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Tue February 7, 2012
Foreign Policy: Freezing in the Dark
Originally published on Tue February 7, 2012 7:35 am
Robin M. Mills is head of consulting at Manaar Energy.
It is getting to be a European winter tradition. In 2006, 2009, and now again in 2012, temperatures plunge, and Russia interrupts its gas supplies. But while this spectacle is sadly familiar, Europe's response continues to be hampered by internal divisions, Moscow-friendly European gas companies, and the Kremlin's clever machinations.
Europe's deep freeze is no laughing matter. Heavy snow fell in Rome for the first time in a quarter-century, Venice's canals have begun to freeze, and temperatures in Ukraine have plunged as low as -32 degrees Celsius. As a result, more than 300 people have died across the continent.
Russian gas exports have dropped by 15 percent as its own consumption has soared in the cold weather — meaning there's less to go around. Deliveries to some countries, including Austria and Bulgaria, have been reduced by as much as 30 percent, and Russia accused transit country Ukraine of siphoning off more gas than it was entitled to. This time — unlike the 2009 supply cut, which arose from a pricing dispute — the cause of the shortages seems to be that Russian gas monopoly Gazprom simply does not have enough gas to serve both its domestic and international markets, and Prime Minister Vladimir Putin reportedly ordered the company to prioritize Russian consumers.
The United States may have turned "energy independence" into a populist rallying cry and boosted its own gas production dramatically, but European countries have gone in the opposite direction. They have concentrated on trimming demand, developing renewable energy sources, and striking individual deals with Russia. Germany's shutdown of its nuclear plants and Italy's decision not to restart its nuclear program post-Fukushima will further increase Europe's reliance on Russian gas.
This strategy has made Europe more vulnerable to the deep chill currently seizing the continent. But it doesn't have to be that way: Europe's shale gas resources, though probably not on the scale of those in the United States, could be a substantial local energy source. Some estimates suggest that Europe could possibly have 15 trillion cubic meters (Tcm), a figure that would be more than double the continent's current conventional gas reserves.
The challenges of developing these resources are as much political as they are scientific. The possibility of shale gas development has met with opposition from environmentalists, lukewarm enthusiasm at best from politicians, and behind-the-scenes obstructionism from Gazprom and the European gas giants that benefit from a close relationship with it. In 2010, showing a touching concern for the environment, Gazprom deputy CEO Alexander Medvedev told Britain's Telegraph, "Not every housewife is aware of the environmental consequences of the use of shale gas. I don't know who would take the risk of endangering drinking water reservoirs."
In Bulgaria, these veiled warnings were heeded. The country, which was badly affected during the 2009 cut off, buys gas from Gazprom at more than four times the price in self-sufficient North America. Bulgaria's Ministry of Economy estimates it could have 100 years worth of shale gas, and polls suggest 75 percent of Bulgarians support shale gas exploration with appropriate environmental safeguards. Yet in the fastest-moving legislation it had passed since the communist era, Bulgaria voted to ban "fracking," an essential step of releasing the gas from shale, and ended U.S. oil giant Chevron's license for shale gas exploration in the country's northeast.
The move was led not by the Environment Ministry but by the head of the parliamentary economic committee, Valentin Nikolov, who was allegedly influenced by Russian pressure over renewal of gas contracts which expire this year. Energy Minister Traicho Traikov claimed that the campaign was led by a "motivated elite" and the rightist Union of Democratic Forces accused Gazprom of "serving the same role that the Soviet Army served some decades ago." The ban perpetuates Bulgaria's almost complete dependence on Russian gas, and discourages other shale gas explorers from risking their capital in Eastern Europe.
Bulgaria is far from the only European country to shoot itself in the foot on energy independence. France, which may have some of Europe's richest shale deposits around Paris — containing oil as well as gas — had already banned fracking in June last year over environmental concerns, as have two Swiss cantons. These bans came despite a European Commission study stating that "neither on the European level nor on the national level have we noticed significant gaps in the current [shale gas] legislative framework."
European incumbent companies have been mostly negative about their home turf's potential, leaving shale gas development to their competitors. The shale charge in Europe has been led by small companies such as Cuadrilla, which announced a find of almost 6 Tcm in northern England last year, and U.S. giants such as ExxonMobil, Chevron, and ConocoPhillips.
