Russia’s swift actions in Crimea have again put the focus on Europe’s energy supply issues. Russia supplies nearly 30 percent of Europe’s gas, and most of this passes through transport lines that transverse Ukraine. The subsequent sanctions imposed on Russia by United States and EU were more focused on targeted individual sanctions rather than sanctions on the whole country. The Russian Foreign Ministry has labeled these sanctions as “divorced from reality” and stated they have had no effect on the oil industry.
The European Union has taken a very lax stand on the issue of sanctions, knowing very well that imposing hard-line sanctions on Russia will surely disrupt ties and will involve retaliatory measures in the form of a diminished energy supply. According to the European Commission, more than 54 percent of Europe’s total energy supply was imported from outside the EU, with Russia alone accounting for more than 34.5 percent of it. The sanctions situation speaks volumes about European energy dependency on Russia.
Russia has time and again used energy supply as a potent weapon, clearly demonstrated by the crises in 2005 and 2009. Both times, Gazprom, the national oil company of Russia, hiked the price of oil supplies through the transit lines in Ukraine. Ukraine’s unwillingness to pay the hiked price resulted in Russia cutting off oil supplies to the rest of Europe. As of mid-May, the EU may be facing another such crisis.
Europe’s energy dependency on Russia clearly demonstrates that it has not learned from its past. Even though it has diversified its procurement from other sources, now exporting more from Norway and Algeria and investing heavily in renewable sectors, the technology for such investments is still very expensive. Hence, Europe has a long way to go before it can substantially diminish its dependency. Another important point to be noted here is that Gazprom has invested heavily in oil fields in Algeria and hence its position in a future stand-off will be important to watch for.
However, it is important to note that Russia’s plan to use oil as an economic weapon can backfire in the long term. Russia earns nearly $100 million each day from oil sales to Europe, and any plans to cut off supply will hurt its economic interests in the long term. These enormous revenues finance a large chunk of the already struggling Russian economy, and hence it may be sowing seeds of economic destruction itself. Nearly 70 percent of all Russian exports to the EU and APEC are oil shipments valued at more than $400 billion.
Options for Europe
Diversifying Supply: Decreasing energy dependency on one single source, such as Russia, over the long term is the most important strategy to prevent Europe from being held at the whims of one single state. Building oil pipelines from far away fields such as Azerbaijan will surely put pressure on Russian oil politics. Renewable Energy: Europe needs to invest heavily in renewable energy in order to decrease its oil dependency on Russia. Even though the continent’s share of renewable energy has increased from 9.3 percent in 2007 to over 13.4 percent in 2011, much more investment needs to be done in this crucial sector. Countries such as Germany, which is moving away from nuclear energy, clearly need to find a new source of energy at a cheap scale to feed its power hungry industries.
Oil from America: The recent oil boom in the United States, along with a surging shale gas supply, has provided Europe with a viable alternative over the long term. Europe’s strategic alliance with the U.S. on a number of issues provides it with a forum to discuss oil trade in times of emergency. American oil exports across the Atlantic are planned to start in 2016, however this option to achieve energy independency will be an expensive one.
Moreover Europe has come very late to the fracking (Hydraulic Fracturing) party, and as such it will take time before their energy industry can properly utilize the benefits of shale gas. Investments need to be made in fracking technology to make it a viable, inexpensive option for Europe.
Reserve Supplies: As demonstrated by the 2009 crisis, Europe needs to have abundant reserves so that they can be used in case of emergencies. In 2009, Bulgaria had to shut down its industrial production, and Slovakia declared a state of emergency due their incapacity to meet the demands. It is estimated that Europe needs to have around 4.7 billion barrels of oil—a minimum of a one-month supply—of reserves to soften the effect of a Russian cut off in supplies before it starts crippling the European economy. Hence, many more reserve centers need to be developed that can ward off the effects of a supply cut off for at least 3 months.
Options for Russia
New Markets for Oil: Russia is clearly looking to the East and South for new customers for its oil market. Russia clearly knows that countries such as China and India will never support sanctions imposed by individual Western nations, and hence has advocated building pipelines through Central Asia to China and India. Countries such as Japan and South Korea are also looking to decrease their dependency on Middle Eastern oil, and Russia can provide an option close to home.
