House of Commons - Russia: a new confrontation?

Russia: a new confrontation? - Defence Committee Contents

6 European energy security and Russia

167. The extent of Europe's dependency on imported energy, and in particular on Russian supply, has become an increasingly prominent issue in recent years. The European Commission estimates that gas imports, as a proportion of Europe's total gas supplies, will increase from 61 per cent to 84 per cent by 2030 as Europe's own gas production falls and demand rises.[273] In 2006, it was estimated that around a half of EU gas imports came from Russia.[274] The extent to which EU countries are dependent on Russian energy varies considerably. Some EU states—including Lithuania, Latvia, Estonia, Finland, Slovakia and Bulgaria—depend on Russia for 100 per cent of their gas needs. The UK is far less dependent on Russian energy. The CBI estimates that currently less than two percent of UK gas imports originate in Russia.[275] Yet overall the UK is dependent upon imports to meet its energy needs: 40 per cent of gas was imported in 2008 and as much as 80 per cent of its gas is expected to be imported by 2015, as North Sea production declines.[276]

168. The EU is also dependent on oil imports. In 2006, nearly 85 per cent of the oil used was imported from third countries, with Russia accounting for approximately one third of imports. By 2030 it is estimated that the EU will import approximately 93 per cent of its oil owing to the uneven global distribution of reserves.[277] During our visit to Estonia, we learnt that although it does not currently import oil from Russia, it may be forced to import oil in the future owing to the increased cost of EU oil because of the changes to the EU Emissions Trading Scheme.

169. Many witnesses argued that Russia is increasingly using energy as a tool to pursue aggressively its foreign policy objectives, with the most prominent example being the recent gas dispute with Ukraine. Some observers, such as Edward Lucas, point to the 2003 'Russian Energy Strategy to 2020' as proof that Russia believes that its role in world energy markets should be an instrument of state foreign policy.[278] Professor Alan Riley believed that there were three potent elements of Russia's energy weapon:

First, the threat of the energy cut off. Vulnerable states live in the shadow of that threat, that particularly in winter, their people could be shut off from heating and lighting and their industries shut down. The second element of the energy weapon is the pipeline strategy of building additional pipelines without very much more gas supply giving Gazprom and the Kremlin the power to switch supply between favoured and disfavoured customers: In effect enhancing the impact of the threat of an energy cut off. The third element of the energy weapon is the ability to lever Gazprom's monopoly and dominant position to maintain dependence of the Baltic, Central and Eastern European states by contractual measures, acquisition and control of infrastructure and to deny any potential competitor a foothold in Gazprom's commercial 'territory'.[279]

170. John Roberts told us that Russia was using energy as a political tool through the threat of cutting off energy supply to former Soviet Union States. Professor Jonathan Stern agreed with this yet also argued that many of the countries that have been threatened with cut offs did not pay market rates for their energy, "so a great deal of Russian cut offs of energy have been largely commercial problems with these countries incurring massive amounts of debt".[280]

171. The Kremlin has also increased its influence over internal EU energy matters. One of the ways that it has achieved this is by promoting the acquisition of 'downstream' assets in Europe by the Russian state-owned company Gazprom; this includes the purchase of pipelines, refineries, storage facilities and other infrastructure. Edward Lucas argued that Russia "wants to use those assets to exert political pressure".[281] The supply of energy imports to the EU has been disrupted by other countries: Russia benefits from these disruptions as they increase EU reliance on Russian energy.

The Russia-Ukraine gas dispute

172. Gazprom cut gas supplies for Ukrainian consumption on 1 January 2009 and cut off all deliveries to Europe via the Ukraine on 7 January 2009.[282] This crisis erupted after Ukraine rejected a request from Russia to pay an increased cost of $250 per 1000 cubic meters of gas in 2009. This rejection prompted Prime Minister Putin to demand that Ukraine pay the full market rate of $450—the rate paid by EU countries. Ukraine rejected this request and Russia then cut off gas supplies. During the dispute, Russia claimed that Ukraine siphoned off gas supplies that were destined for other European countries—a claim denied by Ukraine. This latest gas dispute followed a series of disputes between the two countries. For example, In January 2006, Gazprom had cut off gas supply to Ukraine until it agreed to pay a substantially higher rate.

