Why Europe can't hit Russia with its biggest club: energy sanctions

Europe has sanctioned Russian individuals in response to the Crimea crisis, but it confronts an inescapable fact when it comes to targeting Russia's natural gas and oil exports.

Focus

Europe has acute concerns about Russia's military intervention and annexation of Crimea – it's doling out aid to Ukraine and imposing sanctions on Russian individuals.

But its potentially most punitive weapon – blocking Russian energy exports – remains out of reach. However much Europe might like to express its displeasure by targeting a major part of Russia's economy, it confronts one inescapable fact: It needs Russia's natural gas and oil.

Europe's dependency has concerned both the European Union and the United States for decades, but the current political crisis in Ukraine has driven home the urgent need for Europe to move more aggressively to diversify its energy sources – particularly its natural gas – thus allowing Brussels to be more economically secure, not to mention more geopolitically nimble in challenging Moscow.

Russia's "repeated and persistent and malicious use of energy as a weapon" just ups the urgency for Europe, says David Goldwyn, who served as the US State Department's special envoy and coordinator for international energy affairs from 2009 to 2011. "What's happening in Ukraine points out that [supply diversification] was absolutely the right policy to pursue, but it is an unfinished policy."

The energy ties that bind

If it comes to imposing sanctions on Russia, Europe has few better targets than Russia's energy sector, which accounts for more than 50 percent of the government's revenues. In 2012, Russia's state-owned gas-export monopoly, Gazprom, brought some $40 billion into Kremlin coffers. About three-fourths of Russia's gas exports – some 130 billion cubic meters in 2013, according to Gazprom – go to Western Europe.

But that dependence is commutative: Russia supplies about 30 percent of the gas imports that the European Union needs to fuel its vehicles, heat its homes, and run its power plants. So cutting consumption of Russian energy is, at best, a painful proposition for Europe.

Moreover, Russia has shaped its vast resources into a blunt diplomatic tool that it is not shy about wielding. Gazprom promises gas supply, or threatens its absence, as a means of keeping Eastern Europe close and Western Europe at bay. Ukraine – through which about half of Russia's gas to Europe flows – has twice borne the brunt of the Kremlin's energy "weapon" in the past decade: Russia shut off gas to Ukraine amid trade disputes in the winters of 2006 and 2009, both times resulting in trickle-down pain for Europe.

The threat of further disruption through Ukraine spurred the construction of the Nord Stream pipeline system, an alternative northern gas route to Europe through the Baltic Sea that Gazprom completed in 2012. Nord Stream makes landfall in Germany, Russia's largest gas customer, and provides capacity to deliver 55 billion cubic meters of gas annually to Europe. Berlin worked closely with Moscow to see it built as a way to secure fuel for the factories that drive Germany's export-oriented economy.

But while shoring up Western European gas supplies against a new round of unrest in Ukraine, Nord Stream also expands Europe's reliance on a mercurial supplier it has long tried to displace. "If there is cheap Russian gas available, you might not invest in [other gas sources]," says Stefan Meister, a senior policy fellow at the European Council on Foreign Relations in Berlin, "so it can undermine energy security to some extent."

The German-Russian business partnership also influences how Berlin responds to the Ukraine crisis. A shutoff of Russian gas to Germany would be a devastating blow to Europe's largest economy, and ripple across global markets. The risk of upsetting a major supplier of resources and financial wealth, critics say, makes German Chancellor Angela Merkel and other European leaders more hesitant to impose significant sanctions on Russia.

US to the rescue?

Both Europe and Russia have diversified their energy strategies over time. Shifting global trends offer new opportunities: Norway increasingly threatens Gazprom's dominance of European markets, while Russia sees its future in Asia (see story, page 20). But neither has so far been willing to wholly abandon an entrenched supply-demand feedback loop.

Now, however, Europe is scrutinizing how it might wean itself to a greater degree from Russian energy.

One solution may lie to Europe's west, where a US gas production boom presents an opportunity to do something unthinkable five years ago: supply Europe with American gas. Many in Washington have pushed for the Obama administration to counter Moscow's resource clout by expanding US capacity to ship liquefied natural gas eastward. Advocates say federal LNG support would send the Kremlin a strong message and help key allies.

Even if this becomes an urgent priority, however, it will be several years before the current dynamic can change. Exporting LNG requires expensive, special ports, and only six such terminals have been approved. Even if the White House were to quickly permit others, LNG projects take years to complete – and domestic prices could increase as gas goes abroad.

Still, American energy is already changing trade flows to Europe's benefit. The shale gas boom "has not resulted in one molecule of gas being exported from the US to Europe," says Simon Pirani, a senior research fellow at the Oxford Institute for Energy Studies in England. But it has nonetheless benefited the European market: Cheap coal and Middle Eastern LNG that might have previously been used by the US have instead gone to the EU.

'Fracking' in Europe

If sharing gas is untenable, the US might still export the techniques that produced it. Hydraulic fracturing, or "fracking," and horizontal drilling were pioneered in stubborn Texan shale rock, and could see results in Europe as well, studies suggest. Several EU countries, including Britain, France, and Poland, are estimated to contain significant gas deposits. Shale gas could meet about a tenth of EU gas demand by 2035, according to a 2012 best-case scenario by the Paris-based International Energy Agency.

American shale is "not a copy-and-paste" scenario, IEA chief Maria van der Hoeven told the Monitor. Europe's geology and landownership laws – wherein mineral rights generally default to the state, rather than the deed holder – are less favorable to extraction.

And many Europeans oppose both the technique of fracking on environmental grounds and the extraction of a fossil fuel that, while cleaner-burning, still emits greenhouse gases.

Fracking is a "distraction and deviation" from solutions offered by energy efficiency and renewables, according to R. Andreas Kraemer, founder and director of the Berlin-based Ecologic Institute, a sustainability and environmental research firm. "You don't want to waste capital and engineering talent on a technology that hastens global overheating," he writes via e-mail.

Efficiency and diversification

The simplest way to reduce Russian gas use is to reduce gas use generally. High energy prices have pushed European households and businesses to do more with less. The EU's ratio of energy consumption to gross domestic product fell nearly a quarter between 1995 and 2011, and the EU aims to shave 20 percent off its projected energy consumption by 2020.

Renewables are expanding, with a 2030 target of supplying 27 percent of EU energy use. Germany, Spain, and others already have substantial solar and wind capacity. But energy transitions are complex and costly, and renewables are not necessarily a direct substitute for gas.

"Renewables and efficiency are crucial, but gas is an important component," says Claudia Kemfert, professor of energy economics and sustainability at the Berlin-based Hertie School of Governance. Gas plants are cleaner than coal, she writes via e-mail, and therefore better complement renewables when the sun isn't shining and the wind isn't blowing.

Ultimately, any effort to ease Europe's dependency on Russian energy will require time and effort. Regardless of how the situation in Ukraine unfolds, Russian gas – and the wealth it brings to Europe's financial centers – is a potent glue.

As Mr. Pirani of the Oxford Institute for Energy Studies says, Russian-European interdependence has survived tough times before.

"Don't forget this started in the 1970s and went through the cold war," he says. "It has braved previous political tensions."