A new chance in the European energy game

Another winter and another gas crisis. The cold, which has gripped most of Europe and Russia, has sharply increased the consumption of natural gas. A shortage of natural gas immediately appeared, as Russia took advantage of the moment and reduced the gas supply through the Druzhba pipeline by 10%. This time, the Russians justified it with record low temperatures in the interior of the country. However, many experts reminded us that we are most likely witnessing another blackmail, through which the Russian energy giant Gazprom is pressuring Ukraine to renegotiate the prices of supplies.

We witnessed similar dramatic scenes in 2006 and 2009. The response of European leaders was a panicked search for ways to reduce the European Union’s (EU) dependence on Russian energy resources. Now Europe has an opportunity to change the status quo. Due to the rapid progress of technological development, as well as the emergence of new global gas players, the European market for natural gas is changing rapidly. Unfortunately, the leaders of the old continent seem unable to seize the opportunity, as they focus primarily on the “dependency theory”, which has a lot of talk about geopolitics and very little rationality. First, it is important to note that energy dependence is not one-sided. Russia needs Europe just as much as Europe needs Russian energy. Currently, 40% of the Russian budget revenues come from oil and gas exports. The sharp increase in energy resources over the past decade has fueled the country's huge economic boom, helping Vladimir Putin consolidate his authoritarian regime. Therefore, energy security, so valued by Europe, is key to the legitimacy of Putin's rule, something that could be used as a trump card by his European economic partners in future negotiations.

Moreover, Europe’s energy insecurity is as much a product of its dependence on imported raw materials as it is a result of the structure of the international gas market. Natural gas is inherently illiquid. This is because it is transported via extremely expensive pipelines and its reserves are concentrated in a small number of politically unstable regions around the world. In order to make it cost-effective to build gas infrastructure to extract the blue gold and transport and distribute it, European investors mostly sign long-term contracts with fixed supply quantities. In these so-called take-or-pay agreements, the purchasing companies commit to buying a certain amount of gas regardless of whether it is needed for domestic consumption. Gazprom takes advantage of these contracts, forcing European countries to buy much more than they need, sometimes for years, at prices two to three times higher than world prices.

The situation is even worse in Eastern and Southeastern Europe, where Gazprom controls not only the production and supply of natural gas, but also domestic distribution through well-placed companies close to governments. These include ENI in Italy, MOL in Hungary, CEZ in the Czech Republic and Overgaz in Bulgaria. The European Union is trying to eliminate these monopolies through the so-called 'third energy package'. It aims to unbundle ownership of gas production, transit and distribution. However, the new legislation has so far been largely unsuccessful, as major European energy companies refuse to sell their shares to third parties independent of Gazprom. The reason is their fear of the possible loss of lucrative contracts with Russia or pressure through increased import prices under long-term contracts.

In recent years, two main options have emerged for liberalizing the market structure: liquefied natural gas (LNG) and shale gas. The former has been particularly successful in East Asia and Southern Europe, where gas transported by tankers from Qatar, Algeria, Nigeria and the UAE has driven down natural gas prices on the London Stock Exchange by 30-40 percent. In this way, the Western European market is increasingly resembling the spot oil markets, where prices are determined by the dynamics of supply and demand. As for shale gas, it is already becoming an important part of the global energy mix. Shale reserves could soon turn the United States from a net importer of gas into a major exporter. In Europe, however, shale gas has been largely discredited because of its perceived environmental threat. Moratoriums on exploitation and exploration have been imposed in France, Germany and Bulgaria, while in Poland, Romania and the United Kingdom, the process is limited to test drilling.

However, if Europe is to achieve genuine liberalisation of the gas market, the EU must start acting as a united force defending its own interests. This means that the Union must either diversify its energy mix through unconventional oil and gas or introduce stricter regulation of contracts between energy monopolies and third countries. The result will be a more transparent, more liquid and more beneficial gas market for consumers. Only then will the interests of European citizens not be sacrificed for abstract geopolitical goals or for the sake of the profit of the energy monopoly.

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