Arctic Oil: Russia lays claim to most of the estimated oil reserves in the Arctic Ocean, and developing future technologies to drill the world’s largest depository of undiscovered oil (around 90 billion barrels) will give it an upper hand in regional geopolitics. Russia has repeatedly laid claim to and carried out scientific research in the region, and has, so far, neglected concerns raised by other Arctic states.
Conclusion
It is apparent that Russia will not back off in eastern Ukraine and will work to consolidate its hold over the region. However, any such move to invade Ukraine will be met with strong sanctions both from the European Union and United States. Under such sanctions, the Russian economy will suffer greatly, especially the oil sectors. Russian oil exports to Europe have already decreased from 45 percent to nearly 30 percent in the last decade. Even if large scale customers such as China and India will not support such sanctions, it will surely decrease the EU’s dependency on Russia oil. In case the need arises, Russia could easily cut off Ukraine through the Nord Stream pipeline or Yamal-Europe pipeline.
It is in best interest of both Russia and the European Union to diffuse tensions substantially, as moving to sanctions will hurt both economies. Gazprom receives 60 percent of its revenue from Europe, and Russian President Putin should know well that any tit for tat action will backfire in the end. Until and unless the European Union finds alternative sources of energy and alternative routes, Europe must tread carefully. Meanwhile, Russia will have to continue searching for new markets in the Asia-Pacific region and should invest heavily in infrastructure to export oil to the new markets.
Piyush Singh is a 3rd year BA, LLB student at Hidayatullah National Law University, Raipur, India and apart from law interests, has forayed into the field of foreign policy and is a keen China watcher. His research interests include international law, China’s foreign policy and India-China War of 1962.
This article was originally published in the Diplomatic Courier's special edition G7 ebook. The full ebook can be purchased here.
Photo: Jerrold Bennett (cc).
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A Europe-Russia Energy Standoff: The Crisis Neither Side Wants
June 17, 2014
Russia’s swift actions in Crimea have again put the focus on Europe’s energy supply issues. Russia supplies nearly 30 percent of Europe’s gas, and most of this passes through transport lines that transverse Ukraine. The subsequent sanctions imposed on Russia by United States and EU were more focused on targeted individual sanctions rather than sanctions on the whole country. The Russian Foreign Ministry has labeled these sanctions as “divorced from reality” and stated they have had no effect on the oil industry.
The European Union has taken a very lax stand on the issue of sanctions, knowing very well that imposing hard-line sanctions on Russia will surely disrupt ties and will involve retaliatory measures in the form of a diminished energy supply. According to the European Commission, more than 54 percent of Europe’s total energy supply was imported from outside the EU, with Russia alone accounting for more than 34.5 percent of it. The sanctions situation speaks volumes about European energy dependency on Russia.
Russia has time and again used energy supply as a potent weapon, clearly demonstrated by the crises in 2005 and 2009. Both times, Gazprom, the national oil company of Russia, hiked the price of oil supplies through the transit lines in Ukraine. Ukraine’s unwillingness to pay the hiked price resulted in Russia cutting off oil supplies to the rest of Europe. As of mid-May, the EU may be facing another such crisis.
Europe’s energy dependency on Russia clearly demonstrates that it has not learned from its past. Even though it has diversified its procurement from other sources, now exporting more from Norway and Algeria and investing heavily in renewable sectors, the technology for such investments is still very expensive. Hence, Europe has a long way to go before it can substantially diminish its dependency. Another important point to be noted here is that Gazprom has invested heavily in oil fields in Algeria and hence its position in a future stand-off will be important to watch for.
However, it is important to note that Russia’s plan to use oil as an economic weapon can backfire in the long term. Russia earns nearly $100 million each day from oil sales to Europe, and any plans to cut off supply will hurt its economic interests in the long term. These enormous revenues finance a large chunk of the already struggling Russian economy, and hence it may be sowing seeds of economic destruction itself. Nearly 70 percent of all Russian exports to the EU and APEC are oil shipments valued at more than $400 billion.
