Highlights
  • The Ukraine crisis have brought Europe to a turning point in its relations with Russia
  • Both Europe and Russia have begun to pivot away from each other
  • Europe has greatly improved its ability to cope with gas disruption with significant developments in LNG, Storage and Interconnectors
  • Despite improvements, Eastern Europe remains the most vulnerable area

Introduction

The Ukraine crisis has brought the European Union to a turning point in its relations with Russia, its largest and most comprehensive energy supplier. In terms of energy security, the geopolitical fall-out between the EU and Russia is far more serious than the brief interruptions of Russian gas to Europe in 2006 and 2009. During that period, Europe was effectively a bystander, suffering collateral damage in terms of a brief loss of Russian gas, in bilateral disputes between Russia and Ukraine over the details of their gas trade.

For the past dozen years, the core of EU policy towards Russia has been a regular energy dialogue with Moscow. This dialogue was designed to create a broad legal framework to manage and protect the flows of gas, oil, coal and uranium from Russia to Europe, and reciprocal investments of EU energy companies in Russia, with the hope of enshrining this in a wide-ranging EU-Russia partnership and cooperation agreement. This hope did not materialise, and is now unlikely to do so in the foreseeable future.

This does not mean that Russia will not remain a major supplier of energy resources to Europe for many years to come. Russia has an enormous stake in maintaining its energy export market in Europe; Gazprom in particular has invested very heavily in pipelines to, and storage in, Europe, though its European gas exports produce less tax revenue for the Russian government than Russian oil exports to Europe that could be more easily re-directed elsewhere. The current gas curve clearly indicates that the market does not anticipate any sudden cut-off of Russian gas, but regardless, the early 2000’s idea of Europe and Russia turning into a “single energy space” is now clearly dead.

The failure to incorporate Russia into a single rules-bound energy space raises the question of what the EU response should now be, what lessons have be learnt and most importantly, are we any better placed to cope now than we were a decade ago?

European imports of Russian Gas
European imports of Russian Gas

EU Response

During the 2009 gas supply crisis the necessary amounts of gas were available on the EU internal market but it was physically impossible to ship them to the affected Member States in Eastern Europe. Against this background, Regulation (EU) No 994/2010 aimed to improve cross-border capacities by pursuing the development of new infrastructure which may not necessarily be commercially feasible but is essential in terms of security of supply.

As it happens, the Ukraine crisis coincided with one of the EU’s periodic re-thinks of its energy and climate policy, prompted by the EU’s desire to generate new policy goals for 2030. Broadly speaking, for West Europeans and the European Commission, the lesson of Ukraine is that the EU should press on, even accelerate, its decarbonisation strategy. It is mainly based on developing indigenous renewable energy and on improving energy efficiency, a strategy which has the key side benefit of reducing the degree to which Europe depends on the fossil fuels – oil, gas and coal – that it currently gets from Russia.

On the 28th May 2014 the Commission adopted its European Energy Security Strategy providing a comprehensive plan to strengthen the security of energy supply in Europe. This laid-out a common European strategy, along with a common European Energy Market and highlighted the fundamental role of natural gas must continue to play in the European energy mix. Therefore, also the risks that gas current posed.

Gas vulnerability

It is in the dependence of some of its member states on Russian pipeline gas that constitutes the EU’s most acute vulnerability. Finland, Slovakia, Bulgaria, and the three Baltic states, rely on Russia for nearly 100 per cent of their gas, while Austria and the Czech Republic are heavily dependent on the same source. The Ukraine crisis presents a particular challenge for south east Europe. Bulgaria, Hungary, Romania, Greece, and Balkan members of the EU-sponsored Energy Community (Serbia, Bosnia-Herzegovina and Macedonia) depend on the transit route across Ukraine for almost all of the Russian gas that they receive.

