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Russia's incursion into Ukraine has sparked concerns over disruptions in natural gas supplies to Europe. Russia has previously shut off the taps for geopolitical leverage, and perhaps they would do so again to gain an advantage in the standoff over Crimea. That is a possibility, but it wouldn't be a smart choice by Putin. As I wrote last week, Russia needs to sell its gas more than the European Union needs to buy it. Europe is not as beholden to Russia as many believe, and indeed, the situation in Ukraine will likely lead to greater energy security for Europe in the coming years.
On March 10 EU Energy Commissioner Guenther Oettinger decided to delay discussions with Russia over the South Stream pipeline in response to Russia's involvement in Ukraine. The pipeline would travel from Russia, underneath the Black Sea to Bulgaria, then on to Western Europe. The South Stream project will supply 64 billion cubic meters of natural gas when it is fully operational in 2018, accounting for 15% of Europe's annual gas consumption. "I'm not accelerating our talks regarding pipelines such as South Stream. They will be delayed," Oettinger told German newspaper Die Welt.
The pipeline is Russia's way of increasing its energy ties to Europe while bypassing Ukraine. It was also conceived as a means to box out the Nabucco pipeline that would have taken Caspian gas to Europe. Nabucco itself was beat out by the Trans-Adriatic Pipeline, but Russia is still moving forward with South Stream despite its $45 billion price tag.
In the short-term Europe's move to delay talks on the South Stream project probably doesn't mean much. It is likely just a temporary move ahead of the Crimea referendum as a way of pushing back against Russia. Europe has 40 billion cubic meters of natural gas in storage – 10% of annual consumption – which is much more than last year. This puts Europe in a stronger short-term position than it has been in the past. Still, if the EU can avoid a confrontation over energy with Russia, it will. Gazprom hasn't really flinched at the news. Alexei Miller, Gazprom's Chairman, reiterated on March 12 that South Stream is "steadily progressing." The pipeline is already under construction and work is continuing despite Russia's row with Western Europe over Ukraine.
Over the long-term however, the EU will look more aggressively for ways to diversify away from Russia. It has already been pursuing such a strategy, but the latest flare up in tensions will likely accelerate the EU's efforts. EU leaders plan to meet on March 20-21 to discuss how Europe can reduce its dependence on Russia. This will likely include pressing the U.S. for more LNG exports. It also means that EU member nations may try to develop their own shale resources. The U.K. and Poland appear the most interested, but have thus far failed to get their shale industries going in any significant way. Germany prefers adding clean energy, but Poland has taken the opposite view – it argues that more coal and nuclear power should be used.
Polish Prime Minister Donald Tusk also suggested the EU should purchase gas from Russia as a block rather than individual countries. This would give it greater leverage in negotiations with Russia. "If the EU as a whole decided that we will buy gas and then divide it according to the needs of each European country, then no-one, including Russia, could disregard such a customer that buys such a gigantic amount of gas," Tusk said, according to Platts. German Chancellor Angela Merkel expressed some skepticism. "It's not the German government that buys gas," Merkel said. "It's EON, it's RWE, it's BASF."
The EU is often plagued by the inability of its member states to coalesce around a single strategy. That might not be the worst thing in the world however-it may just mean that different countries pursue different strategies. Either way, the Ukraine crisis appears to have convinced European leaders to step up their efforts to improve energy security. Whether it's clean energy, nuclear power, coal, or shale gas, adding more generation will displace Russian gas. Russia may hold some leverage over Europe in the short-term (the extent to which, is debatable), but over the next few years the European Union will chip away at Russia's energy grip.