Meanwhile, to pre-empt Europe's attempts at supply diversification and to avoid being held hostage by transit countries, Russia has advanced new pipelines. Nord Stream, which runs under the Baltic directly to Germany, began deliveries in November. Weeks after stepping down as German chancellor in late 2005, Gerhard Schröder became chairman of the committee of Nord Stream's shareholders, who, with Gazprom, include two of Germany's largest gas companies, Wintershall and E.ON. This alliance between Russian and German energy giants has provoked consternation in Eastern Europe: In 2006, then Polish Defense Minister Radek Sikorski said the line revived memories of the Nazi-era Molotov-Ribbentrop Pact.
Russia is also planning a South Stream pipeline, which would make Russia largely independent of the Ukrainian transit route, allowing it to pressure Kiev at will — as it did in 2006 and 2009 to undermine the pro-Western president Viktor Yushchenko. The line, which will run from Russia under the Black Sea to Bulgaria, partners Gazprom with Italy's ENI, Wintershall, and Électricité de France. The pipeline would also forestall attempts to bring Caspian and Middle Eastern gas into southeastern Europe, and prevent Turkmenistan, which sits on top of the world's fourth-largest gas reserves, from cutting out middleman Gazprom and selling directly to Europe.
But with estimated costs 50 percent higher than those of EU-backed rival Nabucco, the commercial rationale for South Stream is hazy. "Gazprom is what one would expect of a state-owned monopoly sitting atop huge wealth — inefficient, politically driven and corrupt," was one U.S. diplomat's opinion, as revealed by WikiLeaks. That appears to be being borne out, as the company is increasingly burdened by subsidizing its domestic market and snapping up infrastructure to enhance political control in the post-Soviet "near abroad." As a result, there is a real risk that Gazprom may not be investing enough in the next generation of more costly, remote fields.
Europe needs to take decisive action. Its leaders should drop any illusions they may still entertain about the ruthless, cynical, calculating men in the Kremlin. It must deal with them from a position of unity and strength, not succumb to the temptation to strike side deals. If Germany shows impatience with eurozone fiscal indiscipline, it must demonstrate its own discipline, rather than self-indulgence, in the energy sphere.
The lesson of the decades since the first oil crisis is that, in the long run, energy exporters suffer more than their customers from embargoes and politicized manipulation. Russia's economy, founded on commodity exports, appears increasingly shaky — and the vast costs of exporting Russian gas to China means the Kremlin has little choice but to look to Europe.
This realization should allow Brussels to aggressively challenge Vladimir Putin's government on human rights and geopolitical issues, as in the current stand off over Syria, and on the growing domestic opposition to Putinism. Europe's challenge is to reconcile its principles and its interest in promoting international free markets with a robust, activist energy strategy.
Europe's Kremlin-friendly gas oligopolies also need to be challenged by aggressive competitors. Liquid, flexible gas markets such as Britain's are gradually replacing the expensive oil-linked contracts that Gazprom insists are necessary for "supply security." Improved energy efficiency and better interconnections in Eastern Europe, particularly to Ukraine, would reduce Russia's ability to intimidate selected countries.
Alternative supplies should also be pursued more robustly. One of the EU's greatest energy security gains has come accidentally, via the great expansion of Qatari gas supplies. Qatar, which only began to export gas as recently as 1996, is now the world's third-biggest exporter and ships a quarter of the world's liquefied natural gas. There are good reasons for Qatar to challenge Russia for market share in Europe — the disappearance of its planned U.S. market due to the boom in shale gas and its desire to restrain Asian supplies to maintain high prices there. Yet with Doha in talks with Moscow over joint Arctic projects, this favorable situation may not endure forever.
Europe's cooling relations with Turkey, marred by growing introspection and a touch of xenophobia, are also detrimental to the continent's energy security. Opposition to the Turks' EU bid has simmered over immigration, Islam, and human rights issues. But the willingness of some European politicians to cold-shoulder Turkey ignores its importance as a transit state for Caspian and Middle Eastern gas, as well as its leading role in Iraq, where resolving the endless tussles over the new hydrocarbon law and the disputes between the Kurdish authorities and Baghdad holds the key to allowing Iraqi gas to begin flowing north.
There are many other countries Europe can cultivate to secure its energy needs. If China can secure a gas pipeline from Turkmenistan, the EU should also be able to do so — especially after Russia took advantage of a mysterious pipeline explosion, as demand slumped during the economic crisis, to cut its purchases from Ashgabat. Supporting the fledgling democracy in Libya, far from friendly to Russia, has the valuable side benefit of stabilizing an important potential secondary gas supplier. And Iran is a natural energy ally of the EU and a competitor with Russia — but that realization awaits a Damascene conversion on both sides.
Finally, Europeans need to develop their indigenous gas resources, with proper environmental controls — not fall prey to scare stories propounded by those with their own interests at heart. That is the best way to avoid freezing in the dark.