Energy security- a primarily theoretical concept in recent years that has been made startlingly real by the recent developments in Ukraine. But what could the possible repercussions of this crisis be on European energy policies and our fuel bills?
I had a chance to ask this question during a recent event at the House of Commons, hosted by the APPCCG and Sandbag. The answer surprised me.
According to Baroness Worthington, director of Sandbag and member of the House of Lords, two outcomes are broadly possible.
I had a chance to ask this question during a recent event at the House of Commons, hosted by the APPCCG and Sandbag. The answer surprised me.
According to Baroness Worthington, director of Sandbag and member of the House of Lords, two outcomes are broadly possible.
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| Figure 1: Map of Ukraine |
The first scenario is of a stabilisation of the diplomatic
situation and the emergence of a westward-leaning Ukraine. In this situation,
it is likely that Ukraine might choose to exploit its own natural gas reserves,
estimated to be in the region of 1.1 trillion cubic metres.
Ukraine possesses the 26th largest natural gas reserve in the world,
which is estimated to be more than half the size of the combined reserves of
the EU.
If Ukraine `turns on the taps’, this would solve their
immediate energy dependence on Russia and produce a revenue stream to support
their economy. However, exploiting natural resources on the scale required
would require significant investment, and Ukrainians would have to accept the
change in land use and economic transformations that come with becoming a major
energy exporter.
This optimistic outcome seems open to several criticisms. It’s
unclear at this moment where investment would come from, and whether Russia
would oppose competition in the European energy market. Moreover, can Ukraine
ever completely replace Russia as an energy supplier? For instance, Russia’s
natural gas reserves are around 40 times the size of Ukraine’s.
The second scenario is of a destabilised Ukraine, whose
policies are influenced to a significant degree by Moscow. In this situation,
European nations would need to purchase natural gas in the short-to-medium term
from Russia and Ukraine, and tamely accept price rises and the uncertainty and
energy insecurity that comes with dependence on a foreign nation for energy
supplies.
This second possibility may also be criticised; Russia may
not have further demands after the annexation of Crimea is completed. It may be
the case that Russia wish to return to business as usual as quickly as
possible, and may choose to offer energy supplies on favourable terms to Europe
in order to encourage the resumption of trade and renewed trust.
In my view, both scenarios will result in one predominant
outcome: the loss of trust. It seems unlikely that Russia can regain the trust
of the West quickly; by it’s very nature, trust takes years to accrue and
moments to lose. Energy security will become a much larger talking point in the
next few years if relations with Russia continue to remain cool. Nations that
previously were willing to base their energy supply on foreign gas purchases
will choose instead to pay a price or environmental premium to source those
supplies from more trusted sources.
The nations most likely to make changes to their energy mix
as a result of this crisis are Germany and Poland. Germany’s choice to abandon
nuclear fission after the Fukushima crisis leaves them slightly more vulnerable
to a loss of fuel supplies from abroad, and they may choose to shift further
towards renewables, or attempt the politically difficult U-turn of returning to
nuclear power. Poland uses natural gas and coal to power much of its economy, a
significant portion of which is purchased from Russia. Since the fall of the
Soviet Union, Poland has been consistently suspicious of Russia, and may decide
that now is the time to reduce or remove their dependence on Russian supplies.
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| Figure 2: DECC figure for natural gas supplies by source, 2010-2013 |
As for the fuel bills of UK consumers, it’s unlikely that we
will see any immediate effects. If sanctions on Russia are imposed, this may
raise gas prices worldwide, but the UK does not directly obtain its supplies
from Russia. The most likely change to the UK’s energy mix will be one that was
on the cards already- an expansion in the exploitation of shale gas. Using energy
security as a primary argument, supporters of shale gas may now find it easier
to convince others that fracking and onshore gas exploitation should continue
or be accelerated.
Perhaps the Ukraine crisis will be the public relations coup
the shale gas industry has been looking for.
This blog is written by Neeraj Oak, Cabot Institute.
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| Neeraj Oak |