expand existing institutions.

Based on these considerations, the EU must spearhead the efforts to bridge the divide between differing regulatory spaces in order to decrease energy policy fragmentation. This can be achieved by setting up cross-regional dialogue platforms, cooperation mechanisms and common standards in a way that enhances energy interconnectivity across the entire European neighborhood. To ensure so, the EU and its financial institutions must deepen energy-related cooperation with other multilateral organizations such as the OSCE, the World Bank and the UNECE. Joint ventures in energy project finance, infrastructural connectivity developments and R&D will strengthen multilateralism, regulatory enforcement mechanisms and European norms both within and abroad. Seemingly, the European External Action Service is an essential player that can coordinate with the Member States’ foreign affairs ministries, incorporate energy-related issues in its external aid instruments and act as an aggregator of European energy demands, thus increasing the EU’s bargaining power.

With regard to diversification, the EU must look beyond its closest existing suppliers and redirect its attention towards the Caspian region. The completion of the Southern Gas Corridor is therefore an essential component of the grand strategy directed at reducing energy dependence on Russian gas. The Southern Corridor also has the added benefit of pulling Azerbaijan and Georgia closer into the EU’s neighborhood, hence countering any possible Russian economic expansion into the Caucasus. Moreover, the potentials for the extension of the project are high, and, in time, countries such as Turkmenistan, Kazakhstan, Iraq and Iran could also significantly contribute to the growth of a diversified gas stream into Southern and Central Europe. Enlargement of the project would additionally address the emerging role of China in Central Asia as a disruptive force and contribute to guarantee a “stable, transparent, rule-based and liquid energy market” in the region.7

Policy Recommendations

In light of these considerations, the policy memorandum suggests the following course of action:

  1. The EU should support the creation of an energy dialogue platform that furthers multilateralism and brings to the table private and public sector energy stakeholders with existing institutions such as the OSCE, World Bank and UNECE. The platform should set a global energy harmonization agenda and develop a single set of minimum rules regarding critical infrastructure, trade and transit and regulatory and technical guidelines.
  2. The EU should encourage its members, neighbors and energy partners to work more closely within the Energy Community with the aim of encouraging dominant suppliers to adhere to internal market and competition rules and increase cooperation on reverse energy flows between countries that are at risk of supply shocks (such as Moldova and Ukraine).
  3. The EU should aim to reduce its external dependence on particularly volatile suppliers, such as Russia and the North African energy-exporting countries. Member States should support the reinforcement of strategic energy partnerships with stable partners (such as Norway) and accelerate the completion of the Southern Gas Corridor connecting the Caucasus to Europe.
  4. In the long run, the EU should spearhead the efforts for a costless and secure energy transition to a low carbon economy and expand its subsidies for the domestic production of renewable energy. The European Investment Bank and the European Bank for Reconstruction and Development should play a greater role in financing wind, solar, hydro and geothermal energy.
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