Saturday, July 18, 2009

EU Wary of Russian Natural Gas

A directive announced today by the European Union will do little to relieve the bloc's dependence on Russian natural gas -- nor should it, analysts say.
It is "pure fantasy" to think Europe could wean itself from Russian natural gas, which fulfills 25 percent of the European Union's demand, said Julian Lee, a senior energy analyst at the Centre for Global Energy Studies in London.

Rather, Europe should try to diversify the ways it gets Russian gas, adding pipelines that avoid troubled former Soviet states. Historically, Russia and Gazprom, its state-owned gas agency, have been reliable partners to the European Union, rather than a looming energy menace, analysts said.

The E.U. directive, proposed by its executive arm, the European Commission, calls for each member state to prepare itself for a disruption of its largest gas supply for at least two months during the depths of winter, when demand is at its highest.

"We have known for some time that the existing arrangements to deal with gas emergencies are insufficient," E.U. Energy Commissioner Andris Piebalgs said. "The Russia-Ukraine gas dispute in January 2009 confirmed our fears."

Many feel that the commission, which accelerated its issuing of the directive in response to the latest gas crisis, has been tardy in its proposal.

"I think this is something, frankly, that the E.U. should have done several years ago," Lee said. "And it's finally got its act together."

Nearly all Russian gas runs through Belarus and Ukraine, former Soviet states that Russia regards as within its sphere of influence. On several occasions, Russia has shut off the supply of gas to Ukraine, most recently this past January when the countries were debating gas prices.

Several eastern E.U. countries, like Slovakia and Bulgaria, that depend on Ukraine's pipelines for all their gas became innocent bystanders in the January dispute. Reports emerged of kindergartens closing for lack of heat and similar crises.

These countries can prepare for disruptions in several ways, principally by diversifying their gas pipelines or increasing their total gas storage, said Ferran Tarradellas Espuny, Piebalgs' spokesman.

"Each member state must be prepared to face such a crisis," he said.

Some supply solutions are simple to implement. Slovakia, for example, relies on Ukrainian pipelines for 97 percent of its gas, but with some minor engineering work, the east-west flow of the pipe can be reversed, allowing imports from well-supplied Germany.

While there has been broad support for improved coordination on gas, some of the Western European countries may balk at helping their peers to the east.

"The E.U.-wide sharing of existing [gas] storage may be resisted by those with plenty of storage," said Jonathan Stern, director of gas research at the Oxford Institute of Energy Studies. There could be accusations, he added, of "free riding."

Major investments needed

The European Union estimated that €150 billion ($211 billion) needs to be spent on gas infrastructure by 2030. The European Union will help fund some of this work, but much investment needs to come from individual countries and industry, according to Piebalgs.

Increasing the use of liquefied natural gas (LNG), which can be shipped in tankers, is also part of the solution; Britain recently opened its third LNG terminal. However, many of the eastern E.U. countries hardest hit by the January crisis are landlocked, and increasing LNG flow to them could call for further reliance on Turkey, Lee said. It is a "major question" how much LNG the European Union can import, Stern added.

Other steps will be more difficult. Many southeastern E.U. countries are anticipating the construction of two new gas pipelines. The first, called Nabucco, will grant gas providers like Iraq and Azerbaijan access to E.U. markets for the first time. A formal agreement among five E.U. nations and Turkey was announced Monday granting legal clearance for Nabucco, which could begin flowing by 2014.

Russia, which could supply gas to Nabucco, has also proposed a southern pipeline, called South Stream, that avoids flowing through Ukraine and Belarus. Italy has strongly supported the pipeline, and Germany has shown similar interest in another pipeline, called Nord Stream, which would flow from Russia to Germany under the Baltic Sea.

Nord Stream, in particular, will provide economic advantages to German industry, which depends dearly on Russian gas, said Jon Levy, an analyst for the Eurasia Group.

Purely from the standpoint of energy security, Europe would be smart to shift its gas infrastructure out of former Soviet states to avoid future troubles between Russia and its former dominions, Stern said.

Such a position gets strong political opposition from many E.U. leaders, who "are very careful in their approach to anything that would destabilize Ukraine," Levy said. Many European banks are deeply invested in the country and want to see it politically stable.

'The big kid in the playground'

While equal portions of blame can be doled to Ukraine and Russia for the most recent crisis, E.U. leaders have fixed on Russia because, compared to Ukraine, "It's the big kid in the playground flexing its muscles," Lee said. Plus, Russia did appear "very willing to turn [its dispute with Ukraine] into a European problem."

E.U. officials are set to hold talks tomorrow with Gazprom and its Ukrainian counterpart. The latter is asking for a multibillion-dollar loan to help pay its debts to Gazprom. Any loan will be linked to a promise no further disruptions will occur, the European Union said.

Demand for Russian gas will decline dramatically this year, largely thanks to the recession, and probably won't recover for another one to two years, Stern said. While an influx of Central Asian gas through Nabucco, which the United States has strongly supported, could be a blow to Russia's market share, the mutual economic dependence between the regions will continue for some time.

What should not be forgotten is that since the 1970s, Russia has reliably provided gas to Europe through all sorts of upheaval, Lee said.

"There's a lot of expertise and trust there," he said, "that have survived some very fundamental political differences."

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