January 14, 2009

It is hard to be amused by what now is an annual Ukraine-Russia gas dispute.  What surprises, is the continued lack of readiness in Europe to protect commerce and households from this problem.  The lack of viable alternatives is particularly evident in new Europe.

  But Europe is not more dependent on Russian gas today than it was say 10 years back.  On the whole Europe has managed to diversify away from Russia, despite increasing its gas imports since the 1970s.  In other words, Europe has managed to meet close to 80 percent of its gas demand growth with non-Russian supplies, including liquefied natural gas, or LNG.

The level of exposure to Russian gas differs across Europe.  A country like France for example buys close to 10 percent of the total gas which Russia sends to Europe each year.  Germany buys close to 36 percent of it.  Yet, the German and French households are far less exposed to Russia political pressure when it comes to energy than their eastern neighbors like Slovakia, the Baltic States or Hungary, Romania and Bulgaria.  New Europe supplies their households with mostly Russian gas.

The first to freeze then when Russia turns off the gas valves is eastern and southeastern Europe, where not enough is being done to diversify the energy supplies.  At the same time, these are small markets in terms of total volume of gas consumed when compared to Germany or Italy, and thus their weight in the European Union-Russia gas negotiations is significantly less.

What works for Slovakia will probably not work for Germany, France or Italy, which is why Russia and Ukraine can afford to pass along their bilateral disagreement to EU consumers.  Because the argument for the last years has been that Europe has a Russia problem, the recommendations have focused largely on how the EU should avoid buying Russian gas.  This argument is not a sound one.  For example, Italy and Germany, where Gasprom is a key energy partner, will not risk alienating the Russian gas supplier.  It may also be commercially irresponsible for the Europeans to walk away from the Russian gas market, which is close by to Europe and potentially lucrative.

There is a better alternative to ensuring European gas security than to play the anti-Russia card.  Above all, the EU gas market should be further integrated and made more competitive, which means that the Russian gas would lose its political significance.  The national barriers that keep European gas companies from trading and selling across all of Europe must be dismantled, at which point the only factor that will still play a role will be the price.  In addition, Brussels should continue to develop direct commercial relations and secure access to external gas suppliers.  In particular, the Caspian option is a good one.

The Caspian basin is rich with gas and oil reserves.  Over the years, Europe has been dealing with individual Caspian states, including Azerbaijan, Turkmenistan and Kazakhstan, as well as with individual transit countries, like Turkey.  If Europe and its companies want to play a role in the decisionmaking on the development of the region’s energy potential, Europe will need to trade in its bilateral approaches for a Caspian region strategy.

At stake are the gas supplies from Azerbaijan and Turkmenistan.  To get this gas Europe will need to help Azerbaijan and Turkmenistan build the Trans-Caspian inter-connector line, as well as push Turkey to agree to a transit deal with Azerbaijan for the gas from Shah-Deniz 2 fields.  Turkey’s desire to be an energy hub in the Mediterranean is undermining the construction of a viable EU southern corridor.  In the end pointing the finger at Russia will not be enough to solve Europe’s gas insecurities.

Borut Grgic is the director of the Institute for Strategic Studies.  

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