Tough Choice: If Europe decides to slash gas imports from Russia, it will shoot itself in the foot

By Svetlana Kristalinskaya, June 3, 2014

The growing tension between the West and Russia over the annexation of Crimea accentuated all problems that have plagued gas ties between longtime partners. The West threatens to introduce serious economic sanctions against Russia, including the halt of purchase of Russian energy, a ban on technology transfer to Russian companies working in the fuel and energy sector, investments in field development and infrastructure construction. Experts and businessmen are inclined to think that neither Russia nor Europe would benefit from deteriorating ties.

Today, a set of sanctions is in effect against Russia over its annexation of Crimea. In particular, talks on a new Russia-EU framework agreement and visa regime liberalization have been halted, visa bans have been imposed on a number of Russian officials and their assets frozen. If the situation deteriorates further the West threatens to introduce economic sanctions against Russia. Potential backlash might hurt Russia’s banking sector, trade, services rendered by European firms to Russia’s oil and gas companies. Sanctions on the oil and gas sector could include bans on technology transfer, investment into new fields development and infrastructure facilities, as well as insurance and logistics services.

Russian Dominance

Russia supplies around 150 billion cubic meters of gas to Europe annually, covering approximately a quarter of the European Union’s (EU) gas demand, and providing one-third of EU’s gas imports. Russia is linked to Europe via pipelines and some 80 percent of its Europe-bound gas is shipped through Ukraine where recent events have sparked a blaze. In Europe, Gazprom markets a third of all gas it sells and European sales account for more than half of the company’s revenue. Ukraine, one of the largest consumers of Russian gas, is not able to pay for it.

As the events in Ukraine escalated, European politicians rallied support to reduce dependence on energy supply from Russia. Despite talking about that for several years and taking specific steps such as the adoption of the Third Energy Package and open lobbying of gas pipeline construction from Trans-Caspian states to counter Russia’s own trunkline projects, today those calls trigger a rather sensitive reaction. Particularly painful was the European Commission’s move to postpone its decision (after almost agreeing upon it) to grant Gazprom exemptions from the Third Energy Package in regard to the use of OPAL gas pipeline (an offshoot of Nord Stream), which had been built on German territory by local companies. However, such stance of the European Commission has met resistance of its own business community. In his recent interview with the Moscow-based Vedomosti newspaper, Wintershall chief Rainer Seele said that as the gas transit crisis looms, Europe more than ever needs supply from both Nord and South Stream, Russia’s Europe-bound trunklines by-passing Ukraine. The OPAL trunkline’s throughput capacity totals 36 billion cubic meters per year, which represents one-third of Germany’s current gas demand and is slightly less than the volumes shipped to Germany by Gazprom.

Industry experts and entrepreneurs maintain in unison that Europe won’t be able to quickly reject Russian gas supply and,