From Dependence to Diversification: Russia and Europe’s Energy Security Challenge

, by Konstantin Chopov

From Dependence to Diversification: Russia and Europe's Energy Security Challenge
ReubenGBrewer, CC BY-SA 3.0 <> , via Wikimedia Commons

While the European Union’s (EU) sanctions, imposed after February 24, 2022, have targeted numerous essential sectors of the Russian economy, Russian gas has remained a notable exception. Following the indefinite suspension of the Nord Stream pipeline by Gazprom in 2022, the Ukrainian Transit Route (UTR) has become one of the last remaining conduits for Russian pipeline gas to reach the EU.

With the current agreement allowing Gazprom to utilize the Ukrainian pipeline network for gas transfers to Europe nearing its expiration, there has been speculation about objections from both Ukraine and the EU to extending this deal. Such a development could further decrease the volumes of Russian pipeline gas transferred to Europe, which have already fallen by over 56% in 2023.

This article will explore the potential implications of not extending the Russia-Ukraine gas transfer agreement on European energy security and also explain why the EU has become so reliant on Russian gas, what efforts have been made to reduce this dependence and assess whether those efforts will be successful in the long run.

The dependency story

To understand why the European Union has become so dependent on Russian gas, it is crucial to consider a blend of logistical and economic efficiency-related factors.

Although constructing the necessary infrastructure, such as pipelines, entails significant costs, pipeline gas is considerably cheaper than liquefied natural gas. This cost advantage comes from the absence of additional expenses for liquefaction, shipping, or regasification. Moreover, Russia possesses some of the world’s largest natural gas reserves. This capacity has enabled Russia to supply larger volumes of gas at significantly lower prices. The cost-effectiveness of Russian gas particularly appealed to one of its first buyers—Germany, which signed its initial gas contract with the Soviets in 1970 after a decade of historically high economic growth that cemented its status as Europe’s largest industrial economy. Other European nations such as France, Italy, and Austria, keen on keeping their industrial sectors competitive through minimized production costs, also regarded Soviet gas as their optimal choice, especially considering the USSR’s geographical proximity.

From a logistical and practical perspective, it is essential to emphasize the significant degree of inflexibility associated with the infrastructure built to facilitate the transfer of pipeline gas compared to the more flexible infrastructure needed for transporting other Russian energy exports like coal or oil that unlike gas were subject to sanctions and embargos. Pipelines are designed to last for decades, creating a direct connection between buyers and sellers. Therefore, the construction of new pipelines with new suppliers requires significant time and investment.

As a result, switching to alternative gas suppliers presented logistical challenges and substantial costs and the cost-effectiveness of Russian gas has arguably both disincentivized the EU from significantly diversifying its energy supplier. Also, by providing an energy safety net, Russian gas supply incentivized some EU member states to adopt more radical policy approaches to attain their “green objectives.” For instance, in 2011, the German government orderedthe shutdown of all nuclear power plants in the country by the end of 2022. Consequently, it could be suggested that Germans, who in 2021 imported over 65% of their gas from Russia, potentially planned to replace nuclear power with natural gaz in short and medium term.

REPowering EU?

The short-term consequences of the closure of the Ukraine transit route will undoubtedly increase the existing shortage and gas prices, which in 2023 have recovered to below €50 per megawatt hour after an unprecedented increase during 2022. However, the long-term implications present a more nuanced picture.

EU’s gas consumption declinedby more than 18% last year, with projections indicating a continued decrease in the years ahead in part due to the adoption of the REPowerEU – the European Commission’s plan to end the EU’s reliance on Russian fossil fuels by 2030. The planned attainment of this ambitious objective is facilitated through increased investments in energy conservation infrastructure, renewable sources, and strategic diversification of energy suppliers, turning to countries like Algeria, Azerbaijan, the US, and Norway. For instance, the Baltic Pipe – new European gas corridor was openedin Autumn of 2022 allowing Norway to transfer more significant volumes of its natural gas to the EU. Declining gas prices, therefore, could suggest that REPowerEU appears to be working already, with some commentators claimingthat “Europe looks like it has successfully weaned itself off Russian gas.” Therefore, it could be argued that the impacts of UTA’s closure on European energy security would be less severe in the long run, as the EU already found various ways to substitute Russian gas.

Russian isn’t gone (yet?)

It is necessary to stress that despite the potential closure of the UTR, Russian gas can still reach the EU through various alternative pathways. When the pipeline gas is concerned, one of such pathways is the recently constructed TurkStream. This development facilitates gas flow to most Russian gas-dependent EU nations, such as Slovakia and Hungary, and is part of President Erdogan’s aspiration to establish Turkey as a global gas hub.

Initially, Russia aimed to redirect its pipeline gas exports towards emerging economies that maintained political neutrality in regard its actions in Ukraine. Russia hoped that this shift would compensatefor an 80% reduction of its overall gas supplies to Europe in 2022—a move that seemed contrary to its trade-related interests. However, this strategy did not yield the expected success. Notably, China, which currently has a significant bargaining power over Russia due to the pressure of international sanctions exerted on the latter, was reluctant to negotiate on the new pipeline Power of Siberia 2, seeking to secure Russian gas at the lower price. Therefore, it could be argued that President Putin recognized the significance of EU gas purchases for sustaining the Russian economy. This realization has arguably sparked his enthusiastic support of Erdogan’s vision for a Turkish gas hub not only through pledges to invest heavily in the necessary infrastructure but also through proposal to construct an additional TurkStream string to increase its transfer capacity. Consequently, in the long run, if the EU’s “no sanctions on gas approach” continues, the supply of Russian gas to Europe through TurkStream could potentially increase. However, whether there would be sufficient demand – remains a question.

In conclusion, it’s critical to acknowledge that the contemporary European energy security landscape is embroiled in unprecedented controversy and uncertainty. Questions loom large: Will the UTR be shut down, or will Ukraine, despite its initial unwillingness, eventually negotiate with Russia on prolongation of the current transit deal? Will the EU demand for gas decrease further as planned, and will the new suppliers be able to provide sufficient volumes in the long run? And most crucially, will the EU be able to REPower itself by 2030? And, of course, will Russia ultimately strike a deal with China and successfully shift its gas exports to Asia, not needing the European markets anymore? All those questions are something yet to be answered!

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