To counter Russian influence Europe needs to battle corruption

The EU sought to diversify its gas supplies, particularly since a cut-off in 2009, but efforts to develop new pipelines floundered

epa07134646 (FILE) - European flags in front of European commission headquarters in Brussels, Belgium, 26 June 2018 (reissued 01 November 2018). The treaty was signed on 07 February 1992 and was a milestone on the way from the original European Coal and Steel Community (ECSC) of 1951 to the modern European Union (EU). 01 November 2018 marks the 25th anniversary of the coming into force of the Treaty of Maastricht.  EPA/OLIVIER HOSLET
Powered by automated translation

Two new Russian gas pipelines are tracing across the map of Europe. The US Congress says they “put at risk the security of Nato” and is preparing sanctions on companies that install or finance the lines. But if some see them as the chains of servitude, then who is binding who?

Nord Stream II runs under the Baltic Sea directly to Germany. Turkish Stream will cross the Black Sea to European Turkey, supplying both the key market around Istanbul and neighbouring countries such as Bulgaria. The two pipelines are being built to bypass Ukraine, where in the post-Soviet period, Russia has repeatedly shut off supplies in politicised disputes, complaining of non-payment.

But neither line will be ready as planned by the end of this year and, even once they are, high winter demand means government gas giant Gazprom still needs some Ukrainian transit. The expiry of its contract on December 31 raises concerns of another termination of gas flows to Europe.

The EU has sought to diversify its gas supplies, particularly since a cut-off in 2009, and then with Russian pressure on Ukraine following the annexation of Crimea. With Europe’s own output shrinking, efforts to develop new pipelines from Turkmenistan, Iran, Iraq or Egypt foundered on American sanctions, political obstacles and a lack of available gas. In the end, only the modest Trans-Anatolian pipeline has moved ahead, running from Azerbaijan across Turkey and linking to another line under the Adriatic to Italy. North African supplies also look uncertain because of dwindling exports from Algeria and the security vacuum in Libya.

Meanwhile, Russia has backed anti-shale gas environmental campaigns in Europe, and through various vehicles established strategic positions in gas-producing areas around the continent’s periphery. Arctic liquefied natural gas (LNG) player Novatek, controlled by Putin allies Leonid Mikhelson and Gennady Timchenko, has acquired exploration blocks off Lebanon. State champion Rosneft, chaired by presidential confidant Igor Sechin, took 30 per cent of Egypt’s giant Zohr field in 2017, and agreed to build a gas pipeline from the autonomous Kurdistan region of Iraq to Turkey.

Yet in these cases, it is unclear how much the firms were acting to support Russian gas policy, perhaps by actively frustrating or diverting competing supplies; how much in rivalry with Gazprom; and how much just pursuing attractive commercial opportunities.

Europe’s strategic gas situation is far better than a decade ago. The share of Russian gas in total consumption is expected to increase from about 31 per cent today to 42 per cent by 2040, according to BP. But overall European gas demand is set for a slow fall, replaced by renewables and improved efficiency. Russia knows that higher prices or more supply disruptions will lose it market share.

The high proportion of Russian gas does not equal “dependency”: Europe has built LNG import terminals well in excess of demand. Facilities in Lithuania, Poland and Croatia will serve markets otherwise reliant on Russian supplies or bypassed by Nord Stream. Even Germany, the pipeline’s terminus, is hedging its bets with at least two LNG import points. New interconnections allow gas to flow back east, so that Ukraine can be supplied in case of a Russian cut-off, keeping Kiev aligned with Brussels.

A glut of LNG has sent prices as low as $3.6 (Dh13.2) per million British thermal units, compared to the $6.4 Gazprom expected to receive for its European gas sales this year. The price has dropped largely because of the aggressive expansion of US exports, but also Russian, where Novatek’s Arctic LNG plant has jumped ahead of Gazprom’s slow-moving LNG strategy.

Moscow depends on the European market more than vice versa. Costly fixed infrastructure and long-term sales contracts set the pattern for decades: Nord Stream II will cost €11 billion (Dh45bn) and Turkish Stream some €6bn. Gazprom has also lavished $55bn on the Power of Siberia pipeline to key growth market China, but sales here reap it only about half the profits per cubic metre of those to Europe. At some point, a post-Putin Russia may grow wary of its bigger eastern neighbour and gravitate to the European orbit.

Russia’s economy is the size of Italy’s, not an economic powerhouse. Eighty-five per cent of its exports are natural resources: oil; gas; minerals; and agricultural products. Its population, barely a quarter of the EU’s, is in slow long-term decline. International respect is paid to Russia because it has nuclear weapons and looks big on a map.

Meanwhile, US sanctions have been portrayed as some kind of noble attempt to save the Europeans from themselves. In May, its Department of Energy referred to exporting “molecules of US freedom”.

But they are futile – Nord Stream II is already two-thirds complete – and likely further to sour relations with its erstwhile allies. They reflect, in fact, two imperatives. Firstly, there is the mercantile instinct to exclude a competitor to US LNG exporters, who are locked out of China by retaliatory tariffs. In turn, those LNG exports might become a trading chip in a future round of trade wars with the EU.

Secondly, domestic American politics require appearing “tough on Russia”, to compensate for the limp response to Moscow’s election subversion and Donald Trump’s humiliating obeisance to Vladimir Putin at last June’s Helsinki summit.

The Kremlin has extended its financial tentacles, allegedly funding far-right politicians such as Italy’s Matteo Salvini, backing Brexit, and co-opting even former mainstream politicians. Germany’s former chancellor Gerhard Schröder has moved from advocating Nord Stream when in office, to chairing the project company.

The danger for Europe is not physical dependence on Russian gas but – as with America - the undermining of institutions, public trust and honest media and the fracturing of the core alliances of the EU and Nato. Berlin and Brussels need to build a wall against corruption but keep the doors of commerce open.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis