European member states have different degrees of exposure to disruption of supplies from Russia, which must be addressed to secure the future of the EU's Energy Union.
The Energy Union is already a fact. It represents a useful tool to help Europe overcome the patchwork of energy markets, which prevents the member states from agreeing on a common energy security policy. However, there are obstacles: member states vary considerably in terms of the role of gas in their economies, in the relative importance of gas markets and national economies to major external suppliers (such as Russia), and in the availability of infrastructure to cope with a serious energy supply disruption.
European Union member states have many differences in terms of their energy security and, in particular, in their degree of exposure to a possible disruption of gas supplies from Russia. Figure 1 below illustrates this in three dimensions. The horizontal axis shows the ability of member states to cope with a major disruption of energy supplies from Russia (expressed as member state’s storage capacity as a percentage of Russian gas imports). The vertical axis illustrates each country’s level of dependence on Russian gas, which reflects member state security exposure. And the size of the circles shows the commercial interests of member states and Russia in keeping open gas flows (since both Gazprom and European energy companies have a commercial interest in continued gas sales).
Figure 1: Energy security cacophony in Europe
Source: IEA 2014 Natural Gas Information
Note: Due to lack of information, Malta and Cyprus have been excluded from the figures. These two countries consume little gas and certainly receive no gas from Russia.
Three groups emerge from this exercise in dividing member states according to their interests in keeping or diversifying away from Russian gas:
1. “Neutral” member states (green): these nations do not import gas from Russia directly and therefore have no formal contracts with Gazprom.
2. “Secure” member states (purple): these states import gas from Russia but are protected from disruptions, whether because they have sufficient storage capacity, because they have a very strong, long-lasting, and established commercial and political relationship with Russia (Germany and Italy), because they possess indigenous supplies and enough LNG facilities to diversify away from Russia (France, the Netherlands, Italy, and Greece), or because Russian gas in their energy mix is marginal.
3. “Insecure” member states (red): these countries are either already very dependent on Russian gas supplies (more than 80 percent of their total annual consumption) or are expected to become more dependent on Russian gas (Poland).
In addition to the member states already dependent on Russian gas, in a few others, coal consumption dominates the energy mix. If European climate policy is effective in driving these member states to reduce CO2 emissions by diversifying away from coal consumption, then their exposure to natural gas supply security will grow: gas is likely to be the next fuel of choice because of its relative competitiveness when compared to other low-carbon energy sources (renewables, coal with carbon capture and storage, nuclear and so on). This could apply to Estonia, Poland, Czech Republic, and Bulgaria. Coal dominates their economies, contributing more than 30 percent (the largest share) of their energy mix. Therefore, Poland is classified alongside countries that are very dependent on Russian gas as a country with potentially high exposure to energy supply insecurity. However, it should be noted that Poland is completing the construction of an LNG terminal, which, in theory, could replace up to 80 percent of Russian gas supplies.
Figure 2: Fuel mix of member states
Source: IEA 2014 Gas Information, BP Statistical Review of World Energy 2014, IEA Website
Another dimension that should be considered in examining the energy situation of member states is the degree of market deregulation and liberalisation. Most of the northwest European countries – the United Kingdom, the Netherlands, Belgium, and to a lesser extent Germany, France, and Austria – have deregulated and liberalised markets with established liquid trading and gas market exchanges. The advantage of having competitive trading gas market exchanges (such as the National Balancing Point, NBP, in the UK, or Title Transfer Facility, TTF, in the Netherlands) is that the price discovery process is based on a more transparent and fair basis (markets with many commercial sellers and buyers) than bilateral contracts negotiated between companies and often involving their respective governments. These bilateral negotiations often involve non-market considerations. For example, Ukraine’s gas price renegotiation in 2010 involved strategic questions such as the stationing of the Russian Naval Fleet in Ukraine, making trading arrangements more fragile in view of the changing political and geopolitical landscape.
Grouping countries according to their exposure to energy insecurity, based on broad energy security metrics (gas import dependency and storage capacity as a percentage of supplies from the largest sources), helps to make clear the high-level differences that exist in Europe. However, a detailed analysis of the security situation in each country is necessary to avoid “over-insuring” and underestimating the ability of each energy system to cope with a potential gas crisis. Below, we focus on the key features of the energy policies of “insecure” countries.
Baltic States and Finland
The Baltic States and Finland are unique in that they import their entire natural gas consumption from Russia, either directly or through Belarus. This separates them from the rest of Europe. This isolation is problematic not just for the four countries themselves, but also from the point of view of a common European energy market. To address concerns about security of supply in these countries, three steps could be taken:
1. Upgrade existing interconnections in the region.
2. Build new pipeline connections, such as the proposed Balticconnector between Finland and Estonia or the Gas Interconnection Poland-Lithuania (GIPL).
3. Increase LNG utilisation. All three Baltic countries are planning LNG terminals, and Lithuania’s Klaipeda LNG terminal came on line at the end of 2014.
These options could improve diversification in the medium term, but they are unlikely to address near-term disruption risks. It should be noted that the Baltic countries would be relatively secure if the disruption of Russian gas supplies only involved stopping gas from flowing through Ukrainian pipelines. However, if Russia were to halt all gas exports to Europe, these countries would be seriously affected.
Central and Eastern Europe
The countries of Central and Eastern Europe (Poland, Hungary, the Czech Republic, and Slovakia) are more exposed to energy supply disruptions from Russia than most other EU member states. However, they are still better positioned than either the Baltic States or Bulgaria. The Central and East European countries still import a large proportion of their natural gas from Russia: Hungary imports around 89 percent of its annual consumption from Russia; Poland imports 53 percent (2013); the Czech Republic, 99 percent; and Slovakia, 95 percent. Because some of the region’s gas from Russia comes via Ukraine, it risks transit disruptions due to Ukraine’s situation as well as Russia-related risks. Despite this high exposure, the risk is somewhat mitigated by the region’s interconnectors to other EU member states and the countries’ storage facilities and LNG terminals (Poland).
Romania is almost completely self-sufficient in gas consumption and imports only around 10 percent of its gas from Russia. The country has also recently installed an interconnector with Hungary, although this might not help much if Russian gas supply were to be halted, since Hungary itself is dependent on Russian gas. Although the country’s exposure to Russian gas is quite small, some operational issues with the gas system in Romania mean that loss of Russian gas supply could in fact endanger supply in the country: a drop in pipeline pressure could make it impossible to deliver indigenous supplies to the market.
During the 2009 gas crisis, Bulgaria was the country affected most by the crisis, because all of its gas comes from Russia via Ukraine. In contrast to many other member states, gas contributes about 15 percent of Bulgaria’s entire energy mix and most of its gas is used for district heating. Thus, the loss of the country’s supply in winter 2009 was not only an economic but also a humanitarian crisis. The country has interconnectivity to Romania, but progress on building an interconnector with Greece (with reverse flow capacity) has been very slow. If this interconnector were built, it could potentially contribute not only to security of supply but also to breaking Russia’s supply monopoly position in the country.