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Russia hardens EU resolve to seek new energy supply - analysis

Renewed tension between Russia and Belarus has yet to disrupt energy flows, but still it has sharpened Western Europe’s desire to curb dependency on Moscow if it possibly can.

Russia last week postponed its threat to hold back gas after Belarus paid a first installment of a $456 million debt accrued since Moscow more than doubled the price of gas to Belarus in January this year. By Tuesday, Belarus had paid two thirds of the debt, according to state television. Analysts do not dispute that Russia has a strong economic argument for raising energy prices, but say the brinkmanship has still been damaging. “The most important consequence will be further nervousness in the West that Russia cannot be relied upon as a supplier,” said Dieter Helm of Oxford University.
This latest flare-up recalled a more serious pricing dispute in January 2006 when Russia cut off supplies to another transit state Ukraine, with the knock-on effect of reducing supplies to Europe during peak winter demand. That had already focused the European Union on finding alternatives to Russia, the world’s biggest gas producer and exporter and second largest exporter of oil after Saudi Arabia. It provides roughly 25% of western Europe’s gas.

In addition, the former Soviet Union, including Russia, provided 35% of crude and refinery feedstock products for western Europe and 17% of refined oil products in the Q1 of this year, according to the International Energy Agency (IEA). “Clearly there are seaborne alternatives where Russian supplies are to be curbed,” said David Fyfe of the Paris-based IEA. “But central European refiners served by the Druzhba pipeline might struggle to immediately replace the 1.2 million barrels per day of crude coming via this route.”
The Druzhba-or Friendship pipeline-ships Russian oil through Belarus to Germany and Poland and through Ukraine to central Europe. Oil flows through Belarus were halted for three days in January during another pricing dispute with Russia. Such disputes have also focused Russian attention on alternative routes for its oil and gas following disputes with existing transit states and analysts say Russian proposals could have a better chance of being built than European projects. Some are skeptical about the EU-backed Nabucco pipeline, for instance, which would transport gas from the Caspian, central Asia, rather than from Russia. “A number of factors are stacked against Nabucco in the scramble for available gas,” said Mark Rowley, an oil and gas lawyer at Baker Botts’ London office. “The South Stream pipeline and proposed extension of Blue Stream are both backed by Russian gas producers with available gas to transport.”

Apart from the Caspian, Europe has also been looking to Norway and Algeria for supplies, but their reserves are a fraction of Russia’s. Russia holds reserves of 47.65 trillion cubic meters (tcm), according to the BP Statistical Review, published in June.
Algeria, by contrast, holds 4.5 tcm and Norway 2.89 tcm. “Can they replace Russia? I don’t think so. There is a limit to how much can come from Norway and from Algeria,” said independent gas consultant Andy Flower. “What’s important for Europe is whether, with countries like Algeria and Norway, they can avoid that dependency increasing. It’s not realistic to replace Russia.”

Over the longer term, however, Europe should be able to diversify its sources for gas and for power production, even if it is harder to find alternative suppliers of oil. Liquefied natural gas (LNG), or gas cooled to liquid form so it can in theory be shipped all over the world has potential to change significantly the energy balance in Europe, provided sufficient investment is made. “Europe has alternatives for gas supply, some for pipeline, a lot for LNG,” said Ian Cronshaw of the IEA. Renewables should also help, he added, but because they are intermittent, they will probably need to be supplemented.
Coal is another secure alternative to Russian gas for power generation, but, unlike gas, it produces large amounts of the carbon emissions blamed for global warming. Nuclear could also help, although power stations can take years to build and for those politically opposed to them, they are as alarming a prospect as being overly dependent on Russia. (