Market is the Key for Energy Independence
By the Editorial Board of VoxUkraine
Energy is at the core of the
Russia-EU and Russia-Ukraine relationships. Since the 2009 gas dispute, which
led to a 13-day interruption of the natural gas exports from Russia to the EU,
European politicians have started publicly talking about reducing Europe’s
dependence on Russian energy supplies. A lot more has been said than done on
that front, admittedly. Yet, the issue has resurfaced recently, as Russia’s
blatant disregard for international law and its aggression against Ukraine
brought about fresh fears that the country will once again be leveraging the
energy as a “diplomacy tool”.
The good news for both Europe and
Ukraine is that a new player – USA – will be entering the European energy
scheme. The currently ongoing shale oil and gas boom in that country is turning
the United States into an oil exporter, and will likely bring US gas to Europe
as soon as the relevant infrastructure is ready. A possibility of increased gas
supplies from the Middle East could also change the balance in the European
energy sector. It is our belief that:
- The EU and Ukraine need to confront Russia’s energy bullying by uniting their forces;
- In the short run, the EU and Ukraine should appoint a single agent to negotiate with Gazprom, with the European Commission taking a leading role. A preferred solution will be to sell Russian gas at the Russia-Ukraine border;
- In the medium run, Europe needs to actively pursue and encourage shale gas exploration and development. This will require striking a balance with the active environmentalist lobby movement (or culture) on the continent;
- In the long run, the EU and Ukraine should review their gas pipeline network, with the view of creating a structure similar to that present in the United States. The end goal should be redesigning of this infrastructure to facilitate creation of a single European natural gas market. This market will allow for a better substitutability between the energy suppliers, and will diminish the abuse of market power by Gazprom (or any other entity, for that matter);
Ever wondered what allows Russia to
use its natural gas supplies as an instrument to blackmail the EU and Ukraine?
Of course, the short answer is that the EU is “dependent” on Russian gas – for
only about a quarter of its supplies, that is. If we look at the broader issue
of Russian energy exports, a puzzling fact surfaces. While energy (gas, oil,
and petroleum products) comprises about two thirds of Russia’s export revenue,
natural gas is the source of only a quarter of Russia’s energy export proceeds,
with oil and petroleum products covering the remaining three quarters. Why then
do we not hear about Russia using oil or petrol as its energy weapon?
A short answer to the above question
is that there is a well-developed worldwide market for oil and its products,
while the same cannot be said about natural gas. We use the notion of “market”
here in a somewhat narrow sense to imply both the buyers’ ability to sell to a
different customer and the sellers’ ability to buy from a different supplier in
case the present relationships fail to work as expected. We are convinced that
any long-term solution to the present situation on the European natural gas
market must involve creation of a framework (in terms of both infrastructure
and institution) that will facilitate substitutability between the natural gas
suppliers for all consumers on the continent. Such a framework exists in the
USA, and we believe certain lessons can be learned by Europe here. Moreover, a
contract signed recently by Ukraine with Statoil suggests that the existing
pipeline infrastructure in Europe already allows for such substitutability to
some extent. This, however, is a long-term solution that will require
substantial infrastructure investment to both bring in new supplies (e.g., LNG
from the USA) and restructure the gas pipeline networks to facilitate substitutability
for both suppliers and customers.
At the same time, certain steps to
counter Russia’s energy bullying can be done now. Part of the Europe’s natural
gas problem is that different countries depend on Russian gas supplies to different extents. Overall, Russia’s
dependence on the European Union far outweighs the EU’s dependence on Russia.
This is also true specifically in the energy sphere (it is, for instance, very
difficult for Russia to move its natural gas to different markets should the EU
decide to stop buying it). Individually, however, there are a number of
countries that depend on Russia more than Russia depends on them. A lack of a
single EU position towards Russia in the energy sector means that each European
country is left on its own in its negotiations with Gazprom. The Russian gas
monopolist has an upper hand in such talks, especially with countries that are
more dependent on supplies from Russia. A simple solution to this problem would
involve the European Commission taking a more active role in negotiating with
Gazprom. This will strengthen Europe’s bargaining position with respect to the
Russian monopolist. Further, Ukraine has to strive to also take part in these
negotiations on Europe’s side. A preferred solution would be for all the gas
that transits Ukrainian territory to be sold to this single entity at the
Russia-Ukraine border, further weakening Gazprom’s influence on Ukraine in this
sphere.
We are overall optimistic about
increased variability of sources of natural gas over the medium and long run.
Europe has some shale gas resources, which should and could be tapped into in
the medium run. We understand that developing shale gas in densely populated
areas will require overcoming resistance from environmental lobbies, and the resulting
shale gas volumes will likely not be sufficient to replace gas imports. However,
this should not stop Europe from actively working in that direction. USA plans
to start its LNG exports to Europe in 2016 – of course, there are a number of
uncertainties here, such as the potential for Asian customers outbidding Europe
for the US LNG. There are also prospects of increased gas exports from the
Middle East – we are understandably cautious here, however, given the current
instability in the region. Europe and Ukraine need to work together to ensure that
as many countries as possible are able to tap into these new energy sources.
For Ukraine this means further developing the means to obtain gas from the EU –
the prospect of LNG deliveries to Ukraine are not very bright, as Turkey
opposes the idea of using Bosporus for such shipments.
On the domestic front, Ukraine needs
to work in two dimensions: ensuring robust domestic energy markets, and
implementing energy saving technologies. The former task has to be an integral
part of the wider package of the social and economic reforms Ukraine currently
requires. To facilitate implementation of energy saving, we advocate the
combination of market mechanisms, tax incentives, and potentially assistance
from European institutions (e.g., a dedicated EBRD program).
Overall, we need to think about
Ukraine’s energy independence as an integral part of the wider European energy
policy. Ukraine and Europe will be much more capable of countering Russia’s
energy (natural gas, to be more specific) bullying together. The long-term
solution we have outlined here – establishing infrastructure for a proper
European natural gas market – need not have removing Russia from the energy
market as its goal. Rather, the goal for both Ukraine and the EU has to be to
make sure that Russia is not able to have market power over any single country.
This is only possible if European consumers are able to quickly switch between
their suppliers.
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