The EU and Russia are inseparable… or not?

The term “energy” has become more familiar with developments in the economy and changing modern lifestyles. Energy demand is rising. Often, the natural resources of countries are insufficient to meet the increasing demand and this leads countries to seek alternative solutions.

A significant example of this would be the EU. Given its limited and decreasing reserves of natural gas, the EU is a net importer of gas. The Russian Federation which supplies a significant volume of fossil fuels is also the largest exporter of oil and natural gas to the European Union. This dependency dates back to the 1970s. Nowadays policymakers seek solutions to reduce this reliance. So, how did this dependency become a concern among European countries?

There is no single underlying cause

According to the EU Energy Security Strategy document, the EU imports more than 50% of the energy consumed. Dependence on foreign resources in crude oil is 90% and in natural gas it is 66%.

As we can see from the chart, Germany is the main purchaser from Gazprom, the largest Russian gas company, with a record of nearly 53.5 Bcm followed by Turkey with almost 30 Bcm. According to Bloomberg,  Italy has become the second-largest buyer of Russian natural gas in 2018, taking over Turkey’s position whilst Germany remains first place. For Estonia, Poland, Slovakia, and Finland, more than 75 % of their imports of petroleum oils originate from Russia.

Germany can count on direct supplies from Russia thanks to Nord Stream which is the 13th gas pipeline from Russia to Europe. This is the longest sub-sea pipeline in the world and it’s crucial for both Moscow and Berlin since it avoids passing through the Baltic Republics, cutting down costs and avoiding any political interference. Besides, Russia and Germany agreed on the second double-pipeline Nord Stream 2 which will increase the amount of gas going under the Baltic. According to Gazprom, NS2 would make gas supply to Europe more secure by allowing to avoid Ukrainian transit. However, this project has been subject to debates and much disagreement. Some countries even suggested that NS2 could become an excuse for an expansion of Russian military service. As a result, scheduled completion by the end of 2019 has been delayed. Why have European countries, which have also been Russia’s customers going back in history, seen this as a threat?

The answer is simple; being heavily reliant on a single supplier equally poses the risk of being vulnerable to supply disruptions, whether caused by political or commercial disputes, or infrastructure failure. An example from late history would be the gas dispute in 2009. Ukraine, with its 44 million population is the main corridor for Russian gas exports to Europe. Thus, the conflicts between these two countries did not only affect them but also the European countries that rely on Russian gas transit via Ukraine. Due to a strong disagreement in 2009 between Russia and Ukraine, many EU countries received less gas and this led to severe shortages. We should also note that similar disputes affected the EU in 2006, 2008 and most recently in 2014. Due to the Russian reaction to political events in Ukraine in 2014 and its annexation of Crimea, military involvement in the separatist movements in eastern Ukraine, the reliability of Russia and European dependence on Russian energy in general, has been questioned. Taking lessons from the past, the possibility of interruptions of gas supplies to Europe, led to a need for diversification of European gas supplies and a reduction of Russian imports.

If not from Russia how will Europe obtain Gas?

To address concerns about energy supply, the EU started the Energy Security Strategy in 2014. This strategy aims at increasing energy production in the EU and improving coordination of national energy policies as well as having diversification. What is meant here with diversification is not only about suppliers but also about transport modes and routes.

Among the EU Member States, the level of dependency and diversifications of suppliers and supply routes varies greatly. Some northern and eastern Member States depend on a single supplier, and often on one supply route, for their entire natural gas consumption, while others have a more diversified portfolio of suppliers. Gas is transported by pipelines to the final customer and until the early 2000s, most of Europe’s imports came by pipeline. The major entry points of the pipelines are on the Eastern borders of the EU and in the north. Thus, the EU is planning to implement various pipeline projects.

Poland, for instance, which relies mainly on imports, has implemented physical reverse flows on the Yamal Pipeline. This means that Poland became able to cover almost half of its consumption through imports from Germany and the Czech Republic. This is indeed an important step in diversification of supply routes. Thanks to new pipelines, under construction of the Southern Gas Corridor, allow by 2020 supplies to the EU markets of 10 bcm per year gas from Azerbaijan. The currently foreseen infrastructure in Turkey could transport up to 25 bcm per year for the EU market. Another example would be the Trans Adriatic Pipeline (TAP). Scheduled to be completed by 2020, it enables to transport natural gas starting from Greece via Albania and the Adriatic Sea to Italy and further to Western Europe.

LNG stands for Liquefied Natural Gas and it is an alternative to pipeline transport of gas. As is evident from the chart, even though there are some declines during the years, LNG has a significant share in total imports. Thus, to increase gas security, the European Commission is investing in LNG terminals and gas connections between EU countries. Whereas the pipeline capacities are almost fully utilized, the utilization of LNG terminals is much lower. In Austria, thanks to reverse flow modifications on the connection points, countries adjacent to Austria became able to use the Italian LNG terminals as a point of entry. According to data from Thompson/Reuters, the utilization rate of LNG terminals is about 25%.  Further terminals are planned, and their total capacity should reach 275 bcm/year in 2022

Conclusion

“When we evaluate our short-term geopolitical and energy situation, it is clear that Russia will continue to be the EU’s main energy supplier.” said Miguel Arias Canete, Member of the European Commission on Climate and Energy. The Energy Union strategy suggests a number of measures to boost Europe’s energy security, both internally and externally. The short-term goal is to ensure that natural gas imports are coming from various suppliers. European countries give importance to reducing the overall dependence on imported gas by increasing energy production in the EU. Europe still depends on Russian gas and will continue to do so for a while, but its dependence is not as absolute and unavoidable as before.

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