Ukraine is paying the price of Europe's energy dependency on Russia | ViewComments
I have spent much of my professional and academic career focusing on Ukraine’s energy policy, and warning of the strategic implications —now painfully laid bare— of European dependency on Russian gas.
Now, having fled my home for the comparative safety of Lviv with my son, while my husband and father remain in the capital Kyiv, listening to air raid sirens at night, I am very sad that the advice of Ukrainians has always been taken lightly.
Now the whole world has to pay for it.
But that milk is spilt. Optimistic policymakers in Berlin and other capitals supported the building of the Nord Stream 1 pipelines running from Russia directly to Germany under the Baltic Sea in 2010, rather than expanding two overland export routes running through Ukraine and Poland.
Europe’s dependency on Russian gas increased — although fortunately, the doubling of Nord Stream gas capacity was finally blocked by Germany just days before Putin sent his army into Ukraine.
Yet with Nord Stream 1 alone, Russia’s Gazprom delivered almost 60 billion cubic meters (bcm) of Russian gas to Germany and northern Europe last year; that’s roughly a third of total Russian gas shipments to Europe in 2021.
At the start of March, as Russian troops destroyed Ukrainian cities, the EU was paying Russia around €800 million a day for gas — drastically undercutting the economic impact of Western sanctions and funding the war.
The European Commission has said it wants to reduce dependency on Russian gas by two thirds by the end of the year, with a drive to secure new sources of supply. But there are other steps that the European Union can take now to undo some of the damage done.
First, the EU must take the political decision and set a firm early deadline for ending its dependency on Russian gas. Currently, the Commission says that this can be done “well before 2030”. We need a firm date, and much, much sooner.
A clear schedule and deadline set now will allow the market to adjust to the shift—rather than expecting that Russian gas will always be on tap. Dependency on Russia will continue for the forthcoming 2021-22 heating season. But with a firm deadline in place, the global energy companies will start developing other supply options, encouraging compensating increases in Liquid Natural Gas production.
Secondly, the EU can move now to take control of Russian energy assets in western and central Europe—including the vital gas storage facilities, using underground caverns, now owned or part-owned by Gazprom, the Russian gas monopoly. There are seven of these facilities in the EU, four of them in Germany — accounting for a quarter of the country’s gas storage capacity.
Letting Gazprom maintain control made sense if Russia maintained reliable supplies. But this last year, Gazprom’s failure to keep its storage inventory at a reasonable level before the winter of 2021 contributed to spiking natural gas prices — highlighting the strategic threat.
The European Commission is already proposing new regulations that will require gas storage companies to fill 90% of their storage capacity by October. But seizing control of the facilities — as the United Kingdom has moved against oligarch assets — presents an immediate way to neutralise this strategic threat. Additional steps may be possible against Russian ownership of local gas control and distribution systems.
This should be supplemented by seizing other energy assets. Russia’s Lukoil owns refineries a refinery on the Italian island of Sicily that accounts for a fifth of Italian refining capacity, as well as refining capacity in the Netherlands, Romania and Bulgaria. It also owns hundreds of petrol stations in Finland, Belgium, the Netherlands, Italy and the Western Balkans, and has investments in petroleum products terminals and storage in the ports of Barcelona and Rotterdam.
More broadly, the European Union needs to move now to incorporate Ukraine into its energy market. In the immediate future, in the event of the war somehow cooling down over this summer, Ukrainian excess gas storage capacity could be used to augment EU storage to avoid a rerun of the gas price spikes of 2021.
Looking further ahead, Ukraine itself produces around 20 bcm of gas a year and could increase its output with investment in deeper drilling technology. We are happy that Equinor, Shell and Exxon have all pulled out of projects in Russia; we urge them to be prepared to invest in Ukraine, in exploration, refining, and renewables, when peace returns.
It is also time to address the anomaly of Gazprom having a role in the business of gas distribution between European countries, through its control of pipeline transit switching facilities in Western Ukraine.
All this, of course, depends on the course of the war. Whatever the EU resolves to do, Ukraine will pay a devastating price from the historic miscalculation of Russian energy dependency.
Olena Pavlenko is the vice president of DiXi Group, a Kyiv-based think-tank focused on energy issues.