Putin Opens Up Europe’s Energy Fault Line Along Oder-Neisse

Vladimir Putin’s play to wrest control of Ukraine is accentuating divisions in the European Union over how to balance climate and energy policies, driving a wedge between Germany and its eastern neighbor Poland.

By moving forces into the Crimea region, the Russian president caused a jump in natural gas prices from the U.K. to Germany, highlighting Europe’s dependence on gas piped through Ukrainian territory.

Polish Prime Minister Donald Tusk has turned on Germany, saying that its appetite for Russian gas as it shifts to clean energy is “a threat to Europe’s security and sovereignty.”

The German-Polish split underscores a broader dilemma over the direction of Europe’s $13 trillion economy and the energy model that powers it. Merkel is focused on cutting pollution and closing German nuclear reactors, consuming more Russian gas in the process. Tusk, more concerned with energy security, is pushing coal and atomic power, and yesterday backed a law to speed up hydraulic fracking to get at domestic hydrocarbons.

“Germany and Poland in many ways represent a fault line when it comes to defining Europe’s future energy mix,” William Pearson, London-based director for global energy and natural resources at the Eurasia Group, a political-risk consultancy, said in a March 7 telephone interview. Both, he said, “enjoy the support” of other EU nations.

Oder-Neisse Line

The divergence has implications for businesses as well as consumers on both sides of the Oder-Neisse Line, the post-World War II boundary first proposed by the Soviet Union at the Yalta Conference in 1945 and which still forms the present-day border between Poland and Germany.

Tusk is buoyed by Poland’s shale gas reserves, ranked as Europe’s biggest by the U.S. Energy Information Administration. It estimates that Poland has technically recoverable shale-gas resources of 148 trillion cubic feet, or about as much as a quarter of the U.S. level.

Polish authorities have granted about 100 licenses to foreign and domestic companies to drill for unconventional gas and have sought to revive investments from companies including Marathon Oil Corp. and Exxon Mobil Corp.

Fracking Divide

About 20 kilometers east of the border in the Polish town of Lubsko, Baltic Ceramics SA Chief Executive Officer Piotr Wozniak plans to begin building a $20 million factory this year to supply the nascent fracking industry. He is betting that Europe will try to emulate the shale-gas boom that has brought the U.S. close to energy-independence.

Across the river in Germany, Merkel is closing reactors by 2022 as she pursues the biggest transition to renewable energy of any developed country in history. With her Social Democratic Party coalition partner opposed to fracking, Merkel’s government has imposed a moratorium on new drilling using the technology.

Alwin Guedesen, a retired former communications engineer, illustrates the German government’s dilemma. Guedesen, 67, who in the 1980s worked on a NATO project to detect Warsaw Pact tank movements via seismic amplitudes, now spends much of his time trying to stop a different encroachment: drilling for gas near his home in the Weser valley of Lower Saxony.

Right Strategy

The practice may contaminate groundwater and cause earthquakes, Guedesen said. He says the risks connected with the technology mean that pushing fracking in Europe isn’t the right strategy to reduce dependence on Russia.

That makes little sense to Wozniak, whose plant will produce the ceramic material that props open rocks cracked in the fracking process so that gas can flow into the well more quickly.

“Europe has to make strategic choices about its future,” Wozniak said in a March 5 telephone interview. “The Ukrainian lesson should help tip the balance towards energy security rather than environmental issues.”

Poland plans to build its first nuclear power plant by the end of 2024. It would have a capacity of at least 1,000 megawatts, or enough for about 800,000 homes in the U.S. It intends to have 3,000 megawatts of nuclear capacity by 2030 and to double that level by 2035.

As much as 2,800 megawatts of new coal capacity is being built and at least 1,900 megawatts being developed as PGE SA, the country’s largest utility, and its competitors seek to replace older plants fired by lignite and hard coal.

‘Paralyzing Europe’

Tusk’s government, which depends on Russia for about two-thirds of Poland’s gas, plans to diversify its imports of the fuel in the next few years. Tusk said the EU and Germany should do the same. About 35 percent of German oil and gas imports come from Russia.

Taking aim at the EU’s current climate and energy policies, Tusk said this week that he’d discuss with Chancellor Angela Merkel during her visit to Warsaw today how to prevent Germany’s dependence on Russian gas imports “from paralyzing Europe when it needs decisive action.”

One route would be for the EU to consider collective purchases of gas to increase its leverage in talks with Russia, he told reporters. Merkel said the companies had to be on board to build an internal European market for energy.

“It’s not the German government that buys gas,” Merkel said. “It’s EON, it’s RWE, it’s BASF.”

Tusk’s hand is strengthened by rising gas prices since Russian troops took control of Crimea over the weekend of March 1-2. Front-month gas in the U.K., a European benchmark, has gained 3.5 percent since then. The contract jumped 10 percent on March 3, its biggest one-day gain since September 2011, on London’s ICE Futures Europe exchange.

Power Prices

While Poland strives above all for energy security, Merkel’s government is also seeking to lower prices for consumers. German private households pay the second-highest power prices in the EU behind Denmark, according to Eurostat data. Germans pay an average 0.29 euros a kilowatt-hour, almost double the 0.15 euros/kWh Polish households must pay.

Tusk’s Cabinet approved a law yesterday aimed at speeding up drilling for shale gas, forecasting about 30 new wells drilled and the country’s first commercial well coming onstream this year.

“Shale gas is probably one of the beneficiaries of the Russian-Ukrainian dispute,” said Pearson of the Eurasia Group. “I’m confident that shale will be a long-term factor in the fuel mix in Europe.”

Germany and Poland have clashed over energy before. In 2006, Radoslaw Sikorski, then Poland’s defense minister who is now foreign minister, compared a planned natural gas pipeline under the Baltic Sea circumventing Polish territory with the Molotov-Ribbentrop Pact that carved up Poland between Germany and the Soviet Union before World War II.

Nord Stream

Nord Stream, a joint venture between German companies BASF AG and EON SE with Russia’s OAO Gazprom chaired by former German Chancellor Gerhard Schroeder, was completed in 2011. Russia in December 2012 began building the $20 billion South Stream pipeline to send gas to central Europe across the Black Sea and the Balkans -- a project it said will improve EU energy security since it bypasses Ukraine, where price disputes have disrupted exports in recent years.

“Supporting the construction of the Nord Stream pipelines may have given Germans a false sense of energy security,” said Keith Smith at the Center for European Policy Analysis, a Washington-based research group focused on energy policy. “The dangerous situation in Ukraine may, however, cause a re-think in German energy policies.”

Ukraine and Europe’s future climate and energy framework will be the focus of the March 20-21 EU summit in Brussels, European Commission President Jose Barroso told members of the European Parliament today in Strasbourg, France.

“In the light of the crisis in Ukraine, no one will need to be reminded of the costs and dangers of Europe’s remaining energy dependence,” Barroso said.

Before it's here, it's on the Bloomberg Terminal.