The Fuse

Russia, the European Union, and Energy Security

May 30, 2015

Guest Post by Peter Kiernan | @peter_kiernan |

Peter Kiernan is Lead Analyst, Energy at the Economist Intelligence Unit

Energy security returned to the forefront of the European energy policy agenda when the crisis in Ukraine erupted in early 2014. The resulting soured relationship between Russia and the West has intensified the view that ongoing dependence on Russian energy exports makes the European Union (EU) both economically and strategically vulnerable, and that a key energy security objective should be to reduce Russia’s role in supplying Europe’s energy needs.

In 2013 Russia alone supplied 29 percent of the EU’s oil imports, and 39 percent of the EU’s gas imports.

However, in discussing energy security in Europe it is important to put in context the nature of the EU’s energy import dependence, which varies between different countries and among different fuels. It is essential for Europe to diversify its sources of imported energy supply and to reduce the dependence on imports overall, but achieving the goal of energy security requires much beyond this. It is also not just a matter of how much energy comes from Russia. Equally important is to integrate Europe’s energy system to make it more resilient to external supply disruptions, regardless of where they might originate from, and to further diversify the fuel mix. This will take time, and will require significant investment, but a measure of energy security can be realised even if dependence on imports remains a feature of the EU’s energy system.

Europe’s import dependency

Energy-chart-19-05-2015aa  Energy-chart-19-05-2015acJust over 50 percent of Europe’s energy consumption is met by imports, which supply 90 percent of the EU’s oil needs and 66 percent of its natural gas needs. Around 42 percent of Europe’s coal consumption is supplied by imports as well. Production from Europe’s major oil and gas-producing region, the North Sea (which includes non-EU member Norway), is falling. Absent a U.S.-style boom in hydrocarbon production from shale basins, which is not a likely prospect, the gap between oil and gas production and consumption in Europe will remain significant.

Russia is a key source of Europe’s oil and gas supply. In 2013 Russia supplied 29 percent of the EU’s oil imports (22 percent of consumption), and 39 percent of the EU’s gas imports (27 percent of consumption). The Middle East and North Africa are also major suppliers of Europe’s oil and gas. Russia is a key source of EU coal imports as well. Due to the more flexible nature of the global oil market—where importers can access supply from several sources in the event of a disruption—energy security concerns in the European context tend to focus more on the security of natural gas supply.

Despite the fact that the EU’s rate of dependence on imported oil is higher compared to that of natural gas, many European gas markets are dependent on just one supplier. Consequently, developing alternative sources of gas supply to these markets requires the building of expensive infrastructure. As a result, diversifying sources of natural gas supply has been a key objective for European policymakers for well over a decade.

Realising the goal of energy security

Energy-chart-19-05-2015abThe issue of energy security goes beyond examining the rate of import dependence for particular fuels, or on any one country. A recent EU policy document on energy security highlighted the need to promote resilience within Europe’s internal energy system to supply shocks and disruptions as well.

To some extent, progress on this front has been occurring already. But recognition that there is still progress to be made was reflected in the February 2015 release of a proposal for the creation of an EU Energy Union, which would formalise a more unified approach to addressing European energy security issues within the context of addressing climate change. A measure of energy security for the European energy market can be achieved through a combination of strategies, including diversifying sources of imports, increasing domestic production, facilitating an integrated energy market, improving energy efficiency, and promoting renewables.

An all of the above strategy

Energy-chart-19-05-2015adDiversifying sources of energy imports. Expanding options of natural gas supply is seen as crucial, largely to diversify from dependence on Russian gas. However, this has already been occurring. Russia is the largest supplier of the EU’s imported gas, but its share of the EU’s gas import market is lower compared to the 1990s, when 75 percent of Europe’s gas imports originated from Russia. This had fallen to 32 percent by 2012 (although it rose again to 39 percent in 2013) due mainly to the emergence of Norway and Qatar as major suppliers. In terms of gas consumption, Russia’s share has hovered between 25 and 30 percent over the same period. Europe has in fact increased its LNG import capacity over the last decade, although this is heavily concentrated in Western Europe (the UK and Spain account for over half of Europe’s LNG capacity). The TANAP/TAP project—from Turkey to Italy via Greece and Albania—will open up Caspian gas to Europe by 2020, albeit in small volumes. LNG capacity is being developed in the Baltic region, but south-east Europe remains heavily dependent on Russian gas supply, and where supply diversification is needed the most.

