Escaping from Russia’s energy control

The Ukraine crisis of 2006 could drive Europeans to the Middle East for natural gas. When Russia reduced the output on its westward line to Ukraine in January because of a pricing quarrel, throughput on to Europe was sliced by about 30%. Ironically, Russia began its chairmanship of the Group of Eight (G-8) the same day — a chairmanship it had themed on “energy security.”

  • E-Mail
By  Stratfor Published  February 7, 2006

|~|Hill200.gif|~||~|When Russia reduced the output on its westward line to Ukraine in January because of a pricing quarrel, throughput on to Europe was sliced by about 30%.

Ironically, Russia began its chairmanship of the Group of Eight (G-8) the same day — a chairmanship it had themed on “energy security.”

Europeans are left wondering about a very uncertain future. Roughly 40% of Europe’s natural gas imports come from or through Russia — and 80% of that transits Ukraine. A glance at the map shows that there are not any obvious alternate suppliers.

The EU bloc’s options fall into four broad categories.

The first is additional natural gas from existing suppliers. Not much can be squeezed out of this particular turnip.
Production from the North Sea has peaked, and Algeria is already a mature supplier — there is not much room to increase production, even in the long term. Libya, which has only recently returned to the international fold, might be able to help out. But Libya has never been known as a large natural gas player. There is undoubtedly some gas under the Libyan Desert, particularly in the western parts of the country, but bringing it to market will be a multiyear effort necessitating pipelines under the Mediterranean — and all for likely only a few billion cubic metres (cm) per year. In comparison, Europe’s total demand is 540 billion cm, of which 95 billion cm currently comes from Russia.

The second option is tapping liquefied natural gas (LNG). Currently only France, Spain, Greece, Italy, Belgium and Portugal have LNG import facilities. Tapping LNG tends to be (relatively) cheaper and faster than building new pipeline networks over thousands of kms — particularly if a country is only having to expand an existing LNG terminal. Combined, Europe’s LNG import facilities currently can handle 76 billion cm per year.

Third, the Europeans can reduce the amount of sectors that use natural gas. The sector that theoretically could make the biggest change is power generation. This, of course, poses a problem for other policy goals. Europe has been steadily switching its electricity generation plants from oil and coal burners to natural gas because burning natural gas produces far fewer greenhouse gas emissions. Switching back might encourage energy dependence, but at the cost of abrogating Kyoto. The only direction Europe can go with this option, therefore, is to nuclear power.

That, in turn, creates its own set of complications. While the Green movement is not as strong in Europe as it once was, the Western European population remains broadly distrustful of the word “nuclear” no matter the context. Additionally, the ten EU members who joined the bloc in 2004 had to negotiate away their nuclear facilities as part of the terms of their accession. Only a Czech plant was able to get a full exception.

But this is not the closed door it might seem. Finland and France already are enthusiastic nuclear energy users, with France getting 70% of its electricity needs from atomic power and working on a new fleet of reactors. Central European states are likely to push hard for the ability to split the atom, too. Not only are countries such as Poland habitually wary of Russia, unlike Western European states that import natural gas from places such as Norway or Algeria, these states also have fewer replacement options. But nuclear power is not a panacea. It cannot replace natural gas completely; some industries — such as petrochemicals, plastics and fertilisers — have to have natural gas as an actual feedstock. The substance, of natural gas is in many ways nonsubstitutable. Nuclear power can take the edge off, but not much more, and only over a long time frame.

So ultimately, the Europeans are going to have to seek out the fourth alternative: fundamentally new suppliers of piped natural gas. The only serious option would be to look southeast past Turkey to an odd crop of new suppliers: Azerbaijan, Iraq, Iran and Turkmenistan.

Though that seems a long haul, it is not the pipe dream it appears at first glance. Turkey already has a relatively well-developed infrastructure, so most of such a megaproject would not have to start from scratch. Azerbaijan, Georgia and Turkey already have broken ground on the Shah Deniz project that will send Caspian natural gas to the edge of Europe, hopefully by the end of 2006.

Likewise, Greece and Turkey have managed to bury the hatchet and have agreed to build the Poseidon link that will allow natural gas in the Turkish network to flow under the Strait of Otranto to Italy. Similarly, there already are plans drawn up for the Nabucco line, a connecting link that runs from Iran through Turkey and the Balkans to Austria. More speculatively, there also could be a pipeline starting in distant Turkmenistan that flows through northern Iran before joining up with this migrating pipeline herd in Turkey, or a link that originates in Iraq.

The problems, of course, would be time, cost and the United States. While natural gas pipelines build faster than their oil counterparts, even a rush job on Poseidon, Nabucco and Shah Deniz probably would not get the lines up and running before 2009. And even then those combined options in their current incarnations would supply only about 35 billion cm per year at a cost of US $10 billion. And even that assumes that the Europeans can get along with Iranians long enough to invest a few billion without Washington (or perhaps even a spurned Russia) throwing a monkey wrench into the works.
But though that sounds like an awful lot for an awful little, bear in mind that Russia has alerted its European consumers that their prices will increase by about 50% to $240 per 1,000 cm by the end of 2006, and the Ukrainian crisis provides no confidence that Russia has any intention of seeing its largely state-run energy industry as anything other than a political tool. EU members will have to write cheques to Russia for natural gas in 2006 edging up toward some $30 billion. In that light, coughing up an extra $10 billion to reduce their long-term Russian exposure seems a much more viable — and likely unavoidable — option.

Add a Comment

Your display name This field is mandatory

Your e-mail address This field is mandatory (Your e-mail address won't be published)

Security code