Impact of Russian gas disruption
Percentage of average unserved gas of a Russian gas disruption through Ukraine – UA – (above) and a total gas disruption from Russia – RU – (below) happening in 2009 (left) and 2014 (right) during 90 days

Most of these countries are taking, or could take, measures to limit the damage from a worst-case scenario of Russian gas being cut off. Whilst most of these countries have taken measures to (1) increase storage, (2) expand LNG terminals or (3) enhance pipelines to neighbours, problems still persist. However, in most cases, these alternatives would only partly replace Russian gas coming through Ukraine.

If Russian gas stopped flowing through Ukraine, one option would be for Gazprom to re-route some of it through its existing pipelines – the Yamal pipeline through Belarus to Poland or the Nord Stream pipeline linking Russia to Germany through the Baltic. But this obviously does nothing to reduce dependence on Russia, and would be objected to by many in the EU as undermining the bargaining position of Ukraine vis-à-vis Russia.

Other sources for European gas

Europe has other sources of imported gas it can draw on, though these are not without problems. Norway is already a substantial supplier and does not want to raise its output much more, while political turmoil, especially in Libya, has turned North Africa into an unreliable supplier. Further east, the EU has not yet succeeded in persuading Turkmenistan that it is worthwhile trying to build a pipeline across the Caspian to bring its gas to Europe, via Turkey. So far, only Azerbaijan – on the western side of the Caspian – has responded to the EU’s Southern Corridor initiative to bring Caspian gas to the European market.

LNG

LNG does offer one solution and the number of regasification plants has increased of four units, from 17 to 21 in 2014, after the coming into operation of two Floating Storage and Regasification Units (FSRU), one in Italy and one Lithuania, and two on-shore plants, one in the Netherlands and one in France. The nominal annual aggregated send-out capacity increased by 41% from 134 to 189 Bcm/y, as a combination of the new facilities and the upgrading of existing facilities. The maximum daily aggregated send-out capacity is further increased from 483.5 to 616.5 Mcm/d, so providing an extra 28% capacity over five years.

Gas Storage

Finally, underground gas storage facilities (UGS) can play a key role as a balancing tool in the event of a supply disruption in EU. According to Gas Infrastructure Europe there were 143 UGS facilities in Europe in 2014, with an increase of 11% since 2009, comprising a combined working volume of 100 Bcm (an increase of 21% since 2009). By comparing 2009 and 2014 storage figures (GIE, 2009 and GIE, 2014b), EU shows a marked increase in withdrawal capacity of 23.5% (up to 2030 Mcm/d) and injection capacity of 33.3% (up to 1122 Mcm/d), with approximately three quarter of the facilities providing access through a negotiated regime.

Changes in European Gas Storage
Changes in European Gas Storage

However, the business model for filling UGS’s is not necessarily setting incentives to store gas to prevent crisis situations. Storage is being filled in on the basis of spreads between summer and winter time. Analysis of such spreads, based on historic events does not predict unexpected events. Moreover the price spread between winter time and summer time decreases over years. The decreasing spreads and volatility (due to a combination of factors such as excess of supply in Europe), competition from other sources of flexibility (LNG, interconnectors and spot gas) and increasing storage-to-storage competition have undermined the value of storage.

Cross-border capacity and physical reverse flow

Thus, among different tools foreseen by Regulation (EU) No 994/2010 focused on increasing and strengthen the level of EU security of supply the use of physical bi-directional gas flow (or reverse flow). Reverse flow can be an efficient and cost effective way of increasing entry capacity and having access to new sources of gas. It provides a tool to change the direction of traditionally one-way transport routes in case one of the Union’s major supplies becomes unavailable and it helps the shippers to rapidly and massively reroute gas deliveries within internal market.

EU Gas Cross-border capacity
EU Gas Cross-border capacity

Reverse flow has been substantially implemented within the EU as the number of interconnection points increased from 24% in 2009 to 40% in 2014. Thanks to these improvements, natural gas can flow in both directions via almost every second interconnection point between Member States. Furthermore the geographical location of the new bi-directional interconnections provides insights on an increase flexibility of moving natural gas among member states. Along with the implementation of physical bi-directional capacity among MS, the overall capacity of the EU high pressure grid has improved as a whole of 8,6% since 2009.

