By Alina Yablokova and Global Risk Insights
On February 25, the European Commission presented its Energy Union package of proposals, a first major step made by the European legislators to realise the strategy of coordinating the energy policies of the 28 EU member states. Indeed, the European Commission envisages a union that speaks with one voice in global affairs and that creates “an integrated continent-wide energy system where energy flows freely across borders.” The document also emphasizes natural gas management and supply diversification. Analysts described it as an attempt to ease the Kremlin’s “stranglehold” on Europe’s gas supplies.
The European Union relies on Moscow for almost a third of its overall natural gas demand. Many EU member states import most of their gas from Russia and some, namely Finland and the Baltic countries, are entirely reliant on it. The debate about the necessity to reduce such dependence gained prominence when gas deliveries to Europe were put on hold as a result of a pricing dispute between Russia’s Gazprom and Ukraine’s Naftogaz in winter 2009. Additionally, the Kremlin is criticised for using energy prices as its bargaining tool both for receiving political concessions and overcharging its European clients.
There may be truth to this claim, with the gas prices reportedly varying 20-30% among buyers in the EU. Therefore, the package of proposals is viewed in Brussels as a stepping stone to more affordable and competitive prices for consumers and to a greater security of supply.
The idea of the Energy Union was initially spearheaded by former Polish Prime Minister Donald Tusk, who proposed to “confront Russia’s monopolistic position with a single European body charged with buying its gas.” The new president of the European Commission, Jean-Claude Juncker made the achievement of a resilient Energy Union his top priority. However, in order for the Energy Union to come into force, the package of proposals will first need to be translated into legislation to be adopted by 2019. Only afterwards is the Energy Union expected to be fully realized and start operating, around 2030.
The implementation of this ambitious project will require not only years of work, but also an estimated €200 bn of investment.
Diversification of Supply Routes
The newly-published communication highlights that the diversification of energy sources away from Russia is the chief measure for improving European energy security. The European Commission shows determination to intensify work on the South Gas Corridor and “to establish strategic energy partnerships with increasingly important producing and transit countries or regions such as Algeria and Turkey; Azerbaijan and Turkmenistan; the Middle East; Africa and other potential suppliers.”
Additionally, the document encourages the EU member states to build Liquefied Natural Gas (LNG) terminals as an alternative to Russian pipeline gas.
When it comes to energy security, analyst Luca Bergamaschi argues that reliability of trading partners is more important than the number of import routes. However, Europe’s alternative suppliers are by and large incapable of providing stable gas deliveries on a long-term basis.
For instance, Algeria’s export volumes have already been reduced by 40% between 2012 and 2013 due to a surge in local demand combined with a lack of investment. Current estimates are that Algeria will deplete its reserves by 2030 and soon after will become a net importer.
Similarly the hydrocarbons from Kazakhstan, Turkmenistan and Azerbaijan, in which the European Union places much hope, are problematic in terms of their availability and transportation. Production and export volumes from these countries are only expected to compensate for the cutback in imports from Libya and Algeria. All additional volumes are expected to be “eaten up” by growing gas consumption in Europe.
Most importantly, Russian gas is still by far the cheapest on the European market, rendering it hard to replace with current alternative routes not necessarily reliable or economically viable. Reducing the demand for gas (by using alternative energy sources and increasing energy efficiency) could potentially bring the EU better results in solving the “over-dependence” on Russia.
Integration of Energy System
The Energy Union initiative is ultimately attempting to secure a reliable energy supply in Europe to improve the investment climate, create new jobs and spur economic growth. The European Commission believes that this could be successfully achieved if the risk of supply disruptions, as the one that took place in 2009, could be mitigated by expanding the network of interconnecting pipelines and electricity grids.
Additionally, experts believe that connecting countries in Eastern Europe, such as Hungary, Bulgaria and Romania to supply chains that will carry non-Russian gas will decrease their dependence on Moscow. Although straightforward in theory, the large distance between countries will further increase the cost of the already more expensive non-Russian fuel.
The European Commission calls on member states to consult the EU when negotiating supply contracts with major energy providers, such as Gazprom. This measure was at the heart of Tusk’s proposal and is aimed at ending Moscow’s strategy of “divide and rule.”
While this project has a great potential to substantially decrease Moscow’s bargaining power and its ability to set prices in the European market, it will prove hard for European countries to agree upon this matter. For instance, Germany receives Russian gas on favourable long-term contracts through a dedicated North Stream pipeline at a price 15% lower than, for instance, Lithuania. Hungary also recently negotiated a lucrative gas supply deal with Russia and now calls the Energy Union a threat to its national interests.
Although the recently announced Energy Union package of proposals is designed to break the EU’s dependence on Russian gas, its chances of success are small. The emphasis on diversifying supply routes is misplaced and the EU should focus on reducing the overall demand for gas through energy efficiency and alternative energy sources. With energy market integration a very costly and politically divisive enterprise, the EU will need years of work to successfully reduce its energy dependence on Russia.
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