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Page added on March 29, 2014

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The battered state of EU-Russia energy relations

Public Policy

Russia’s annexation of Crimea presents the EU with a terrible dilemma. It cannot let the flouting of international borders and use of military force go unanswered, nor does it want war. That leaves it with political and economic sanctions. But it remains hamstrung by its dependence on Russian gas.

Given the high level of mutual interdependence between Russia and the EU, economic measures, if harsh, risk impacting the EU as much as they do Russia. That leaves primarily political sanctions. The risks for the US are much lower.

But it is changes to internal energy policy that will have the most impact. EU leaders have already indicated that they will reinvigorate efforts to reduce the EU’s dependency on Russian gas. This will take a number of forms: the further promotion of renewables, a potential reconsideration of nuclear, the pursuit of shale gas and the encouragement of alternative gas supply sources.

In other words, trends promoted by regulation and technological change will be compounded and reinforced by geopolitical concerns heightened by Russian aggression.

Given dire political relations, reinforced by sanctions, and an explicit desire to reduce the amount of Russian gas consumed in the EU, it is hard to see how the already malfunctioning EU-Russian energy dialogue can resume in any constructive form any time soon. The balance between the EU’s troika of energy sector objectives — security of energy supply, affordability and climate change mitigation — cannot avoid a fundamental shift.

This has widespread implications. It makes rapprochement with Iran particularly timely. It will intensify competition for access to gas in Central Asia, a potential flashpoint of Western, Russian and indeed Chinese interests. It will reinvigorate Russia’s desire to reduce its dependence on the EU as the primary market for its gas; Russia will pursue its ambition to become a major player in the LNG market and give new impetus to its long-delayed plans to build large-scale gas pipelines to China.

Long-lived EU-Russian antagonism would result in a major reinforcement of existing shifts in world energy flows. Asia not Europe is the location of growth in world energy demand.

The role of gas in the EU generation mix has held an ambiguous position since environmental concerns came to the fore. This has not been lost on Russia.

Speaking at the World Gas Conference in Kuala Lumpur in June 2012, Alexander Medvedev, deputy ceo of Russian gas giant Gazprom, said EU energy policy on the one hand treats natural gas as a green, abundant fuel supply, while with the other hand it tries to engineer its total elimination from the energy mix. In a scathing critique of EU energy policy, Medvedev said that innovations in the gas industry meant gas could outpace oil and coal in meeting energy demand, but Europe was ignoring this fact.

The critique was and remains largely accurate, but reversing it is contingent on a coherent EU policy towards gas and positive EU-Russian energy relations, neither of which currently look likely. Gas has been treated by the EU as both the cleanest burning fossil fuel, with quick response characteristics that make it an ideal complement to variable renewables, but also as a dirty hydrocarbon, the import of which undermines security of energy supply. In practical terms it has been left to the market, where the EU’s gas-fired generation sector has been caught between high fuel costs and subsidized and prioritized renewable generation.

This ambivalence towards gas on the part of the EU has been a key stumbling block in developing a closer EU-Russian energy partnership in the past, one that has been compounded by Russia’s dogged defense of oil indexation in gas pricing. Russia’s intervention in Crimea suggests there is no way back to even this former unstable balance.

But by encouraging gas displacement in its primary market, Moscow risks losing more than the EU does. Russia’s dependence on its hydrocarbon exports is ultimately higher than the EU’s dependence on its Russian energy imports.

platts



14 Comments on "The battered state of EU-Russia energy relations"

  1. rockman on Sat, 29th Mar 2014 4:28 pm 

    “…Moscow risks losing more than the EU does. Russia’s dependence on its hydrocarbon exports is ultimately higher than the EU’s dependence on its Russian energy imports”. Hmm…Russia is in the process of developing fossil fuel markets outside of the EU… especial in Asia where demand is booming. And exactly where is the EU looking to develop fossil fuel sources to replace Russia? Exporting Persian Gulf LNG would be one way to escape the Russia NG. All the EU has to do is be willing to pay more. Which they could have done years ago…when LNG was cheaper before the Asian LNG market exploded.

    The EU has had the same motivation to escape the Russian shadow for decades as it has today. And they are still where they are today. The only difference is that now fossil fuels are more expensive with fewer sources.

    Good luck, EU. Having a great motivation to change is only actionable if there’s a ready option to effect the change.

  2. Arthur on Sat, 29th Mar 2014 4:38 pm 

    “russia’s dependence on its hydrocarbon exports is ultimately higher than the EU’s dependence on its Russian energy imports.”

