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St. Petersburg Summit

Finland's EU Presidency and Energy Issues

Keynote speech by Matti Vanhanen,
President of the European Council
European Business Leaders Convention,
St. Petersburg, July 7, 2006


As president of the European Council, Finnish prime minister Matti Vanhanen will participate in the G8 St. Petersburg Summit on July 15-17, 2006. Finland holds the rotating presidency of the council from July 1 to December 31, 2006.

Mr Chairman,
Ladies and Gentlemen,

I feel privileged to be here with you in the lovely city of St. Petersburg today and it is a great honour to speak at your meeting. You have chosen a very crucial topic, Europe's energy needs and the role of Russia, at a time when energy is very much at the forefront of the international agenda and Finland's EU Presidency.

I might add that one of my very first speaking engagements as Prime Minister was at a European Business Leaders Convention in Helsinki, three years ago in July 2003. I feel very much at home at this convention and I am glad to be back.

Energy is one of the key issues for Finland's EU Presidency. There are many obvious reasons for this. Global demand for energy is growing fast. Oil prices are high and volatile. At the same time, the need to fight climate change and protect the environment creates further challenges for our energy policies. There is a clear link between the development of energy policy and environmental protection, especially as regards climate change.

Ladies and Gentlemen,

Developing the external dimension of EU energy policy will be a leading theme during our presidency. This is mainly about finding a common understanding with our external partners on how to develop a mutually beneficial framework, which satisfies both consumers and provides a fair long-term outlook for producers. Russia is a strategic partner to the EU, and this is especially true in energy, where Russia and the EU have complementary needs – the EU as a customer and Russia as a supplier.

During our Presidency, there will be a number of occasions, including summits, at which we can discuss these issues. On 20 October in Lahti, European leaders will have the opportunity for a more informal exchange of views on energy relations. President Putin will attend the dinner in connection with this meeting. At the EU-Russia summit in November we can promote energy cooperation between the EU and Russia, which is one of the priority issues during the Finnish Presidency. Much sooner, next week here in Saint Petersburg, global energy security will be in the spotlight at the G8 Summit. I am looking forward to that opportunity to address this issue.

Ratification of the Energy Charter by Russia and the conclusion of negotiations on its Transit Protocol would be a welcome and concrete step. The Energy Charter Treaty would bring about transparency and dispute settlement mechanisms that would enable mutual confidence and encourage investment, while also introducing long-term stability.

The EU has many instruments to develop the external dimension of energy policy. I would now like to make a few comments on the basic tenets that should underpin the development of the EU's energy policy, especially its external dimension and the role of Russia.

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First of all, I think that we need to recognise the fact that the cornerstone for energy security is a well functioning energy market. Markets are not only about customers: suppliers are also part of the system. Therefore, we cannot limit ourselves to looking at the energy market only from an EU perspective: relevant suppliers need to be included in the picture too. An effective market does not stop at the EU's border and this is what the development of the external dimension of the EU's energy policy is all about.

At EU level, we support the extension of internal market principles to our neighbouring countries. An important concrete step in this direction has just been taken with the entry into force of the Energy Community Treaty on 1 July. At present, this Treaty covers the countries of South-East Europe, and is thus also an important factor in regional integration. However, the objective is to extend the Energy Community to other neighbours of the Union as well.

Another possible way to extend the EU's internal energy market is through the European Neighbourhood Policy. The Neighbourhood Policy already covers most of the EU's Eastern and Mediterranean neighbours, many of which are important energy producers or transit countries.

We need truly European energy markets, European not in the EU meaning, but pan-European including Norway, Russia, the Ukraine and other EU partners.

Well-functioning markets need to be developed more globally as well. Open and efficient markets are one of the keys to ensuring energy security. I would also like to emphasize the importance of a stable regulatory environment. After all, the ownership of energy companies is not the key issue, but whether they operate within a healthy regulatory framework. Many European energy companies are publicly owned, and most Russian companies are privately owned. Transparent and predictable regulatory frameworks generate investment at all levels of the energy chain. And investment is what we need to respond to the growing challenges.

This brings me to my second point, which is about infrastructure. We need more investment in the energy sector at all levels. The infrastructure for energy transfer is inadequate both within the EU and Europe at large. Overall, the energy infrastructure is still too national, with not enough cross-border networks. Cross-border capacity is very limited and transport routes are too few. Without an adequate network, markets cannot function properly. A more networked energy infrastructure would also contribute to energy security, by providing alternative supply routes.

