EU options on Russian energy stranglehold few and pricy

LONDON Fri Mar 21, 2014 10:48am EDT

A gas pipe is pictured at an underground gas storage facility in the village of Mryn, 120 km (75 miles) north of Kiev in this May 21, 2013 file photo. REUTERS/Gleb Garanich/Files

A gas pipe is pictured at an underground gas storage facility in the village of Mryn, 120 km (75 miles) north of Kiev in this May 21, 2013 file photo.

Credit: Reuters/Gleb Garanich/Files

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LONDON (Reuters) - Russia's seizure of the Crimea and its threat to cut off gas to Ukraine, a transit route to the rest of Europe, have revived calls to reduce the EU's reliance on Moscow for energy, but the blocs options are limited and costly.

The European Union made some progress in improving its energy security after rows over unpaid gas bills between Kiev and Moscow led to the disruption of supplies to western Europe in 2006 and 2009.

By improving its pipeline network, the EU is better prepared for a new supply disruption, but it has not managed to reduce Russia's share of European energy supplies.

Russia today is Europe's biggest supplier of oil, coal and natural gas, meeting around a third of demand for all those fuels, according to Eurostat data, and receiving in return a thumping $250 billion a year.

European leaders said on Friday that the stand-off with Moscow over Crimea made them more determined than ever to end decades of dependence on Russian gas, but they will have to work hard to convince the skeptics.

"The curious feature of the energy policy that emerged from the middle of the last decade is just how little serious effort has been put into security - in particular Eastern security," said Dieter Helm of Oxford University in a research paper this week.

While buyers can switch oil and coal suppliers relatively quickly and easily, Europe receives most of its gas through pipelines that are fed by only one supplier, chief among them Russia's state-controlled Gazprom.

"Gazprom's market share in Europe is increasing (due to decline of European production). So the aim of diversification of our supply is not going to be achieved this side of 2020," said Thierry Bros, gas analyst at French Bank Societe Generale.

"The question of diversification of supply post 2020, what is now in discussion in Brussels, is going to be very difficult to achieve, as with (gas) prices just below $10 per million British thermal units (mmBtu), Russia is making alternative developments for Europe less profitable," he added.


Even so, there are alternatives.

The Baltic states of Estonia, Latvia, Lithuania and Poland, which used to be part of, or dominated by, the Soviet Union but are now EU and NATO members, all rely almost completely on Russian gas supplies.

To reduce Moscow's energy grip, the region is planning to build several small-scale LNG import terminals.

U.S. LNG company Cheniere Energy, which expects to begin exporting gas in the next two years, is one of the companies in talks to supply the Baltic region.

Such terminals offer an alternative should Russia use gas for political leverage, but LNG is too costly to meet the bulk of demand.

U.S. plans to export LNG largely have Asian customers in mind, as prices there are almost twice as high as in Europe, so Europeans would have to match those prices to secure supply.

"European LNG imports have declined steadily since early 2011, reaching a nine-year low in 2013 as Asian and Latin American demand continued to grow," BG Group, a major LNG shipper, said in its global trade summary published this month, adding that it did not see this trend changing soon.

Europe may, however, be able to tap a much bigger and closer gas source.

Almost one trillion cubic meters of recoverable natural gas has been discovered in Israeli and Cypriot waters, enough to supply Europe for more than two years.

Although export projects are at early stages and politically difficult due to the region's instability, increased efforts are being made to make some of its gas available to Europe, and with Cyprus the EU would gain a new and internal supply source.

"With recent events in Europe ... and the aspiration of different countries to diversify their gas supply, that puts another spotlight on our massive resources," said Gideon Tadmor, CEO of Avner Oil, a leading developer of the region's resources, at a conference this month.

But accessing East Mediterranean gas will be expensive. Cost estimates to develop Cyprus's gas export project alone are as high as $10 billion and would be the largest investment in the island's history.

Building gas export facilities in the region will also be politically challenging.

"Someone will have to win a Nobel Peace Prize before getting the region's gas flowing," one source involved in exploration said.

It also might not succeed in cutting out the Russian interest; Gazprom is one of the companies that is interested in developing the region's gas fields for export.


