Corporate Foreign Policy and the Fate of UK Energy Security

[Over the next number of weeks, I am going to be taking a closer look a phenomenon my colleagues and I are calling “Corporate Foreign Policy” – the comparative strategies of engagement with governments carried out private corporations. Not only will these discussions about Corporate Foreign Policy allow us to assess the impact of the actions of these newly empowered non-governmental actors, but also put forward a construct for the promotion of rule of law and transparency by the private sector in an era of increasing resource nationalism and opacity in countries such as Russia, China, Venezuela, and elsewhere. – Robert Amsterdam] In the near future, Russia could own 10% of generation and major stakes in two out of the three pipelines supplying the United Kingdom One of the most under-appreciated impacts of the rise of Russian resource nationalism is that private companies are now increasingly finding themselves with policy powers formerly only known to the public sector. Case in point, as the rumors swirl around Gazprom’s creeping interest in gradually acquiring more and more energy infrastructure in the United Kingdom, a large part of the nation’s energy security lies not in the hands of government authorities, but rather with the business decisions of the German energy firm E.ON. E.ON UK is the second-biggest energy company in the United Kingdom – both in generation and distribution, owning coal, gas, oil and renewable generation assets. It owns Powergen, an acquisition it completed in 2002, which gives it 10% of the distribution market, a pearl highly sought after by Gazprom.

In order to convince E.ON to give up these lucrative assets – right at the heart of one of Europe’s principle demand centers, Gazprom is said to be offering the Germans a 25% stake in production at the Yuzhno Russkoe natural gas field, one of the main sources for the planned Nord Stream pipeline from Russia to Germany. Under the potential deal, the Kremlin will gain control over five gas-fired power stations in the UK including Killingholme, in Lincolnshire; Taylor’s Lane, in Willesden, London; Cottam Development Centre, in Nottinghamshire; Enfield, in London; and Connah’s Quay, in Flintshire. Yet despite the very real possibility that the decisions of a German energy company could soon put UK electricity consumers in direct contact with the Russian government, the British government has its head completely in the sand. The May 2007 White Paper on Energy does make brief mention the threat of resource nationalism, but not once do we see the word “Gazprom.” Gazprom’s move in the United Kingdom is a long term game – even if they take control of all of E.ON’s assets, including Powergen, they of course would still be very far away from any sort of monopoly. However, what happens at the margins of the energy sector matters, and with 10% market share and direct access to consumers, any threats of supply disruptions can have a dramatic effect on prices and supply over the coming years.

Meet Wulf H. Bernotat, CEO of E.ON, and unofficial British Minister of Energy

As Gazprom continues its wining and dining of E.ON, something we have seen with the Nord Stream and other projects, and German firm will increasingly find itself in the role as Europe’s disaggregator, and for the United Kingdom, this is cause for worry even beyond the sale of 10% of its market. E.ON and Gazprom together control the largest stake in one of the country’s three main pipelines, the Interconnector, which will soon have capacity for 25.5bn cm/y – ie, a quarter of UK demand. Gazprom could also gain a stake over the Balgzand-Bacton Line (BBL) pipeline from Gasunie, which wants in on the Nord Stream. For many observers, it is already becoming exceptionally clear how useful the Nord Stream is as a bargaining chip even before it is built. But what rights should a German company have to hand over the energy security of British citizens in exchange for Russian assets? Does the UK government really wish to see British energy consumers – and voters – used as pawns in a chess game being played by Russian and German companies? Gazprom has no interest in advancing the European liberal market policy, as it has stated many times. Should it be welcomed to the heart of Europe’s most liberalized energy market? There are of course arguments that say Gazprom should be allowed into the British market so that it gets “normalized” – made to face market conditions and competition, be made to finally ratify the Energy Charter Treaty, and that Russia would be less likely to cut off supply to its own subsidiaries. Some even go so far as to suggest they expect reciprocity for better conditions for European investment in Russia. These arguments are not flawed by logic, but rather by the presumption of rational and regular behavior on behalf of Moscow, when quite to the contrary we have a firmly established record of lawless violations on contracts, supply cuts, and an overt politicization of the energy sector. It is high time that the United Kingdom started to do what most other nations in Europe are doing – make the energy security concerns of their citizens a strategic priority.