Friday, 21 March 2014

Russia's "Gas Blackmail" limits EU response to Ukraine crisis

The deadlock between the European Union and Russia over the crisis in Ukraine is exposing the dilemma of Europe’s overreliance on Russian energy. Ukraine is a critically important energy transit country, especially for natural gas, and Europe needs to be careful it doesn’t strangle the gas deliveries from Russia with rash sanctions.

The European Union is the world’s third-largest energy consumer, according to the International Energy Agency (IEA). While this is a huge amount, with most of it coming from hydrocarbons (at 76.1% in 2010), that total is expected to decline to 67.7% in 2030 and 62.4% by 2050 according to a 2013 European Commission report.

Right now though, which is the only time that really matters, the EU needs enormous amounts of energy. There isn’t enough on the European landmass to cover all of Europe’s demands, so imports have become especially important over the past decade.

Energy imports are set to increase from 53% in 2010 to more than 53% in 2030, before jumping to 57% by 2050. Europe’s recent trend towards discarding some expensive renewable energy projects will only exacerbate this rise, as will the almost wholesale shutdown of many nuclear plants in Germany and elsewhere.

Russia has noticed Europe’s dilemma and taken full and speedy advantage. Gazprom, a Russian energy company, built pipelines into Europe and now claims around 30% of the energy market in Europe and Turkey. It could also have delivered a staggering 5.9 trillion cubic feet of natural gas to Europe in 2013, if reports are accurate.

These numbers are very important. EU leaders have vowed to reduce their reliance on Russian energy. The current crisis, however, offers few immediate avenues to diversify their imports.

Simply put, no matter how the EU wishes to punish Russian President Vladimir Putin for his unilateral military takeover of the Crimean peninsula and meddling in Ukraine, Europe is not in a position to enact harsh economic actions without the very real threat of them backfiring.

Russia is already too integral to European livelihoods and industry. This is not to say the Europeans aren’t trying.

21 people from Russia have been named on an EU “blacklist”, along with other bilateral sanctions shared with the United States targeting “any individual or company believed to be providing financial support to the Russian government”.

But the West may need to target more crucial sectors of the Russian economy if they are to affect any real response from Moscow. Putting pressure on Russia’s energy sector would be effective.

On March 10, the EU Commission said it would delay a decision about whether Russian state-owned energy major Gazprom could supply more natural gas to Europe via the OPAL pipeline in Germany. Also under the spotlight is the legal status of the new South Stream pipeline which will run out of Russia, through the Black Sea, and into Southern Europe.

Both of these pipelines would allow Russia to skirt Ukraine and deliver their natural gas into Europe. Stalling these particular pipelines won’t directly assist Ukraine, but it is a heartening show of support for the embattled country.

The reality is that this support is largely symbolic. There is no chance the European consumers would accept any disruption to their energy requirements just to stand firm against Russian political and military aggression. Firing electricity turbines and keeping warm are much more pressing needs than geopolitics for the average European.
Neither Russia nor Europe wants the Ukraine crisis to shut down gas or oil pipelines. The EU is keen to put pressure on the Kremlin, but it can’t do that without hurting itself. It is a similar story for Russia, but the balance slightly favours Moscow in this regard. They have control of the energy, whereas Europe only has the cash.

The EU can begin to open alternative import options from the United States, where new gas fields are producing larger amounts every month for international sale, or open their own gas and oil fields.

The European Continent may not have much indigenous energy - and certainly not enough to compensate Russian energy - but at least it would offer a backstop to any worst-case scenario. Europe is probably prepared to weather a limited tightening in Russian energy imports, but neither of the two mentioned alternatives is ready for full adoption at this point.

Polish Prime Minister Donald Tusk encouraged his country’s push to develop its shale gas reserves and recently announced a six-year tax break for that industry. Mr Tusk views that new policy as part of a “fundamental prerequisite of sovereignty” to help combat the threat of “gas blackmail.” By this “threat” he clearly means Russia.

Developing Europe’s energy fields may take years, and the US is not in the position yet to deliver the necessary quantity of gas. America may be organised in the medium term, but Russian gas is the best of bad options right now.

It’s really the only choice.

Unfortunately for Europe, no matter how badly it wants to pressure Russia, the status quo of “gas blackmail” might be the reality for the foreseeable future. In Ukraine, Europe may just have to grin and bear a posturing Russia at this moment.

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