How Europe Maneuvered Itself Into an Energy Crisis

 How Europe Maneuvered Itself Into an Energy Crisis

Nikolas Gvosdev Tuesday, Oct. 19, 2021

Four years ago, at a Track II dialogue between German and American diplomats and analysts, a German colleague of mine explained his firm belief that his country—and, by extension, Europe as a whole—could use geoeconomic tools to regulate and blunt Russia’s geopolitical ambitions. 

Europe’s need for natural gas, he said, was balanced by Russia’s need to sell. A European strategy of energy diversification would therefore give the West leverage over Moscow, which would not want to risk its access to European markets by making bold political plays. 

The plan was for European governments to encourage gas utilities to shift from large-volume, multiyear contracts with Russia’s Gazprom to “just in time” agreements, in which they would buy energy for short-term use at competitive prices on the spot market. At the same time, Europe would invest in new interconnectors and pipelines across the continent, ensuring that no region would be dependent on a sole port of entry for energy. Russia, then, would be incentivized to continue using Ukraine as a “reliable entry point” to European markets, thereby retaining its position as a “reliable supplier” of energy on the continent.  

This was not the first time I had heard confident predictions that Europe could retain the upper hand as an energy consumer vis-à-vis Russia, the supplier. Previously, Europeans assumed they could find a way to bring the vast gas reserves of Iran and Central Asia to the West, but a combination of high development costs, continued U.S. sanctions against Iran and increased demand from China made it difficult for Europe to achieve this goal. For instance, the European Union’s ambitious Nabucco pipeline project, which was designed to carry 31 billion cubic meters of gas between Eastern Turkey and Austria, was eventually abandoned in favor of a much more modest project that would bring only 16 billion cubic meters to European markets. The Southern Energy Corridor ended up augmenting, rather than replacing, Russian gas.

Just as the EU’s plans to achieve energy security in the 2010s fell short, the picture in 2021 looks far different from the vision that was laid out for me by my German colleague. As energy prices skyrocket in Europe, threatening economic productivity, Russia’s shadow looms large. Some have blamed the continent’s recent gas crisis on the European Union’s climate change policies, which have increased competition for natural gas as more countries turn away from coal—a charge the International Energy Agency has firmly rebutted. The reality is that today’s crisis is linked to a series of geopolitical and geoeconomic gambles Europe made in its attempts to manage Russia—gambles that have not panned out.

Today’s crisis is linked to a series of geopolitical and geoeconomic gambles Europe made in its attempts to manage Russia—gambles that have not panned out.

Some of the trouble comes down to bad luck. Back in 2016, the prevailing assumption was that the Iran nuclear deal, combined with a spate of natural gas discoveries in the Eastern Mediterranean, would upend Russia’s dominance of the energy market in Europe. The lifting of U.N. sanctions on Iran, along with the easing of other punitive measures by the U.S., was expected to clear the way for major investment in Iran’s undertapped and underutilized natural gas sector. At the same time, it was expected that a consortium of Eastern Mediterranean states, bound together by the lure of shared profit, would make arrangements to develop the newly discovered offshore gas fields and build the infrastructure needed to bring those new resources to waiting European consumers. In fact, the idea that Eastern Mediterranean, North African and Middle Eastern gas could compete with Russian producers was a driving factor for Russian firms themselves, leading them to acquire stakes in some of these projects.

However, former U.S. President Donald Trump’s decision in 2018 to repudiate the Iran nuclear deal and reimpose U.S. sanctions meant that the wave of Iranian gas never materialized. Turkey, Lebanon, Israel, Cyprus and Greece, too, have been unable to settle their competing claims over the Eastern Mediterranean, a situation worsened by Libyan and Turkish efforts to delineate their borders in a way that would negatively impact the energy projects of other regional states.

Around the same time, the Trump administration proposed that Europeans, as part of their “recompense” to the United States for providing the continent with a security umbrella, should buy larger quantities of North American gas. However, the American export infrastructure to Europe was at the time underdeveloped, and it remains so today. And in any case American producers preferred to sell to more lucrative Asian markets, where spot prices are higher than what European purchasers are willing to pay. Trump’s implicit grand bargain never materialized. What’s more, some of the recent environmental measures taken up by President Joe Biden’s administration will further hinder the U.S. from becoming an alternate supplier for Europe.

