By Dr. Ante Batovic, Oilprice.com:
The fragile ceasefire and negotiations between Ukraine and Russia have revived hopes that the months-long violent conflict in Eastern Europe is nearing its end. However, many questions remain unanswered, as hostilities and distrust between the confronted parties continues to plague a potential peaceful solution.
With the Ukrainian conflict unresolved and winter in sight, the EU will not only have the grand task of preparing the continent for the possibility of energy shortages, but also to define its long-term energy goals.
Most East European EU members depend heavily on natural gas supplies from Russia. Despite the last mild winter and efforts to stockpile additional gas reserves, these countries will not be able to survive the winter on their own, should Russia decide to shut off the valves. Currently only Latvia has enough storage capacity to survive the winter without replenishing its reserves.
At the moment, there are no signs that cut-offs will actually occur. Moscow has publicly rejected such a scenario, and recent reports on the reduction in gas supplies to some Eastern European countries are more related to Russia’s efforts to control gas supplies to Ukraine via reverse gas flow, rather than its intention to use gas as a political tool against the West.
Russia has strong financial reasons to be pragmatic when it comes to gas supplies to Europe. Its revenues heavily depend on gas exports to the continent. According to the US Energy Administration, natural gas exports to Europe accounted for $73 billion, or 14 percent of the country’s total export revenues in 2013. Brussels was careful enough not to target Europe’s key gas supplier Gazprom with sanctions for an equally pragmatic reason, despite the fact that heavy sanctions were imposed on other energy giants with close ties to the Kremlin.
However, should the shortages occur, Europe does not have too many cards up its sleeve in the short-term. In spite of the relatively well-developed LNG terminal network, only 20 percent of its capacity is currently in use due to high liquefied natural gas (LNG) market prices and strong Asian demand. Following the Fukushima disaster in 2011, and the shutdown of Japan’s 54 nuclear reactors, most global LNG was redirected towards Asia. It pushed the prices up by 55 percent, and made the LNG option in Europe unattractive, compared with other alternatives such as cheap US coal and Russian gas.
As a consequence, currently there is not enough LNG on the global markets to replace Russian imports. According to energy analysts, any attempt to fully replace Russian gas with LNG in the short-term would force a 127 percent hike in Europe’s natural gas prices.
In the mid and long-term, Europe will continue to make steps to increase its energy security and reduce reliance on Russia. In May, the European Council adopted the new European Energy Security Strategy (EESS,) with a particular emphasis on reshuffling its energy relations with Russia. This will not only include natural gas, but also nuclear fuel and oil imports, as well as building additional infrastructure to ease Eastern European energy dependency.
The biggest and most demanding task will however remain to define and develop a reliable pipeline system that will diversify natural gas sources. In this context, following the Russian incursion into Ukraine, the Gazprom-backed South Stream project has a small chance of becoming operational.
Interested countries, such as Bulgaria and Serbia, were put under strong EU and US pressure to halt any activities related to the project, and the European Parliament recently adopted a resolution urging the EU “to regulate third-party businesses in the areas of gas storage, interconnectors and flow-back facilities, and urge the EU countries to cancel planned energy sector agreements with Russia, including the South Stream gas pipeline.”
The most likely alternative will be the development of the Southern Corridor Pipeline System. This project involves the construction of the TANAP-TAP pipeline from Azerbaijan and Turkmenistan through Turkey, Greece, Albania and Italy, with extensions towards France, Spain, and the Eastern Europe.
Although the Southern Corridor will not solve the problem of the European energy dependency on Russia completely, the realization of this project, along with the likely kill-off of the South Stream and the provisions of the EESS, will inevitably be seen by Kremlin as a major blow to Russia’s efforts to strengthen energy influence over the continent.
In the light of new geopolitical realities following the Ukrainian conflict, such a situation can create new instabilities and conflicts between the West and Russia, not only in Europe, but also in Caucasus and Central Asia, an area which Moscow, similarly to Ukraine, traditionally regards as part of its sphere of influence. By Dr. Ante Batovic, Oilprice.com
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