EU Proposes Security Plan to Reduce Reliance on Russian Gas

May 28, 2014 9:56 am ET

(Updates with comments from BusinessEurope in sixth paragraph.)

May 28 (Bloomberg) -- The European Union should reduce energy consumption, seek new supply sources and examine ways to increase transparency of the gas market to cut its rising dependence on imports from Russia, an EU report showed.

Increasing domestic energy production and accelerating the integration of the EU energy market are also ways to increase the 28-nation bloc’s energy security, the European Commission said in a communication to EU governments and the European Parliament. EU leaders in March asked the bloc’s regulatory arm to prepare a plan for reducing Europe’s reliance on Russia for energy amid the escalating crisis in Ukraine.

EU heads of state will discuss the commission’s report during a June 26-27 summit in Brussels. Russian gas accounted for 27 percent of EU consumption of the fuel last year, according to the report. About half of gas from Russia to Europe crosses Ukraine, making EU supplies vulnerable to disputes between the former Soviet allies.

“We want strong and stable partnerships with important suppliers, but must avoid falling victim to political and commercial blackmail,” EU Energy Commissioner Guether Oettinger said in a statement today. “Collectively, we need to reinforce our solidarity with more vulnerable member states.”

Russia is the sole external supplier for six EU states, of which three rely on gas for more than a quarter of their total energy needs. It sent 80 percent of its gas exports to Europe in 2013, with the largest volumes sold to Germany and Italy, according to the report.

Energy Prices

The situation in Ukraine is a wake-up call for a strong European energy security strategy, said Markus Beyrer, Director General at BusinessEurope, a lobby representing employers from 35 nations.

“Industry stresses the need to focus on cost-effective implementation of the strategy because energy prices in the EU are already impacting our competitiveness heavily,” he said in an e-mailed statement.

Russia has threatened to cut off Ukrainian gas shipments in June unless Ukraine starts to prepay after accumulating $3.5 billion of unpaid bills. OAO Gazprom, Russia’s monopoly pipeline-gas exporter, in April raised the price it charges Ukraine by 81 percent to $485 per 1,000 cubic meters.

Ukraine has said the higher price has no economic justification and it will repay the debt after Russia returns the price to the first-quarter level. Trilateral talks with the EU brought a tentative agreement on Monday on how to settle $2.5 billion of Ukrainian debt to Russia, a step that would help avert gas cutoff. Governments in Kiev and Moscow have until today to give their answers on the plan, whose approval, would pave the way for talks about gas prices from April.

Renewable Energy

Energy security is moving up the EU agenda, Oettinger said. The crisis in Ukraine comes as the bloc readies a decision on its energy and climate policies for the decade starting in 2020. Boosting renewable energy and nuclear energy as well as “sustainable production of competitive fossil fuels” could help cut imports, the commision said.

The environmental lobby group Greenpeace criticized the EU road map, saying it potentially prolongs Europe’s addiction to imports of fossil fuels.

“Europe should kick the habit and exploit the enormous potential for energy savings and home-grown renewables by setting ambitious targets for 2030,” said Greenpeace EU energy and transport policy director Franziska Achterberg. “Anything less would not only be environmentally and economically disastrous. It would be politically irresponsible.”

External Suppliers

To increase Europe’s security, member states should develop gas infrastructure, better coordinate “important energy policy decisions” and ensure that their gas contracts with external suppliers are fully compliant with EU laws, according to the commission’s report. The EU regulatory arm also said it will examine if the bloc could implement procedures to increase transparency of the market.

“In addition, voluntary demand aggregation mechanisms that could increase the bargaining power of European buyers could be assessed,” the commission said. “These options would need to be carefully designed and executed to ensure compatibility with EU legislation and trade law.”

The idea for Europe to increase its negotiationg leverage vis-à-vis external suppliers has been promoted by Poland’s Prime Minister Donald Tusk, who last month proposed an energy union, including more collective gas purchases. The commission is looking at Tusk’s plan and will give an answer on it before the June summit, Oettinger said.

Limited Options

In the short term, the EU has limited options to overcome a potential cutoff of Russian natural gas supplies and might have to add more storage or form a common reserve, according to the report. It should seek to develop reverse pipeline flows and keep studying liquefied natural gas as a potential remedy in case Russian flows are disrupted this winter.

In the coming months the commission and member states should look at ways to carry out a stress test of Europe’s energy system to help overcome potential gas-supply disruptions in the 2014-15 winter, according to the document. It also suggested steps including expanding inventories of the fuel and acting to reduce energy demand in the very short term.

Another solution would be to temporarily redirect supplies available in world gas markets, notably LNG, the commission said. It also suggested pooling some existing energy reserves at EU or international level and seeking to help nations that supply gas to the bloc to increase their production.