Russian Supplies to Europe: Shut-off Unlikely

Russia's annexation of Crimea has shed new light on the prospect of the Kremlin once again using natural gas supplies as a geopolitical tool, whether it be against Ukraine or gas consumers further west. Just days ago in Brussels, US and EU leaders said they would help Ukraine decrease its dependence upon Russian sources of gas and would work together to diversify Europe's sources of energy.

Despite such tensions, there is very little chance that Russia's Gazprom might cut off gas supplies to Europe this time, according to former US Ambassador Keith Smith, Distinguished Fellow in Residence at the Center for European Policy Analysis (CEPA). He says, “Only if some major thing were happening – if Russia were to invade eastern Ukraine, then Europe would have to take some very strong measures.

“Russia shutting off the gas cuts of 50% of the government's revenue. Can Russia afford this at a time when their economy is not in great shape? Are they willing to risk that? I highly doubt it,” he opines.

Of the previous natural gas shut-offs in 2006 and 2009, he explains, “In 2006 the cutoff didn't really affect Western Europe so much, so they didn't care so much about what happened. It was only after the 2009 cutoff affected western Europe, then the European Union and the European Commission’s Directorate-General (DG) for Energy decided to increase energy security by making pipelines two-way, electricity lines and speed up some of the interconnectors that they had in their long term planning.”

Ambassador Smith says he believes the tensions surrounding Ukraine are, however, likely to have a similar impact upon European energy security policy.

“Some countries will try to keep their investments in Russia and allow Russia to invest in infrastructure, like in Germany, where they're investing in refineries. On the other hand, there is an awakening in many countries as to their vulnerability, and that will probably have a long-term effect but it's going to take a while to change things,” he says.

Meanwhile, Gazprom has recently hiked the price of the gas it sells to Ukraine from USD 268/TCM to USD 500, and Kiev has a big outstanding balance on it's account, to the tune of USD 2 billion. The Financial Times recently reported that Ukraine's prime minister did not find the new price acceptable.

Ambassador Smith offers, “Obviously the price of gas depends on political measures and not economic measures. Meanwhile, Russia has seized billions in assets in Crimea and that's going to take time to get through the international courts, but at some point Russia will have to pay for that, or there could be canceling of the debts to Ukraine for the natural gas that comes across.”

Ukraine could create big savings with energy efficiency, he adds, as there is big room to improve there, and hopefully will be able to access its own hydrocarbons resources. He points out that while such investments may have become even higher risk than a few weeks ago, the same thing is happening for investment in Russia.

He reports, “I think we're about two weeks away from a final announcement by the IMF which will result in USD 14-18 billion in assistance to Ukraine over at least two years.”

To do anything with that, however, he concedes that graft and corruption need to be reduced in Ukraine.

One thing to keep in mind regarding Europe's diversification of energy supplies, according to Ambassador Smith, is that DG Energy has taken issue with many aspects of Russia's South Stream Pipeline project. He comments, “They know it's a political project designed to bypass Ukraine. It's going to be delayed several years until Europe gets itself in better shape.”

This means, he explains, that Russia can only shut off the gas traversing through Ukraine at a great cost, which gives the EU a bit of leverage.

As for German Russian relations in regards to Nord Stream, Ambassador Smith says there may be a delay in approving two more strands of the pipeline due to Russia's actions in Crimea.

A former Ambassador in Lithuania, Mr. Smith says that by next year the Baltic states will be a lot less insecure in terms of energy security. “There's an electricity line between Sweden and Lithuania that should be finished by the end of this year; another electricity line goes from Finland down through Estonia, Latvia and Lithuania; also by the end of this year the small LNG input terminal for Lithuania will be finished and will bring at least 5BCM, which will help.”

As for alleviating European energy dependence on Russia going forward, Ambassador Smith says Europe should continue what it's been doing: “Building interconnectors, building reverse flow pipelines, requiring countries to have storage of oil and gas.

“Allowing the South Stream pipeline to go ahead, I think, would be a big mistake because it would really put Europe in an armlock on the part of Gazprom.”

He adds, “I don't things will be the same in Europe. This really has been a wake-up call.”

According to him, European states might even reconsider hydraulic fracturing and the pursuit of unconventional gas, given the new realities, possibly lifting some of the hydraulic fracturing bans.

Drew Leifheit is Natural Gas Europe's New Media Specialist.