At the same time, over the past decade, Russia itself has worked to alter the geoeconomic balance. In 2004, the Orange Revolution in Ukraine saw a democratic uprising prevent a Russian-backed candidate, Viktor Yanukovych, from winning the presidency in a rigged election. This inspired the Russians to reduce their dependence on Ukraine by launching a new pipeline project: Nord Stream, which was designed to connect Russia directly to Germany, via the Baltic Sea. 

“European

EU Energy Commissioner Kadri Simson speaks on rising energy prices, in Strasbourg, Oct. 7, 2021 (AP photo by Jean-Francois Badias).

A decade later, Ukraine’s 2014 Euromaidan Revolution saw Yanukovych, who had eventually managed to secure the presidency a few years earlier, ousted by another popular protest movement. To Moscow, the ouster signaled Ukraine’s definitive break with Russian plans to create a Eurasian economic and political sphere. So Moscow decided to push ahead with a pair of new pipeline projects: a second Nord Stream and a Turkish project called TurkStream. The latter would substitute Turkey for Ukraine as Russia’s energy gateway to the EU, while further encouraging Turkey’s geopolitical shift away from the West.

Europeans have long asserted that the EU has the upper hand in Russian-European energy relations, because a good chunk of Russia’s natural gas was supposedly only marketable to Europe. Over the past decade, however, Russia has expanded its capacity to produce liquefied natural gas, or LNG, which turns natural gas into a more fungible commodity like oil. It has also developed new export routes to Asia—notably, Gazprom’s Power of Siberia pipeline, which transports natural gas to Russia’s Far East and to China—and is increasingly using natural gas to generate electricity for export. 

Europe’s current energy crisis, then, materialized from these geoeconomic factors, combined with weather trends and a surge in demand. Last winter in Europe was colder than expected and drew more natural gas out of storage than usual—so predictions that this winter will be similarly frigid are raising concerns about energy supplies. At the same time, despite the economic tremors caused by the delta variant of the coronavirus, the global economy is going through a major recovery. Demand is soaring—and in the energy industry, that has meant greater than expected demands for power and well as raw material stock. 

For now, Russia has agreed to continue sending gas via Ukraine until 2024, if at a lower volume of some 40 billion cubic meters per year, as per a 2019 agreement brokered by Germany. But despite U.S. attempts to stop construction on Nord Stream 2 via haphazard sanctions measures, the pipeline was completed earlier this year. Moscow is now seeking to certify Nord Stream 2 and bring it into operation as soon as possible, so that it can finally decouple its energy strategy from its Ukraine strategy.

If Nord Stream 2 goes into operation, it will change the balance of power between Moscow and Kyiv.

If it goes into operation, it will change the balance of power between Moscow and Kyiv. Ukraine will no longer be able to exercise a transit veto over Russian energy deliveries to Europe. Moreover, the pipeline will deprive Ukraine of a significant source of revenue, and that in turn will limit its ability to continue re-equipping and augmenting its armed forces, putting it in an even weaker position vis-à-vis Russia. 

The U.S. and some European countries still want to suspend the pipeline project, indefinitely if possible, hoping that the delays will force Russia to rely on Ukraine as a transit country. But this is where elements of the European strategy have backfired. Over time, European consumers have spurned long-term contracts with Gazprom, secure in the assumption that there would be sufficient supplies of gas available on the spot market. But today, those “just in time” supplies are nowhere to be found. Although Gazprom does seem to be fulfilling all of its existing contract obligations, according to EU Energy Commissioner Kadri Simson, it’s not releasing more gas for the spot markets. 

In other words, a key European assumption—that Gazprom would be forced to sell its uncommitted gas to Europe, because there are no other buyers—is running up against several tough realities. First, Gazprom has concluded that it is happy with its profits at this time, and therefore does not need to sell its remaining gas to Europe via Ukraine. The company’s officials have argued that they should be free to instead export their uncommitted supplies to Asian markets; sell them locally for domestic storage; or use them to generate electricity that can then be sold in northeast China. Second, it seems that Europe’s alternate energy suppliers would also rather sell to Asian markets—especially since Beijing appears willing to outbid Europe so it can ensure there are no energy shortages in China this winter.

