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Gas Geoeconomics in Europe: Make Russia a "Normal" Gas Supplier Again

Russia’s leader Putin shakes hands with Hungary’s leader Orbán.

To protect Europe from Russian gas coercion, the U.S. should take the unorthodox step of investing in European gas infrastructure, write Gabriel Collins and Anna Mikulska of the Baker Institute’s Center for Energy Studies. Such a “geoeconomics-based strategy” would help blunt and deflect the Kremlin’s gas wedge.

The U.S. should ramp up its energy diplomacy in Europe and help better insulate our European partners from Russian gas coercion. Gas supplies are a powerful tool of geoeconomics–using “economic instruments to produce beneficial geopolitical results.” To date, Moscow has dominated this game.

The shale revolution offers Washington and its partners an opportunity to right the balance and further harness the benefits of globally abundant natural gas. European consumers’ economic security would benefit—and with it, the Continent’s overall security in the face of increasingly aggressive Russian behavior.

Our new working paper, “Gas Geoeconomics in Europe: Using Strategic Investments to Promote Market Liberalization, Counterbalance Russian Revanchism, and Enhance European Energy Security,” offers U.S. and European stakeholders new and scalable policy options to help achieve at least three key objectives. These are: (1) diversify gas supply sources, (2) make Russia a “normal” commodity supplier that is less able to selectively employ gas supplies as a coercive instrument, and (3) accelerate the liberalization of gas markets in Europe.

An unorthodox supplier

Russia is not a standard commodity supplier. Commodity producers and their customers often disagree about fundamental national interests—witness the 1973 Arab oil embargo against the U.S. and other countries that materially supported Israel during the Yom Kippur War. Yet it is virtually unprecedented for a large commodity supplier to purposely and systematically attempt to undermine national political and governmental institutions in customer countries.

Low-cost, highly available gas supplies are Moscow’s best option to project geoeconomic power from Russia’s western border to the shores of the Atlantic

Russia has done just that for years in Central and Eastern Europe. More recently, the Kremlin has intensified its influence operations in Western European countries, including Germany, France, Italy, and the Netherlands—nearly all of whom are increasing their use of Russian gas.

Low-cost, highly available gas supplies are Moscow’s best option to project geoeconomic power from Russia’s western border to the shores of the Atlantic. But robust U.S.-backed gas geoeconomics strategies can attenuate the influence that Moscow enjoys under the current gas supply architecture, while preserving Russia’s role as a baseload gas supplier.

Liberal and diversified

European policy makers recognize that diversified gas supply sources and liberalized markets can transform gas from a potential lever of political influence into a more run of the mill commercial good.

Indeed, the EU’s Third Energy Package, Connecting Europe Facility, and the EU’s Energy Security Strategy amply reflect this understanding. And for its part, the U.S. State Department’s Bureau of Energy Resourcespromotes “market-based energy solutions” and Washington has funded at least one feasibility study of new gas supply routes in Europe. But to truly succeed, U.S. and European gas security actions must move faster, more decisively, and at a larger scale.

U.S. seed investment could effectively “de-risk” gas infrastructure deals aimed at diversifying supplies to areas where gas markets are underdeveloped and dependent on Russian gas delivery. These investments could also facilitate the entry of private capital by making gas market liberalization—a critical foundation of energy security—a prerequisite to obtaining support.

To that end, the infrastructure would be “molecule indifferent.” Whether the gas passing through the system came from Norway, Qatar, Russia, the U.S., or another supplier would not matter.

In fact, the primary precondition should be that the system would be openly accessible to all freely tradable gas cargoes. A secondary precondition would be that projects must seek to be connected with pipeline networks capable of enabling transnational movement of gas.

Exhibit 1: Priority Zones for Geo-Economic Gas Investments in Europe

As discussed in detail in our working paper, these investments can be executed rapidly and in full compliance with EU law. Potential methods include the use of “forgivable debt” as well as other measures including but not limited to direct financing, “assured payback,” or preferential finance loans.

The probability is rising that Russia will use gas supplies and pricing to divide the political and business communities

These ideas should be urgently considered. Russia’s non-standard behavior arises in part from the basic contradiction between its need for hard currency from gas exports to Europe, and the reality that many Russian political elites—likely including President Putin himself—crave a return to the regional and global influence the Soviet Union once enjoyed. Such nostalgia for the past is essentially inextricable from having a divided—and pliable—Europe.

As such, the probability is rising that Russia will use gas supplies and pricing to divide the political and business communities, dissuade political leaders from taking actions Moscow disfavors, and foment divisions that set the stage for negotiations on Russian terms. A gas geoeconomics-based strategy can help blunt and deflect the Kremlin’s gas wedge.

If executed well, the benefits of a gas geoeconomics strategy could last for decades and bolster European resilience in the face of potential gas coercion by Russia

Admittedly, our gas geo-economics ideas are unorthodox, especially from a modern U.S. and European perspective that emphasizes commerce above nearly all else. It could also be considered ironic that we suggest injecting more state influence—at least upfront and for a short period—in order to pre-empt the corrosive long-term strategic effects of Russia using gas supplies as a wedge issue in Europe.

But if executed well, the benefits of a gas geoeconomics strategy could last for decades and bolster European resilience in the face of potential gas coercion by Russia long after the U.S. jump start money is “sunsetted” out by private funds that would take over in a liberalized gas marketplace.

We expect intense criticism, both from the ideological and practical viewpoints. That is OK. We hope our analysis stimulates a fresh look into new policy options the U.S. and its European partners can potentially leverage as they grapple with an aggrieved and increasingly revanchist Russia.

As Gen. Michael Hayden, former NSA Director, recently told the Atlantic Monthly: “Sometimes you have successful covert operations that you wish hadn’t succeeded.” The ultimate collateral economic consequences for Russian interests of a more robust U.S.-led gas geoeconomics strategy may make Russia’s leadership wish it had not launched the invasion of Crimea, the war in eastern Ukraine, and the influence operations against the 2016 U.S. presidential election and democratic processes across Europe.

By  and 

Gabriel Collins is the Baker Botts Fellow in Energy & Environmental Regulatory Affairs at Rice University’s Baker Institute for Public Policy.

Anna Mikulska is a nonresident fellow for the Center for Energy Studies at Rice University’s Baker Institute for Public Policy.

This article was first published on Forbes.com and is republished here with permission.

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Content Discussion

Willem Post's picture
Willem Post on May 2, 2018

The US is urged to wage a gas war on Russia?
The US does not have enough wars to deal with?

The US LNG delivered to Europe, after re-gasifying, is about $7.5 per million Btu.
The Russian pipeline gas is about $5 per million Btu.
That means US supply is about 50% more expensive than Russian supply.

East European gas pipes ran from east to west prior to 1990, which enabled Russia to charge different prices to countries.
That is no longer the case.

Now they run west to east, and east to west, and north to south and south to north.
Now prices for countries are about the same.

Countries like to buy Russian gas, because the price is right and it is readily available. The proof of that is they more and more of it.

Any price differences relate to distance from Russia, and to transit fees imposed by various countries, both of which are not under Russian control.

Evgenia Vanadzina's picture
Evgenia Vanadzina on May 7, 2018

Well, this solution would definitely benefit European gas consumers! At the end, the price would be defined at the entry to Europe, more supplies – lower price. Only question, is it justified to invest in (subsidise) LNG, which costs higher than pipeline gas, engaging in a price war just to annoy Russians? If it is the aim, oil market could be more favorable field to focus on.