Russia caught the world off guard when it sent soldiers into Crimea on Feb. 28. Europe considered economic sanctions against Russia, but ultimately targeted only a few government officials. This was considered a weak response, but the European Union relies too heavily on Russian gas to have taken it further.
Natural gas from Russia flows into the EU at a rate of $100 million every day, about a quarter of the bloc’s total demand. One-third of this moves through pipelines in Ukraine. In the wake of the instability through the region, Western powers — the EU backed by the United States — have raised the search for new sources to a high priority. The immediate effort focuses heavily on Ukraine itself.
“It really boils down to this: no nation should use energy to stymie a people’s aspirations,” said U.S. Secretary of State John Kerry. “So we are taking important steps today in order to make it far more difficult for people to deploy that tool.”
The sense of urgency was heightened when Russia raised the price of gas to Ukraine by a third. To cover this, gas has been promised to flow back into Ukraine from pipelines that typically send the gas west, originating from liquified natural gas terminals in Croatia — an expensive option. But for the long term, the search is on for a more affordable option.
The focus of the search has turned to Poland, where reserves of natural gas are vast and largely untapped. There’s enough to supply the nation’s needs for 65 years. Chevron has already inked a contract to explore the southwest corner of the nation, and more exploration is expected. But Polish Prime Minister Donald Tusk has even bigger plans.
Visiting a new natural gas storage facility in Husow on March 31, Tusk said, “Thanks to investments such as at Husow, it would be hard to blackmail Poland today with the threat of having its gas cut off.”
This facility is a small start to Tusk’s call for an “Energy Union” that would wean the EU off of Russia completely.
“Taking into account the danger of potential gas crises, we should construct more effective mechanisms for ‘gas solidarity’ in the event of a crisis in gas deliveries,” Tusk said in early February. The proposal is for up to one-third of the infrastructure in pipelines and other facilities to be paid for by the EU.
The problem for Poland is that most of the country’s reserves would have to be released by hydraulic fracturing, or fracking, a method that has been known to have disastrous environmental impacts here in the U.S. European environmentalists are alarmed by the rush to develop the gas fields.
“Despite the Polish government’s glossy propaganda, Polish people have not bought the alleged benefits of shale gas and, like the rest of Europe, are rightly sceptical (sic) about the benefits the gas industry claims it will bring,” Antoine Simon, from Friends of the Earth Europe, has said.
“The European Parliament and European Commission recently questioned the European dash for gas and highlighted the numerous high risks associated with the extraction of shale gas. Concerned communities in Poland and across Europe are taking action against this dangerous experiment on health and the environment,” Simon added.
The rush to build new gas infrastructure is hardly unique to Poland, however. The largest non-Russian source of natural gas near Europe is Iran, but decades of isolation — with sanctions tightening dramatically recently over their nuclear program — have not produced the infrastructure necessary to bring it to the EU. There is a new urgency to the talks, however, in part because of the Ukraine crisis.
Turkey is interested in a new pipeline from Iran to Europe, despite the regime of sanctions. Many see this as an important alternative, but officials have not spoken on the record as to the state of the project at this time.
That would naturally worry Iran’s most bitter enemy, Israel, but the discovery of a large gas field off the Israeli coast has put it into play as a potential source of gas for Europe, too. This could include a pipeline to Turkey, if relations between the nations normalize. Turkish Foreign Minister Ahmet Davutoglu said, “Progress has been made to a great extent, but the two sides need to meet again for a final agreement.”
He also cited “[a] positive momentum and a process in a positive direction.”
To sweeten the deal, Israel has reportedly turned to Turkish companies for bids on the gas pipeline on the floor of the Mediterranean.
But Israel is far from the most distant and difficult potential source of natural gas for Europe. Canada’s vast fields in Alberta may be thousands of kilometers away, but the government is looking into liquefied natural gas stations that could bring it to Europe.
“I think, if anything, it underlines the importance of moving ahead responsibly on the export of not just our oil but natural gas,” Canadian Foreign Affairs Minister John Baird said of the Ukraine crisis.
“And it’s an important reminder that opportunities are not all exclusively south of the border or to the Asia-Pacific region but also to our traditional allies in Europe,” Baird also noted.
This global hunt for a natural gas alternative begs the ultimate question: what if it is successful and Europe no longer needs Russian gas? Nearly all of that gas is delivered by Russia’s state-owned Gazprom, which, until recently, was the most profitable company in the world. It comprises 10 percent of Russia’s GDP and the profits provide half of Russia’s federal budget.
“Gazprom is a champion in value destruction,” according to Ian Hague, a manager of many Russian stocks for Firebird LLC. “It’s not just Gazprom that failed to achieve its goal of increasing market capitalization. It’s Russia who failed. It failed to create an environment where state-owned companies would function as shareholder-owned entities.”
As investors turn away from Gazprom and Europe finds alternative sources of natural gas, Russia may find itself in serious financial trouble. The scramble for new sources of natural gas for Europe ultimately shows how precarious the arrangement was for both sides and puts a potentially very high price tag on Crimea for Russia.