Options for Europe
Diversifying Supply: Decreasing energy dependency on one single source, such as Russia, over the long term is the most important strategy to prevent Europe from being held at the whims of one single state. Building oil pipelines from far away fields such as Azerbaijan will surely put pressure on Russian oil politics. Renewable Energy: Europe needs to invest heavily in renewable energy in order to decrease its oil dependency on Russia. Even though the continent’s share of renewable energy has increased from 9.3 percent in 2007 to over 13.4 percent in 2011, much more investment needs to be done in this crucial sector. Countries such as Germany, which is moving away from nuclear energy, clearly need to find a new source of energy at a cheap scale to feed its power hungry industries.
Oil from America: The recent oil boom in the United States, along with a surging shale gas supply, has provided Europe with a viable alternative over the long term. Europe’s strategic alliance with the U.S. on a number of issues provides it with a forum to discuss oil trade in times of emergency. American oil exports across the Atlantic are planned to start in 2016, however this option to achieve energy independency will be an expensive one.
Moreover Europe has come very late to the fracking (Hydraulic Fracturing) party, and as such it will take time before their energy industry can properly utilize the benefits of shale gas. Investments need to be made in fracking technology to make it a viable, inexpensive option for Europe.
Reserve Supplies: As demonstrated by the 2009 crisis, Europe needs to have abundant reserves so that they can be used in case of emergencies. In 2009, Bulgaria had to shut down its industrial production, and Slovakia declared a state of emergency due their incapacity to meet the demands. It is estimated that Europe needs to have around 4.7 billion barrels of oil—a minimum of a one-month supply—of reserves to soften the effect of a Russian cut off in supplies before it starts crippling the European economy. Hence, many more reserve centers need to be developed that can ward off the effects of a supply cut off for at least 3 months.
Options for Russia
New Markets for Oil: Russia is clearly looking to the East and South for new customers for its oil market. Russia clearly knows that countries such as China and India will never support sanctions imposed by individual Western nations, and hence has advocated building pipelines through Central Asia to China and India. Countries such as Japan and South Korea are also looking to decrease their dependency on Middle Eastern oil, and Russia can provide an option close to home.
Arctic Oil: Russia lays claim to most of the estimated oil reserves in the Arctic Ocean, and developing future technologies to drill the world’s largest depository of undiscovered oil (around 90 billion barrels) will give it an upper hand in regional geopolitics. Russia has repeatedly laid claim to and carried out scientific research in the region, and has, so far, neglected concerns raised by other Arctic states.
Conclusion
It is apparent that Russia will not back off in eastern Ukraine and will work to consolidate its hold over the region. However, any such move to invade Ukraine will be met with strong sanctions both from the European Union and United States. Under such sanctions, the Russian economy will suffer greatly, especially the oil sectors. Russian oil exports to Europe have already decreased from 45 percent to nearly 30 percent in the last decade. Even if large scale customers such as China and India will not support such sanctions, it will surely decrease the EU’s dependency on Russia oil. In case the need arises, Russia could easily cut off Ukraine through the Nord Stream pipeline or Yamal-Europe pipeline.
It is in best interest of both Russia and the European Union to diffuse tensions substantially, as moving to sanctions will hurt both economies. Gazprom receives 60 percent of its revenue from Europe, and Russian President Putin should know well that any tit for tat action will backfire in the end. Until and unless the European Union finds alternative sources of energy and alternative routes, Europe must tread carefully. Meanwhile, Russia will have to continue searching for new markets in the Asia-Pacific region and should invest heavily in infrastructure to export oil to the new markets.
Piyush Singh is a 3rd year BA, LLB student at Hidayatullah National Law University, Raipur, India and apart from law interests, has forayed into the field of foreign policy and is a keen China watcher. His research interests include international law, China’s foreign policy and India-China War of 1962.
This article was originally published in the Diplomatic Courier's special edition G7 ebook. The full ebook can be purchased here.
Photo: Jerrold Bennett (cc).
