July 28, 2017

Ukraine Crisis Reigniting Europe’s Energy Security Dilemma

Moscow’s use of energy as a geopolitical tool to gain leverage will only serve to further undermine Russian credibility as a reliable supplier. Russia’s energy weapon is thus losing potency, which gives the European Union greater room to maneuver. The EU is ultimately better prepared for eventual supply shocks and an immediate impact should be moderate given spare storage capacity. Nonetheless, EU member states should view the ongoing crisis in Ukraine as an incentive to proceed with diversifying their energy supply and reminding themselves of their high dependency on Russia.

Posted on 04/3/14
By Alexander Müller | Via Turkish Weekly
Europe's largest gas liquefaction plant was built in northern Norway. (Photo by Bilfinger SE, Creative Commons License)

Europe’s largest gas liquefaction plant was built in northern Norway. (Photo by Bilfinger SE, Creative Commons License)

International relations is witnessing the revival of oil and gas geopolitics as a decisive issue on the global political agenda. Rising demand, swelling energy costs and the ever-growing scarcity of resources has ushered in a new wave of competition for raw materials and energy reserves.

 

Consequently, the European Union (EU) is attempting to systematically incorporate energy security into its foreign policy. The ongoing crises in Ukraine and Crimea have heightened Europe’s urgency to diversify its supply sources and transport infrastructure. The EU Member States must capitalize on the crisis in order to revive progress on the energy security issue, whilst addressing and overcoming the divisions between them. Political solidarity within the domestic environment is a necessary precondition for effective dialogue with third-party energy producers.

 

The politics of interdependency
Contemporary energy relations are governed by the principle of reciprocity and entail a growing interdependence between energy producers and energy consumers. For one, energy security must be differentiated between security of demand and security of supply in order to comprehend the diverse interests and priorities of states. Energy producers and exporters such as Russia, require access to markets in order to sell their energy produce. Contrarily, for energy importers and consumers, including the European countries, it remains imperative to allocate reserves and obtain supply routes to ensure the delivery of resources necessary to fund their economies. Since energy interdependence renders self-sufficiency obsolete, states are compelled to pursue greater cooperative ventures.

 

In terms of the Europe’s exposure to Russia, approximately one quarter of the EU’s current energy mix is comprised of natural gas. Furthermore, nearly 25% of the EU’s gas consumption is produced and supplied from Russian gas fields. Of these exports roughly 80% transit through Ukrainian territory prior to arriving in the European Union . Dependence on Russian gas itself varies greatly throughout the EU. Bulgaria is dependent on Russia for 90% of its gas needs while Romania relies on Russia for only 25% due to possessing its own oil and gas reserves . Among the big member states, Germany imports almost 40% of its gas from Russia while the UK and the France are practically zero-reliant on Russian imports, instead meeting their demand with Liquefied Natural Gas (LNG) or nuclear power respectively.

 

Despite high import dependence in several European countries, Russia may be more reliant on revenues generated by gas exports than the EU is on Russian energy supplies. Of its total indigenous production, Russia exports 53% of its gas output to the EU generating 17 billion annually. Energy therefore constitutes a vital component of Russian GDP. Russia may hold dependent all of Europe, but its strategy to adopt energy as a political weapon in order to gain leverage might prove counterproductive in the long-run. Further supply reductions could induce European member states to increase their efforts in replacing Russian gas with other more stable alternatives.

 

The EU and Russia: A strained marriage?
Until the early 2000s the EU viewed Russia as a reliable and strategic energy supplier. EU member states were therefore reluctant to pursue policies aimed at reducing Europe’s dependence on Russian energy, given fears of jeopardizing relations with Moscow. However, the Russian-Ukrainian gas disputes (2005-2006, 2007-2008, 2008-2009) served as the catalyst for Europe’s new orientation. These disputes were primarily concerned with the volume of gas trade, pricing, transit costs and debts between Russia’s Gazprom and Ukraine’s Naftogaz. Russia accused Ukraine of not paying the agreed-upon prices and diverting gas intended for the European market for its own domestic use. In response, Russia halted deliveries, which inevitably resulted in gas supply disruptions throughout Europe in the midst of a winter season. In particular, most eastern EU member states reported severe drops or even complete cut-offs in domestic heating and industrial production from gas supplies arriving via Ukraine. The gas disputes served as Europe’s wake-up call and alarmed the EU regarding its vulnerability vis-à-vis Russia.