Clearly therefore, the main means of addressing Europe’s gas vulnerability will have to be in building up the internal resilience of the gas market by completing its integration. Building more cross-border infrastructure and agreeing pan- European trading arrangements would remove congestion and bottlenecks in the gas market, and allow gas to flow smoothly to where it is most needed and where it can command the highest prices. As the Commission itself points out, it is precisely those markets in eastern and south east Europe that are the most vulnerable to supply interruptions which are also often the least attractive for suppliers . Retail prices, and wholesale prices in some nations, are regulated, and the markets are not very liquid. South east Europe clearly needs a liquid gas trading hub of the type that has been developed very successfully across north west Europe.

Conclusions

The EU has pursued a number of streams and learnt a number of lessons from the various gas crisis over the past decade. Amongst these, we can highlight a number of key achievements:

  1. The EU high pressure grid has grown on average 8% concerning pipeline infrastructure. In addition the ability to transport gas has improved by increasing notably the total installed compressor power
  2. The number of EU LNG terminals has increased by four units in the period and the nominal annual aggregated send-out capacity increased by 41% from 134 to 189 Bcm per year. Such changes provide the opportunity for many MS to reduce their dependence from a single supplier. However, the EU LNG market has experienced a substantial reduction since 2011 due to, among other factors, the decrease in gas demand
  3. The number of UGS facilities and the working storage capacity have increased 11% and 21% respectively, with a total of 143 sites and a capacity of 100 Bcm. In line with the European energy policy, UGS is playing more and more a strategic role in providing reliable sources during crises or exceptional conditions, as it can react quickly to sudden peaks and it can be geographically near to the consumption areas
  4. Reverse flow has been substantially implemented within the EU as the number of interconnection points increased from 24% to 40% and the overall capacity at cross-border points has improved as a whole by 10.6% from 2997 Mcm/d to 3315 Mcm/d. However some relevant bottlenecks still exist in the EU grid (e.g. the South-East corridor, interconnections between France and Spain or France and Germany and Belgium) and some MS are still poorly or not connected to the main EU gas system (e.g. the Baltic region and Finland, Croatia, Bulgaria and Greece).

Given the relative market power, the primary aim of European policy is not to make Europe independent of Russian gas, but to reduce the vulnerability to a sudden cut off and significant steps have been taken to achieve this.

However, there needs to be continuing efforts by transmission operators, regulators and industry to increase cross-border market integration through the creation of wider (and therefore fewer) harmonised gas trading hub and entry-exit zones, and the coupling of electricity markets, within the EU.

But the Ukraine crisis also shows the need to accelerate the laying of cross-border inter-connector pipes within central and east Europe; the eventual aim being a gas corridor linking LNG terminals from Poland in the north to Croatia in the south. Creation of an EU strategic gas reserve, analogous to America’s Strategic Petroleum Reserve, has been considered in the past, and deemed too expensive. But the EU could, through legislation, encourage changes in gas storage tariff regimes to give commercial gas storage a better reward for its strategic value in energy security.

Above all, the EU should not let energy security concerns arising from the Ukraine crisis bend its entire energy and climate policy framework out of shape. Reducing Europe’s energy vulnerability is manageable within that framework, while its broader goal of decarbonisation is vital – and in the long run will bear fruit in energy security terms.

References
  1. https://www.tap-ag.com/the-pipeline/the-big-picture/southern-gas-corridor
  2. Europe’s energy security – Oxford Institute for Energy Studies
  3. European ability to cope with a gas crisis. Comparison between 2009 and 2014 – http://dx.doi.org.iclibezp1.cc.ic.ac.uk/10.1016/j.enpol.2016.07.016
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