Trend: Europe increasingly depends on Russia for natural gas and oil, as Russia seeks more control over the pipeline network to Europe.
Europe has become alarmingly dependent on Russia for its energy needs, dependent on Russian gas and oil and on gas and oil from the Caspian region that flow through pipelines under Russian control and influence.
Europe has naively banked its future energy needs on Russia in the belief that it will behave like a boy scout, no blackmail and threats, no intervention in neighboring countries, and no monopoly price gauging. It is not that Europe does not have other options. It does, both for sources of oil and gas and on pipeline routes to transport them that avoid Russian control, reduce Russia's monopoly power and its ability to hold Europe hostage. The key is Iran. But Europe is blindly following a flawed US policy on Iran and that will cost the energy importer dearly. It is a recipe for economic and political disaster that is surely to follow.
In 2007, Europe imported about 220 billion cubic meters (bcm) of natural gas, of which 165 bcm was piped gas, with the rest in the form of liquefied natural gas (LNG). Crucially, about 150 bcm of this gas was from the Russian Federation (all piped), making Europe dependent on Russia for 68% of its natural gas imports. By 2015, Europe is projected to import a total of 300 bcm of gas with even a higher dependence on gas from the Russian Federation. That's an enviable monopoly power that you would not afford to your closest ally, let alone to Russia. European leaders may need to have their heads examined.
Europe's dependence on Russia for its energy needs goes beyond natural gas and extends to oil also. The Druzhba oil pipeline carries about 40% of Russia's total oil exports, with a capacity of over 2 million barrels per day (mbd), of which about 1.5 mbd is destined for the European Union. This represents about 12.5% of oil consumption in the 27-country bloc, while directly providing about 40% of Germany's consumption.
But Russia is not satisfied with even this degree of control. It wants total control over the pipeline system that supplies Europe's oil and gas. That is, it wants to control the pipeline transit countries or to bypass the countries altogether. Russia does not want to be held hostage by any transit country, rather it wants to assert its energy muscle as no country has ever done before. It wants importing countries to be its hostage.
The Russia of Prime Minister and former president Vladimir Putin wields influence because of its gas reserves and because of the pipeline network that it controls. It has realized that one without the other does not give it the power it wants. Putin has consolidated his country's oil and gas sectors and brought them firmly under state control as a weapon of influence, especially against Europe.
But about 90% of the Russian gas that goes to Western Europe transits Ukraine. So Russia cannot dictate to Ukraine if it wants to continue piping its gas to Europe through this channel, as Ukraine can in turn stop the trans-shipment of Russian gas to Europe. Russia wants to be able to control all of its customers independently.
A case in point was in 2005, when Ukraine, facing Russian blackmail for gas supplies, forced Moscow to back down because of Ukraine's control over the pipelines that carried Russian gas onwards to Europe. This taught Russia an invaluable lesson that Europe still has not grasped. To have absolute monopoly power in piped energy you need to control both the energy source and its transportation.
Russia (in the form of Gazprom) has tried for a number of years to buy the Ukraine network from state-owned Beltranshaz, but Ukraine was not willing to give up this bargaining chip that it has in negotiating its own gas needs with Russia. The US also supported and pushed Ukraine in its refusal to sell.
To get around Ukraine, Russia conceived of a pipeline project that would also circumvent Poland and all the Baltic states, running along the bottom of the Baltic Sea to Germany. It is implemented through a consortium (with 51% Gazprom ownership) initially known as the North European pipeline (NEGP) and recently officially re-named the Nord Stream, after the operating company that runs it. It consists of two parallel pipelines each carrying 27.5 bcf of gas annually. The latest projected cost of this pipeline is about 15 billion euros (US$22 billion).
As a result, this gas could be more expensive to deliver to market. Russia argues this may not be the case because transit fees, costs that can quickly escalate, are avoided. This pipeline is expected to be on line in 2010/2011. Yet even this, it seems, is not enough control for Russia.
Russia has wanted to control the gas and oil pipelines that transport gas and oil from the Caspian countries to European markets - specifically, Moscow wants their oil and gas to go through Russia (as opposed to Georgia or for that matter any other country). Here, the US sees a direct threat to its own financial interests and opposes this expansion of Russian energy influence for a number of reasons.
In short, Russia is intensifying its efforts to connect key Caspian producers to its existing and projected natural gas pipeline projects with the goal of blocking the building of pipelines outside Russian control that could take natural gas to Europe.