With this newfound leverage, Gazprom is waiting to see what happens to Nord Stream 2, which is currently awaiting a certification decision by German regulators. Russian President Vladimir Putin himself has intimated that Europe will only get its hands on more Russian gas once a decision is made—and that if Nord Stream 2 is not certified, Europe will never see a single cubic meter of gas above what is required by the 2019 gas agreement.

“Russian

Russian President Vladimir Putin talks with Gazprom CEO Alexey Miller in Hanoi, Vietnam, Nov. 12, 2013 (AP photo by Na Son Nguyen).

Another key element of European strategy was to more tightly integrate the continent as a way to resist Russian energy coercion. Now, that same unity is being used by Russia to its advantage. For years, Hungary has enjoyed a certain degree of economic importance by serving as a hub for the Russian gas that crossed through Ukraine. In order for Russia to cultivate Budapest as its partner in Europe, it had to allow gas to flow through Ukraine. 

But in late September, Moscow signed a new, long-term gas agreement with Budapest, in a demonstration of its new power over Kyiv. In it, Hungary agreed to be supplied with Russian energy entirely through non-Ukrainian routes, with most of the resources entering through a new southern route that utilizes the TurkStream pipeline. Indeed, even as Nord Stream 2 remains held up in the approvals process, Russian gas is already flowing across the Black Sea to a delivery point on the European side of Turkey’s Bosporus. From there, the gas can reach all of Russia’s customers in southeastern Europe, which no longer have to worry that further spats in the Ukrainian-Russian relationship will impact their own energy security.

Russia is gambling that European countries will not want to tie their energy and economic security to Ukraine’s fate as the primary transit country for Russian gas. At the same time, Gazprom has found the current crisis to be an unexpected advertisement for the value of long-term supply contracts over the uncertain promises of the spot market. Gazprom also had the chance to show its European customers that Russian producers now have interested buyers outside of the continent. To the extent that Europe’s environmental commitments do limit its ability to shift to other fuels for power generation—between the dirtiness of coal and the fear of nuclear power—Europe needs gas, and Russia remains a key part of that supply matrix.

Yet there are risks to Russia’s approach, too. Short-term disruption could lead to longer-term consequences. After all, many of the energy technologies that we take for granted—from lithium batteries to fracking—were developed in the wake of the energy shocks of the 1970s. And as European prices continue to increase, some of the supplies currently heading to Asian markets may well reroute back to Europe. For energy companies, gas production projects that just a couple of months ago may have seemed too expensive or too environmentally damaging to pursue may now become more lucrative. For instance, Norway’s state-owned energy company, Equinor, is preparing to ramp up its gas exports ahead of the looming shortages. 

Russia is gambling that European countries will not want to tie their energy and economic security to Ukraine’s fate as the primary transit country for Russian gas.

Politically, too, the composition of the next German government is still being determined. Depending on the role the Greens play, Moscow could find a less accommodating partner in Berlin. The EU may also have leverage over Russia, depending on how it chooses to interpret and apply a newly proposed carbon border tax against Russia's traditional exports to Europe. In the aftermath of an energy crisis that Russia is seen as fomenting, the EU may be more willing to take a tougher approach to ensuring that Russia is meeting its environmental criteria.

Russia’s machinations have also given new urgency to the projects in the Eastern Mediterranean that held so much promise back in 2016. In late September, for example, France and Greece signed a new defense agreement to provide military assistance to one another in the case of an external threat—implicitly, from Turkey. The deal points to a growing frustration with the stalemate over territorial claims in the Eastern Mediterranean and how they have inhibited the development of the region’s energy resources. Other ventures that have been on hold—such as the Trans-Caspian pipeline, which would connect Turkmenistan’s major gas deposits to Europe via the Southern Gas Corridor, or the Iranian projects, whose advancement hinges on the outcome of talks between the Biden administration and the Iranian government—could again provide sustainable alternatives to Russian suppliers if they are revisited.

Five years ago, the prevailing attitude was that Russia was entirely dependent on European markets. Today’s crisis is a reminder that Europe is just as dependent on Russia for power. But out of crisis comes opportunity, meaning that a lot might have changed five years from now. 

Nikolas K. Gvosdev is a professor of national security studies at the U.S. Naval War College. He is also the editor of the Foreign Policy Research Institute’s journal