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Europe’s Energy Security Problem Leaves it in the Cold

The lights in Europe might go out this winter. The continent is facing a severe energy crisis that could lead to a very cold and dark holiday season across the continent. Natural gas prices are five times higher than they were a year ago due to a sharp rebound in demand from the pandemic, a colder than usual spring, increased and unanticipated Asian consumption, and the European Union’s own energy and climate policies. As a result, storage facilities are low, and states across Europe could face gas shortages or potential blackouts.

Last month, Moldova declared a state of emergency after its gas contract with Russia’s state-controlled gas conglomerate Gazprom, Europe’s dominant supplier of natural gas, expired in September. Gazprom cut supplies to Moldova by one-third until a new contract and gas debt arrears arrangement could be reached. With gas pressure levels dangerously low, Moldova appealed to the European Union for emergency aid — even though it’s not an E.U. member — receiving 60 million euros to help manage the crisis. Poland and Ukraine, both of whom regard themselves as victims of Gazprom’s vise-like grip on Europe, rushed to Chisinau’s aid, pledging to sell additional volumes. But less than two days later, Moldova concluded a new five-year gas contract with Gazprom that reinforces both Moldova’s energy dependence on and political relationship with Russia.

An emergency European Union summit to address the crisis hardened divisions between member states with divergent energy interests. As gas prices dropped over the past decade, some European states sought to extract themselves from long-term natural gas contracts with Russia while others deepened commercial ties — stalling union-wide energy reform efforts and increasing exposure to market volatility. Further disagreements over European Union climate policies and Gazprom’s Nord Stream 2 gas pipeline have made addressing energy security even more difficult. European energy security has long been a major concern due to structural interdependence with Russia: Europe is dependent on Russia for over a third of its energy needs, and Europe has been Russia’s most profitable hydrocarbons consumer.

Energy sits at the nexus of security and economic development. Secure and uninterrupted access to energy is vital for all aspects of the national economy and it enables nearly every function of the military. Energy has been a major driver of conflict and a strategic consideration in warfighting for over a century, but between 1970 and 2010, the energy intensity of conflict has grown by a factor of sixteen. European gas crises in 2006 and 2009 highlighted a NATO vulnerability. In recent years Russia has deployed a range of hybrid threats against critical energy infrastructure and assets in NATO member states (Poland, Turkey, the United Kingdom, and the United States) and NATO partners (Ukraine).

Energy insecurity can have a profound effect on security outcomes. Europe has discovered that there is no easy path to energy security, and short-term solutions to the energy crisis (e.g., signing long term contracts for additional volumes of Russian gas) may undermine longer-term goals. The current crisis underscores the biggest problem of the European energy security conundrum: Europe’s diverging interests block a unified agenda, diminishing European bargaining power and rendering the union less secure. Because the gas trade is conducted bilaterally rather than at the European Union level, Russia exploits Europe’s divisions, punishing states with less relative bargaining power, and rewarding its best consumers. Nevertheless, Europe and the United States should take action to alleviate the immediate crisis while bolstering longer-term European resilience to Russian energy coercion. These policies, including increased flexibility on green initiatives, reevaluating nuclear energy, and improving energy infrastructure between states, may be a foul tasting, but life-saving medicine.

Europe’s (Latest) Gas Crunch

Although Moldova managed to avert an energy disaster, this year’s European energy crisis is far from over. Europe is entering the winter season with less gas in storage than usual, higher prices, and tighter global supplies. As a result, households are already paying higher prices and some energy intensive industries, particularly in Eastern Europe, have been forced to slow production. Ukraine is in a particularly dire situation and may face severe natural gas and coal shortages, leading to potential blackouts. Relations with Moldova and Ukraine are shaped via the European Neighborhood Policy and are thus a significant consideration in European foreign and security policy.

Lithuania, Poland, and others have accused Russia of manipulating gas markets to increase prices, and called on the European Commission to launch an investigation into Gazprom’s market practices in Europe. Pawel Majewski, the chief executive officer of Polish utility giant PGNiG, argued that the situation in Moldova is “proof of what we have been saying for many months: that unfortunately the interests of the main gas supplier from the east are enforced hard. Gazprom is not a friend of the EU.”

Russia’s response to the energy crisis has been lukewarm: Although Putin rebuffed claims that the Kremlin was weaponizing energy, it waited until very late in the season to begin refilling its European gas storage facilities. Gazprom also announced that it would not book additional transport capacity through existing Ukrainian and Polish pipelines next year, signaling its intent to wait for final approvals of Nord Stream 2, now delayed until spring 2022 at the earliest. Putin also offered to sell more gas to Europeans immediately — if they booked additional volumes through Gazprom’s preferred long-term contracts. In September, Hungary did just that, signing a binding 15-year contract for Russian natural gas supplied through Gazprom’s Turk Stream pipeline, circumventing the traditional transit route through Ukraine and thus depriving it of valuable transit fees. This enraged many Eastern European states, prompting Ukraine’s foreign ministry to argue that Budapest’s “purely political, economically unreasonable decision” was signed “to the detriment of Ukraine’s national interest and Ukrainian-Hungarian relations.”

