University of Lodz
Why is Europe afraid of Russian gas monopoly?
The tradition of intensive cooperation in the gas sector between Russia and European states that we observe nowadays has its roots back in the Soviet times. In the end of the 60s of 20th century the Soviet Union began to sell gas to both German states and another gas contracts with Western countries followed. The supplies of Soviet (and after 1991 – Russian) gas were not disrupted even when the exporting country had to face enormous internal problems, such as the collapse of the Soviet state in 1991, financial crisis in 1998 that led Russia to the verge of bankruptcy and many minor challenges that occurred during the contemporary existence of the Federation.
Today the West is having an attentive look on expansive actions of Russian gas sector and these observations are more and more often accompanied by concern and mutual distrust. What is the reason for that? Why is Europe afraid of Russian gas monopoly? I will try to answer these questions in hereby short speech.
Russian Federation as we all probably know has the world’s biggest natural gas resources. According to BP Statistical Review of World Energy for 2007 they amount to over 44,65 trillion cubic metres (tcm) [BP Statistical Review of World Energy 2007, June 2008, BP, p. 22] which is equal to one quarter of accumulated world’s resources. As a comparison – Iran and Qatar that are second and third in this ranking have about 28 and 25 tcm respectively. Russia on its territory has a few so-called giant fields that after thorough processing are capable of producing even 84 billion cubic metres (bcm) what is equal to Germany’s annual gas demand.
Second important question – apart from the amount of resources – is the matter of infrastructure as well as production and transport capabilities. Russian gas output for many years now has been tending to increase – in 1997 the production figures were 537 bcm annually and ten years later, in 2007, it rose to 607 bcm [Ibidem, p. 24]. Russian economy, nevertheless, is highly energy-consuming, especially when we talk about heavy industry. Consumption in the domestic market is systematically growing – from 350 bcm in 1997 to 438 bcm in 2007 [Ibidem, p. 27]. It is therefore easy to calculate that Moscow each year can count on about 160 bcm of extra gas which is of course assigned to export. The largest single contracts with European countries bind Russia to provide no more than 22 bcm annually [Agata Łoskot-Strachota. Katarzyna Pełczyńska-Nałęcz, Ekspansja Gazpromu w UE – kooperacja czy dominacja (Gazprom’s Expansion in the EU – Cooperation or Domination), Centre for Eastern Studies, Warsaw, April 2008, p. 5], and European economies either are not that much energy-consuming or are relatively small. Both factors diminish their gas demand. It could thus be concluded that Russia has a real potential to be a monopoly in satisfying Europe’s gas needs. If we additionally take into account the fact that transit infrastructure connecting Russia-producer with Europe-client in lion’s share is built and controlled by Moscow, we can actually come to quite disturbing conclusions that the West has fallen into deep dependency from its Eastern neighbor.
The first place in world’s accumulated energy mix is nowadays occupied by crude oil. International organizations as well as countries themselves for several years now have been attaching more and more weight to a matter of saving energy resources and fossil fuels that the world could soon run short of as well as of environment pollution. Crude oil is a fuel of low level of so-called ecological purity. This means that when burnt, oil produces much more substances that are harmful to the environment in comparison with natural gas for example. Besides, largest and most profitable oil deposits are located in the Middle East region which for many years has been politically unstable. For those and some other reasons, world, including highly economically developed Europe, pursues a change in its energy mix. Ultimately, renewable sources of energy are to have the highest share possible, but in this ‘interim’ period large economies want to switch to gas. If that happens, it will mean that the demand for gas may significantly rise. For the lack of sufficiently developed LNG (liquid natural gas) infrastructure Europe will have to receive larger amounts of Russian fuel through Russian pipelines, which will make the dependence even deeper.
