The New Commission: Managing and Optimising the EU’s Natural Gas

Written by Loyle Campbell (Editor in Chief of the EST)

There are many challenges and obstacles facing the incoming European Commission (EC) regarding energy and the environment. With the successful election of United Kingdom’s (UK) Prime Minister Boris Johnson, Brexit is inbound and likely to cause a wide series of big changes for the European Union (EU). While this is progressing, the EU appears to be caught in the middle of superpower politics of gas developing between the United States of America (US) and the Russian Federation. As these two powers compete for access to the EU’s natural gas market, the EC will play an important role in mediating between them. While doing so, the Commission must prioritise transitioning away from coal and finding a balance that is both optimal and socially sustainable for all of the EU’s Member States. In this brief, I will make an analysis of these developments and provide policy suggestions on how the Commission should respond to ensure the EU’s energy security. 

One of the most imminent concerns facing the new Commission is the composition of the EU’s natural gas market. The EU-28 is the largest importer of natural gas in the world and is well known for its dependency issues on imported gas (Grigas, 2017). Considering that the EU has few domestic reserves to utilise and that EU’s gas production is declining, it is not surprising that, in 2018, 15 Member States had a natural gas import dependency higher than 90% (Eurostat, 2019). This is concerning for the EU’s energy policy because high import reliance remains a critical obstacle in achieving energy security for the Union. Energy security, as broadly conceptualised by American energy expert Daniel Yergin, can be defined as the “protection of the entire energy supply chain and infrastructure” (2006, p. 77). While this broad definition encompasses energy suppliers and consumers, the EU follows a security of supply mindset, which prioritises the timely and uninterrupted delivery of energy to consumers at the expected price, quality, and quantity (Ibid.). This is the case, because the EU is dependent on energy imports (Ibid.). For both the broad and security of supply definitions the key to reaching energy security is through diversification of the routes, sources, and suppliers within your energy portfolio (Ibid.). While the first problem facing the EU’s energy security is high import dependency, the second problem arises because many of the EU Member States have very limited means to diversify their energy routes, sources, or suppliers. When we consider that in 2018 up to 46% of the EU’s natural gas originated from Russia, a country that has a history of disrupting energy supply and changing prices, the Union’s threat to energy security vis-a-vis supply disruption becomes a lot clearer. 

This vulnerability will only increase in the future, especially if we consider the outcomes of Brexit. As the UK leaves the Union, the remaining EU-27 will have the dynamics of their gas markets change dramatically. First, the UK is one of the largest gas markets within the EU and it is one of the least susceptible to Russian pressure, because only 5.16% of the UK’s imports originate from Russia. As the UK leaves, a larger proportion of the total gas consumed by the EU-27 will be imported from Russia. Secondly, the UK is also one of the largest importers of Norwegian natural gas within the EU-28 and as they leave, Norway’s market share –of 30.2% of the EU total (Eurostat, 2019)– will shrink substantially. Thereby weakening the market position of one of the EU’s friendliest suppliers. Thirdly, the UK is the Union’s largest internal gas producer. Once they leave, the EU’s production to import ratio will be even smaller. This will make the Union proportionally more dependent on imports. All three of these factors will shift the supplier proportions of the remaining EU-27’s gas imports to Russia, which will increase the leverage it can exert over the EU’s natural gas supply. 

Beyond Brexit, the completion of the Nord Stream 2 –a pipeline that will connect an additional 55 billion cubic meters of natural gas capacity from Russia to Germany– also raises further vulnerabilities to the EU-27’s energy security (Euractiv, 2019). On one hand, this pipeline may appear to improve energy security because it diversifies the routes coming to the EU-27 and is an important resource to help Germany reduce its greenhouse gases. On the other hand, it also undermines the EU-27’s energy security by making the primary economic engine of the EU more vulnerable to Russian supply disruptions. As was seen in the 2014 annexation of Crimea, this poses a strategical security problem because if Russia were to continue its territorial expansion in the Baltics and Caucuses or run election interference campaigns. Consequently, the EU-27 will be even more reluctant to sanction Russian gas because they would be disrupting their own energy supply. This is crucial because in 2018 energy exports accounted for 65% of all Russian exports (World Bank, 2019) and being unable to target this economic engine greatly reduces the range of foreign policy tools the EU-27 can respond with. Beyond that, the pipeline has also been the source of recent diplomatic tensions between the US, Germany, and Russia (Euractiv, 2019.). American President Donald Trump has used these points as motivation for bluntly slapping sanctions on the European companies involved in this project while also calling for the EU to import more American ‘Freedom Gas’ instead (Ibid.).

