Global Economics

Energy: Europe's Escape Routes from Moscow


The EU hopes that several planned pipelines will provide a way of circumventing Russia's stranglehold on natural gas supplies

Wary of Moscow's stranglehold on natural gas supplies, the EU hopes several planned pipelines will provide a way out.

Russia's threat in early August to nearly halve the amount of gas it exports to Belarus over unpaid bills must have brought back bad memories for many in Europe.

Memories, for instance, of earlier this year, when Russia cut off the gas that flowed through its Druzhba pipeline to Belarus in a dispute over price hikes and tariffs. At that time, a wave of disruption surged down the supply chain.

Within days, the Czech Republic and Slovakia (who rely on Russia for around 65 percent of their natural gas) saw their shipments halved. Poland and Germany began tapping reserves, and other countries looked to increase imports from other suppliers like Norway.

It was not the first time a row between Russia and one of its neighbors had held some of Europe's energy supply hostage. A similar drama had played out at the beginning of 2006 with Ukraine.

These moves signaled a new reality for the European Union: Russia leveraging its energy dominance, not afraid to wield its power in localized disputes to get its way. The blows exchanged in those fights were felt throughout the EU, and for the world's largest importer of energy -- one that relies on Russia for a huge amount of gas and oil -- it was a wake-up call to just how vulnerable it was if Russia wanted to press its interests beyond its immediate neighbors.

Which helps to explain the EU's push in the past 18 months to back a series of pipeline projects, largely in the south of Europe, that aim to diversify the delivery routes for energy supplies -- either by circumventing Russia's vulnerable neighbors or avoiding the energy giant altogether.

"You are seeing an attempt to enhance security by making any single supplier less important to the overall picture," said André Plourde, president of the International Association for Energy Economics. "If one supplier decides it is not interested in playing by the rules anymore, the impact would be smaller if you have alternatives [in sources or delivery routes] than it might otherwise be."

Not surprisingly, Russia has been resistant to EU efforts to diversify its energy supply and has not hidden efforts to undermine it: The union's most touted project, the Nabucco gas pipeline from Central Asia, received a significant blow in May, when Russian President Vladimir Putin traveled to Central Asia himself and closed deals with Turkmenistan and Kazakhstan to build a natural gas pipeline to tap the region of much of its gas and sell it back to Europe at a huge markup.

"Russia needs security of demand, that those who are on the other end of their pipelines will definitely buy their gas," said Friedemann Mueller, an energy expert at the German Institute for International and Security Affairs in Berlin. "This is a power game and Putin is showing every day that he is in a powerful position, and we have to adjust to this new balance."

THIRSTY FOR GAS

Russia is the world's second largest exporter of oil, shipping out 7 million barrels per day, and natural gas, selling 216 billion cubic meters annually, and it is natural gas that the EU is most concerned about.

Natural gas is the fastest growing fuel source in the EU, with consumption rising by 42.3 percent in the last decade, according to the U.S. Energy Information Administration. Europeans consume 506 billion cubic meters of natural gas a year, with Germany, Italy, and France the top consumers. Germany depends on Russia for 46 percent of its gas supplies, and Italy and France are also major consumers of Russian gas, importing 32 percent and 21 percent respectively of their needs from Russia, according to the EIA.

Overall, the EU gets 25 percent to 40 percent of its natural gas from Russia, with 17 percent coming from Norway and 10 percent from Algeria.

At the same time that natural gas consumption has been on the rise, localized production has declined.

Experts agree that natural gas will soon replace oil as the EU's dominant energy source. Energy analysts like Fariborz Ghadar, director of the Center for Global Business Studies at Penn State University in the United States, say that by 2030 Europe could need to import as much as 80 percent of its natural gas.

"The reality of the thing is that if you look at where the gas is, the gas is in Russia and it is in Iran. Those are where the largest reserves are. Right now, the Russians basically have a stranglehold on the whole thing," Ghadar said.

