Europe's pipe dream

Like it or not, Europe needs Russian gas
February 28, 2009

Russia's annual gas row with Ukraine erupted again in December, shutting down exports for nearly two weeks. Brussels fretted, Moscow and Kiev swapped insults and their two state-controlled energy firms—Gazprom and Naftogaz—bickered, before reaching a compromise. (Russia wanted to raise Ukraine's bill in line with European prices, while Ukraine wanted more money to transport the gas.) The dispute, more serious than its predecessor in 2006, will trigger yet more debate about Europe's energy supplies. Three years of tough EU rhetoric, however, have yielded little progress. The EU's flawed strategy—that market liberalisation will bring energy security—has been undone by energy companies careless of the continent's broader long-term needs as they pursue short-term profits.

Gas is a particular flashpoint. It burns more cleanly than oil and coal, which is important for plans to slow global warming. Its power stations are also cheap, which energy companies like. This has pushed up demand: despite the recession European consumption will shoot up from 493bn cubic metres in 2010 to an estimated 625bn in 2030. Dwindling local reserves will see Europe's gas imports almost double.

The EU is caught in a bind. It wants more gas in general, but less from Russia. One escape route could be importing more liquefied natural gas (LNG)—gas converted into liquid form so it can be shipped around the world. This is cheap, for the moment, but it needs expensive specialist terminals to receive it. And many of these are in the wrong places. Britain's spare capacity, for instance, does little to help Bulgaria. Proposals to build new facilities normally stall because the sellers want guaranteed prices, while the buyers don't have the money to build terminals without guarantees about supply. Energy companies, who do nicely out of a tight market, have little incentive to build new depots, so the LNG sails off to terminals that already exist, often in Asia. The result is typical of the market failures that should prompt the EU to rethink its liberal instincts.

LNG's limitations make the planned Nabucco gas pipeline more important. It is expected to begin pumping 31bn cubic metres a year from Turkey to Austria in 2013. This effort, which is supported by the US, makes superficial sense. Central Asia has plenty of gas, as does the middle east. Andris Piebalgs, the EU's energy commissioner, has banged his drum for years about the importance to eastern Europe of this "southern gas corridor."

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But the project faces huge problems. Turkmenistan and Kazakhstan now export gas through Russia. Nabucco's backers say they could ship it across the Caspian sea to their pipe instead. But that also requires Russia's say so. Unlikely. The same backers think Azerbaijan will supply 15bn cubic metres; half that amount is more likely, say analysts. Iran, Iraq and Egypt provide other options. But Iran has poor infrastructure and no cash to improve it. Iraq's energy promise remains elusive, while Egypt's depends on it finding more gas in the Mediterranean. Few banks, therefore, are rushing to fund Nabucco's €7.9bn bill. Even in a best-case scenario the pipe would meet only about 5 per cent of forecast European demand and do nothing to lessen dependence on imported energy.

So what is the answer? Technical fixes allowing countries that have spare gas to send it to those who don't can help, as could funding new LNG facilities. EU progress on renewables and nuclear energy is also important. But public opinion, especially in Germany, opposes nuclear. And politicians dislike telling people to use less energy. What Europe really needs is a vendor with lots of gas and the appetite to sell more. Luckily, one exists. It's called Gazprom.

Whatever Europe does, its reliance on the Russian giant is only likely to increase if it builds two planned pipelines—one across the Baltic, the other through the Black sea—to bypass troublesome Ukraine. Opponents of the first pipeline, Nord Stream, say it is an expensive Russo-German regional carve-up. The second, South Stream, might merely duplicate Nabucco. The only certainty is that both would enrich Gazprom while increasing Europe's dependence.

But a dose of reality is needed. Energy liberalisation hasn't worked. Nabucco is a pipe dream. Better LNG infrastructure and pipelines inside the EU will not be sufficient. Stopping Nord Stream—as many in the Baltics, the US and Europe want—is self-defeating. Gazprom's export boss, Alexander Medvedev, told me in 2008 that anyone who will "take responsibility for blocking [Nord Stream] will have to assume responsibility for a shortage of gas." Like it or not, he's right.

To prevent another cold winter in the continent's east, Brussels must realise that Gazprom is part of the solution, not just the problem. The continent needs more, not less, Russian gas. Any drug addict would tell you the same. If you can't find a better dealer, best to stick with the one you've got.