Given how Brexit and the completion of Nord Stream 2 will increase Russian leverage over the EU-27’s energy supply, it is quite apparent for the need to aggressively diversify their energy portfolio. To this end, several academics identify North American Liquified Natural Gas (LNG) as an important means to depoliticise Russian gas (Grigas, 2017, p. 6; Marshall 2016, p. 28). In my opinion, President Trump has opened an opportunity to pursue this. The EU is already experiencing an exponential surge of American LNG imports and these projections are only expected to continue climbing (European Commission, 2019b). Beyond this, the Commission has planned, and co-sponsored, a large increase in LNG infrastructure and interconnectors throughout the EU (Ibid.). For this reason, I propose that the European Commission looks at the example set by Poland and encourage other Central and Eastern Member States to sign 5-year LNG trade agreements with the US. Agreements that allow landlocked Member States to access coastal LNG infrastructure via interconnections and that privilege American companies to a certain proportion of their gas imports. If this is coordinated multilaterally at the EU level, these agreements can be leveraged for a condition where the US removes its recently applied sanctions in the hopes of de-escalating the scenario. Doing so will follow the existing import and investment trends the previous Commission has already set and should be economically viable for the EU while also providing President Trump with the concessions that he can push to his political base in the scenario where he gets re-elected. 

Beyond that such agreements will also reaffirm the transatlantic link that underlies European security and transpose this connection to energy security as well. It will show that, while the EU is open for business with Russia, their long-time American ally is not that far away. Moreover, incorporating American LNG into Central and Eastern Europe’s energy mix will increase the EU’s energy security by diversifying routes, sources, and suppliers to a part of the EU that is especially reliant on Russian pipe-gas imports. Using American LNG to create a degree of market competition in this region should, similar to the Lithuanian case, help lower and stabilise prices while also weakening Russia’s leverage over energy supply. From a foreign policy and national security perspective, this is extremely beneficial because it gives these Member States a means of defense and deterrence against Russian pressure. On one hand, should Russia try to forcibly raise the prices, these States can import more LNG which will divert revenues away from Russia. On the other hand, if these States disagree with a Russian action they can also lean more on LNG as a way to economically sanction the behaviour they disagree with. With this deterrence and defense mechanism added, Russia will become less willing to pursue national interests via its energy exports.

Outside of these agreements, the EC has a crucial role to play in helping the EU find an optimal balance between Russian pipe-gas and American LNG. While American LNG is important for diversification and creating market competition, it will never be economically viable to fully replace, or even really challenge, the dominant market position of Russian pipe-gas. Optimising the balance between these two is especially important for the EU to reach its climate targets because the two Member States that consume the most coal –Germany & Poland– have different perspectives on how to incorporate natural gas into their energy portfolio. With Germany being much more open to Russian imports and Poland being diametrically opposed to this, these two countries must not lose sight of the ultimate objective: to reduce the CO2 emitted from their electricity generation. For this reason, the European Commission should actively moderate between both strategies and help each country reach its optimal supplier to phase out coal. For Poland, this can be clearing additional European funding to finance LNG storage facilities near the LNG terminal in Świnoujście and for Germany, this can be leveraging American LNG import agreements to resolve the diplomatic tension raised by President Trump.

