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Wenyuan Wu

Wenyuan Wu

Wenyuan Wu holds a PhD in international studies from the University of Miami. Her research covers governance and energy reform issues in China, the United…

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Will Europe Ever Shake Its Dependence On Russian Energy?

Much of the current discourse over Europe’s economic “independence” has revolved around its increasingly-tense relationship with the Trump administration over foreign policy issues such as trade and Iran. This focus has sidelined another important development, however: portions of the European energy industry—a major pillar of the single market—are increasingly coming into Russian and Chinese hands.

In spite of impending American sanctions and widespread opposition including from within the European bloc, Nord Stream 2—Gazprom’s $11 billion natural gas pipeline running underneath the Baltic Sea between Russia and Germany— is nearing completion. Meanwhile, China has gone after energy prizes all over the union. As just one noteworthy example, state-owned utility China Three Gorges— already the largest shareholder in Energias de Portugal— mounted a colossal $10.8 billion bid to take over the entire Portuguese grid.

The uptick in Moscow and Beijing’s investments in nearly every aspect of Europe’s energy industry—from fossil fuels to renewables and power generation to energy infrastructure—have drawn criticism from both within the EU and abroad. Particular concerns have been raised over European unity and unfair competition. If unaddressed, these geopolitical and commercial implications could drive a wedge between the U.S. and Europe while sowing serious divisions within the single European market.

Can Europe trust Russian gas?

Longstanding geopolitical conflicts and Cold War-era rhetoric have fueled the uneasiness around Russian energy investment in Europe. In May, U.S. Energy Secretary Rick Perry proposed a sanctions bill which would target companies, including a number of European firms, involved in the Nord Stream 2 project in an effort to stall construction on the controversial pipeline. Although Gazprom has obtained authorization from Russia, Finland, Sweden and Germany, it has encountered resistance from Denmark, which has yet to grant permission for the pipeline to pass through its territory. The project is also vehemently protested by most Central and Eastern European countries, including Poland and the Baltic states—to say nothing of Ukraine’s steadfast opposition. Related: LNG Upends Europe’s Gas Market

The European Commission has sounded the alarm as well, wary of increasing the region’s energy dependence, both on gas and on Russia—a politically unfriendly state which remains under EU sanctions for its aggression in Ukraine.  In an effort to mitigate the risks of this dependence, the Commission has made policy changes to subject Nord Stream 2 to the EU’s regulatory umbrella. The reforms are currently being challenged by Gazprom at the European Court of Justice. Notably, internal discord around the project effectively contravenes the Commission’s energy policy which calls for a more integrated internal market and an external framework with “one voice”. The project’s intentions to bypass Ukraine, Poland and Slovakia—each of which Russia has had political fallouts with, raising their fears that the new pipeline could lead to further aggression—would also lead to dwindling windfalls in these countries.

Beijing: hands in every pie

In contrast to Russia’s targeted approach, Chinese energy investment in Europe is more expansive and diversified, with both fossil fuel and renewable projects throughout the continent. Central and Eastern European countries have been popular destinations under the “16+1” Format encompassing a group of 11 EU members and 5 Balkan countries as an outgrowth of the strategic Belt & Road Initiative (BRI).

EU leaders have become increasingly alarmed by the 16+1 platform, which allows China to strike bilateral financing deals with participating states. Brussels fears that this erodes EU’s cohesiveness in anchoring member economies by circumventing EU regulations and laws. Even some in the “16+1” network are displeased with the Chinese way of doing business, citing issues such as crowding out local input. Collectively, some political circles in Brussels view China as an illiberal partner that can undermine Europe’s liberal foundations.

Outside the 16+1 format, China also supplies Europe with raw materials such as tellurium, gallium, indium and the rare earth elements neodymium and dysprosium, which are critical to the solar and wind industries. With experts predicting that solar and wind will make up 80% of the power mix in Europe by 2040, China’s role providing these raw materials has both immediate and far-reaching repercussions. First, the European renewable energy sector will be shaped by Beijing’s industrial policies, creating external shocks including supply bottlenecks and price volatility—on top of unfair competition to home-grown solar and wind businesses. In the long run, Europe’s energy security could be compromised by increasing dependence on China and waning global competitiveness.

Reassurances: too little, too late

Certainly, both Russian and Chinese stakeholders deny these criticisms and insist that their investments will prompt win-win outcomes. Nord Stream 2’s sole shareholder, Gazprom, has financial backing from five Western European companies — Austria’s OMV, Anglo-Dutch Shell, France’s Engie, and Germany’s Uniper and Wintershall, and has contracted out pipelaying to Italy’s Saipem and Swiss-based Allseas. Beijing, meanwhile, continues to proclaim its unwavering support for the EU’s integration and unity: during the 21st EU-China Summit in April 2019, Chinese Premier Li Keqiang reiterated the need for a comprehensive strategic partnership between Beijing and the bloc. Related: Russia’s Breakeven Oil Price Falls To Decade Low

Such one-way reassurances don’t suffice to tame the EU’s fears, rooted in both historical pains and fundamental cultural and political differences. While Chinese energy investments in Europe have been increasingly spearheaded by private companies, this financial backing nevertheless reflects a clear political strategy of balancing China’s domestic energy security and global environmental stewardship as well as enhancing Chinese enterprises’ international profile.

Russia’s state-owned Gazprom, meanwhile, has initiated countless disputes with the Ukrainian government over its natural gas supplies, including cutting off gas flows to all of Europe in order to prevent Ukraine from reversing flows through the pipelines crisscrossing its territory and cutting flows to Poland, Hungary and Slovakia through Nord Stream 1 to stop them from supplying Ukraine. Ultimately, for countries like Russia and China, with economies grounded in state-led capitalism, it is impossible to divorce economic and political rationale and to claim their financial investments do not also have geopolitical motivations.

The challenge ahead for the EU depends on its member states’ ability to build on regional unity and cohesion to mitigate the aggressive influences of Russia and Chinese entanglements and build a meaningful debate that goes beyond simplistic bifurcations.

By Wenyuan Wu for Oilprice.com

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