DEFENSIVE DETOURS

The markets for natural gas and oil work differently. There is a real world market for oil, and traders can buy on the spot market in places like Singapore or Rotterdam without being dependent on one source.

The EU gets most of its oil from Russia as well, but analysts say Russia plays nicer with its oil -- largely because of this market fact. Yet the EU is backing several oil pipeline projects that, while still pumping Russian oil, would at least largely circumvent Ukraine and Belarus and translate into more direct routes to southern Europe, which looks poised to become a new energy gateway for the rest of the EU.

In January, Macedonia, Bulgaria, and Albania agreed to build the Albanian Macedonian Bulgarian Oil Corp. (AMBO) pipeline, which will stretch almost 1,000 kilometers across the Balkans, transporting Russian oil from the Black Sea to the Mediterranean.

Next year, ground is expected to break on the Burgas-Alexandroupoli pipeline, a collaboration between Russian and Greek companies. When completed in 2011, it is expected to pump an annual average of 20 million tons of oil from the Bulgarian Black Sea port of Burgas to Greece.

In early April, Croatia, Italy, Romania, Serbia, and Slovenia signed an agreement to build what is being called the Pan European Pipeline, expected to stretch 1,400 kilometers between the Black Sea and the Italian port of Trieste, where some estimated 40 million tons of oil a year should flow into existing pipelines that feed Austria, the Czech Republic, and Germany.

THE NABUCCO HOPE

Russia, by and large, is happy with these projects, experts say, since they are simply alternative ways to get Russian oil to European customers.

It is the EU's strong backing for the Nabucco pipeline that is generating tension with Russia. Nabucco is expected to run 3,300 kilometers between the Caspian Sea and Austria, through Turkey, Bulgaria, Romania, and Hungary. It is being overseen by five energy companies (each from one of the countries along the line), and the proposed 4.6-billion-euro pipeline could pump nearly 30 billion cubic meters of natural gas a year to Europe when it is fully operational, according to reports.

"Of course, the whole purpose of Nabucco is that this would be the one pipeline that comes out of Central Asia that isn't controlled by Russia," said Katinka Barysch, an energy expert and head economist at the Center for European Reform in London. "The Russians are very aware that if the Europeans get their act together this would undermine their strong position, so they're trying to act on it early."

Gazprom, Russia's state-run energy behemoth that produces more than 90 percent of Russia's natural gas and owns most of its pipelines, has been making steady rounds throughout the EU this year, securing new, long-term supply contracts with European energy distributors and buying into European pipeline networks.

Putin has been casting around for support for Gazprom's alternative to the Nabucco pipeline, a plan to extend its Blue Stream pipeline from Turkey north along the same route as the Nabucco route. He has promised to make Hungary, where the extension would end, Russia's principal gas gateway to Europe. This spring, Hungarian Prime Minister Ferenc Gyurcsany broke with Brussels and signaled a willingness to support Blue Stream instead of Nabucco.

Despite Russia, Nabucco is moving ahead, its managing director, Reinhard Mitschek, said. It is expected to break ground in 2009. "Due to the variety of potential gas sources, single events and done deals between other market players will not jeopardize the project," he said.

A SECURITY ISSUE

But don't look for Russia to go quietly. Analysts say the coming months could see more shuttle diplomacy, with Gazprom officials paying more visits to European capitals, Turkey, and Central Asia. Expect European leaders to head to Turkey and Central Asia, too.

"That's what needs to happen," said Zeyno Baran of the conservative Hudson Institute think tank in Washington. "European leaders need to look at energy not as something that heats the house, but look at it from a security and foreign policy perspective, because Putin uses it as such."

That view could continue to resonate in Brussels as Europe continues to clash with Moscow over things like a U.S. missile defense system in Europe, the fate of Kosovo, and NATO expansion.

"You can say Russia will wonder what is better, to supply its friends or its enemies," said Ivan Safranchuk, director of the Moscow branch of the World Security Institute. "Probably to supply its friends is better."


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