 

The unending gas conflicts between Russia and the Ukraine initiated the EU’s new stance on energy policy. These gas disputes served to undermine all confidence in Russia as a credible energy supplier. Changing perceptions and growing distrust towards the Kremlin initiated Europe’s search for energy alternatives and additional producers. Nevertheless, the prospect of completely replacing Russian gas in the short-term appears unlikely. Opportunities to diversify exist, such as re-diverting Algerian or Norwegian gas and Nigerian LNG to EU terminals (albeit at a considerable price).

 

Moreover, even if European countries were to invest in new technology and infrastructure, it would not only be costly but also take years to implement. The escalating geopolitical tensions over Ukraine and Crimea should serve as an impetus for renewed European efforts towards energy security, but reliance on Russian energy cannot be ruled-out in the near future.

 

Alternatively, Russia does not share the same forecasts as the EU. As mentioned, Russia’s repeated use of supply interruptions to achieve politically favorable outcomes may backfire in the long-term. Customers gradually become wary and suspicious and begin to cultivate new energy sources. Similar to the EU, Russia suffers from significant constraints regarding the diversification of export routes away from Europe. The bulk of Russian gas exports are targeted towards the EU market and alternate supply routes to address growing demand in Asia are absent. Thus, a redirection of major Russian gas exports to potential new markets is impossible in the medium-term. For one, natural gas remains a cost-intensive commodity that is primarily transported via extensive pipeline networks. Such inflexibility on behalf of Russia may grant the EU increased leverage in future negotiations regarding energy security.

 

The urgency of energy security
To some degree, the crisis in the Ukraine and Crimea may prove beneficial for the EU’s energy diversification plans. Taking into consideration the circumstances governing European energy concerns, the Ukraine crisis should help mobilize national political and economic support towards the EU’s energy security policy. Previously, the 2004 and 2007 enlargements brought new member states into the EU with specific patterns of energy demand and supply. The energy patterns of the Central-Eastern European countries were heavily based on their former orientation towards Russia . However, this issue has not been alleviated with integration and the Eastern European Member States still remain largely dependent on Russian natural gas . The European Union thus unwillingly inherited the task of assuming responsibility for the energy concerns of its eastern members.

 

The necessity of attaining greater energy autonomy from Russia is further underlined by developments in the European energy market. Demand for natural gas is growing rapidly in Europe due to its applications for heating and electricity generation, as well as its environmentally friendly properties and efficiency . Thus, Europe is expected to import 84% of its gas by 2030. However, for the time being Ukraine is a vital factor in Europe’s energy considerations as most Russian gas supplies transverse through Ukrainian territory. In the event of supply cuts and the loss of deliveries via Ukraine, the EU would experience shortages. Furthermore, if the Ukraine were to cease being a transit country, alternative pipeline routes to transport Russian energy to Europe are lacking.

 

United in need, divided in deed
Although the EU Member States share the motive of diversifying their supply sources and reducing their dependence on Russian energy, European countries are divided on the precise approach to attaining energy security. This division largely stems from Europe’s lack of internal coherence when addressing energy issues. Energy policy remains a sovereign competence under member state jurisdiction and enshrined in EU law. Hence, the EU Member States prefer to conclude bilateral agreements with third-country producers to meet their energy needs. Such a constellation is to the benefit of Russia. By signing lucrative deals with individual European countries, Russia can preemptively block EU attempts to pursue policies that are designed to marginalize its leverage on Europe . Such a divide-and-conquer strategy enables the Kremlin to exploit Europe’s lack of cohesion to extort favorable gas contracts, and further induce European dependence on Russian energy. If the EU Member States wish to devise a common energy policy they must first overcome the wedge being driven between them by Moscow.