Europe and Russia’s Uneasy Interdependence 

Long before the advent of liquified natural gas, the European gas market was set up with pipeline infrastructure linking Russia to its European consumers, locking both Russia and Europe into mutual dependency: Europe requires Russia’s hydrocarbons, and in turn the Russian economy is cripplingly dependent on revenues from resource sales. Gas and oil revenues contribute, on average, 40 percent of the annual budget of the Russian Federation. But unlike oil, natural gas is both highly flammable and pressurized, and difficult to handle and transport, which traditionally has required fixed infrastructure, long-term investments and point-to-point delivery. This interdependence explains why Russia is both empowered and constrained by its resources.

This crisis takes place in the context of a crucial Russian foreign policy goal: the approval of Gazprom’s Nord Stream 2 pipeline, which bolsters important commercial and political relationships with Germany while at the same time weakening Ukraine’s role as a gas transit state. Putin was justifiably annoyed by Belarusian President Alexander Lukashenko’s threats to cut off gas transit to Europe in response to European Union sanctions — Gazprom has spent much of the last two decades trying to demonstrate that it is a reliable and apolitical supplier of natural gas to Europe. At the same time, Putin wants to show Europe that direct pipelines are safer.

The two Ukrainian gas crises of 2006 and 2009 demonstrate this conundrum for both Russia and Europe. In both 2006 and 2009 gas price disputes between Kiev and Moscow resulted in failures to renew long-term gas contracts ahead of their expiry, which prompted Russia to reduce volumes of gas sent through Ukrainian transit pipelines. After Russia accused Ukraine of stealing gas bound for European consumers, Gazprom turned off the spigot altogether, causing a humanitarian crisis in the Balkans when there was no energy available to heat homes or generate electricity for hospitals.

These events brought European energy security to the front of the policy agenda, and resulted in the implementation of the European Union’s Third Energy Package in 2009, designed to liberalize gas markets and decrease the potential for Russia to weaponize energy. The main effect of the third energy package was breaking up Gazprom’s monopoly over the European gas market by forcing the separation of energy supply and generation from the operation of transmission networks. This legislation forced Gazprom to adopt its market strategy, which up to that point was vertically integrating the entire energy chain of downstream consumers. Some states, including Lithuania, forced Gazprom to sell its interests in their transmission systems, while others, like Moldova, have derogated this responsibility, allowing Gazprom to continue operating as a monopoly for at least another year.

European Energy Disunity

While the Third Energy Package did reduce Gazprom’s leverage, it did little to address Europe’s divergent energy interests. Over the past two decades, Russia has taken advantage of the bilateral contracts that oversee gas sales, extracting major concessions from weaker, energy-poor states that do not have access to alternative supplies (ports for liquid natural gas, or even alternative energy sources like nuclear power). At the same time, Gazprom enjoyed a cozy relationship with Germany, its most profitable consumer, whose gas demand increased as it reduced its reliance on nuclear energy in response to the Fukushima nuclear disaster. In 2020, Germany represented over 26 percent of Gazprom’s total exports outside of the former Soviet Union.

Further European Union efforts at rendering the opaque natural gas market more transparent were met with resistance by Germany, Hungary, and others who refused a proposed initiative to publish bilateral natural gas contracts. These states, who opted to maintain long-term contracts with Gazprom, argued that these contracts contained confidential “commercially sensitive” information that must remain protected. Moscow’s divide and conquer approach has allowed industry corruption to flourish all along the energy value chain, benefiting elites within European states that participated in Russian energy exports. Energy corruption in Ukraine was so endemic that it contributed to the Maidan revolution, annexation of Crimea, and ongoing war in eastern Ukraine.

The latest crisis also reveals the tension at the heart of European Union energy policy between energy security supply on one hand, and decarbonization efforts on the other. The European Union has pressured members to phase out coal consumption by 2050, in line with the outcome of the recent COP26 summit, increasing reliance on natural gas for electricity generation. This disproportionately affected Eastern European member states, who were already the most dependent on Russian supplies to begin with. Forcing states to choose between secure access to energy supplies and increasingly existential environmental consequences has not been a successful policy. The European Union also pushed developing states to move away from coal consumption, transforming them into rivals for liquid natural gas supplies from Qatar and the United States. This was unexpectedly and keenly felt when gas demand rose sharply in Asia as economies came roaring back from the pandemic.

Europe’s lack of consensus on energy issues renders it unable to act as a unified block, and is its biggest obstacle towards achieving greater energy security. Gazprom learned in the early 2000s that bilateral gas contracts were beneficial, because they undermined collective bargaining and facilitated effective hostage-taking. While Poland and Lithuania were forced to pay exorbitant gas prices in the early 2010s, larger states like Germany and France ignored their pleas so as not to endanger the profitable relationship with Russia.

