The Geopolitics of Gas in the European Union

When on December 31 2019, Russia and Ukraine reached a tense and difficult five-year gas supply deal, in Brussels they heaved a sigh of relief, with the EU energy Commissioner Maros Sevcovic addressing the agreement as “great news for Europe’s energy security”^[1]. Indeed, about 16.3% of the European Union’s annual natural gas consumption comes from Russia via Ukraine and the agreement should prevent a repeat of the so-called gas wars that previously disrupted supplies and caused real energy problems for several EU member states.

Natural gas is currently the second source of energy in the EU energy mix (23%). Domestic production is progressively decreasing and accounts for 22.1% of total EU energy consumption. Russia is the major supplier (40.5%), followed by Norway (35.1%), Algeria (11.2%), Qatar (5.4%) and Nigeria (3%). A situation that is currently playing a major role in influencing the external action of the European Union and its member states in their national foreign policies, which are not always consistent with the interests put forward in Brussels.

EU security of supply

Soon after the second Russia-Ukraine gas crisis of 2009, the EU enacted several reforms aimed at reducing dependency on a single supplier. In 2010, the new EU regulation on security of gas supplies included new standards, a solidarity mechanism in case of emergency, and the requirement for each member state to rely on three different sources of gas supply. In 2014, the adoption of the European Energy Security Strategy accelerated the creation of international interconnections among member countries, in order to create a full-fledged integrated market. Furthermore,  the creation of a single market, the diversification of supply sources and the increase in strategic reserves in European countries have contributed to reducing risks in the event of an external shock^[2].

Pipelines and corridors

To cut natural gas prices, increase strategic autonomy and differentiate supply sources, the European Union has fostered and also funded the construction of gas pipelines that connect the southern European countries with North Africa.  The EU is currently connected to the southern Mediterranean through  two main gas pipelines reaching Italy (the Green Stream, and the Trans-Med)^[3] and two pipelines reaching Spain (the Medgaz  and the Maghreb-Europe gas pipeline)^[4]. Furthermore, the EU has individuated four main gas corridors which, when completed, will boost diversification capacity for EU member countries.

These corridors are:

• The ‘NSI West Gas’: new gas pipelines intended to increase gas transit in the north-south direction in Western Europe, further diversify the sources of supply and increase short-term gas deliverability.
• The NSI East Gas’: new pipelines between and within the Baltic Sea, the Adriatic Sea, the Aegean Sea, the Eastern Mediterranean and the Black Sea, intended to strengthen supply security.
• The Southern Gas Corridor (‘SGC’): for the transmission of gas from the Caspian Basin, Central Asia, Middle East and eastern Mediterranean Basin to the EU.
• The ‘BEMIP Gas’: Infrastructure aimed at connecting the three Baltic States and Finland to the EU gas network and end their dependency on a single supplier.

TAP and East-Med

In the SGC corridor a central role in changing the European gas scenario will be played by two EU Projects of Common Interest (PCIs): The Trans-Adriatic Pipeline (TAP) and the East-Med. The first pipeline, under construction and almost completed, will allow gas from Azerbaijan to reach Italy (in Apulia through Greece and Albania), connecting to the Trans Anatolian Pipeline (TANAP) and to the South Caucasus Pipeline.  The EastMed, on the other side, will connect the European grid to the recently discovered offshore gas fields in Cyprus, Egypt and Israel. The economic viability of the latter pipeline is a source of concern: high costs of construction and low prospected revenues cast doubts about the return on investment. However, the project has a political and strategic rationale, besides the economic. The European Union has a strong interest in enhancing its energy security, bypassing Russia but also Turkey for gas supplies. Secondly, the new pipeline may be a fundamental geopolitical tool to strengthen economic and political ties with the EU’s traditional allies in the region, such as Israel and Egypt. Finally, the EastMed is essential to ensure Cyprus’ diversification of gas supplies, connecting the gas network of Cyprus with the European.

Three Seas Initiative

The great game of gas, however, is not limited to the Mediterranean area. In Central Europe the Three Seas Initiative, a forum of political and economic dialogue that gathers 12 EU countries in Central and Eastern Europe (from the Baltic, Adriatic and Black Seas), is playing a key role. The focus of the initiative is to counteract Russia’s increasing presence in the region by strengthening regional energy and infrastructure cooperation and increasing the economic partnership with the United States with more liquefied natural gas (LNG) supplies from Washington.

