Four Reasons Europe Is Stuck Buying Gas From Putin

Photograph by Oliver Bunic/Bloomberg

Can Europe wean itself from Russian gas? Lithuania seems to have succeeded. The Baltic nation, which until now has bought 100 percent of its gas from Gazprom, this week inaugurated a liquefied natural-gas facility, supplied from Norway and elsewhere, that could furnish all the country’s gas needs as early as next year. “Finally, we have our energy independence,” Energy Minister Rokas Masiulis said.

Alas, few other countries can replicate that feat. A study released this week by the Oxford Institute of Energy Studies in Britain predicts that Europe won’t significantly reduce its dependence on Russian gas for at least a decade—and probably longer. Here’s why:

• Buyers are locked into multiyear contracts with Gazprom. “The vast majority of Russian gas exports to Europe are sold on long-term contracts varying from 10 to 35 years,” the report says. (Lithuania is an exception; its contracts expire in 2015.) Through the mid-2020s, European buyers will be obliged to take at least 75 percent of the amount of Russian gas they bought in 2013, a year in which Russian gas supplies to Europe hit an all-time high, the report says. Although some European buyers have recently renegotiated their contracts with Gazprom, “there are significant limitations on the options to reduce the volumes in these contracts, or to terminate contracts before expiry.”

• Other suppliers can’t take up the slack. Norway is a major gas exporter to the rest of Europe. But Norwegian gas production is forecast to reach a plateau and possibly decline by the end of this decade, and gas from potential new wells above the Arctic Circle is likely to cost far more than current supplies do, the Oxford report says. North African countries, including Algeria and Egypt, also supply gas to Europe. But the outlook for increased production from the region is “bleak,” the report says, as development has been hampered by political instability and lack of investment.

• Fracking has been a bust in Europe. Drillers in Poland, considered one of the most promising sites for shale-gas development in the region, are packing and leaving after early results disappointed. While development is continuing in Britain and some other countries, progress has come slowly, and shale gas is unlikely to provide a significant share of Europe’s supply for decades, the report says.

• Liquefied natural gas is a possible substitute, but it might cost too much. The U.S. is gearing up for a major increase in LNG exports because of the shale-gas boom. However, buyers in Asia, the Middle East, and South America will be competing with Europe for those supplies, which could drive prices above what Gazprom would charge, the report says.

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