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Wednesday, March 5, 2014

Russia And Europe’s Mutual Dependency On Natural Gas

A man wearing a hard hat looks out at the central facility where the Nord Stream Baltic Sea gas pipeline reaches western Europe following the pipeline's official inauguration on November 8, 2011 in Lubmin, Germany. (Sean Gallup/Getty Images)

A man wearing a hard hat looks out at the central facility where the Nord Stream Baltic Sea gas pipeline reaches western Europe following the pipeline’s official inauguration on November 8, 2011 in Lubmin, Germany. (Sean Gallup/Getty Images)

A third of Europe’s natural gas comes from Russia, most of it through Ukrainian pipelines. Russia has used the gas as a weapon before, to gain the upper hand in conflicts with its neighbors.

But the relationship cuts both ways, with over half of Russia’s federal budget dependent on energy imports.

Phil Flynn, energy market analyst with Price Futures Group, joins Here & Now’s Robin Young to discuss Russia and Europe’s mutual dependency on natural gas.




From NPR and WBUR Boston, I'm Robin Young.


I'm Jeremy Hobson. It's HERE AND NOW. And the standoff between Russian and Ukrainian warships continues off the coast of Crimea, even as Russia's foreign minister and U.S. Secretary of State John Kerry meet today to resolve the crisis.

YOUNG: Also earlier today the European Union offered 15 billion in aid to Ukraine. That comes on top of the $1 billion in energy subsidies the U.S. promised to Ukraine yesterday. Energy is a key concern. It's part of what's coming between Europe and the U.S. in this crisis. Russia provides half of Ukraine's gas supply and a third of Europe's, and most of it comes through Ukrainian pipelines.

Phil Flynn is senior market analyst with Price Futures Group in Chicago. He joins us from the studios of WBEZ. And Phil, help us understand this because we've been hearing how much Europe is dependent on its gas from Russia, maybe hesitant to put sanctions, for instance, on Russia for its troops in the Crimea area. But then we're also reading that Europe is less dependent on that gas because of a mild winter. So how would you sum it up?

PHIL FLYNN: I think it's the best of both worlds. The bottom line here is that in the big picture, Europe is mainly or dramatically dependent for one-third of its natural gas supplies from Russia through those Ukrainian pipelines. And because Russia has played this card before by cutting off supplies to the Ukraine on two other occasions, Europe has already been on guard for this possibility.

They've already moved to, you know, diversify away from the Russian-Ukrainian supplies, but it is a big threat. But Mother Nature is working with us right now, as is the calendar, because unlike here in the United States, Europe has had a very mild winter. So they have about 45 days of supply in backup.

So if supplies are cut off, it's not as critical if this would've happened, say, January 1 in the heat of a cold front. So we have a little bit more wiggle room here.

YOUNG: Well, still, who are the countries - which are the countries in Europe that depend most on this gas from Russia?

FLYNN: I think the entire European Union is at risk. I mean because what happens is, is that once they cut off that supply, the pressure to most of the countries right around Europe start losing that inventory. And whether you're in the U.K. or you're in Spain or France, all of those countries are dependent, you know, one way or another.

The other thing is, is that if you cut off gas supplies, it's not like you can easily replace it. So what happens is that the other countries will then start bidding up the cost of oil, diesel and coal because they're going to have to keep the factories running. So they're going to be looking towards alternative fuels.

So while a lot of people think that this is just a natural gas story, it really expands out to be an energy story overall.

YOUNG: Yeah, and what are you hearing as an analyst? We'll take a deeper look. But as an analyst, are you hearing in the drumbeats that are coming out of meetings in Paris and Brussels today, and of course from Russia, are you hearing the threat of turning off the pipeline to Europe or to Ukraine?

FLYNN: The market thinks the risk is less, though we already know that the deal that Russia had with the Ukraine to give them gas at a discount was really predicated on the fact that they would do, you know, Vladimir Putin's bidding, you know, if they joined the Russian Federation that he wants to create and not join the EU. And that's really what's at stake here.

Not only does Russia just want to take over Ukraine, they want to solidify their power as an energy monopoly. Russia is dependent on energy exports for their economy to flourish. They would - they are very concerned that if Ukraine joins the EU, that they will develop their own energy resources and basically leave Russia's economy in the lurch.

And because Russia has not played nice with Europe in the past by cutting off supplies, if the Ukraine could employ fracking, for example, and start developing their own supplies, you know, they may say to Russia, hey, you can't use our pipelines, we're going to be exporting our own supply. So that would be in direct competition with Russia, and Russia can't afford that.

YOUNG: OK, a couple things here. You say how much Russia is dependent on exporting this natural gas because it needs the revenue from its energy exports. You also said that this is why it wants to take over Ukraine. I think, you know, there are people who would debate whether that's what's happening here, whether they want to have a footprint in Ukraine and continue to have a hand in Ukraine or completely take it over.

I know you meant that, but I just - to have said that, yeah.

FLYNN: Well, I think in the Crimea, right now in the Crimea, many energy experts believe that if they start fracking there, they could have an energy revolution like we've seen here in the United States, that they could be one of the world's largest producers. If that happens, and the Ukraine starts exporting natural gas, they could cut off Russia's access to those pipelines, you know, use their own supply, and that's what I'm getting at.

YOUNG: Right, that they want to keep a hold on Crimea, but you mentioned this idea that other areas, Europe, Crimea, could begin their own fracking, find their own sources of natural gas. Here in the U.S. we're seeing the tweets flying on Twitter of people who back fracking and the natural gas industry in the U.S., saying let's do that here. This is the time for the U.S. to start exporting liquefied natural gas. What are the questions there?

FLYNN: I think it's good for our natural security. I mean we had a very cold winter right now, and we realize that, you know, despite our record production, we need more infrastructure in place. But I think it's good for the global economy, it's good for the U.S.

Right now the U.S. is in an incredible position that nobody thought they could possibly be in, you know, 10 years ago. We're in a position to be the energy hub of the globe. You know, we're going to be one of the world's biggest producers. We have the potential to be one of the biggest exporters, one of the biggest consumers.

And by having that, that is power. And in the past, the biggest threat to the U.S. economy was concerns that, you know, OPEC would cut off our oil supply, or we would see Russia cut off supply to the Ukraine. You know, Russia a few years ago was talking about creating a natural gas OPEC before the fracking revolution.

They wanted to use energy as a political weapon. You know, they've used it not only against the Ukraine but against Czechoslovakia and Yugoslavia. You know, and they were going to use their muscle because they had a monopoly on natural gas supplies.

YOUNG: Well, we just have to jump in to say, Phil Flynn, that of course liquefied natural gas raises a lot of questions. Shipping natural gas out raises a lot of questions about safety that people here in the U.S. have. But we'll take that up at another time. As you say, voices are being raised calling for that to happen right now.

Phil Flynn, senior energy market analyst with Price Futures Group in Chicago, taking a look at the gas and energy questions being raised by the crisis in Ukraine. Phil, thanks so much.

FLYNN: Thank you for having me. Transcript provided by NPR, Copyright NPR.

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Robin Young and Jeremy Hobson host Here & Now, a live two-hour production of NPR and WBUR Boston.

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