Nord Stream 2

Against this backdrop, however, the dependency of the EU on a single supplier (Russia) has remained stable and could eventually increase when the Nord Stream 2, a new €9.5 billion undersea pipeline between Germany and Russia is completed. Envisaged in 2011, the project has the full support of German and Russian governments but is facing opposition from both the European Union and the United States, alongside Poland and Ukraine. Brussels insists that the new pipeline will increase dependency on a single supplier and does not comply with EU gas market rules and with the primary goal of diversification. Washington, on the other side, argues that the project would weaken the Ukrainian bargaining power with Russia, as it will not be the only reliable pipeline to transport Russian gas to Europe. To stop the project, Washington even enacted sanctions against companies working on the North Stream 2 infrastructures: a move that can also be regarded as an attempt to help US exports of LNG into Europe.

LNG to Europe

LNG supplies indeed have traditionally been more flexible but more expensive. In this scenario, the LNG revolution – started in 2007 with the exploitation of shale gas in the United States – has had important repercussions for Europe. The new source of gas, threatening the traditional dominance of Russian and Norwegian suppliers, has triggered a significant reduction in European gas prices. In particular, prices for Norwegian and Russian natural gas in Europe fell by 41% and 32% respectively between 2015 and 2018. So far, however, Russian gas is still cheaper than any other competitors’ and its share of gas to the EU increased also in the LNG sector, becoming the second supplier with a market share of 20% after Qatar (27%).

A Gas Brexit?

Up until recently, the UK with its North Sea reservoirs has been one of the major European producers of natural gas and at the core of the EU’s liberalized energy market. Brexit will result in the UK being outside the EU energy market. What this entails will depend mostly on the final deal between the EU and UK, ranging from a soft Brexit with virtually no changes to a hard Brexit. However, as underlined by Thierry Bros from Oxford Energy, the UK would need to reshape its energy diplomacy, which has in the last decade increasingly been handled by Brussels but will also become more dependent on foreign sources especially in cold periods, given its limited storage capacity and dwindling domestic production. What will be more complex, however, is the situation of Ireland, which with Brexit would be effectively cut off from the EU system of pipelines since the only connection it has nowadays passes through UK, from which Ireland has been getting 97% of its gas.

Future perspectives

All the aforementioned geopolitical issues could significantly evolve over the next decade, and the role of natural gas in the EU energy mix could dramatically change in the context of the EU’s transition to a low-carbon economy.  The EU, as confirmed by the International Energy Authority (IEA), has some of the greatest potential in the world for switching to gas power generation, in terms of reduction of greenhouse emissions, especially for those member states heavily reliant on coal such as Eastern Europe and Germany. Natural gas is also considered the most flexible solution for an energy mix made with a growing role of renewables due to storing capacity that grants continuity in energy supply.

As a matter of fact, according to recent studies, the share of natural gas in the European energy mix is set to remain stable up to 2030 as the second main source of energy.

However, the role of natural gas in the future of Europe will be highly affected by policy decisions concerning greenhouse gas reduction. Achieving net-zero greenhouse emissions by 2050 as envisioned in the newly labelled EU Commission’s green deal would entail bold decisions concerning new, affordable and efficient solutions, reliable alternative energy sources and consistent investment in carbon capture and storage technology: issues whose feasibility is still under hot debate. Under these circumstances, the timeliness of investments is crucial: investing in new infrastructure should be the result of a clear, long-term political vision at the European level in order to avoid the risk of creating potentially stranded assets.

NOTES

[1] Gazprom is expected to ship at least 65 billion cubic meters of natural gas via Ukraine next year and at least 40 billion per year from 2021 to 2024.

[2] The Connecting Europe Facility (CEF)’s mandate has provided it with €5.35 billion (€4.18 billion in the EU-27) for energy security, although this is insufficient to cover the €70 billion of investment needed just in the gas sector (the most recent proposal for the new Multiannual Financial Framework 2021-2027 foresees a 83% funds increase for CEF Energy to €7.67 billion).

[3] The Green Stream originates in Mellitah (Libya) and goes to the Italian grid in Gela (Sicily); Trans-Med starts in Algeria, runs through Tunisia and ends in Mazzara del Vallo (Sicily).

[4] Medgaz runs from Algeria (Beni Saf) to  Almeria and the Maghreb-Europe gas from Algeria runs through Morocco and reaches Cordoba.