The profound disagreement over Nord Stream 2 is evidence that this disunity still stymies European energy security. Poland and Ukraine, two of Russia’s harshest critics in the region, have repeatedly warned against the inherent danger of increasing dependence on Russian energy supplies, arguing that approval of Nord Stream 2 removes a critical deterrent against further Russian aggression in Ukraine. For now, Ukraine remains a primary gas transit corridor to European markets, increasing the costs of full-scale war. Meanwhile, as gas prices spiked across the continent, Berlin remained silent, until the German Federal Ministry for Economic Affairs and Energy released an assessment declaring that the Ministry believed certification of Nord Stream 2 would “not endanger the security of the gas supply to the Federal Republic of Germany and the European Union.”

While the critical cleavage on energy has generally been along the East-West divide, disparities in factor endowments, as well as divergent policy directions, mean that even within Central and Eastern Europe there are profound disagreements on how best to pursue energy security. Poland and Lithuania have led the charge on diversification away from Russian supplies, but Hungary has chosen to manage its energy dependence by deepening its relationship with Moscow, signing a sweetheart gas deal and securing a $11 billion loan to build a nuclear power plant.

The Energy-Environment Balancing Act 

The beneficiary of these disagreements, is of course, Moscow, which has watched with pleasure as Europe consistently fails to reach consensus on energy issues. October’s summit in Brussels yielded few concrete results on the energy crisis, serving instead to calcify divisions within the bloc. Poland, Hungary, and the Czech Republic called for major revisions to the European Union’s climate plan, citing it as a major contributor to the energy crisis. These large policy differences contribute to the European Union’s schizophrenic Russia policy, imposing sanctions on one hand, while increasing engagement on the other. Nevertheless, this latest crisis, along with Russia’s continued aggression towards Ukraine, provides a focal point for engagement within the West to increase European resilience to Russian energy coercion. Given the state of European disunity, this may require bilateral rather than union-level policy initiatives.

Given that Europe will remain locked into a mutually dependent energy relationship with Russia for the foreseeable future, there are several policy options, but all have trade-offs. In the short and medium terms, there is an unfortunate clash between energy and environmental problems. To ensure the energy security of its member states and the wider European community, the European Union may have to consider modifying or temporarily suspending some of its ambitious climate rules.

The energy crisis in Ukraine exemplifies this hard choice: Ukraine will likely face energy shortages that may be severe enough to cause blackouts this winter. The West could help avoid this by sending coal supplies immediately, a policy that contradicts long-term climate goals. Poland, the biggest coal producer in the European Union, may also need to push back its coal phase out by more than a decade to maintain its energy buffer against Russia. This short- and medium-term solution would help lessen Ukraine and Poland’s dependency on Russia, but are counter to European Union green initiatives.

In the long term, the European Union will have to reckon with its profound disagreement on nuclear energy, which could both reduce dependency on Russian energy supplies and help the European Union meet its climate initiatives. Both Angela Merkel and the new German government have reiterated Germany’s firm anti-nuclear energy position, arguing that nuclear power should not be considered clean energy. Many in Central and Eastern Europe as well as France disagree, which presents a unique opportunity for U.S. nuclear power firms to regain market share lost in recent years to Russia’s Rosatom.

The United States has long wanted Europe to wean itself from Russian energy. The State Department’s appointment of Amos Hochstein as an energy security envoy to Europe underscores this aim. Given the state of European energy disunity, it may be more expedient to work bilaterally with the states most vulnerable to Russian energy coercion: Ukraine, Moldova, and Southeastern Europe. In these states, one of the biggest obstacles towards energy independence is endemic energy corruption, which enriches powerful individuals at the expense of state energy security. This is not a quick or easy fix, but it is crucial.

Looking Ahead

Europe is facing its most existential energy challenge in over a decade. This crisis, however, presents an opportunity for European states to work together, or at the very least bilaterally with the United States, to coordinate plans on how to manage its energy relationship with Russia. If Europe does not manage to overcome its energy coordination problem, it will continue to be vulnerable in the face of Russian pressure, and will not adequately manage the threat of climate change.

 

Emily Holland, Ph.D., is an assistant professor in the Russia Maritime Studies Institute at the Center for Naval Warfare Studies, U.S. Naval War College. Dr. Holland studies energy politics, Russian and European foreign policy, U.S.-Russian relations, and populist movements in East-Central Europe and Russia. Her book project, “Poisoned by Gas” elucidates the relationship between foreign policy, domestic politics, and the natural gas trade in Europe and the post-Soviet space. The views expressed here are hers alone and do not express those of the Naval War College, the U.S. Navy, or the Department of Defense.

Image: Wikicommons (Photo by Julian Nyča)

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