While rapidly transitioning from coal to renewables and gas is a crucial step for the EU’s climate targets, the EC must be mindful of the social pillar of sustainability. The most commonly agreed-upon pillars of the sustainability framework are economic, environmental and social, with the social pillar being concerned about how society supports and accepts the transition being made (Purvis, Mao & Robinson, 2018). It is absolutely vital that as the transition progresses the changes being made have the support and a social license from the broader society, especially the communities most affected by the changes. For this reason, the new ‘European Green Deal’ incorporates a “Just Transition Mechanism, including a Just Transition Fund, to leave no one behind” (European Commission, 2019a, p. 16) that will make up to €100 billion available to be invested into the communities and regions most affected by the transition (Apelblat, 2019). It is my suggestion that this mechanism pay particular attention to the communities for whom fossil fuel activities –such as coal mining– generate significant income. By targeting these communities, and their respective fossil fuel labour forces, with proactive reskilling programs two potential problems for the EU’s energy security can be addressed simultaneously. 

Firstly, these communities can generate strong political backlash if they feel like they are being forgotten or that their jobs will be lost and not replaced. If they have employment opportunities made available in other sectors, they will be more supportive of the transition and less likely to pressure governments, or support candidates who would reverse environmental policies. Preventing any possible policy reversal is a crucial component for a long-term policy consistency that does not get obstructed by a change in government. This is important because environmental commitments and energy transitions unfold over multiple election cycles and the only way to reach them is through a continued approach. If any of the EU’s Member States were to begin experiencing a strong reversal on environmental policy and commitments, they would be able to greatly hamper the Union’s ability to set and reach its consensus-based emission targets. 

Secondly, job growth in the renewable energy sector is quite high and expected to grow substantially in the EU as the climate targets are raised (IRENA, 2019). However, this kind of rapid sector growth can be restricted by the skilled labour force available to meet the growing demand. The EU is currently facing a chronic skill mismatch in a wide variety of sectors and the renewable sector is a part of this trend. Some news reports even suggest that “Skilled workers shortage could stall Germany’s progress on climate targets” (Stam, 2019, para. 1). While fossil fuel workers, might not have the exact skills required for the renewable sector, they are manual and skilled labourers by trade and can serves as a strong addition to any workforce. If fossil fuel workers can be reskilled to the renewable sector, a sectoral imbalance in skilled labour can be avoided and cross-sectoral stability during the transition can be reached. Which will ensure that the energy transition and the renewable industry’s growth will not be slowed or stalled by labour shortages.

Addressing both of these issues before they develop is crucial for the EU’s energy security because it will help stabilise the energy transition and policy at a level that is socially acceptable and supported by the local communities heavily impacted by the transition. Beyond that, they go hand in hand to ensure that at the national and supranational level the EU’s energy and environmental policy has long-term consistency that meets market trends and projected sectoral changes. This policy and political stability are a strong incentives for investors who need sound long-term projections before they invest the billions needed to make the energy transition possible.

In conclusion, the new EC faces several substantial changes to the EU-27’s energy security. As Brexit and superpower politics play out in the natural gas market, the Commission will have an important role to play in balancing these developments. By mobilising the EU’s multilateral capacities it can help multiple Member State’s leverage LNG import negotiations as a bloc and dampen the influence of large external players. In doing so the Commission will help the biggest polluters in the EU move away from coal to a cleaner and more optimal energy source, while also facilitating a transition that is socially sustainable and not reversed. While this policy suggestion focuses more on the natural gas and coal components of the EU’s energy security, this is by no means an exhaustive formulation of the problems facing the incoming Commission. With this in consideration, I suggest that future research investigates how renewable energy investments can be used as another way to mitigate dependency on natural gas imports and balance the ongoing geopolitical tensions between the EU, US, and Russia.

Loyle Campbell is the current Editor in Chief at the European Student Think Tank. Originally from Canada, he is an Honours student studying a BSc of Political Sciences at the Free University of Brussels (VUB) in Belgium. Prior to his studies, he worked for five years in exploration, production, and well servicing in the Canadian oil field. He has recently been involved in the 2020 London International Model United Nations as the Director of the UNEP and as the student workshop coordinator for the VUB’s 2020 PeaceJam youth conference on Climate Change and Sustainable Development.

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