Assessing the Impact of the Recent Russo-Ukrainian Crisis on the European Commission and European National Energy Policies

The ongoing Ukraine crisis and annexation of the Crimea by Russia in 2014 has brought international attention to a potential disruption in gas supplies. Crédit Agricole was interested in understanding how the recent Russia Ukraine crisis would impact investments in the gas industry.

This study developed a qualitative assessment of European gas supply vulnerability to Russian gas. The analysis relied on subject matter expert interviews with industry-participants, energy policy academics, and senior European policy-makers. In addition, the research team monitored international media, European institutional publications, and political communications in the public domain to build a forward-looking outlook.

The team’s research revealed a shifting role for Russian gas in Europe –  one where Europe is not entirely dependent on Russian gas, but continues to rely on Russian gas supply at increasingly favorable prices. This change is triggered by declining price environment, diminishing demand from the generation sector and shift towards hub pricing in gas contracts.

Russia will remain Europe’s primary gas supplier for years to come, yet Liquefied Natural Gas (LNG) import capacity adds essential supply flexibility. The growth in LNG import capacity in recent years allows Europe to take advantage of competitive LNG offerings, in particular thanks to a reduction in the Asian LNG premium and the expectation of American LNG exports. On the other hand, the development of indigenous shale resources, is impeded by domestic regulation and an adverse price situation in the most favorable cases (i.e. Poland and the UK), and moratoria maintained by environmental pressures in the unfavorable (i.e. France). 

There have been no large-scale alterations of gas demand to reduce Europe’s vulnerability from Russian supplies.  Europe has already witnessed a decline in gas demand since the financial crisis of 2008. Meanwhile the energy mix of European countries is fundamentally changing with the growth of renewables. As Europe revises its emissions commitments to increase the cost of carbon, gas demand will grow again, slowly displacing coal. In effect, the region’s gas demand by volume will not be radically altered.

Europe’s ongoing strategy to reduce gas supply vulnerability is centered on strengthening integration. Since 2007, the Trans European Energy Networks program (TEN-­E) has been key to this endeavor, focusing specifically on building a well-functioning internal gas and electricity market across member state borders. To this end the European Union created the Agency for the Cooperation of Energy Regulators (ACER) supporting the harmonization of network codes, and the European Network of Transmission System Operators for Gas (ENTSOG) for identifying infrastructure gaps in the gas transmission network and selecting critical ones for financial support from the European Commission. The core European gas market is now better integrated than ever before, and as a result less vulnerable to Russian supply disruptions.

A critical barrier to this strategy is the non-commercial feasibility of many proposed infrastructure projects seeking to integrate Europe’s “energy islands.” As the security benefit of cross border energy flows is not priced into project cash flows, many projects fail to be realized. Furthermore, industry participants consider the current amount of European Commission funding insufficient.  From a project sponsor’s perspective, several Projects of Common Interest face high regulatory burdens on the rate of return.  As a consequence, while the core of the European gas network is well integrated smaller peripheral markets, particularly in the South East region, remain highly vulnerable to Russian supply disruptions.