U.S. official urges EU to build one energy market

WARSAW (Reuters) - Linking up European electricity grids and gas networks would boost the continent's energy security and economic competitiveness and help reduce its heavy reliance on Russia, a senior U.S. official said on Wednesday.

"Europe does not function as one energy market... It needs to unbundle its energy companies and create one deep, liquid European energy market," Douglas Hengel of the U.S. State Department's economic bureau told Reuters in an interview.

"If systems in Europe are all linked up, that becomes in some sense instant diversification. That would allow gas to flow if there is a problem in one country to another country, to meet the needs."

The EU relies on Russia for around a quarter of its gas and much of its oil, and imports are expected to rise as North Sea production falls.

"Russia faces 27 energy markets. If it is facing just one, the dynamics change," he said, referring to the divisions within the European Union.

Russia's invasion last month of Georgia -- a key transit route for Caspian basin oil and gas -- has reignited European fears over relying too much on Moscow for energy.

In recent years, Moscow has cut off energy supplies to neighbors on a number of occasions, prompting the EU to push for projects that would bypass Russia, such as Nabucco, which would bring Caspian and Central Asian gas to Europe via Turkey.

Hengel, in Poland for energy talks, said the United States wanted to see the EU boost its ties with Caspian producers such as Azerbaijan.

"The Europeans (need to) express the importance they attach to this region, directly to the governments of that region, that they view the Caspian to be of strategic importance to them," he said.

Analysts say part of the reason Nabucco and a proposed trans-Caspian pipeline that would link Turkmenistan to Europe have struggled is because Europe's governments have been reluctant to back the projects with cash or diplomatic pressure.

"We care about European energy security... because in an increasingly globalized energy market... energy security in one part of the world affects it in other parts of the world too," Hengel said.

(Reporting by Gareth Jones, editing by Anthony Barker)