Russian Gas

Putin's Pipeline Politics

By | Updated Dec 28, 2016 1:44 PM UTC

Europeans who want to get tough with Russia must face a chilling fact: They need Russian natural gas to stay warm in the winter. About a third of the continent’s gas comes from Russia, a vulnerability laid bare by shutoffs during freezing weather in 2006 and 2009Central to the predicament is the conflict in Ukraine, which carries the bulk of Russia’s European-bound gas via a Soviet-era pipeline network. Alternatives for powering Europe's homes and factories come at a much higher cost. So despite pledges to reduce its dependence on Russia, Europe is buying more gas than ever from its eastern neighbor. That means gas remains a powerful tool of Russian foreign policy.

The Situation

The European Union has stepped in repeatedly over the years to try to settle disputes between Russia and Ukraine and to help avert disruptions in supply. The most recent talks, in December, made little headway. Ukraine stopped buying gas from Russia for its own use in 2015 — the year after Russia annexed its Crimean peninsula — and relies on resale of Russian gas from neighboring countries instead. The EU has also accused Gazprom, the Russian state-controlled gas producer, of abusing its market power in certain eastern European countries. Meanwhile, plans for new pipelines to bypass Ukraine and cement ties to Russia have divided European leaders. There's an agreement to double the capacity of the Nord Stream route under the Baltic Sea, which links directly to Germany, the biggest buyer. In October, Russia formalized a plan to build a second gas pipeline through Turkey. Russian gas faced increased competition globally after the start of U.S. shale gas exports in 2016. To help protect its market share, Gazprom has been holding auctions that offer more flexible prices and terms. Gazprom and Ukraine’s Naftogaz are still pressing competing claims against one another that seek to recover billions of dollars from more than a decade of disagreements over pricing and unpaid bills. 

The Background

Russia began exporting gas to Poland in the 1940s and laid pipelines in the 1960s to deliver fuel to captive Soviet satellite states. Supplies to Europe were steady through the Cold War. The two major shutoffs were triggered by pricing disputes after Russia accused Ukraine of siphoning gas. The second disruption, in the icy winter of 2009, lasted almost two weeks and halted all gas transit to the EU via Ukraine, leading to a scramble for supply. Slovakia and some Balkan countries had to ration gas, shut factories and cut power supplies. Since then, better infrastructure has been built to create a more integrated market for gas, which provides about 20 percent of Europe’s energy. The EU has repeatedly vowed to diversify its energy supply and the most vulnerable countries have raced to lay pipelines, connect grids and build terminals to import liquefied natural gas. Russia also plans to sell more gas to China, raising the prospect that Europe may eventually have to compete with Asia for Siberian fuel. 

The Argument

Around Europe, dependence on Russian gas varies widely — ranging from the bulk of supply in eastern Europe to zero in Spain and Portugal — making it difficult to forge a unified approach. Efforts to become less captive to monopoly pricing and supply manipulation have been complicated by Germany’s decision to shun nuclear power and coal and by widespread opposition to fracking. They also come at a cost. Eliminating Europe’s dependence on Russian gas could require as much as $200 billion in investment, according to analysts at Sanford Bernstein. Russia is keen to sell more gas to Europe to help pull its economy out of the longest recession in two decades, triggered by the slump in energy prices. It's also suffering from U.S. and EU sanctions stemming from its aggression in Crimea. Oil and gas taxes fund about 40 percent of Russia’s national budget, and the industry enriches allies of President Vladimir Putin. Longer-term alternatives for Europe include bringing gas supplies from Azerbaijan and other parts of the Caspian region, along with importing more U.S. gas.

The Reference Shelf

  • An EU stress test of gas supplies in October 2014 showed a six-month disruption in Russian gas would severely hurt eight countries.
  • The Gas Infrastructure Europe website provides live monitoring of gas storage levels in the 28 EU countries and Ukraine.
  • Oxford Institute for Energy Studies report on reducing European dependence on Russian gas and its study of the 2009 shutoff.
  • QuickTakes on Ukraine, fracking,  fracking in Europe and liquified natural gas

First published Nov. 19, 2014

To contact the writer of this QuickTake:
Anna Shiryaevskaya in London at ashiryaevska@bloomberg.net

To contact the editor responsible for this QuickTake:
Leah Harrison at lharrison@bloomberg.net