    The opposite is the truth: Russia can turn it’s back on Europe and sell it’s stuff to China and replace Chinese demand from US ally KSA. Not today, but in a few years time. Until 1989 the world was divided in two blocks: west and east. This could become reality again: west against SCO, with Europe the big loser. Europe would become totally dependent on the Gulf, if push comes to shove, controlled by SCO member Iran. If such a scenario would materialize, it is only a matter of time before the value of the western alliance would become subject of debate in Europe. Are we really going to let this happen because of the Crimea?

  3. Arthur on Sat, 29th Mar 2014 5:32 pm 

    http://www.zerohedge.com/news/2014-03-28/jim-rogers-america-shooting-itself-foot-over-russia

    Jim Rogers: “America Is Shooting Itself In The Foot” Over Russia

    There is no reason for Russia to worry about the western sanctions it is facing now over the Ukrainian issue since “Moscow has too many other trade partners to work with,” Jim Rogers explains in this interview, adding that “America is shooting itself in a foot getting the most of our world to pushing China and Russia closer together.” Simply put, he warns, “I don’t see any sanctions strategy that they can use that will hurt Russia worse than it will hurt the people imposing those sanctions…
    Of course, Russia is being forced to look east and not necessarily because they want to, but because they have to. If people are going to impose the sanctions and if you look to the east, you’d see who is out there, who may or may not trade with you. Not just North Korea, not just China, some other countries –Myanmar, Thailand, Vietnam certainly will, Indonesia certainly will. So, many people that don’t have problems with Russia these days, they will be happy to trade with Russia”

    Exactly. And it will hurt Europe a lot more than the US.

  4. rockman on Sat, 29th Mar 2014 6:46 pm 

    True Arthur. And one other thing for sure: if the Russkies started making a move on Canada I’m sure the US gov’t would quickly ratchet up those political sanctions. We all have our limits. LOL.

  5. DC on Sat, 29th Mar 2014 8:02 pm 

    Q/Given the high level of mutual interdependence between Russia and the EU, economic measures, if harsh, risk impacting the EU as much as they do Russia. That leaves primarily political sanctions. The risks for the US are much lower.

    Of course the ‘risks’ for the uS are much lower. The uS always gets other people to fight the wars it starts. Use it EU puppets to beat down Russia(if possible) Risk Assesment?-About zero.

    Q/It cannot let the flouting of international borders and use of military force go unanswered, nor does it want war. That leaves it with political and economic sanctions.

    Very well put Platts. So when can we expect those EU sanctions against the united Snakes? I mean after all, a serial abuser of international borders AND military force like the uS shouldnt be let off the hook for its crimes, right?

  6. baptised on Sat, 29th Mar 2014 9:04 pm 

    Edward Snowden’s revelations pivied off a lot of nations, including Germany. So the USA deflected the anger onto the mean old Russia, by supporting thugs in Ukraine. Plus the advantage of putting “defense” missiles in Ukraine. That is what I personally get from all this. But two facts that are not opinion’s, but true facts is 1 Their is no truth in any USA media, 2 UN & Russia both want this to go away.

  7. Arthur on Sat, 29th Mar 2014 9:18 pm 

    One of the best PCR interviews ever:

    http://deepresource.wordpress.com/2014/03/29/paul-craig-roberts-ukraine-neocons-armageddon/

    1939-2014
    Poland-Ukraine
    Danzig-Crimea
    Hitler-Putin
    Nuland-Bullitt
    Japan-China
    Italy-Iran

    Same people, same methods, same pretexts, same objective.

    War as a method of breaking the status quo and create new realities. Irrelevant how many millions get killed. Egg/omelet.

  8. Arthur on Sat, 29th Mar 2014 9:22 pm 

    Creative destruction is our middle name, both within our own society and abroad. We tear down the old order every day, from business to science, literature, art, architecture, and cinema to politics and the law. Our enemies have always hated this whirlwind of energy and creativity, which menaces their traditions (whatever they may be) and shames them for their inability to keep pace. Seeing America undo traditional societies, they fear us, for they do not wish to be undone. They cannot feel secure so long as we are there, for our very existence—our existence, not our politics—threatens their legitimacy. They must attack us in order to survive, just as we must destroy them to advance our historic mission.

    Michael Ledeen, neokohn.

  9. Kenz300 on Sat, 29th Mar 2014 11:59 pm 

    Every country needs to develop policies for greater energy security and greater economic security.

    Relying on outside sources for more than a minor supply is foolish.

    Alternative energy sources like wind, solar, wave energy, geothermal and second generation biofuels made from algae, cellulose and waste can now be produced locally. Local energy production with local jobs provides greater energy security.

    The centralized model for energy production is too unstable. It is time to move to a decentralized, local energy production system.

