How EU can wean itself off Russian gas

By Hugo Dixon
March 24, 2014

European Union leaders at the summit last week made a commitment to cut their dependency on Russian gas. The Ukraine crisis has highlighted the issue: about 30 percent of the gas the EU consumes comes from Russia.

Not that there is any immediate risk of the Kremlin turning off the taps. After all, Russia gets around 14 percent of its entire export earnings from gas it sells to other European countries.

What’s more, the EU is better placed to withstand a disruption of gas supplies than it was in 2009 when Moscow last cut off gas supplies to Kiev. Then 80 percent of Russian gas was routed via the Ukraine, according to the Oxford Institute for Energy Studies. Now it is around 50 percent, largely because of a new pipeline that connects Russia to Germany via the Baltic Sea.

The EU also responded to the 2009 shutdown by building “interconnectors” between different countries. As a result, it is easier to shunt gas and electricity from countries that have excess energy to those that face a shortage – though these connections are still patchy and need to be built up.

This is relevant in what some pundits, such as Rem Korteweg of the Centre for European Reform, consider a possible escalation scenario: that Russia cuts supplies of gas through Ukraine but continues pumping it via its other two pipelines to the West – one through the Baltic and the other through Poland.

In such a scenario, the EU would probably get enough gas during the spring and summer months. Some countries in southeast Europe – such as Austria, the Czech Republic and the Balkans – would run out of gas they import via Ukraine. But gas could then flow down south from Germany via the interconnectors.

There is a more dramatic but less plausible scenario: a total gas war, when all pipelines are turned off. In this case, Moscow would suffer more pain than the EU. But that may not be the whole story, as Russia’s President Vladimir Putin may be more willing to suffer pain than his western European counterparts. Or, at least, he may be more prepared to dare them into a game of Russian roulette.

Given this, it makes sense for the EU to strengthen its negotiating position by diversifying its sources of supply. There will be a cost – either in cash or in the impact on the environment. But it’s one worth bearing.

That said, EU nations should not prioritise security of supply to the exclusion of its other objectives: boosting competitiveness and combating climate change. The question is how best to balance these conflicting objectives? Part of the answer is to distinguish between short-term and long-term measures.

In the short run, EU countries can use more coal and less gas in their electricity generation. Coal imports from America are particularly cheap, so this would advance the competitiveness agenda. The snag is that coal produces much more carbon than the equivalent amount of gas, so that’s not good for climate change. Given the imperative to stand up to Russia, the EU should delay but not scrap rules for phasing out dirty coal-fired power stations.

The EU can also increase imports of liquefied natural gas (LNG), mainly from Qatar. But there are problems. For a start, most of the EU’s LNG terminals are in the West whereas it is the East which is most vulnerable to a cut-off of Russian gas. So more terminals need to be built, which takes time. What’s more, LNG is expensive – partly because Japan is buying lots of it after it closed its nuclear plants in the wake of the Fukushima disaster.

EU nations should also fill up storage facilities during the spring and summer. Some countries such as Germany have well-stocked strategic reserves – partly because Europe has enjoyed a mild winter. But those of others, such as Greece, are empty. If cash-strapped Athens needs a loan to help finance such restocking, it would be worthwhile for the rest of the EU to provide it.

Longer term, EU nations should embrace domestic shale gas. It is cheap and local. Britain and Poland have the most potential. It is important that the EU doesn’t get in the way of its exploitation.

There will also be the option of importing liquefied shale gas from America, especially if the transatlantic trade deal currently being negotiated is agreed. Indeed, the Ukraine crisis is likely to give an added impetus to clinching that deal as the United States has a geopolitical interest in weaning the EU off Russian gas.

Meanwhile, countries such as Germany should abandon their knee-jerk aversion to nuclear energy. While it has its risks, it has the benefit of being carbon-free – and of cutting the EU’s dependency on Russia. There should also be an intensified push to increase energy conservation.

Finally, the EU is devising new targets to combat global warming. At present, it has targets both to cut carbon emissions and to increase renewable energy. The problem isn’t the carbon goal, argues Raoul Ruparel of the think tank Open Europe. Rather it is the renewable target, which results in uneconomic wind and solar power being built across the EU. There are, after all, other potentially cheaper ways of hitting carbon emission targets such as nuclear power.

Fortunately, the EU is now considering a target for 2030 that is more focussed on cutting carbon emissions than boosting renewable energy. Such an approach could help competitiveness and wean the EU off its Russian gas.

So the EU does have options that can cut its gas dependency on Moscow without contributing to climate change or damaging competitiveness. It needs to grasp them.

6 comments

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Diversifying gas supplies is fine but it will cost a lot of money and take plenty of time. Counting on easy sources is very optimistic: for example Poland was going to be shale bonanza but emerging real evidence is rather bleak. Perhaps the UK will fare better.

Posted by wirk | Report as abusive

In all the discussion of this issue I have heard little mention of the fact that Russian gas is delivered to various European destinations under long term commercial agreements with a variety of commercial counter parties. The biggest are EON, RWE, ENI and GDF-Suez, but there are many more. These are contracts that have stood the test of time, including, in the case of the most important ones, during the last freezing blast of the Cold War in the 1980′s. The principal stress on these contracts today is not the geopolitical situation (though that is important) but the disconnect between oil indexed pricing (defended by the Russians) and the actual gas market pricing that holds sway in the consumer countries. That disconnect is the subject of ongoing negotiations, but it is not a reason for Gazprom to turn off the taps – nor for the buyers to walk away.

Posted by Patrick_Heren | Report as abusive

Yet more reason to speed up exports of LNG from the U.S. and increase development of LNG shipping infrastructure world wide. Unfortunately some large U.S. industrial users have mounted a large propaganda & lobbying campaign to lock in artificially low U.S. prices by fighting exports. They have co-opted some environmentalists as well.

It makes tremendous economic sense for the U.S. to make profitable exports of natural gas. It creates large numbers of jobs in developing the infrastructure paid for by profits not government dollars. As we see above it increases the security of our western European allies and decreases Russian leverage. And the costs of LNG shipment will always guarantee U.S. users a hefty price advantage – no need for them to be so greedy.

Posted by QuietThinker | Report as abusive

@QuietThinker, “And the costs of LNG shipment will always guarantee U.S. users a hefty price advantage” is no guarantee at all. What the market will bear is what the price will be, period. We the people have been promised and guaranteed so many things in the past that we no longer believe in them at all. Especially when is comes to jobs and fuel prices.

Posted by tmc | Report as abusive

Russia is planning on selling their gas to China, thereby avoiding the petrodollar.

Look for an announcement in May when Putin visits Beijing.

Problem solved. For Russia.

US foreign meddling, or policy, has alienated the entire planet (except our fellow consipirators – UK etc). They all want out of the dollar.

In 5 or 10 years, the dollar will have its Lehman/Bear Stearns moment. Presumably, CB’s will have purchased nough gold by then to go back to a gold standard. (Thus the 3 am NY time hammering of gold futures…………suppressing the price……….allowing the major players to buy.)

Posted by Loucleve | Report as abusive

The Germans will be the ones who have the most to lose. They will therefore be most reluctant to be weaned off the Russians because they had rushed in where angels fear to tread.

Posted by pbgd | Report as abusive