Why Europe’s options for diversifying its energy supplies are strictly limited

CONFLICT in Ukraine has added another major geopolitical risk for energy markets in 2014. Gazprom’s cancellation of gas price discounts in Ukraine at the start of April significantly raises the risk that Russia will use short-term gas supply cuts for political leverage. While a short-term disruption this spring or summer would have muted market impact in Europe, in the event that tension escalates, more significant cuts to Russian energy exports could follow.

Some EU member states are more dependent on Russia than others, with countries in the Balkans and in southern Europe particularly exposed to cuts via Ukraine. But even those that have more diversified energy supplies are exposed to volatile market conditions in the event of a supply disruption.

In considering alternatives, pipeline gas options are limited and boosting liquefied natural gas (LNG) imports would add significantly to European end user energy bills. Since rising energy bills and falling industrial competitiveness are already major concerns, EU leaders hope to avert any supply disruption.

Regardless of the outcome of the Ukraine conflict, energy policy priorities have shifted in Brussels. In late March, the European Council directed the European Commission (EC) to devise, by June, a plan to reduce energy dependency, while postponing planned discussion on 2030 climate and energy targets.

A renewed focus on supply security is clearly intended to lower import dependency on Russia. Several gas and power projects are feasible in the next three to five years that will leave Europe better equipped to access alternative supplies, and more confident in negotiating pricing deals with all suppliers – such as new pipeline and transmission interconnections, additional storage facilities, and more reverse flow capacity.

Over the longer term, the crisis in Ukraine has also increased discussion about the role of the US as a new “petrostate”. For now, much of this discussion is overstated or ahead of politics in the US. The country may be shifting in a direction that will promote more exports of gas and oil, but these changes will not have any implications on the timeline for US LNG to enter the global market from 2016. Even then, US sellers will seek the highest price – likely Asia – while European buyers will seek the lowest cost option – likely Russia and other incumbent regional suppliers like Norway.

Will Pearson is director of global energy and natural resources at Eurasia Group.