 

The ongoing crisis in Ukraine should not only serve as a wake-up call, but also compel the EU to resolve its internal differences. Domestic cleavages make the realization of a common energy policy harder to materialize given differing interests and priorities among European governments. The EU-27 have failed to forge a strategic and coherent energy foreign policy due to the absence of political solidarity. Most European countries, especially those with high dependency rates, do not wish to antagonize Russia for fear of retaliation via supply cuts. Nevertheless, a common energy policy would go a long way in pursuing alternatives to Russian energy and promoting new infrastructure projects.

 

The UK and Eastern European members advocate for greater independence from Russia, yet others, including Germany, appear content with relying on Russian oil and gas . Having opened the Nord-Stream Pipeline in 2012, Germany now draws its gas directly from Russia without disruption fears as the pipeline bypasses the difficult transit countries Belarus and Ukraine . Such ‘special relationships’ with Russia highlight European disunity and complicate cooperation efforts with regards to external energy policy. European countries, most prominently Poland, have voiced their objection towards each other for acting out of their own interests rather than in solidarity and consultation with their EU partners.

 

Conclusion: A new energy policy?

The current tensions between Russia and Ukraine undoubtedly evoke memories of past supply disruptions. It is therefore necessary to determine if the crises in Ukraine and Crimea bear implications for Europe’s energy security. For one, is Europe as vulnerable to potential cuts in gas supplies as it was in the past? Could Europe sustain longer disruptions in gas deliveries? Supply cuts could emerge in two circumstances: either voluntary on behalf of the EU as part of sanctions, or forced via Russian retaliation to EU sanctions and political interference. These supply cuts may emerge out of geopolitical reasons, or in the worst hypothesis, due to war.

 

 

For certain, if Russian gas supplies transiting through the Ukrainian corridor were to be interrupted, the probability of a repetition of past gas crises, such as in 2009, is unlikely to be reproduced. This can be traced to two factors. First, Europe is emerging from a comparatively mild winter where reduced heating and gas demand has left storage levels high. Although spare capacity may be unequally distributed throughout the EU member states, the EU is capable of coping with short-term supply shocks.
Moreover, storage levels are higher than they were in the past. Europe’s clement winter left gas storage levels at around 50% in 2014, whereas in 2009, storage capacity was below 25% . Second, the EU has responded to past supply disruptions and further integrated its internal gas market. Additional gas inter-connectors, storage sites, LNG facilities and market liberalization policies have enhanced the EU’s ability to face potential supply reductions. In light of the Ukraine and Crimean crisis, Europe could absorb Russian gas cuts. Yet allowing the Ukraine to fall of the grid in the long-term would entail disastrous ramifications and complicate Europe’s efforts to search for alternatives.

 

Of further importance is the declining role of Ukraine as a transit country for Russian gas exports to Europe. The share of Russian exports destined for EU member states via Ukrainian territory has decreased substantially from 80% to 50%. This is partly due to the existence of new direct transport infrastructure, such as the Nord Stream pipeline, which still possess substantial unused spare capacity for future diversification. Nevertheless, the Ukrainian gas transmission system remains the main route for Russian gas exports flowing to the European market. The EU should therefore concentrate its efforts in preserving Ukraine’s status as a transit country for the time being while it searches for alternatives to meet its energy needs elsewhere. Since alternative routes to transport Russian gas to Europe are lacking, the EU needs to ensure that Ukrainian transit infrastructure remains intact and operational amidst the political instability and widespread social unrest in the country.

 

Overall, Europe must temporarily rely on the Ukraine, as a lifeline to meet its energy needs. Since indigenous European production is declining the EU is forced to compensate via higher energy imports. However, Russia is highly dependent on gas exports to Europe for its income, while Europe retains the ability to resort to other alternatives to Russian energy in the short- and medium-term. Moscow’s use of energy as a geopolitical tool to gain leverage will only serve to further undermine Russian credibility as a reliable supplier. Russia’s energy weapon is thus losing potency, which gives the European Union greater room to maneuver. The EU is ultimately better prepared for eventual supply shocks and an immediate impact should be moderate given spare storage capacity. Nonetheless, EU member states should view the ongoing crisis in Ukraine as an incentive to proceed with diversifying their energy supply and reminding themselves of their high dependency on Russia.

 

This article first appeared on Turkish Weekly. Click here to go to the original.


Filled under: Energy Security

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