Energy prices are rising across the European Union, causing worry among consumers and governments alike as winter fast approaches. The EU has responded by releasing a “toolbox” of measures that member states can deploy to assist households, and many governments are offering subsidies to tide people over.
The price rises have prompted EU leaders to direct stern words Russia’s way – European Commission president Ursula von der Leyen blamed the country for failing to increase supply, and pointedly praised Norway for raising production. The EU’s high representative for foreign affairs, Josep Borrell, suggested Russia was intentionally withholding further supply.
The current energy shock may be the first of the green transition, and there are numerous issues at play. They range from previous EU liberalisations of the energy market, which have helped prices skyrocket as Europe reacts strongly to fluctuations in the international gas market, to rising demand for gas in emerging economies – countries that the EU actively encouraged to move towards gas and away from coal. Europeans may now be entering an era where shortages are not unusual: this high demand is rapidly opening up new markets for producers of liquefied natural gas, which have more options of who to sell to than previously.
This means that the EU’s tough talk approach will soon prove insufficient to the task of keeping warm in a geo-economically cooler world. Governments across Europe are setting about transforming how they generate and supply energy, but, for Moscow, the Russian economy remains dependent on fossil fuel exports. It will view efforts to move to renewables as a long-term challenge to its economic model. Russia cannot yet afford to lose European countries as its main buyers. But, at the same time, it is already looking at how to shore up its position by diversifying into Asia, especially China, where Russia’s vast natural resources are growing in importance. Russia remains Europe’s main gas supplier, but Europeans urgently need to understand the changes it is currently making to its energy transport infrastructure – as these changes could leave Europe even more at Moscow’s mercy.
Since the end of last year, the new Power of Siberia pipeline has been in operation, transporting gas from Russia’s Chayandinskoye field to China, with another field to be opened by 2022. In March this year, Vladimir Putin gave the green light to move ahead with a second pipeline, Power of Siberia 2. This facility would supply gas from Siberia’s Yamal peninsula, which holds Russia’s biggest gas reserves – and which currently supplies EU customers.
Russia’s ‘pivot to Asia’ in supplying gas should come as no surprise. Demand in China is still rising, and the country is finally determinedly moving on from coal. For China, filling the gap with globally traded LNG brings other consequences, such as LNG ships having to pass through the bottleneck Strait of Malacca, and tensions with two of the world’s main suppliers, Australia and the United States. In this light, Russian-supplied gas becomes even more attractive to Beijing. Power of Siberia 2 would deliver gas straight to China’s north-eastern regions, which are the most densely inhabited part of the country. Alongside this, Beijing has for some time been in talks with the Turkmenistan government about adding a fourth line to their joint central Asia-China pipeline, which already provides nearly 40 per cent of China’s gas imports. But this project has experienced numerous delays – meaning there is an opportunity for Gazprom to get in first and secure its market share.
Mongolia could also be interested in the Power of Siberia 2 project, given the transit fees it could demand, but it too needs to diversify, with coal accounting for some 80 per cent of its energy sources. And, as Asian economies continue to grow, and China adds millions of households to its gas grid, demand will only rise. Furthermore, Russia wants to increase the amount of LNG it supplies via the Arctic Sea route, aiming for it to account for 20 per cent of global supply by 2035, with Asian customers, and China especially, making up the bulk of the custom for this LNG.
The Power of Siberia 2 pipeline remains just a plan for now, and it will not be operational until 2030 at the earliest. Undertakings of this scale take some time to agree, and it could yet run into showstopper negotiations about prices and transit fees. But it is a serious plan nonetheless. If the pipeline does materialise, the same field – on the Yamal peninsula – will be a key supply for both Europe and parts of China. This gives Russia new leverage to switch from one market to the other.
The EU must therefore think more strategically about its energy supply and how to eliminate future vulnerabilities now. It can make a start by refusing to allow the Nord Stream 2 gas pipeline between Russia and Germany to open. Supporters of the scheme have maintained that it is not designed to be used by Moscow in a coercive way – but the potential for this remains. Gazprom has just leveraged its gas monopoly over Moldova and suggested that the country’s pro-European government should abandon a free trade deal with the EU and halt gas market liberalisation in exchange for lower gas prices in a new long-term contract with the company. The EU needs to understand that other players will actively use dependencies for their political goals, and should include this risk in its foresight assessment.
Just as Russia is strategically increasing its options, so will the EU have to assess its needs strategically. Above all, it ought to press ahead on developing its future renewable energy infrastructure. But in the meantime it should also consider moving back to more long-term contracts. This will give consumers breathing space, shielding them from wild price fluctuations and allowing European states to pursue the major energy transition. The EU should safeguard its medium-term needs by stabilising its supply of gas as a ‘bridge fuel’ as it moves to renewables – which would also solidify the relationship with Russia over this period; Europe, after all, is still its biggest customer. There is an opportunity to progress the green transition while securing steady gas supply, but now is the time to take these crucial decisions – before key suppliers such as Russia have the option of looking east for sales, rather than west.
The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.