Europe Stuck with Russian Natural Gas?

Summary

After a three-week standoff, Russia and Ukraine have finally resolved their natural gas row, a conflict that has caused supply disruptions throughout much of Europe. Despite the agreement, European countries have begun laying out plans for new energy projects to lessen the impact of future disruptions. Many obstacles lie ahead for Europe’s plans, however, meaning Russia is likely to retain its powerful supplier role in the near future.Analysis
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* Russian Energy and Foreign Policy

Nearly three weeks into a major dispute over natural gas prices, Russia and Ukraine finally reached a substantive deal Jan. 19. No one is happier than Europe. This is especially true of Central and Southeastern Europe, which have had to cope with diminished natural gas supplies (or none at all) over the course of the extensive row, causing major heating and electric shortages and a costly drop in industrial production.

But while natural gas shipments from Russia through Ukraine and on to the European states will slowly resume over the next few days, the Europeans will remain uneasy about the future of their energy security — and will feverishly proceed with plans to escape Moscow’s energy grip as soon as possible.

Europe made similar declarations, and had the same intentions, in 2006, the last time its natural gas supply was jeopardized by an energy row between Russia and Ukraine. In the years since then, nine new energy projects actually have come online. These include two natural gas pipelines and six liquefied natural gas (LNG) facilities, which bring an annual 62 billion cubic meters (bcm) of natural gas, and one nuclear plant that produces and annual 650 megawatts of electricity (MWe).

To put this in context, Europe consumed more than 500 bcm of natural gas in 2007, receiving around 160 bcm (more than a quarter of supplies) from Russia. In addition, Europe’s annual demand for natural gas is projected to increase to more than 800 bcm over the next decade. While the recent projects account for a considerable amount of new energy supplies, nearly all of them are in Western Europe, thus providing little help to Central and Southeastern Europe.

Russia supplies the amount of natural gas it does to Europe for good reason. Europe shares a land border and a deep history of energy ties with Russia, unlike other suppliers such as the Middle East or North Africa. The pipelines from Russia’s Yamal Peninsula to Europe cover a large distance and were fairly expensive to build, but they were constructed in the Soviet era under a central-planning system that did not prioritize efficiency and returns on investment; it is doubtful such projects could or would be built today. The volume and nature of Russian natural gas dictates that it can be transported most efficiently via pipeline. And Russia has a vast and established pipeline network it uses to send energy throughout Europe. Finding a cost-effective alternative to this network will be doubly hard in the current period of financial instability.

Rather than focusing on rumors of new energy projects circulating in Europe, examining which efforts to shift to energy alternatives actually have made it past the planning phase will prove more helpful in understanding the future of European energy dependence on Russia.