Russia’s Grip Over EU Energy Unlikely to Change Soon

The European Union’s initial resolve at breaking its dependence on Russian energy after the Ukraine crisis erupted appears to be giving way to a realization that its giant eastern neighbor will continue to be Europe’s main supplier of natural gas for years to come.

The quasi civil-war in Ukraine is far from over, but with Russia showing more restraint than expected – the Russian parliament withdrew its authorization for the use of military force in Ukraine, for example – urgency over the issue receded in recent weeks. Also, the Ukrainian military has made surprising gains against pro-Russian rebels recently, raising hopes in European capitals that Ukraine will not be overrun by Russia and pro-Russia separatists.

The sense of urgency is subsiding, and at the same time, there is a growing recognition that Europe cannot wean itself off Russian energy anytime soon.

Russia’s destabilization of Crimea in March led EU leaders to seek ways to both punish Russia and improve energy security. One fallout was EU Energy Commissioner Guenther Oettinger decision in March to suspend discussions over the South Stream pipeline. If completed, the South Stream pipeline would travel from Russia underneath the Black Sea, through Bulgaria and Serbia before arriving in Western Europe. It would also allow for Russia to export more natural gas to Europe while bypassing Ukraine.

But completing the pipeline would only increase Europe’s reliance on Russia for energy. The EU already depends on Russia for 39 percent of its natural gas imports, and building South Stream would increase that volume by an additional 25 percent. The pipeline is expected to come online in 2018 at a cost of $40-$45 billion, and will have a capacity of 64 billion cubic meters of natural gas.

This is why the EU wants to halt construction on the pipeline. EU officials in early June ordered Bulgaria to suspend construction work on South Stream. The EU says that the project runs afoul of EU laws because it does not allow third party access. The Bulgarian government complied, and Serbia initially appeared to do so, as well.

However, Austria, Hungary, and Serbia have recently said that they will continue with construction on their sections of the pipeline in defiance of the EU order. On June 24, Austria signed off on the pipeline, and the head of Austrian oil and gas company OMV appeared at a signing ceremony with Gazprom CEO Alexei Miller.

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“Europe needs Russian gas. Europe will need more Russian gas in future because European gas production is falling…I think the European Union understands this, too,” OMV CEO Gerhard Roiss said at the ceremony.

On July 1, Hungary followed suit, and said that it too would ignore EU orders and proceed with construction of the pipeline. “[T]hose who say we shouldn't build South Stream should make an alternative proposal about how we could live without energy,” Hungarian Prime Minister Viktor Orban said. “We are going to build the South Stream.”

The incident highlights Europe’s conundrum: It wants to break Russia’s grip over its energy supplies but has few options in the near term as there aren’t alternatives that can be ramped up quickly.

Several nations have issued moratoria on hydraulic fracturing, including France, Bulgaria, and potentially Germany. Therefore, shale gas will likely not develop significantly on the continent anytime soon.

Nuclear power plants also face a stagnant or declining future in most of Europe. Germany is leading the way in backing away from nuclear power. Increasing imports of liquefied natural gas is likely, but it will take time to construct more import terminals. Renewable energy continues to grow, and will be a key pillar of EU energy security over the long-term, but it will take time for wind and solar to significantly replace natural gas.

That leaves Europe with only minor options in the short-term, including increased storage, greater interconnections between member states, and reverse pipeline flows.

As a result, European countries that still need Russian gas are willing to ignore EU orders in order to obtain energy supplies. To them, it’s a matter of survival.

By Nick Cunningham of Oilprice