Though Europe's conventional gas reserves are declining, some still harbor hopes that Europe could repeat the U.S. success in developing shale gas.

While Europe has estimated reserves about three-quarters of the U.S. figure, its geology is more complicated and it will be more costly to extract. The politics also look more fraught, with governments such as France, Bulgaria and Germany already halting exploration in the face of public opposition.

Measures to increase the share of renewables also haven't helped to address Russia's gas supply dominance.

Since their output varies strongly depending on weather conditions, renewables still require back-up by conventional power stations such as coal, nuclear or natural gas.

Coal is unpopular, given Europe's emissions reduction targets, and the prospects of increasing use of atomic power have been undermined by Germany and others' decision to give up on nuclear.

History shows limited success in loosening Russia's grip.

Europe's biggest recent effort was the Nabucco pipeline, which was supposed to meet 5 percent of Europe's gas demand from producers in Central Asia and break Russia's almost complete supply monopoly in Central and Southeast Europe.

But cost overruns, a lack of available gas, as well as Russian lobbying meant that the alternative, smaller Trans Adriatic Pipeline project was chosen, which will meet around 2 percent of EU demand by pumping Azeri gas via Albania, Greece and into Italy, which is already a well diversified gas market.

"On Nabucco, it has been game, set and match to the Russians," said Oxford's Helm.

Nabucco's failure has left the field open for Gazprom to build its huge South Stream gas pipeline, which plans to meet 10 percent of Europe's demand by pumping gas via the Black Sea into Southeast Europe towards the end of the decade, cementing its dominant role in the region.

(Additional reporting by Barbara Lewis in Brussels and Oleg Vukmanovic in London; Editing by Will Waterman)

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Comments (3)
Loucleve wrote:
The EU is gonna lose its russian gas:

Petrodollar Alert: Putin Prepares To Announce “Holy Grail” Gas Deal With China
If it was the intent of the West to bring Russia and China together – one a natural resource (if “somewhat” corrupt) superpower and the other a fixed capital / labor output (if “somewhat” capital misallocating and credit bubbleicious) powerhouse – in the process marginalizing the dollar and encouraging Ruble and Renminbi bilateral trade, then things are surely “going according to plan.”
For now there have been no major developments as a result of the shift in the geopolitical axis that has seen global US influence, away from the Group of 7 (most insolvent nations) of course, decline precipitously in the aftermath of the bungled Syrian intervention attempt and the bloodless Russian annexation of Crimea, but that will soon change. Because while the west is focused on day to day developments in Ukraine, and how to halt Russian expansion through appeasement (hardly a winning tactic as events in the 1930s demonstrated), Russia is once again thinking 3 steps ahead… and quite a few steps east.
While Europe is furiously scrambling to find alternative sources of energy should Gazprom pull the plug on natgas exports to Germany and Europe (the imminent surge in Ukraine gas prices by 40% is probably the best indication of what the outcome would be), Russia is preparing the announcement of the “Holy Grail” energy deal with none other than China, a move which would send geopolitical shockwaves around the world and bind the two nations in a commodity-backed axis. One which, as some especially on these pages, have suggested would lay the groundwork for a new joint, commodity-backed reserve currency that bypasses the dollar, something which Russia implied moments ago when its finance minister Siluanov said that Russia may regain from foreign borrowing this year. Translated: bypass western purchases of Russian debt, funded by Chinese purchases of US Treasurys, and go straight to the source.

Mar 21, 2014 11:55am EDT  --  Report as abuse
Looter wrote:
I think Russia should triple the price of Gas that’s flowing to EU countries. The European Union is becoming an evil empire annexing country after country. See what happened in Ukraine, a bunch of right wing thugs over thrown a democratically elected president and now signing off their country to European Union. Isn’t it what just happened? Russians at least did a referendum before annexing Crimea (The validity is a serious question about the referendum) And we in America don’t care about this undemocratic process. We just sing along the far right. I thought Obama who is a nobel prize winner will look for a peaceful outcome of this, what a disappointment. President Obama is just falling into the right wing trap of another cold war.

Mar 21, 2014 12:11pm EDT  --  Report as abuse
UauS wrote:
just one of many options:


Mar 21, 2014 3:18pm EDT  --  Report as abuse
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