  10. Davy, Hermann, MO on Sun, 30th Mar 2014 1:37 am 

    I wonder if Germany will reconsider its effort to shut down its nuclear power industry?

  11. Makati1 on Sun, 30th Mar 2014 1:49 am 

    @Arthur, well said!

  12. GregT on Sun, 30th Mar 2014 6:13 am 

    “Same people, same methods, same pretexts, same objective. War as a method of breaking the status quo and create new realities. Irrelevant how many millions get killed.”

    Exactly Arthur. The game is much bigger than what most people can comprehend. Divide and conquer, bait and switch, the real game is not what everyone is focussed on. The real game is global dominance, the rest is all a distraction for the masses. Unlike you, I still believe that they are going to win their game, and I also believe that they are very close to doing so.

  13. Makati1 on Sun, 30th Mar 2014 8:29 am 

    GregT, I agree. I think the only thing that can prevent it is a nuclear war and then we all lose. Not that climate change is going to be a walk in the park if we avoid war, but at least the human species will have a chance.

  14. Arthur on Sun, 30th Mar 2014 10:58 am 

    Unlike you, I still believe that they are going to win their game, and I also believe that they are very close to doing so.

    It could be wishful thinking on my side of course, but I actually have a few arguments against your vision…

    In 1939 it was Germany, the smartest, most creative people of European civilization with the strongest spine, against the rest (USA, France, UK, USSR, Holland, Belgium, Norway, Canada, Australia), outnumbering them 1:6. Forget about Italy, the ally from hell. Without their foolish invasion of the Balkans, providing the British an excuse of invading Greece, aimed at capturing the oil fields of Ploesti, Romania, Germany’s only source of fuel, prompting the Germans to invade the Balkans and Greece, costing three valuable months, postponing Barbarossa, which made all the difference and caused the Germans to be stuck in the mud, 50 miles from the Kremlin, the only chance the Germans had in dissolving the ‘evil empire’ (Reagan) before December 1941, before the Americans got a chance to get involved, after they successfully engineering Pearl Harbor. The Germans not capturing Moscow in 1941 was the moment when they really lost, not Stalingrad, one year later.

    Now it is Washington against Russia and the Chinese. The Russian and Chinese leadership know exactly what is at stake here and who the enemy is. Germany is actually a small country, but Russia and China have strategic depth, as Napoleon and Hitler found out the hard way and as every professional geopolitician can confirm (read: wiki Heartland theory or Brezinsky, the Grand Chessboard).

    Both Russia and China have nukes. Five nukes on Manhattan, Washington, London, Tel Aviv and Jerusalem and the problem is solved once and for all. Don’t get me wrong, I am not advocating this, just considering potential moves on the chess board, just like the folks in the think tanks do.

    It is absolutely out of the question that the European population is going to be motivated for a major war against Russia over the Crimea. There is no real anti-Americanism in Europe, everybody still watches Hollywood movies, but the US government is treated with great suspicion, even among the greatest supporters of the west; Richard Snowden is generally considered a hero. Putin is more respected than Obama. Nobody is really outraged about the Russian actions in the Crimea, except for the professional lefties in politics and media. There is a general perception about the US government as being hypocritical about Iraq, Libya, Syria and Ukraine. In 1987 communism was dead in eastern Europe, but was still in power. Likewise, the US flavor of communism, multiculturalism, is all but dead in Europe and waiting for the final blow, which I expect to happen in the second half of this decade. And I guess that France is going to make the first move.

    And then there is the real game changer, without which for instance the Arab Spring was unthinkable: the internet. The official MSM are now circumvented, bypassed and are steadily becoming irrelevant. People are spending ever more hours online, where they read other than globalist opinions, at the cost of hours spent on the MSM. Historic revisionism is on the rise. Putin has the historic truth about WW1/WW2 in his archives and can launch that ballistic missile on a for him opportune moment, notably to draw Germany in his SCO camp.

    And then there is ‘peakoil’, making more globalism impossible from a resource depletion angle. People will travel less and less. Furthermore, the less money people have, the more they turn to the political right and become more nationalist and less globalist. Perfect example: the Greeks and Ukrainians, not exactly the intellectuals of Europe, have become the most rightwing of all. And the rest will follow, both in Europe and the US.

    Furthermore, it is a mistake to see ‘these people’ as invincible. They never had a chance in western Europe in the first place, unlike the USSR and USA. A Zionist coup, like the recent one in Kiev, is completely out of the question in western Europe.

    Almost nobody needs to be convinced on this board that the US empire is running out of steam. Everybody is waiting for the final blow: the dumping of the dollar. And not just on this board.

    I am not saying that ‘these people’ have lost, they can still blow up the world. But their hand of cards is much, much worse than it was in 1941.

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