Energy Security in Europe: A Need for Diversification in the Natural Gas Sector

By Ansis Spridzāns, Kevin Duffy and Dominik P. Jankowski

As the geopolitics and technology of natural gas continue to change rapidly—with such developments as shale gas production and Liquefied Natural Gas (LNG) transport—the European community would do well to consider the strategic value of supply diversification. Crises in 2006 and 2009, both the result of intentional supply decreases from Russia, highlight the risks of overdependence on any one source for this vital commodity. But overreliance on Russia is not the only possible source of distress for the European market: from environmental concerns to instability in other potential supplier nations, every natural gas supply comes with its own set of challenges and risks. For this reason, an “all sources” strategy for natural gas production (one that spreads the risk and minimizes the impact of a reduction in any one source of supply) should characterize the European approach in years to come.

There is already widespread recognition in Europe that energy security is a strategic priority: NATO’s role in keeping energy sources secure was laid out at the Bucharest Summit in 2008 (in the report “NATO’s Role in Energy Security”) and reiterated at the Strasbourg-Kehl Summit in 2009 and the Lisbon Summit in 2010. By 2011, an Energy Security Centre was opened in Vilnius, Lithuania. As emphasized by these documents and initiatives, NATO’s strategic approach to energy security includes dialogue, member state information sharing, military cooperation with partner countries, and energy infrastructure protection. It is time to emphasize source diversification as a priority item on that list.

To illustrate why, one needs look no further than the aforementioned 2006 and 2009 crises. In both cases, Russian disagreements with the Ukraine resulted in a decrease of supply from the former to the latter, a move that, by extension, decreased supplies to large swaths of Europe, since the massive Druzhba pipeline crosses the Ukraine enroute to European destinations. In 2006, this supply decrease directly affected Austria, Bosnia and Herzegovina, Croatia, France, Germany, Hungary, Italy, Macedonia, Poland, Romania, Serbia, Slovakia, and Slovenia in mid-winter. In 2009, it was Bulgaria, Croatia, the Czech Republic, Greece, Hungary, Poland, Romania and Turkey. Clearly, such large-scale impact from the reduction of a single source is unacceptable—more gas sources are crucial to European energy security.

One reason this is so challenging is the very scope of Russia’s share of the world’s natural gas reserves. The country owns the largest natural gas reserves in the world, more than 27% of the global total. OAO Gazprom, a company in which the Russian Federation holds a majority stake, is the key exporter and one of the largest conventional natural gas companies in the world. Gazprom alone supplies one quarter of Europe’s conventional natural gas and more than 70% of the conventional natural gas for the countries of the former Soviet Union. In some European countries all gas supplies are imported only from Russia. Even as the Russian share of European gas imports is predicted to level off (with Norway and some North African countries providing diminishing amounts and countries from the Caucasus and Middle East providing an increasing share), the sheer volume of its gas supply will make it a formidable factor for the foreseeable future.

An alleviating factor in this situation is in fact Russia’s own effort to increase pipeline options for gas delivery to Europe. The trans-Baltic Nord-Stream pipeline constructed a line from Russia to Germany in 2011 and is expected to add another line this year. Farther south, the intended South Stream pipeline from Russia to Bulgaria is expected to begin operating in 2015. More sources of Russian gas, however, cannot represent a real solution without legal protections against production and delivery monopolies. To this end, a team led by EU Commissioner for Energy Günther Oettinger (and former Commissioner for Energy Andris Piebalgs) recently suggested several notable legal initiatives that have the potential to reshape the energy market in the future by separating gas producers from the owners of transport infrastructure. The implementation of such legal initiatives, however, may not be simple in practice, as evidenced by the recent conflict in Lithuania between the government and Lietuvos Dujos (partly owned by Gazprom). The Lithuanian state encountered severe difficulties and corporate push-back when it moved to implement its “Third Energy Package” program, which seeks to improve market competition and provide access through independent gas transport networks to different gas suppliers, and would have required Gazprom to sell its stake in Lietuvos Dujos.

As such legal wrangling is likely to continue, other sources of gas must also be explored and exploited, and two major developments in recent years have already started to revolutionize the European (and global) gas market. Liquefied Natural Gas shipments (LNG) to Europe, especially from the United States, have already impacted Russian market share, and terminals to receive LNG have been constructed in the UK, Spain, Portugal, Italy, France, Greece, and Norway. In Central Europe Poland has started to build an LNG terminal, while Lithuania is in the planning stages for its own. Even more drastic is the advent of shale gas, which has the potential to drastically change the energy security paradigm for the transatlantic community. Poland, which is estimated to have one of the largest shale gas deposits in Europe, is leading the way in pursuing it. The government has issued over 100 exploration permits, and has permitted U.S. companies including Chevron, Exxon Mobil, and Conoco to begin development; estimates are for the gas to start flowing by 2014. Optimistic predictions have Poland transforming itself from a gas importer to a gas exporter in the coming decades (a major change for a country that currently receives the majority of its gas from Russia). Other European countries, including the Czech Republic, Hungary, and Ukraine are aggressively pursuing the same shale gas resources. Of course, the method of shale gas extraction, known as “fracking”, is controversial due to unproven environmental concerns; France and Bulgaria have already instituted moratoria on the practice, and the issue is being hotly debated in Germany.

In short, Europe has many intriguing options for its energy future. None of them, however, are without challenges, whether they be legal, environmental, or political. Spreading the risk by collectively pursuing all options as vigorously as possible represents the best way for Europe to ensure its energy security in the years to come.

This article was written by Ansis Spridzāns, Kevin Duffy and Dominik P. Jankowski.

Ansis Spridzāns serves as Senior Associate at the law firm SORAINEN in the Republic of Latvia. He is a lecturer at the School of Business Administration Turība.

Kevin Duffy serves as a Lieutenant Commander in the United States Coast Guard where he is presently second-in-command of U.S. Coast Guard Maritime Safety and Security Team Boston.

Dominik P. Jankowski serves as Expert Analyst at the National Security Bureau of the Republic of Poland and is pursuing a doctorate at the Warsaw School of Economics.

Authors are members of the Atlantic Council’s Young Atlanticist NATO Working Group.

The authors’ arguments are their own and do not represent the views or opinions of the law firm SORAINEN, the United States Coast Guard and the National Security Bureau of the Republic of Poland.