Cohen: Europe’s Strategic Dependence on Russian Energy

Ariel Cohen of the Heritage Foundation has published an important new energy paper examining what needs to be done to solve Europe’s near total lack of coherence on a common energy security policy. The familiar trends and patterns of Russia’s energy policy disaggregation, cooperation and co-optation are once again in evidence. Excerpts from Cohen’s paper about how the Kremlin works to lock in demand, lock in supply, and eliminate competition can be found after the jump. It’s no big surprise that Austria plays a key role in strategy energy dependency.


Locking in Demand. Russia is attempting to lock in demand by signing long-term bilateral and multilateral contracts with European countries. Moscow prefers to deal with the EU member states separately rather than as a group so that Russia can price-discriminate among its customers, charg­ing each country as close to its full paying poten­tial as possible.Gazprom has negotiated long-term supply con­tracts with most Western European countries, including France, Germany, Italy, and Austria. Rus­sia has contracted for portions of Central and East­ern European demand that are much greater than that of Western Europe. Newer EU members, such as Slovakia, Bulgaria, and the Czech Republic, are almost entirely dependent on Russian gas.More recently, during President Vladimir Putin’s May 2007 visit to Austria, the Austrian government agreed to a major deal with Gazprom. OMV, a par­tially state-owned Austrian energy company, signed a long-term gas import deal with Gazprom. Under the agreement, Gazprom subsidiaries GWH and CentrexEurope Energy and Gas will begin to deliver gas directly to Austrian consumers in 2008. Current imports from Russia account for approxi­mately 70 percent of Austrian gas consumption. Gazprom is scheduled to deliver 6.8 bcm of gas in 2007 and 9 bcm in 2009. This agreement would practically integrate Austria’s gas transit and storage networks (existing and planned) into Gazprom’s expanding network of dependencies.Moreover, Gazprom intends to use Austria as a transit corridor to capture other EU markets. It is planning to develop a Central European Gas Hub and Gas Transit Management Center, the largest in continental Europe, at Baumgarten near Vienna. In July 2007, OMV announced its intent to take over MOL, a private Hungarian energy company, which will further strengthen Russia’s grip on Euro­pean energy infrastructure.Locking in Supply. Russia’s second tactic is to lock in supply by consolidating its control of strate­gic energy infrastructure, most notably pipelines, throughout Europe and Eurasia. Rus­sia is using outright ownership and joint ventures to control supply, sale, and distribution of natural gas and is buying up major energy infrastruc­ture, such as pipelines, refineries, electric grids, and ports.In 2002, Russian state-owned Transneft attempted to gain control of the Mazeikiu Nafta refinery in Lithua­nia and the Ventspils oil-export ter­minal in Latvia. When the two governments refused to sell their stakes to Transneft, Moscow sharply cut oil deliveries, forcing Ventspils to obtain oil by rail. Russian pursuit of the Lithuanian refinery was cut short when the Polish company PKN Orlen bought the refinery in 2006, but Moscow is still pursuing the Latvian terminal. As recently as May 2007, a top Ventspils executive said that “the company was prepared to take on a strategic Russian investor.”As of 2004, Gazprom had in­vested $2.6 billion in 23 major joint ventures, including buying a 50 per­cent stake in Slovrusgaz in Slovakia, 48 percent of Europol Gaz in Poland, and 30.6 percent of Eesti Gaas in Es­tonia. Russia is also buying up stra­tegic infrastructure companies in Georgia, Hungary, and Ukraine. In 1998, Gazprom took over shares of Topenergy, a Bulgarian company dealing with commercial distribu­tion of gas.Russia is also aggressively consoli­dating its control of European pipe­lines. The Kremlin has actively opposed Western-controlled pipeline projects directly linking Eurasian energy-producing countries to Euro­pean markets, such as the Baku– Tbilisi–Ceyhan oil pipeline and the Baku–Erzurum gas pipeline.Earlier in 2003, German Chancel­lor Gerhard Schroeder and President Putin agreed to build a Nord Stream pipeline to supply Germany with Russian gas. The pipeline will cross the Baltic Sea and bypass Ukraine, Belarus, and Poland. (See Map 1.) It will have an annual capacity of 27.5 bcm of gas and is expected to become operational by 2010. Gazprom owns 51 percent of the North Euro­pean Gas Pipeline Company, which was created to build the pipeline’s underwater section. This pipeline will further tie European energy security to the Kremlin….Derailing Competition. On June 23, 2007, Gaz­prom and Italy’s ENI signed a memorandum of understanding to build the South Stream gas pipe­line from Russia to Italy. This pipeline will have a capacity of 30 bcm per year and will run across the Black Sea from Russia to Bulgaria, bypassing both Ukraine and Turkey. From Bulgaria, the pipeline could run either southwest via Greece and the Adri­atic Sea to southern Italy or northwest via Romania, Hungary or Austria, and Slovenia to northern Italy. Through ENI, Gazprom has gained access to Italian distribution systems and consumers.The South Stream pipeline will increase EU dependence on Russian energy and compete directly with the Nabucco gas pipeline project backed by the EU and U.S. The Nabucco pipeline was expected to transport gas from the Caspian basin to Europe via Turkey, Bulgaria, Romania, Hungary, and Austria, benefiting all 27 EU member countries. However, its chances are shrinking as Gazprom is building up influence in Europe and reaching agreements on alternative routes. South Stream also rivals the proposed extension of the EU-backed Baku–Erzurum gas pipeline via Turkey, either connecting to the Nabucco pipeline or con­tinuing on to Greece and Italy.