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Global Risk Insights

Global Risk Insights

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EU Struggling To Diversify Away From Russian Gas

EU Struggling To Diversify Away From Russian Gas

Russia will remain a major supplier of natural gas to the EU as projects to find alternative sources face headwinds from escalating costs and political meddling from Moscow. Whereas Europe is attempting to limit natural gas imports from Russia, few source countries have the reserves and infrastructure to meet demand from Brussels. Moreover, Russia relies on internal EU division to maintain the status quo.

Over the past year, many have clamored for the EU to reduce its energy reliance on an increasingly revanchist Russia. As approximately 30% of its natural gas imports stem from Russia, it seems logical that the EU should lower its dependence on Moscow. Russia does not enjoy a steadfast export reputation, as it has a history of cutting off supplies to neighbors. Related: Huge 100 Billion Barrel Oil Discovery Near London

However, there is little evidence that the EU can significantly limit its Russian energy imports in the foreseeable future. With EU near-term consumption expected to rise slightly, and internal production set to decline, there is little room for Europe to maneuver. Moreover, cutting Russian imports while adding to the EU’s already significant reliance on Norway or Algeria does little to aid the cause of diversification. Just because Russia is a thorny trading partner today, does not prevent another nation from assuming that role in the future.

Even if Norway is viewed as a stable friend of the EU, it has limited scope to diminish the influence of Russian energy. At present all Baltic countries and Finland are utterly dependent on Russian gas: a further nine EU members also obtain more than 50% of their supplies from Russia.

Efforts to change this dynamic are hindered by the fact that Russia has the world’s largest natural gas reserves, is (conveniently) adjacent to the EU, and already has significant infrastructure in place. Alternate source countries do not have these advantages and as such are hard-pressed to replace Russia’s share in the EU natural gas market.

Alternate ideas such as increasing imports of liquefied natural gas (LNG) also seem unattractive in the current economic climate due to higher costs relative to conventional natural gas. Central Asia and the Caspian region have vast natural gas deposits that remain untapped, yet pipeline infrastructure remains limited and construction plans have been beset by skyrocketing costs and political wrangling. Related: Price War: OPEC Versus U.S Shale Likely To Continue Despite Iran Deal

Russian State Companies as Extensions of Kremlin Policy

Russia, via state-owned Gazprom, has played a key role in obstructing the EU’s efforts to find alternative suppliers. It has used various tactics such as offering European companies stakes in competing projects. Russia has also used its political clout to dissuade some of its neighbors from participating in EU plans. Furthermore, Russia has attempted to draw attention to the environmental hazards associated with unconventional natural gas projects.

The Trans Anatolian Natural Gas Pipeline (Tanap), which started construction last month, encapsulates the many headwinds faced by the EU in finding alternative gas sources. Aiming to bring gas from the Caspian region to Europe, Tanap has had a turbulent history. Originally announced in 2011, Tanap has had a high turnover rates of investor countries and companies. Notably, Tanap suffered the loss of two key players in 2013 when European oil companies Total and Statoil pulled out amid concerns about the soaring costs.

Russia later criticized the project and questioned its feasibility via its ambassador to the EU, thus only increasingly uncertainty. Afterwards, in a related move, Gazprom announced in December 2014 that it had abandoned plans for the South Stream pipeline, a project which was intended to run under the Black Sea to supply southern and central Europe.

Competing Voices Undermine EU Bargaining Power

It should be noted that dependence on Russian gas is not a universal concern across the EU. Indeed, some of Europe’s largest energy companies have sizeable financial interests in maintaining the steady flow of gas from Russia. Crucially, various European companies have contractual obligations to import certain minimum amounts. Related: Shell Betting Its Future On LNG

The Oxford Institute for Energy Studies notes that European companies are contractually obligated to import at least 115 billion cubic meters (bcm) a year of Russian gas,(approximately 75% of the 2013 import level), until the mid-2020s. Failure to adhere to these obligations would be result in said EU companies becoming subject to international arbitration.

Additionally, Russia benefits from the competing interests and differing gas import levels present amongst EU members. In order to gain bargaining power and present a united front, the EU has made some steps towards an energy union. Specifically, such a pact intends to make gas contracts more transparent in the hope of weakening Russia’s influence. While said endeavor is well intentioned, it has so far only served to highlight divisions among EU members.

Russia will continue to loom over the European gas market for years to come. Limiting its influence will be a slow process fraught by setbacks, while achieving full diversification of natural gas imports seems nothing more than a pipe dream.

By Ronan Keenan for GlobalRiskInsights

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