  • Increasing domestic production. Conventional production of oil and gas will continue to fall, although Europe has substantial untapped resources of hydrocarbons from shale. Above-ground factors such as tight environmental regulations (Germany), bans on fracking (France and Bulgaria), and mixed public attitudes (UK) mean that shale gas is a long-term prospect in Europe, and even then only for some countries. Even in Poland, where there is strong official support for shale, progress in drilling has been slow. Major energy companies have also withdrawn from shale exploration in Ukraine and Romania. It is unlikely that output from shale is likely to make a huge dent in Europe’s import level: In 2013 the EU imported 9.8 million b/d of crude oil and 334 Bcm of gas. That said, provided that it is guided by proper regulatory regimes, shale oil and gas can play a role in mitigating growth in imports by making a contribution to domestic supply.
  • Facilitating an integrated energy market. Infrastructure to facilitate greater inter-connectedness in the gas transmission and electricity networks will lead to a more integrated European energy market. This in turn will enable the region to withstand disruptions and better connect isolated energy markets (such as south-east Europe). It will also reduce costs of providing energy supply and enable the market to operate more efficiently. In addition, storage capacity for natural gas can be further increased. The EU recently noted that “European electricity and gas transmission systems, notably cross-border connections, are not sufficient to make the internal energy market work properly and to link the remaining energy islands to the main electricity and gas network.” Some progress has been made, however. Several reverse flow gas pipelines in eastern and central Europe have been completed or are underway, and the EU has set an interconnection target of 10 percent of installed power capacity of EU members by 2020. There is still some way to go and the cost of creating a fully integrated energy market will run into the hundreds of billions, but the characteristics of Europe’s energy system could look very different in 2030 compared to now if the appropriate investments are made.
  • Improving energy efficiency. The energy security debate often revolves around supply side solutions, but the demand side of the equation should not be ignored. As in the US, European oil demand has declined since 2005, at least partially due to better fuel efficiency in vehicles. Still, the EU only supplies 10 percent of its own oil needs, so electrification of the transport sector will have energy security dividends. Furthermore, the EU states that a 1 percent improvement in energy savings, such as in the buildings sector, can reduce gas imports by 2.6 percent. In 2007 the EU set a target of a 20 percent improvement in energy efficiency by 2020, and last year pledged a 27 percent improvement in efficiency by 2030 (along with other targets for reducing emissions and a market share for renewables). On latest data, the EU is likely to fall just short of its 2020 energy efficiency target. Given the high rate of import dependence on fossil fuels, reducing the rate of energy consumption through efficiency measures in the building, transport and industrial sectors is a crucial element of any energy security strategy.
  • Expanding the use of renewables. A greater share of renewables in power generation can lead to less demand for fossil fuel imports, while also contributing to the EU goal to reduce emissions. The EU targets a 20 percent share of energy consumption from renewables by 2020, and a share of 27 percent by 2030. The 2020 renewables target is likely to be reached, with renewables already accounting for 14 percent of energy consumption. A lower carbon power generation system has a role to play in realising the energy security objective of reduced dependence on fossil fuel imports, which will also lower imported fuel costs. It also will contribute to meeting the EU’s emissions reduction targets (of 20 percent from 1990 levels by 2020 and 40 percent by 2030).

Conclusion

A measure of energy security can be realised, even with dependence on imports remaining, to some extent, a feature of Europe’s energy system.

The task of realising energy security in the European context is a daunting one, given the high rate of energy import dependence and the EU’s problematic relationship with Russia, its key energy supplier, and ongoing geopolitical tensions among several key energy exporters in the Middle East and North Africa. That said, a measure of energy security can be realised, even with dependence on imports remaining, to some extent, a feature of Europe’s energy system. This would require, however, integrating Europe’s energy market to ensure that this import dependence does not expose Europe to the strategic and economic vulnerability that it has experienced in the past.

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