The geopolitics of European Energy Security

Photo credit: Audio und werbung / Shutterstock

The current geopolitical changes have been expected for a long time. The Russian invasion of Ukraine is transforming the social and economic pillars of security in Europe. That is why at the EU Summit on March 10 and 11 in Versailles-France, the debate focused on strengthening military defense and energy security throughout the continent. The invasion of Ukraine by Russia forces the EU to address the interrelated economic and security challenges that allow it to develop contingent strategies on energy dependence on Russia and the impact of inflation that this may generate.

Up until this point, the European Union has limited all bank transfers made in the SWIFT system, has imposed tariffs on imports, and has announced its intention to become energy independent from the Russian supply of fossil energy by 2030. However, in over two months of conflict, these measures have failed to produce their intended results. The Putin government has managed to turn the foreign exchange market in its favor. Europe and a good part of the Asian countries continue buying Russian gas and oil, no longer in dollars but in rubles, which are being backed by the gold exchange requested by the Russian central bank for the purchase of Russian energy.

While they have failed to put a stop to Russia’s aggressions, the measures have significantly affected the energy supply of E. U., and have forced its members to consider their dependency on Russian oil and gas. While the extent to which EU countries rely on Russian energy supplies varies, with Germany (which according to Bloomberg relies on Russia for half of its gas, half of its coal, and a third of its oil) being especially dependent, overall the numbers are staggering.

Against this background, the European Union has been developing several strategic plans to mitigate the impact of changes in trade policy on energy security. One of them is the REPowerEu plan that the European Commission has been developing in order to increase the resilience of the energy system. The plan is based on two pillars, the first is to diversify gas supply from larger LPG imports from non-Russian suppliers. The second strategy is to enhance the import of biomethane and renewable hydrogen, to progressively reduce the use of fossil fuels, and promote the development of renewable energy sources. The European Union anticipates these measures to have swift results:

“By the end of this year, we can replace 100 bcm of gas imports from Russia. That is two-thirds of what we import from them. This will end our over-dependency and give us much needed room to maneuver. Two thirds by the end of this year. It is hard, bloody hard. But, it is possible, if we are willing to go further and faster than we have done before. REPowerEU is our plan to make Europe independent from Russian gas”[1].

The E.U. already has a contingent gas supply plan for next winter, which will avoid cost overruns in the Union's tariffs due to the low demand for gas in the spring and summer seasons. By the end of April, the European Commission proposes to present a legislative proposal that will increase the minimum gas storage level obligation to 90% before October.

As previously noted, the European Parliament has also suggested an increase in renewable energy as a means of achieving oil and gas independence from Russia. To strengthen the renewable energy pillar, the EU intends to launch energy decarbonisation programs. In this regard the commission says :

“The REPower EU plan could accelerate the deployment of innovative hydrogen-based solutions and cost-competitive renewable electricity in industrial sectors. The Commission would bring forward the implementation of the Innovation Fund in order to support the switch to electrification and hydrogen, including through an EU-wide scheme for carbon contracts for difference, and to enhance the EU’s manufacturing capabilities for innovative zero and low carbon equipment, such as electrolysers, next generation solar/wind, and other technologies.”[2]

Such programs plan to boost biomethane production to 35 bcm by 2030. They also seek to boost hydrogen production and imports to 20 million tonnes by 2030, and to promote energy savings across the EU, for example by lowering the thermostat for heating buildings by 1°C, saving 10bcm. Solar energy is also envisioned to play an important role; for example, the union will seek to subsidize more frontal loads of solar panels.

Despite the development of these diverse strategies, it is undeniable that the energy situation in Europe is becoming more complex. The energy risk from part of the European Union can be seen in the increase in TTF prices that reached an all-time high last month to impose obligations on the member states on gas savings for next winter.

It is not just the EU whose vulnerabilties in energy security have prompted to explore new strategies. The United States has itself attempted some novel geopolitical manouvers. On March 7, some White House trade representatives traveled to Caracas where they had a conversation with Venezuelan President Nicolás Maduro. The meeting discussed issues such as the reopening of oil imports to the United States, which still prevents the Venezuelan government from negotiating oil prices, which represent 96% of the income of the US market.

Likewise, the high representative of the European Commission Josep Borrel held a meeting with delegates of Venezuela’s governments in Turkey, where they negotiated essential points of the economic blockade imposed by the Union on Venezuela to Venezuelan oil. However, after the blow to its country’s economy, the Venezuelan government has no other way out but to take advantage of the looming energy crisis.

Another contentious meeting spurred by the need to secure energy supplies was held on April 6th, when German Foreign Minister Olaf Scholz met with Colombian President Ivan Duque, in order to strengthen coal imports to Germany. This agreement violates the environmental agreements signed in the South American country on the care of aquifer reserves that will be affected by the massive exploitation of carbon.

For its part, the European Union held a bilateral meeting with its former OPEC partners. On April 11, the European Union energy commissioner Kadri Simson met with Mohammed Barkindo (OPEC Secretary General). During the meeting, Barkindo was specific and pointed out that the production of oil and gas by the states affiliated with OPEC will seek to massify the energy trade. The European Union has also made it clear that, in the face of this trade war with the Russian government, it will not only seek to have other sources of supply, but also strengthen the market for hydrocarbons from the East.

Despite the diversity of strategies being developed, it is clear that the EU’s dependence on Russian oil and gas poses a clear challenge, one that over the next months the EU will have to take on in elaborating its energy transition. Apart from involving internal infrastructural development (such as within the field of renewables), this energy transition has shuffled the geopolitical cards a bit, with old enemies being courted as new oil and gas suppliers. Old enemies, new business partners?

It remains to be seen whether the new trade relations in energy matters will reduce the energy gap that is causing the conflict in Ukraine or whether a multilateral agreement would be necessary to put an end to a war that will have high collateral costs.

On the other hand, European energy companies continue to negotiate mechanisms that allow payments to be made under conditions that also satisfy Russia's interests. For this reason, the European Commission clarified that payments for Russian natural gas made in euros or dollars would not constitute a violation of the sanctions imposed on Russia if the country considers the contractual obligations of European buyers. However, as soon as the sum is paid in the corresponding foreign currency, the supply of Russian oil and gas will be terminated, which implies two dilemmas: continue to buy hydrocarbons in rubles or accelerate bilateral negotiations with new suppliers?

Meanwhile, the trade war continues to put at risk the monetary base of the euro and the energy security of those of us who inhabit the European continent. The transition is necessary, but its cost will impact the economy of the most vulnerable.