173. The gas crisis left some European countries with major shortages during a cold spell. The impact was most acutely felt in Bulgaria, Romania, Greece, Macedonia, Croatia, Serbia, Bosnia and Turkey. Many states had to shut industrial plants and domestic heating systems, close schools and use alternative sources of fuel. The UK gas market was largely unaffected, although for a few days during the dispute, spot gas prices rose.[283]

174. On 19 January 2009, Russia and Ukraine reached an agreement, brokered by the EU, which resulted in the resumption of the gas supply. The Times reported that Yulia Tymoshenko, the Ukrainian Prime Minister, agreed to "pay the same as Europe minus a 20 per cent discount this year and to shift to full-cost pricing in 2010".[284]

175. The trigger for the gas dispute was commercial, yet it is not difficult to see that it was also political. John Roberts stated, "there can be no such thing as a purely commercial dispute between Russia and Ukraine".[285] Commentators speculated that Putin was attempting to destabilise the Ukrainian economy and political system, and particularly the Ukrainian President's position in response to Ukrainian support for Georgia. On the other hand, the Russian President Medvedev asserted that dispute was caused by an internal Ukrainian power struggle between the Ukrainian President Yushchenko and Prime Minister Tymoshenko.[286]

176. Regardless of the causes of the Ukraine-Russia gas dispute, it is clear that it has damaged the reputations of both countries as reliable suppliers. The threat and reality of Russia cutting off energy supply demonstrates the need for the EU to reduce its energy dependency on Russia and diversify energy supply.

Supply diversification

177. Both the EU and the UK are committed to the goal of energy diversification. In November 2008, the European Commission published its second Strategic Energy Review; this stated that the second priority—after investment—was to diversify Europe's energy supply.[287] One of the key arguments in favour of diversification is that it would reduce the EU's dependency on Russia, which leaves it vulnerable to the threat and reality of energy cut offs. Further arguments made are that Russia may be unable to meet the EU's future energy demands and that it is advisable to provide insurance against technical problems, theft, sabotage or terrorism. Denis Corboy told us "having alternative sources of energy is fundamental".[288]

178. Some have questioned the extent to which the EU needs to diversify its energy supplies given the reduced EU demand for energy as a consequence of the global financial downturn: Professor Jonathan Stern pointed out that there had been a fall in demand for gas.[289] It is too early to judge what the long-term effect of the global economic crisis will be on future EU energy demand. Yet the EU needs to press ahead in diversifying its energy supply to ensure that it is not vulnerable to supply disputes.

179. There are many options on how best to diversify EU energy supply. A paper by the Oxford Institute for Energy Studies stated that in the short term the focus should be on improving the interconnection between central and south-east European countries; in the medium term on developing pipelines that bypass Ukraine; and in the longer term developing pipelines such as Nabucco.[290] There are a number of new pipelines that are either under development or proposed: in particular the Nord Stream, South Stream and Nabucco pipelines. Nord Stream links Russian gas directly to Northern Europe through Germany. South Stream would connect Russian gas to Bulgaria through a route under the Black Sea. And, the Nabucco pipeline would run from Turkey up through the Balkans to Austria.

180. Professor Alan Riley said:

from a European and indeed a commercial perspective there is no real need for Nord Stream or South Stream. Both involve the building of new undersea pipelines generating significant financial and environmental costs.[291]

He argued that the Ukrainian pipeline was currently underused so could transport more gas at a cheaper cost. He also argued that Gazprom "is facing a gas supply deficit" so would be unable to increase its export capacity that these pipelines are intended to provide.[292]

John Roberts explained that the Nord and South Stream pipelines were "essentially pipelines that serve existing production areas; they do not bring new supply online".[293] Professor Alan Riley argued that:

the impact of the two pipelines would be to increase the vulnerability of Central and Eastern European states to supply dependency and the threat of cut off.[294]

However, Professor John Stern told us that Nord Stream would be useful to Europe on the basis that it would "enormously assist in any kind of crisis that we might have in Ukrainian transit", though stressed that this would not be a complete answer.[295]

181. In contrast to the limited benefits for Europe arising from Nord and South Stream, the proposed Nabucco pipeline is viewed by many as capable of delivering more substantial benefits. John Roberts told us that Nabucco is important so that "Caspian gas routinely reaches mainstream EU markets by commercial channels".[296] Edward Lucas argued that the benefits of Nabucco are threefold:

First, it would free countries such as Turkmenistan and Kazakhstan from total dependence on Soviet-era pipelines: this allows the Kremlin to dictate the price and quantity of their exports. Second, it would allow European gas companies to bargain with Gazprom from a position of greater strength. Perhaps most importantly of all it would signal to the Kremlin that Europe is able to deal jointly with energy security in a serious way.[297]

