The recurring issue of gas supplies from Russia to Europe being cut has surfaced once again this winter, with Germany and Italy reporting significant reductions in the supply from Gazprom, the Russian owned energy company.
On 31st January Italy reported that volumes dropped by 10% and Germany’s biggest energy utility, E.ON, said last week that its imports from Gazprom were down 30%. This does not indicate an immediate crisis. Gas storage in Europe has improved significantly in recent years and alternative supplies are available with countries able to access extra volumes from Algeria, the Netherlands, Norway and liquid gas markets.
The Russian gas cuts have been a significant issue since 2006 when supplies were cut off to the Ukraine in a row between the two countries over prices. It has been an issue ever since and was arguably at its worst in 2009 when gas supplies were cut to most former Soviet Union states. Although Russia has always maintained that these cuts were due to disagreements over price, many consider them a political manoeuvre.
The EU and US have been wooing Ukraine for many years and Russia is keen to retain political and economic influence over its neighbour. Russia also wants Ukraine to leave the European Energy Community and a draft EU free trade agreement, in favour of joining its own customs union. It also wants control of Ukraine’s pipeline network, which it considers a significant strategic asset.
Indeed the pipeline network is proving to be a significant issue in this debate. The EU has sought to move away from a reliance on Russia’s gas and has made no secret of its support for the big pipeline project, Nabucco, which aims to bring gas from Central Asia and the Caucasus to Europe via the Balkans and Turkey. Unfortunately for the EU, this project has faced significant difficulties; none more so than Turkey’s apparent support for a rival Russian-backed project, South Stream.
This leaves Europe with a problem. According to market researchers ICIS Heren gas prices have spiked to levels not seen since 2006. The combination of increased demand during Europe’s severe cold spell and the cut in supply from Gazprom has seen prices in Britain rise from 60.7pence per therm (p/th) to 93p (p/th) in under one week. Prices in France are 25% higher since Friday and in Germany there has been an increase of 20%. Although storage and alternative supplies can mitigate these demand peaks, the long term reliance on Russian gas is still evident.
As well as price issues there are serious threats to energy security. European countries cannot continue to go from year-to-year with concerns regarding the reliability of supply coming from Russia. In the long term it could have significant impacts on the willingness of other countries and private companies to invest in Europe-based enterprises.
These types of concerns open up the possibility of new sources of energy. Hydraulic fracturing for shale gas is increasingly seen as a way of providing another source of energy into the mix. Certain European countries, such as Poland and France, have potentially large deposits of shale gas and the opportunity to further diversify the energy portfolio of Europe is tempting; however, there are serious environmental considerations that have to be addressed and resolved before the green light is given for expansive drilling.
This energy crisis may provide the opportunity for the EU to collaborate more effectively with Russia. Rather than viewing this through the traditional East versus West security paradigm, it could be time to approach from a different angle. Russia is keen to strengthen its own customs union and this is something the EU has been incredibly successful at. This requires willing from both sides and is not simple; however, rather than focussing on what divides us, it may be time to consider what unites us.