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Sunday, March 1, 2015

Europe's dependency on Russian gas is not likely to change any time soon

Brinkmanship is back. Pipeline image via www.shutterstock.comBrinkmanship between Russia and Ukraine over gas supplies is back. Russia threatened to cut the supply to its western neighbour on Friday February 27 in a dispute over who should pay for the gas supplied to several rebel-held areas in the east of the country. In the end, Ukraine made a small prepayment on March gas supplies ahead of a meeting between Russian and Ukrainian energy ministers in Brussels on Monday March 1. The balance of opinion is that a settlement will be agreed. But with the Ukrainian pipeline responsible for transporting 40% to 50% of Russian gas to Europe, it is a reminder of the problem of Europe’s energy dependency. And the reality is that it is not going to change significantly in the short to medium term. The current situation The conventional way of assessing the ability of a country to cope with energy price shocks or supply interruptions would be to look at its energy dependence. Yet the EU is a slightly different case because it is a bloc of 28 member states who depend on Russian gas supplies to varying extents. The EU is the world’s largest energy importer: 53% of all EU energy comes from imports, of which 39% is Russia gas supplies. Apart from the Ukraine pipeline, there are two other lines: one through Belarus and Poland and another that runs under the Baltic Sea from Russia to northern Germany. This import dependence costs the EU €400bn (£290bn) a year overall – a staggering amount, particularly on the back of a financial crisis. This affects the EU’s economic competitiveness on the global stage. Hence there is a need to rethink energy policy in the union. Without Russian gas, nearly half of Europe’s blue flames would go out. Ol'ga Sabo The energy union The EU’s planned energy union is an attempt to achieve the EU energy objectives dating back a decade or so: reduce energy dependence, become a single energy market and cut emissions. These objectives have been difficult to implement. The EU had inadequate powers to make them happen and the interests of individual member states sometimes differed. Neither are the policies themselves always compatible. Energy union won’t necessarily change these problems in itself – not unless member states agree to make hard choices. These would include prioritising security over sustainability; EU intervention over free market logic over the missing connections for a single energy market; and energy efficiency. The intensifying geopolitical situation with Russia might make the difference, of course. A Caspian pipeline Since the early 2000s, the EU sought to reduce its dependence on Russian gas by building a dedicated long-distance pipeline through the Balkans and Turkey to the Caspian Sea. This would have connected gas supplies from Azerbaijan and Turkmenistan with demand primarily in south-eastern Europe – the area most threatened by the Russians cutting off the Ukraine pipe. Originally conceived as the Nabucco pipeline project, which was going to run from Azerbaijan, the plan was scrapped after the EU failed to reach an agreement with Turkmenistan and the pipeline hit political and legal obstacles. It has since been replaced by a project principally with Azerbaijan to deliver gas from the second phase of the Shah Deniz field. This so-called Trans Anatolian Pipeline (TANAP), due to come into operation in 2018, will only have the capacity to cope with 1% of EU demand in its initial form. Upgrades could eventually quadruple this capacity by also supplying gas from Iran and Turkmenistan, but there are political and legal issues that are unlikely to be resolved in the short term. And whatever happens with the EU energy union, the EU cannot ultimately control whether anything will go ahead. TANAP vs Nabucco Wikimedia Liquefied Natural Gas (LNG) Liquified Natural Gas and the regasification infrastructure that is used to restore it from liquid to gas has been the option of choice for EU members in western Europe over the past few years, including the UK, Spain, Portugal and France. LNG, which primarily comes from Qatar, has the attraction that as opposed to piped gas it is relatively unconstrained by geopolitics. On the other hand, this lack of constraint makes it a truly global commodity. European countries can easily be outbid for supplies by the most lucrative supply markets in Asia – particularly China, Japan and South Korea. Yet Poland, Lithuania and Estonia have now also prioritised LNG to diversify away from Russia, not to mention Greece, Cyprus and Croatia. The success of these moves will largely depend on whether they can buy enough LNG. The prospect of the US lifting its ban on gas exports may improve the situation. But as well as the current market reality, the other drawback is that LNG doesn’t offer energy security against supply shocks if the price suddenly shoots up. Shale gas The lack of an EU-wide policy on unconventional hydrocarbons such as shale gas has been an obstacle for a large-scale effort at developing the industry across the continent. The existing moratoria on fracking in some of Europe’s key shale-rich countries including Germany and France has effectively frozen full exploration of the resource. Will the frack come back? Calin Tatu The most advanced prospection and exploration has been in Poland where 68 boreholes were drilled as of January 2015, though several major players have pulled out because conditions have proved tougher than they expected. The UK is the second biggest player in exploration of the emerging resource (despite recent bans in Scotland and Wales). Shale gas exploration is likely to take hold in those countries where energy security is the key prerogative. Depending on the acceptability of fracking and the availability of alternative methods of extraction down the line, unconventional hydrocarbons may grow in importance. But as the shale-prospection momentum slows down, future production only looks likely to satisfy a small portion of future energy needs on the continent. Slawomir Raszewski does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.


READ THE ORIGINAL POST AT theconversation.com