EU soul-searching over Russian gas vulnerability

Europe's dependency on Russian gas will be at the heart of summit talks starting Thursday as EU leaders weigh up action to match their outrage over Moscow's annexation of Crimea. Over a quarter of the gas used by the European Union comes from Russia and nearly a third of that is piped through Ukraine, making households and industry dependant on Russian goodwill and Ukrainian infrastructure.   For a handful of EU countries -- Finland, Poland, Hungary, Slovakia, Bulgaria and the Baltic states -- Russia's state-controlled gas colossus Gazprom is virtually the sole provider. If the EU and Russia were to escalate tit-for-tat sanctions leading all the way to gas supply disruptions, the EU would have a lot to lose -- a point not lost on many European leaders. Slovakia's Prime Minister Robert Fico for instance warned as he headed to the summit that any energy-related embargo "would be lethal to the Slovak economy." However, an escalation of sanctions could hurt the Russians more than the EU. A paper released recently by the Centre for European Policy Studies (CEPS), a Brussels think tank, claimed Moscow was "more dependent on export revenues from its gas than the EU is on gas imports from Russia." The EU takes 53 percent of Russia's annual gas exports, sliding an estimated $24 billion (17 billion euros) into state coffers. According to the Bruegel think tank, any disruption to that cash flow as a result of sanctions from either side could be crippling for both Russia's national budget and Gazprom's bottom-line. - Gas dependency grows - Yet even the threat of a disrupted gas supply could have significant long-term implications for Gazprom if the EU is spooked into finding ways to further reduce its dependance on Russia. That is exactly what happened after the 2009 gas dispute between Russia and Ukraine that resulted in gas shortages across Europe prompted the EU to change policies to diversify its sources of natural gas and better manage its supplies. According to Eurostat, the EU’s bureau of statistics, in 2003 Russian gas accounted for 45 percent of the bloc’s gas imports, but by 2012 that had been cut to 31.9 percent. However the EU will face difficulty reducing it further as domestic supplies from the North Sea begin to decline, North African supplies have been disrupted and Middle East suppliers of liquefied natural gas have turned to more lucrative Asian markets. In fact, according calculations made by AFP based on data from Eurogas, an association of European gas companies, Russia's share in EU gas imports jumped to around 40 percent last year. That reality may firm up the resolve of EU leaders to find alternatives to Russian gas and explain why energy issues are likely to dominate the agenda of this week's Council meeting. A senior diplomatic source at the European Council confirmed that having "greater control" of energy supplies is the leaders' top priority, arguing that "if we don't take action, our dependancy (on Russian gas) will increase up to 80 percent by 2035." - Baltic vulnerability - While many of the EU’s eastern members are susceptible to Russia’s whims in cutting gas supplies, none are more vulnerable than the three Baltic states: Lithuania, Latvia and Estonia. While all three have been EU members since 2004, the natural gas infrastructure in place is a legacy of the Soviet era in which the region was supplied entirely by the state gas monopoly. There are no gas pipelines connecting the Baltic states with the rest of the EU, and in the past Gazprom has used its role as monopoly supplier to throw its weight around.   In 2012, the company imposed a dramatic gas price hike on Lithuania, on the grounds that its implementation of EU-mandated reforms of the energy sector could harm Gazprom's interests. Those high energy prices remain in place today, with Lithuania paying between 30 and 40 percent more for Russian natural gas than the EU average, with Estonia and Latvia not far behind. "The EU is taking our concerns seriously, but it is up to us, to our actions, to address this -- we need to find a solution" a senior Baltic diplomat said ahead of the leaders' meeting in Brussels. The problem for the Baltic countries is that to build the required infrastructure takes time, and there are a number of projects slated for EU support which are not yet off the drawing board. But Lithuania in particular is hoping that a floating LNG terminal which will be ready soon will allow it to import natural gas from other sources, meaning it could be resupplied by sea if the Russians were to halt deliveries. Diplomatic sources said Baltic countries are now hoping that the United States will make its increased production of shale gas available to EU markets "as a matter of urgency", while also calling for a faster implementation of EU gas projects.