Why energy is front and center in EU-US trade talks

Heavily dependent on Russia for its energy needs, European trade negotiators are looking for a visible anchor to US energy supplies, writes Douglas Hengel of The German Marshall Fund of the United States.

When negotiations between the United States and the European Union began on the Transatlantic Trade and Investment Partnership (TTIP) in 2013, a top priority for the Europeans was inclusion of a chapter specifically covering raw materials and energy. Although a separate energy chapter is not the norm in free trade agreements (FTAs), the North American Free Trade Agreement (NAFTA) does contain one and the EU-Ukraine FTA agreed in June 2014 has specific energy provisions. A strong case can be made to highlight the geopolitical implications of energy in TTIP as well, consistent with language in the U.S. National Security Strategy that underlines the importance to the United States of Europe’s energy security.

While the Europeans have argued that trade in raw materials and energy is not well covered by existing international trade and investment rules, and that together we could set high standards for future negotiations, uppermost in the minds of Brussels and EU capitals was ensuring access to the rapidly increasing supplies of crude oil and natural gas being produced on this side of the Atlantic. Exports of U.S. crude oil are largely prohibited and exports of U.S. natural gas are subject to license (although automatic if the country of destination has a free trade agreement with the United States). Heavily dependent on Russia for its energy needs, and feeling vulnerable after multiple cutoffs of gas supplies by Moscow in recent years, the Europeans see a discrete TTIP energy chapter as a visible anchor to U.S. energy supplies and a tangible commitment to their energy security. To Brussels, a separate chapter would also highlight provisions on transparency and third party access to natural gas pipelines that could be used to combat discriminatory practices by Russian monopoly gas exporter Gazprom.

The calls of European leaders for an energy chapter in TTIP reached a crescendo following Russian aggression in Ukraine in early 2014 and threats of another gas cutoff. Then EU Trade Commissioner Karel De Gucht went so far as to declare that Europe would not agree to TTIP without an energy chapter while visiting Washington in September 2014. While the ardor of EU leaders has diminished somewhat, their talking points with U.S. officials and in public regularly underline their strong interest in an energy chapter. Leaders from Central and Eastern Europe, those most exposed to Russia’s use of gas as a political weapon, also argue that highlighting energy provisions will help convince their Parliaments to ratify TTIP.

The U.S. side believes that most of what the EU wants from TTIP on energy will be covered by provisions under market access or elsewhere in the agreement, or simply by virtue of finalizing the agreement itself (e.g., automatic access to U.S. natural gas exports). While officially neutral on the issue, U.S. negotiators have questioned the need for a distinct energy chapter, and there has been no formal response from Washington to the “illustrative provisions” of an energy chapter that the European Commission has proposed. Given the sensitivity of the debate in Washington on U.S. crude oil exports, opposition by many environmental groups to a TTIP energy chapter (out of concern it will lead to greater U.S. hydrocarbons production), and that there is no clear champion of such a chapter (leading industry groups believe their interests can be met through general treaty provisions and are leery that stand-alone energy language could lead to additional regulation by Brussels), U.S. negotiators see no evident upside in agreeing to the EU’s proposal, especially in light of all the complex issues already on the table. In the meantime, the U.S. Department of Energy has authorized exports of over 100 billion cubic meters a year of liquefied natural gas to countries without free-trade agreements with the United States, roughly two-thirds of current Russian gas sales to Europe. Assuming all the approved plants are constructed, some of this gas can be available to Europe in coming years whether or not TTIP has been signed. This meets one of Europe’s key interests – a secure source of gas should Russian supplies again prove unreliable.

So if liberalizing U.S. crude oil restrictions through TTIP if off the table as too problematic, and U.S. natural gas will be available to Europe beginning in early 2016 with or without TTIP, what would be gained by a distinct energy chapter in the agreement? Would separate energy provisions be merely symbolic?

A convincing argument for an energy chapter can still be made, including the symbolism. The new U.S. National Security Strategy acknowledges the “significant stake” the United States has “in the energy security of our allies in Europe.” To that end, the United States pledges to “promote diversification of energy fuels, sources and routes…” Although appropriate language could be inserted at different points in the TTIP text, conveying robust commitments on both sides in a discrete section would underscore the significance of the issues. One of the strategic arguments for TTIP is that it can set high standards that act as a blueprint for future bilateral or multilateral agreements. Advancing strong disciplines on transparency, market access, competition, and non-discrimination in energy, inspired by TTIP, would serve our respective interests.

The Europeans need to explain more convincingly than they have to date how a TTIP energy chapter will help them implement their Energy Union and advance energy security, in particular the commitments made as part of the G7 energy security initiative agreed in Rome in May 2014, which included encouragement of indigenous sources of energy supply. How would a strong TTIP text influence EU-wide and national energy regulations? How could Brussels use a chapter to strengthen implementation of its market-opening Third Energy Package and help break Russia’s grip on Europe’s energy sector as EU Trade Commissioner Cecilia Malmström has advocated? Implicit in this is how Brussels could use TTIP to corral certain member states that are more prone to Russian enticements.

NAFTA contained separate energy language because both the United States and Canada sought to firm up commitments each had made earlier by highlighting them here, and the United States hoped to spur liberalization of Mexico’s then mostly closed energy sector. There are enough pieces to the energy puzzle, including liberalizing trade in green energy goods and services and convergence of EU and U.S. standards to promote energy efficiency, to package them together in a way that makes a convincing strategic case for carving them out of the rest of the text. Thus, the same logic that applied in NAFTA can be employed in TTIP, and hopefully lead to greater global convergence around trade rules for energy that enhance security and sustainability.

Douglas Hengel is a Senior Resident Fellow with The German Marshall Fund of the United States (GMF). The views expressed are the authors’ own and do not reflect those of GMF or the U.S. Department of State.