Europe, and especially its developed, industrialized and gsa-thirsty economy, is afraid of its Eastern border monopoly for one important reason. It is firstly potential, but real since 2005, threat of Kremlin closing gas taps. Russian Federation as a producer has a physical border only with some of its clients. That means that it has to cooperate with countries that are located on the transit route. Two most important transit countries in this case are Ukraine and Belarus. In the Soviet Union period transit facilities as well as railway system or heavy industry were built without taking into consideration the borders between particular republics. Today both Russian neighbors are independent and Kremlin cannot influence them directly. This is a background for a present situation in which all three capitals seem unable to get along with each other in a constructive manner. This is inasmuch important for the Europeans that for the time being there’s no other gas pipeline that connects Russian deposits with European consumers. In the last few years gas conflicts of various kind and intensity has not been confined to bilateral dispute – Moscow by turning off the tap did block gas for the rest of Europe. Some countries were affected more and some less. Nevertheless, observing the status quo brought the common need to undertake measures aimed at protecting stable supplies of one of the main flywheels of contemporary economy – gas. European Union, however, is not monolithic, and the example for that could be the fact that in the official and backstage discourse two visions occur that explain reasons for which gas turmoil takes place. First vision that is promoted by countries of traditionally closer ties with Russia, and – out of the UE – by Russia itself, sees the problem as purely economical. Natural gas trade is done on a regular basis of market principles, and if Ukraine or Belarus cannot compromise with Russia on the buy-and-transport conditions and they don’t sign contracts, Russia considers cooperation halted or extinct. Claims laid by Ukraine and Belarus aimed at maintaining gas export subsidies for so-called near abroad are groundless. Since Russia as well as both transit countries tend to transform their economies and enter international trade structures, e.g. WTO, they cannot disturb and violate environment for a free competition. Second vision, promoted by countries whose approach to Moscow is rather distrustful, believes that there is a strong political context in Russian activities. According to that version Kremlin wants to use gas instrument in order to achieve its political goals – to turn Ukraine back from the westernization road and to place Belarus under the command even more. Both post-Soviet economies are rely strongly on Russian gas so Kremlin and its tool, Gazprom, have a convenient way of affecting their behavior. Market principles are just a cover for true rules of Russia’s conduct.
Both abovementioned groups seek for various ways to avoid problems with obtaining gas in the future. The supporters of the first vision are mainly the largest economies in the UE – Germany, Italy, and France, Great Britain, the Netherlands and Belgium to a lesser degree. They promote a new system of providing Europe with gas that maintains Russia’s position as a leading exporter. This system consists of two major gas pipelines, Nord Stream and South Stream, that are to be built from the scratch. Those pipes omit transit countries of Eastern and Central Europe and proceed under Baltic Sea and further to the West (northern pipeline) or go under Black Sea to the Balkans and further to the South of the continent (southern pipeline). Such a resolution seems to be inasmuch right that western contracts with market prices and conditions were always mutually obeyed. This is why those countries support Russia’s attempts to eliminate trouble-generating transit factor. Countries, often former Soviet Union satellites, whose dependence on Russian gas is usually higher, are in the opposite camp. This is them who push so-called alternative resolutions. They also plan to build a new system but the source of its fuelling are to be located in Central Asia which is the world’s third region with regard to amount of natural resources. Those countries propose the Nabucco project that is planned to be a continuation of already existing Baku-Tbilisi-Erzurum pipeline. Additionally, Nabucco’s route is very similar to this of South Stream what causes a zero-sum game between the two camps, because if one project is accomplished, the other becomes unprofitable.
In the end of April this year, however, we heard about a common EU initiative of so-called Third Energy Pack. The members of both camps spoke quite coherently, having opened the way for objective solving a transit question. The abovementioned pack is created to keep huge energy enterprises from possessing any significant shares in a transit infrastructure. It’s going to consider e.g. German energy tycoons, such as RWE or E.ON, but the proving ground for that shall be Ukraine which recently gives Russia much trouble. The project is about the EU buying Russian gas not on EU-Ukraine border but on Ukraine-Russia border. The transit itself is to be supervised by the EU as well. Having agreed on that, Russia and Ukraine have to refrain themselves from any activities that are beyond the sphere of regular trade relations if they want to keep their businesslike partner status. That means not only that Ukraine will no more be allowed to execute an unsanctioned gas consumption, but also that Russia will have less reasons and chances to apply pressure measures.
But should Europe be actually that terrified by Russia gas sector? I would like to underline two interesting points although the answer is far more complex. Firstly, Russian Federation has no other markets than the European one. The pace of heralded buyer diversification is very low since it demands colossal expenses on gas mains going to China or South Korea. Russia cannot afford that as its own gas facilities are in a poor condition. Moscow doesn’t have any LNG plant (apart from Murmansk plant which is only being built) so all its gas export have to be exercised through existing pipelines and through near abroad territories. Besides, it is more profitable for Moscow to keep good relations with regular customers who punctually pay a good price than to explore new unknown markets in the Far East. Secondly, Russia does have huge amount of resources but they are not unlimited. Resources/production ratio shows that if Russia keeps the present level of output, there’s going to be enough gas for 130 years [BP Statistical Review…, p. 22 and 24]. However, if the demand grows, r/p ratio decreases, and this could mean that Russia may not be able to fulfill its export obligations. This fact should make the EU undertake a number of serious measures. Nevertheless, those measures should not be aimed at breaking off with Europe’s main supplier, a huge country and one of the most influential player in the region. They rather ought to make European countries respect shrinking resource reserves and switch their economies to work on another sources of energy (France can serve as a good example of that – three quarters of its energy is produced by efficient and safe nuclear power plants). Affluent European economy should find funds for achieving this objective, even during tough crisis period.