Investment is also needed in extraction and production. I think that it is reasonable to assume that Russia needs to invest more in its energy sector in order to remain the strong producer it is today. Its commitments with regard to the supply of energy are such that greater investment is essential. I believe that foreign investment has a crucial part to play in this process both financially and in technological terms. This is where a transparent and predictable regulatory framework is of paramount importance.

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Adequate energy supply is never only about production. Energy use is the other side of the coin. I believe that investing in more efficient energy use is one way of ensuring adequate supply. There is a huge potential for energy saving and conservation. Energy efficiency can be increased at all stages: production, transit and consumption. Energy saving is one of the key elements in a sustainable energy policy. This is a field where the EU and European companies have much to offer Russia and others too. I think that we should make further efforts to foster cooperation with the aim of increasing energy efficiency.

So, what does this mean in concrete terms for the relationship between the EU and Russia as regards energy? I am convinced that market logic means that the EU will remain Russia's main energy customer and Russia the EU's main supplier. Demand and supply fit nicely, in geographical terms too. It is reasonable to assume that, in the future, Russia will develop its Asian markets, but this will take time and investment. And common sense tells us that supplies will come from new sources closer to the Asian markets.

During the Finnish presidency of the EU, Russia has an excellent opportunity to demonstrate its willingness to work constructively with the EU as a reliable supplier and energy partner.

The key in developing this energy relationship between Russia and the EU is reciprocity. The EU wants to be an open market for Russian energy and companies. I think that at the same time it is fair to assume that open EU markets will be met by opening Russian markets, which in concrete terms would mean openness to greater foreign involvement in the energy sector, opening energy infrastructure up to competition, including transit, and strengthening the regulatory framework by making it more predictable and more transparent. A solid regulatory framework would dispel any fears of energy being used for political ends.

I believe that in addition to cooperation with the EU, Russia's accession to the WTO can do much to help all this happen. I look forward to working with Russia during our Presidency on laying the ground for a mutually beneficial energy partnership between the European Union and Russia.

Energy trade with Russia should be based on business interests, long-term contracts and market prices.

During the Finnish Presidency, we want to agree on a mandate for renewing the present Partnership and Cooperation Agreement between the EU and Russia after 2007. This is also a good opportunity to consider EU-Russia energy relations and their contractual basis. I very much welcome the Commission's broad vision of aiming for a free-trade area with Russia, once Russia is a member of the WTO.

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Ladies and Gentlemen,

Energy is a basic need, and therefore a strategic commodity. Energy security is a fair concern. However, legitimate concerns about energy security should not obscure the fact that all markets create a degree of interdependence, which in itself is a basis for cooperation, not conflict. European integration is built on this idea. We need to recognise the growing interdependence between producing, consuming and transit countries. Intensified international cooperation is needed to ensure stable development of our energy markets, which is a necessary basis for economic development. The EU is ready and willing to be an active partner in this cooperation.

Diversification of energy sources is essential for energy security. Together with functioning markets, diversification makes energy systems more able to cope with external disruptions. In Finland, we have deliberately built a wide energy mix. We rely on oil, gas, hydroelectric power, wood and peat to name a few. Additional nuclear power capacity is being built as we speak. No individual energy source is dominant and our energy system is complemented by an integrated Nordic electricity market.

Renewable energy sources play an extremely significant role in Finland. The most important of these is wood-based fuel, providing over 20 per cent of total energy demand. The promotion of renewable energy sources is a priority for Finland, both in its own right and as the holder of the EU Presidency, not least because of their importance in limiting CO2 emissions. However, one model does not fit all. National circumstances are very different. For some countries, for instance, wind energy is a more natural option than bio-energy.

In the discussion on EU energy policy, one should always keep in mind that the choice of energy sources is a matter for the Member States. This becomes most evident when looking at national policies on nuclear power. There is wide agreement that this competence should be kept at the national level in future. However, a strong national competence in energy policy does not mean that the EU has only a marginal role to play. I am convinced that, in energy, we need more Europe, not less. The EU has a crucial role to play in building a real internal market in energy, which should be complemented by ensuring extensive connections to external suppliers as well.

The Finnish Presidency attaches great importance to the effective implementation of internal markets in electricity and gas. One might observe – with hindsight – that the slowness of the EU in liberalising its energy market has been a strategic mistake. The EU would be in a better position in terms of energy security, if markets had been opened earlier. This would have led to more cross-border connections and a more robust common energy market. At the same time we should not lose sight of the fact that energy markets are built by companies, not governments.

Mr Chairman, Ladies and Gentlemen,

A crucial challenge for the European Union is to bring concrete benefits to our citizens and to our businesses. I hope that energy – especially an understanding with Russia on the road ahead – will be among the concrete results of the Finnish Presidency. Thank you.

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