182. Construction on the Nabucco pipeline is planned to start in 2010 and to be completed by 2013. Edward Lucas pointed out "problems have arisen at every point".[298] The pipeline needs to access gas from four possible sources—Iraq, Iran, Azerbaijan and Central Asia. The politics of securing these countries' agreement is complex and difficult. Edward Lucas asserted that Russia has blocked the development of the pipeline through the Caspian Sea through diplomatic and military means.[299]

Figure 3: Map of selected current and proposed gas pipelines across Europe

Source: Produced by TSO based on an image in the Economist, 8 January 2009

The energy security role of EU and NATO

183. Professor John Stern said that the EU is divided on its energy security policy. He told us:

I feel that the EU is split down the middle, between the old Member States who are largely prioritising carbon reduction and the new Member States who are largely prioritising security of supply, by which they mean reducing dependence on Russia.[300]

Edward Lucas argued that the EU had been "faffing around" for years on building the Nabucco pipeline with no success.[301] The House of Lords European Union Committee concluded in its follow-up report on EU and Russian relations:

More vigorous action needs to be taken by the EU to diversify gas supplies, to increase gas storage capacity and to encourage the development of the Nabucco pipeline.[302]

184. The energy relationship between Russia is characterised by interdependency. Russia is also dependent upon the EU to buy its energy, which means that Russia needs the EU's goodwill. A total of 80 per cent of Russian oil exports and 60 per cent of its gas exports go to Europe. This means that the EU has the potential to have leverage with Russia if the EU is able to implement a consistent and united approach to energy. The UK Government should work within the EU to pursue a united approach to energy security and the prioritisation of developing the Nabucco pipeline.

185. Energy security is not only of interest to the EU. In recent years some, including Jaap de Hoop Scheffer, Secretary General of NATO, have argued that NATO should also have a role in energy security. In a Royal United Services Institute (RUSI) journal article he stated, "I firmly believe that the security dimension of our energy supply, and hence the need for NATO to focus on this issue, will become even stronger in the future".[303] NATO's Summit Declaration 2009 identified energy security as one of the key challenges that the Alliance faces. At the Bucharest Summit, the Allies noted a report on "NATO's Role in Energy Security," which identified guiding principles and outlines options and recommendations for further activities. The report identified five areas where NATO could provide added value:

information and intelligence fusion and sharing;
projecting stability;
advancing international and regional cooperation;
supporting consequence management;
and supporting the protection of critical infrastructure.[304]

186. There are, however, different views on the extent to which NATO should be involved in energy security. John Roberts argued that the EU could provide the "soft power"; yet argued that either "NATO or perhaps some new hybrid of EU/US security cooperation" needed to guarantee the physical security of pipelines in Azerbaijan, Kazakhstan and Turkmenistan to secure the agreement of these countries in investing in the necessary infrastructure.[305] On the other hand, Andrew Wood stated, "I would not think that NATO ought to be the lead organisation" on energy security.[306] Denis Corboy suggested that involving NATO would change the climate of the debate and lead to a negative Russian reaction.[307]

187. In our view NATO should have a role in energy issues but it should not play a leading role; this is more appropriately a matter for the EU. Nevertheless, energy is an issue that it is legitimate for NATO to be concerned about because there are significant security implications arising from the possibility of disputes between countries over energy supplies and the potential for states to use their military assets to defend pipelines. The Government should work within NATO to develop an approach on energy issues that focuses on the security aspects of the energy agenda.

273 House of Commons Library, Russia and the West, Research paper 09/36, p 102 Back

274 House of Commons Library, Russia and the West, Research paper 09/36, p 102 Back

275 Foreign Affairs Committee, Global Security: Russia, Second Report of Session 2007-08, HC 51, para 149 Back

276 House of Commons Library, Gas Storage, Standard Note SN/SC/5010, 12 March 2009 Back

277 European Commission, Commission staff working document, Impact Assessment on the Revision of the Emergency Oil Stock Legislation, p 9 Back

278 Edward Lucas, The New Cold War, 2008, p 211 Back

279 Ev 119 Back

280 Q 98 Back

281 Edward Lucas, The New Cold War, 2008, p 211 Back

282 Pirani, S, Stern, J and Yafimava, K, The Russo-Ukrainian gas dispute of January 2009: a comprehensive assessment, February 2009, Oxford Institute for Energy Studies, p 19 Back

283 Pirani, S, Stern, J and Yafimava, K, The Russo-Ukrainian gas dispute of January 2009: a comprehensive assessment, February 2009, Oxford Institute for Energy Studies, p 55 Back

284 "Russian and Ukraine agree price deal to restore gas supply to Europe", Times online, 19 January 2009 Back