The energy transition is complex. Energy policy as a whole is complex and requires a long-term sustainable approach to ensure our economies do well. Undoubtedly, in Europe, there are concerns about its high dependence on Russian gas (Russia supplies 30% of Europe’s gas needs). Understandably energy security has to be uppermost in energy policy. Yes, we want energy policy to be low carbon but main driver has to be security. The International Energy Agency has been driving that theme since the first oil crisis in the 1970s. Nick Butler provides an excellent blog in the Financial Times about Europe’s complex relationship with Russia.
Russia and Europe: nightmares and realities
Is Europe trapped in a state of dependence on Russian gas? What would happen if by some accident, let alone a strategic decision taken in Moscow, the gas stopped coming. Would eastern Europe grind to a halt, and would the west, led by Germany, sue for peace on any terms?
This was the core topic for debate last week at a seminar organised by the Geopolitics Forum at Corpus Christi College in Cambridge as part of their series on nightmare scenarios. With wide participation from within the university and beyond, we were able to go beyond the headlines to build an analysis based on facts. It is worth setting out a few of those facts.
- First, dependence is at the very least mutual and if anything in a buyers’ market power it is skewed to the importing nations. Russia supplies about 30 per cent of Europe’s gas needs and 60 per cent of its imports. Those are serious numbers but they are dwarfed by the 90 per cent dependence of Russia on Europe as a buyer of its gas.
- Second, Russian gas is now the swing supplier. European gas demand has been falling and although flat in 2015 is it 20 per cent below the level reached 10 years ago. All that decline has fallen on the shoulders of Gazprom and explains why the company has around 100bn cubic metres of stranded gas — developed but not producing in the Bovanekovo field in the Yamal peninsula of west Siberia.
- Third, several countries in eastern Europe are indeed 100 per cent dependent on Russian supplies of gas. But that does not mean that their economies would collapse if the gas supplies were cut off for whatever reason. Gas in each case is a small percentage of national energy consumption, probably reflecting a desire to avoid such a risk. Europe’s main importer of gas is Germany – a country well able to replace the gas either through imports from elsewhere or by increasing its use of coal. A cut off of gas to Germany would be a problem – but a problem easily and quickly solved.
- The fourth factual point reinforces the story on the true direction of dependence. The much touted pivot to the east with President Vladimir Putin’s theatrical visits to China to sign vast deals has come to very little. A detailed and expert analysis from the Oxford Energy Insitute shows that neither the volumes nor the price of such trade has been agreed. Indeed, even the route — whether via the Power of Siberia line from east Siberia to north-east China or the alternative line from west Siberia to Xiangjing in western China has not been agreed. In a buyers’ market there are no doubt a host of countries – led perhaps by Iran – offering long-term gas supplies to China at very attractive prices. It is hard to see Russia earning any revenue from sales of gas to China before 2025. Until then, and perhaps for a long time afterwards, Russia will remain dependent on the European market to maintain its export revenue and to keep the 373,000 people who are employed by Gazprom in work.
Gas, then, is not a weapon the Russians can use lightly, if at all, and it is perhaps not surprising that since 1968, when the gas trade began, supplies to Europe have never been interrupted despite numerous periods of tension — such as the invasion of Afghanistan in 1979 and the turmoil around the break-up of the Soviet Union in 1991. Supplies to Ukraine have, of course, been interrupted on two occasions but that has more to do with the lack of payment for the gas than anything else.
What Russia would like is a secure market for its gas — a guaranteed volume of sales at a stable price. Mr Putin has said as much in the past.
The fact that the situation in the market is one of interdependence does not remove the concerns about Russian intentions or about the extent to which Moscow has destabilised the economy of Ukraine to the point where a serious exodus of people to neighbouring European states cannot be ruled out. Given the failure of the EU to manage the problems of migration from Syria, the prospect of an influx of hundreds of thousands of desperate Ukrainians is indeed a nightmare scenario. In such circumstances, Europe led by Germany might indeed sue for peace, or at least stability with Ukraine neutralised and Russia promised a protected share of the European gas business.
But the nightmare scenario is not the only possible outcome of the current situation. The reality is that Russia needs the European energy market more than Europe needs Russian gas. In the end, if Mr Putin wants to stay in power he will have to pay attention to his country’s deteriorating economy. Perhaps from its position of relative strength Europe could then negotiate a deal which traded a part of what Moscow wants — for instance access to a part of the gas market on competitive terms – for a new and improved relationship across the security agenda.
Nightmares are often based on false fears and perhaps as one participant at last week’s seminar said Russia will one day become a normal country. Perhaps, although given Russia’s behaviour in Turkey over the last few months — where gas prices have been hiked and supply contracts broken — simply to punish the Turks for their behaviour in relation to Syria normality and the trust which goes with it, that still seems a long way off.