Dependency on Russian Gas Makes the EU Impotent

The crisis in Ukraine has put the EU on high alert not only because of the prospect of war on its border, but also because the conflict between Ukraine and Russia threatens energy security in the rest of the continent as 30 percent of the EU’s natural gas imports come from Russia. At the European Council summit two weeks ago, the EU’s 28 chiefs made a commitment to cut the EU’s dependency on Russian natural gas. Speaking at the U.S.-EU Energy Council summit, Secretary of State John Kerry pledged U.S. help in weaning Europe off Russian energy.

Image courtesy Bair175, © 2011. Some rights reserved.
Image courtesy Bair175, © 2011. Some rights reserved.

Calls for the EU’s long-overdue energy diversification come as a result of Russia’s increasing willingness to use its energy resources as a tool of political intimidation. “Russia uses natural gas as one of its main trump cards in its foreign policy toolkit,” says Amanda Paul, a foreign policy analyst at the European Policy Centre, a Brussels-based independent think tank. “It is able to raise or drop prices as it feels like it, depending on its foreign policy needs, or cut out supplies altogether.” This puts the EU in a vulnerable position, as 13 EU countries import more than 50 percent of their natural gas from Russia (and four of them rely solely on Russian exports). According to the International Energy Agency, the EU’s energy dependency on Russian energy (including imports of both gas and oil) is set to rise from the current 60 percent to 80 percent by 2035.

Surely, Russia is not likely to cut gas supplies to Europe any time soon. Doing so would negatively impact Gazprom (which draws 60 per cent of its revenue from the European market), the Russian economy, and Putin’s cronies. Moreover, the EU is better placed to withstand a disruption of gas supplies than in 2009, when Gazprom shut off gas exports to Ukraine. Largely due the recently opened Nord Stream pipeline, connecting Russian gas directly to Germany through the Baltic Sea, the share of gas flowing to Europe via Ukraine has decreased to 50 percent. Since 2009, the EU has also built several “interconnectors” between different countries designed to transport gas from countries with excess supplies to those that face a shortage. Although far from completed, this project is a major step in the creation of an integrated energy market in Europe.

Most importantly, however, the dependency on Russia’s energy supplies makes the EU rather impotent in effectively responding to crises such as the one in Ukraine. Poland’s prime minister, Donald Tusk, expressed his concern over Europe’s ability to respond if Russia moved beyond Crimea: “We will not be able to efficiently fend off potential aggressive steps by Russia in the future, if so many European countries are dependent on Russian gas deliveries or wade into such dependence.”

The creation of an integrated energy market within the EU and diversifying away from Russia’s energy supplies would have two major benefits: First, it would allow the EU to assert a more unified and effective strategy vis-à-vis Russia when it comes to responding to the Kremlin’s transgressions. At the moment, Russia negotiates energy supplies with individual member states, rather than with the EU as a whole. This means that the states dependent on Russia’s gas are more interested in maintaining working relations with the Kremlin, rather than imposing harsh sanctions. Second, it would enable the West to target Russia’s energy revenues that keep Putin’s regime alive. Russia’s economy is heavily dependent on energy exports, which accounts for about half of Russia’s budget and about 30 percent of its GDP.

The U.S. Congressional Research Service’s report (CRS) suggests a handful of alternatives to Russia’s gas, including gas from North Africa, Central Asia, and liquefied natural gas (LNG) from the U.S. Yet, the report concludes that completely replacing Russian gas will be difficult, if not impossible, and each option faces significant challenges.

Perhaps the most widely discussed option is to import LGN from the U.S. “Once we have a trade agreement in place, export licenses for projects for liquefied natural gas destined to Europe would be much easier, something that is obviously relevant in today’s geopolitical environment,” said President Obama during his recent visit to Brussels. At the moment, however, the U.S. is still a net importer of natural gas, and it will take years and billions of dollars of investment before the U.S. can export substantial amounts of LNG overseas. The Department of Energy has so far approved seven LNG terminals, which can export a total of 9.2 billion cubic feet per day. Yet, this is only 20 percent of what the EU consumes every day (44.7 billion cubic feet on average). Moreover, even when the Americans start exporting, it is not the U.S. government who sells gas, but private companies. These companies are likely to sell to the customers willing to pay most. Unfortunately, these customers don’t live in Europe, but in Asia. After the Fukushima nuclear shutdown, Japan’s demand for LNG has been soaring (thus driving the price up).

In the longer term, the CRS suggests that countries like Algeria and Libya have the potential to become some of the largest European suppliers. “Libya may have the greatest potential to increase natural gas exports to Europe once a new regime is established and possibly a new state oil and natural gas company in a post-Gadhafi Libya,” the CRS concluded. But problems with infrastructure and political instability are getting in the way.

Central Asia, too, sits on top of substantial reserves of natural gas. The EU’s Southern Strategy is designed to transport gas from the Caspian region to the EU via Turkey. The Trans-Adriatic pipeline is already under construction and could bring modest amounts of gas from Azerbaijan to Europe by 2018.

As the FAR previously reported, there are substantial reserves of natural gas in the Levant basin between Cyprus and Israel. The project for a new pipeline, which would transport gas to Europe by connecting to the Trans-Adriatic pipeline in Turkey, is making headway. At this point, however, the project is stalled by disagreements between Cyprus and Turkey. American intelligence company Stratfor reports that an alternative undersea pipeline from Israel to Turkey was announced last week. While the proposed pipeline is not likely to be constructed anytime soon, the joint-project could lead to normalisation in Israeli-Turkish relations.

Yet, Europe cannot just rely on others to supply all of its energy needs. Countries such as Germany should abandon their aversion to nuclear energy. Germany’s turn away from nuclear power has led to an increase in the consumption of coal, a bigger carbon footprint, and increasing dependence on Russia’s gas. Despite some downsides, EU countries should embrace domestic shale gas. Britain and Poland seem to have the most potential but both countries face domestic protests. In addition, the EU should invest into its infrastructure in order to further increase its gas storage capacity as well as interconnectivity of existing pipelines.

We should keep in mind that many major European energy companies have significant financial interests in maintaining Russian supplies and do not have a problem with depending on one country. In developing a more coherent energy policy, the EU will have to balance such views with those of the member states that are dependent on Russian gas exports and (rightfully) concerned about the Russia’s political leverage. Russia’s intervention in Ukraine is just another signal that the EU desperately needs to come up with a strategy that would create a truly integrated European energy market and help the EU diversify its energy resources away from Russia.

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