This article appeared on Transitions Online.
Conventional wisdom has it that Russia dominates Europe’s natural gas market, and that European imports of Russian gas are growing and can only continue to grow. This supposedly places the European Union in a dangerous state of dependency and compromises its strategic position towards Russia. All sides of the debate over Europe’s Russia policy share these premises, including those “realists” who argue that dependency on Russian gas makes it irresponsible for the EU to pursue policies that antagonize Moscow.
But the conventional wisdom is wrong: Europe’s gas supply is not dominated by Russia, or, for that matter, by any other exporter.
Since 1980, and particularly since 1995, Europe has considerably diversified its sources of gas imports. Today, for the EU as a whole, gas supply diversity is not a pressing problem.
Over the past 40 years, natural gas consumption has grown steadily in Europe, and much faster than primary energy consumption. (Gas now accounts for around a quarter of energy use in Europe.) Since the mid-1970s, imports have covered all this growth. In 2007, Europe imported 300 billion cubic meters (bcm) of gas, accounting for 60 percent of consumption.
Russia remains the largest exporter of gas to the EU, with total annual exports of 130 bcm today. But since the early 1980s, and particularly over the past decade, import growth from other countries has outpaced that from Russia. Since 1990, 80 percent of the growth in European gas imports has originated from countries other than Russia, especially Norway, Algeria, Nigeria and the Middle East. Accordingly, Russia’s share of EU gas imports has declined sharply, from 75 percent in 1990 to just over 40 percent today. The share of EU gas consumption covered by Russian imports grew rapidly in the 1970s and 1980s, peaking at 30 percent in the early 1990s before stabilizing at about 25 percent. However, as a share of Europe’s primary energy consumption, gas imports from Russia have remained stable since 1990 at around 6.5 percent.
In other words, 93.5 percent of the energy consumed in Europe is covered by sources other than Russian gas – and natural gas, unlike oil, faces direct competition from other fuels and technologies.
Transport modes and routes for gas have also diversified. Until the early 2000s, most of Europe’s imports came via pipelines. But over the past decade, Europe has become a major customer in the rapidly growing market for liquefied natural gas (LNG), which is transported by sea. Since 2002, LNG from new suppliers such as Nigeria, Egypt, Trinidad, and Qatar has accounted for most of the rise in EU gas imports. The share of LNG in EU gas imports grew from 15 percent in 2000 to more than 20 percent in 2007. Even pipeline routes from Russia itself have diversified: the Yamal-Europe pipeline, which was opened in the 1990s, has reduced reliance on gas piped across Ukraine.
There may be no problem of European overdependence on Russian gas, but this is not to say that all is well on the supply front. Indeed, the solution to the Russian gas challenge lies not in foreign energy policy but in reform of the European gas market itself.
The gas markets of the EU’s eastern members are, for the most part, small but highly dependent on Russia, while the bigger western markets benefit from greater supply diversity. And while the countries that critically depend on Russia for their gas are to be found among the new member states, Gazprom’s big clients are Germany and Italy, which together account for almost half of all Russian gas consumed in the EU.
These national differences would not matter too much if there were a single European gas market. But the reality is that Europe’s gas market is segmented along national lines. There is little cross-border trading within the EU, and when supply disruptions occur – as in January 2006 at the height of the gas crisis between Ukraine and Russia, or, two months later, when a fire at the Rough storage facility disrupted the U.K. market – we see very little reallocation of supply between national markets.
The result is that Russian gas has become an extremely divisive issue in European politics. The highly dependent countries in Eastern Europe resent the German, Italian or French pro-Russian stance, which they largely ascribe to the strategic partnerships between Gazprom and importers in these countries. Conversely, Moscow’s self-declared strategic partners in the EU resent the anti-Russian approach of some eastern members and argue that cultivating good relations with Russia is essential to the EU’s energy security.
An integrated and competitive European gas market would create the maximum possible degree of solidarity between European gas consumers. It would improve collective energy security by enabling the reallocation of gas across the entire market in times of supply or demand shocks.
Finally, a more integrated gas market would render EU members’ bilateral relations with Russia largely irrelevant to the conditions of access to Russian gas for consumers.
HOW EXPOSED IS CENTRAL AND EASTERN EUROPE?
Integrating Europe’s gas market would enhance the security of gas supply across the bloc, perhaps especially so in Central and Eastern Europe, because the eastern rim is the part of the bloc most dependent on Russian gas. But this is a medium-term prospect, depending on political and industrial processes over which governments in the new member states have little control. In the short term, a more direct approach is needed to address gas security issues in the most exposed EU member states.
The gas security situation in Central and Eastern European countries is probably better than it is generally thought to be, even if a few countries face serious challenges. But markets vary considerably across the 10 new member states, and there is a need for in-depth economic analysis in each of them. Such analysis would inform market-specific policies that could be implemented to improve the security of gas supply in each country.
Six of these 10 states import more than 80 percent of their gas supply from Russia. But as figure 13 shows, on average, the level of energy dependence on Russian gas – the share of total primary energy covered by imports of Russian gas – is about 15 percent (the figure for the 15 Western European members is about 5 percent). Russian gas supplies a particularly high share of total energy in only four countries – Lithuania, Latvia, Hungary, and Slovakia – each of which is reliant on Russian gas for around a third of its energy use. Specific attention should be paid to these four countries.
Diversity of supply does not tell the whole story; the structure of gas consumption is another important determinant of gas security. Lithuania, Estonia, Bulgaria, and Latvia consume virtually no gas for home heating; in Hungary, the Czech Republic, Slovakia, and Poland, however, this sector represents between 25 percent and 35 percent of gas consumption, suggesting a greater need for storage capacity in these countries.
Finally, it is worth noting that, in absolute terms, gas imports from Russia amount to relatively small amounts of energy even in the four highly exposed countries, especially Latvia and Lithuania. This suggests that it may be possible for these countries to implement policies of partial substitution away from natural gas, in favour of oil products and imported electricity, given the relatively small volumes involved.
WHAT CAN THE EU DO?
In the post-Georgian-war environment, with the union divided over what approach to take in its political engagement with Russia – and with talks on a new EU-Russia cooperation agreement due to start in a few days – it is of critical importance that Europe deals with its Russian gas problem. The Czech government has made clear that energy security will be one of the priorities of its presidency of the European Council, which runs for the first half of 2009.
The EU’s Russian gas problem has two related dimensions: the political divisiveness of the EU-Russia gas relationship, and the specific risks to the security of gas supply to the highly dependent Central and Eastern European members. There are several steps the EU can take toward resolving this situation.
First, the bloc can make gas market integration a high priority. A single competitive gas market would help de-politicize gas, with major foreign policy benefits for Europe. It would also improve the security of supply for all European gas consumers, wherever they are.
Russia has a vested interest in market segmentation. Allowing Gazprom to acquire European transmission or storage assets carries the risk of reinforcing barriers to market integration. To guard against this, national energy regulators, and the proposed new Agency for the Cooperation of Energy Regulators (ACER), should screen all proposed takeover projects. The European competition authorities should also be involved.
Next, the union can help member states, especially those in Central and Eastern Europe that are highly dependent on Russia, to develop and implement national action plans for improving their gas security. This would be necessary regardless of Russia’s policy towards Europe. But in the current geopolitical context, alleviating Eastern Europe’s “energy insecurity syndrome” would also help make Russian gas less politically divisive in the EU.
This commentary has been adapted from “Beyond Dependence: How to Deal with Russian Gas,” available at: https://ecfr.eu/page/-/documents/Russia-gas-policy-brief.pdf
The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.