Europe’s Thirst for Russian Gas: An Addiction Unlikely To Wane (Part 1)

The Russia/Ukraine conflict has been a topic of growing concern for the Western World in the past month, especially for Europe. Vladimir Putin has discovered a chink in his western neighbors’ armor and is now exploiting it to his advantage. Europe’s severe dependence on Russian natural gas, a majority of which is supplied through the Brotherhood pipeline that runs through Ukraine, has allowed Putin’s annexation of Crimea to go largely unpunished. If Russia were to suddenly cut off the supply of gas to Ukraine, European gas prices would skyrocket, hurting households and firms across Europe– a risk that European leaders are unwilling to take. Even though Putin has little incentive to cut supply off in the long term (the EU’s purchases of Russian gas make up 3% of Russia’s total output), it is not stopping him from using it as an effective short-term threat while the conflict with Ukraine unfolds.

In a previous post, I discussed some of the potential long-term effects of the crisis, predicting that Europe will make an effort to rely less on Russian gas in the future by increasing demand from alternative sources (Norway, Algeria, and LNG). However, after reading a recent Economist article,  “Conscious Uncoupling,” I am convinced that Europe’s addiction to Russian gas will remain strong in both the short and long term. The combination of (1) an already developed infrastructure, (2) a lack of viable alternatives, and (3) a growing European demand for gas reveals that a large enough economic incentive can successfully overshadow political conflict.

1.    The Infrastructure Problem

The transportation of gas from one region to another requires a significant amount of infrastructure. Everything from pipelines to processing plants to storage facilities need to be built and then maintained regularly. An already developed natural gas transportation infrastructure between Europe and Russia is the primary reason Europe will continue to buy Russian gas. It is simply too costly for European countries to stop using the already built pipelines, especially when, as is the case for Lithuania, Estonia, and Latvia, these pipelines are the country’s only source of natural gas:

natural_gas1

Adding to the infrastructure argument is that even if Russia were to completely cut off supply to the Brotherhood pipeline, its workload would likely be redirected to other pipelines that run from Russia to Europe. As I mentioned in my previous post on this topic, the Nord Stream pipeline through the Baltic Sea to Germany and the Yamal pipeline through Poland and Belarus offer the EU alternative methods of importing gas from Russia.

Furthermore, many alternatives to Russian gas, such as American shale gas, face infrastructure concerns as well. As the Economist article points out, investors may be wary of the large, potentially unjustified startup capital necessary to begin importing shale gas into Europe:

Private-sector investors may be chary of putting money into costly terminals that risk not being used if Europe slips back into accepting more cheap Russian gas.”

And even if European demand for shale gas was guaranteed, lobbyists in the U.S. government could attempt to stop the export of shale gas in an effort to keep domestic prices low.

In the next blog post I will analyze two other reasons for Europe’s long term dependence on Russian gas: a lack of economically viable alternatives and a growing demand for gas in general.