This article was originally featured in the PCC Report 1/2016 “Global Debates and the Eastern Mediterranean”, which is published by the PRIO Cyprus Centre and the Atlantic Council on 16 November 2016.

This paper examines the current and future energy landscape of Europe with particular reference to two recent key documents of the EU – the European Energy Security Strategy of May 2014 and the Energy Union Package of February 2015.1 It will be seen that in spite of the heightened concerns over environmental issues and the need to make more use of renewables, gas will remain an important component of the energy mix of EU member states for the foreseeable future. Attention will focus on supply security with declining gas production in Europe and serious questions over the future of shale gas extraction. Given the theme and location of the conference in Cyprus where this paper was originally read, the possibility of the eastern Mediterranean becoming an important gas hub is also discussed.

The Importance of Gas

According to BP, in 2014 gas accounted for 22% of the EU’s primary consumption by fuel. Only oil was more important, largely because of its use in the transportation sector, accounting for 37% of energy consumption.2 Unlike oil, it is not so easy to switch from one supplier to another in the case of gas. In spite of the increased use of liquefied natural gas (LNG), most gas is still traded in regional markets and is carried by pipeline. The EU has set itself the targets by 2030 of reducing greenhouse gas emissions by 40% (compared to 1990 levels), improving energy efficiency by at least 27%, and ensuring that renewables account for 27% of energy consumption.3 Gas, though, will remain an important ‘bridging fuel’,4 as efforts will increase to cut back on the use of heavily polluting coal.

The European Energy Security Strategy has focused on the significance of gas, stressing the need to diversify the sources of gas deliveries, increase LNG imports, and develop local shale gas production. Of the 33 projects identified as critical for the future of the EU’s energy security, 27 were in the gas sector.5 Fully aware of the overlap between energy and foreign policy, and seeking to build on the European Energy Security Strategy and the Energy Union Package, in July 2015 the European Commission launched a ‘diplomatic energy action plan’ to enhance ties with key neighbouring gas producers and transit states to ensure the diversification of future gas supplies to Europe.6

Europe and Energy Security

Energy security involves a range of issues. As well as environmental concerns, energy efficiency and the need for a more integrated market with better storage capacity should be considered. Supply security is another major concern. Imports of energy should be diversified to avoid over-dependence on one supplier. The security of pipelines and energy infrastructure from sabotage or attack from parties in a war zone must also be taken into account.

Dependent on imports for over 60% of its gas needs, the EU will likely have to procure 66% of its gas consumption from outside suppliers in 2020.7 In 2013, Russia accounted for 39% of the EU’s gas imports and provided for 27% of the EU’s gas consumption.8 In the foreseeable future, although gas demand may only marginally increase, European gas imports will continue to rise steadily as net production in the EU falls. BP predicts that there could be as much as a 45% drop in domestic gas production in the EU by 2035.9 The EU’s largest gas field at Groningen in the Netherlands has had its production capped at 27 billion cubic metres per annum (bcm/y) – from an original ceiling of 42.5 bcm – because of the risk of earthquakes associated with gas extraction.10

High expectations raised over the prospects for shale gas exploration in Europe have been dashed because of potential environmental problems, questions over the feasibility of proposed projects with disappointing test results, unclear local legislation, and the lack of drilling and other equipment. The French authorities have banned fracking even though France has the second largest unproven technically recoverable reserves of shale gas in Europe. In theory, Europe could import shale gas from Algeria in the form of LNG given that the North African country has the third largest technically recoverable shale gas reserves in the world. However, because of security concerns, the lack of water available for fracking, local protests at drilling sites, and the need to tap the expertise of international energy companies who will need to be given considerable incentives to invest, the prospects for shale gas production in Algeria are not promising.11

Moves are going ahead, though, to improve energy security with regard to gas by making Europe a more integrated market through building interconnectors, modifying current pipelines and laying new pipes to allow the bi-directional flow of gas. The European Commission has agreed to construct the Gas Interconnector Poland-Lithuania (GIPL) to end the isolation of the Baltic region from the rest of Europe.12 A High-Level Group was established in June 2015 to promote the building of gas and electricity infrastructure to connect the Iberian Peninsula with France.13 An Action Plan was agreed upon in Dubrovnik in July 2015 to accelerate the building of new gas interconnectors and reverse the flows in existing pipelines to improve gas connections between central and south-eastern Europe.14 However, substantial sums will need to be raised to make Europe a more integrated energy market. The European Commission has estimated that 200 billion Euros must be found by 2020 to build major interconnectors.15 Funding mechanisms have been established such as the Connecting Europe Facility and the European Fund for Strategic Investors, but these will need to mobilise huge sums from the private sector to add to finance provided by the EU.

Gas Corridors

Currently, three corridors are used to transport gas to EU member states. Brussels has been encouraging the development of the Southern Gas Corridor as a fourth route to help diversify the sources of gas imports and reduce dependence on Russia. In the face of a more aggressive Russian policy in Ukraine and in Syria, European governments are conscious that Moscow may attempt to exploit energy as a political tool to heighten its influence. However, major European energy companies are still prepared to negotiate deals with Gazprom. In September 2015 a consortium of firms concluded a controversial binding agreement to proceed with Nord Stream 2. This would entail the delivery of an additional 55 bcm/y of Russian gas to markets in Europe through a network running across the Baltic Sea to Germany. Gazprom could then further scale back or terminate its delivery of gas to Europe via Ukraine. Several EU member states in central and eastern Europe have denounced the deal claiming that it ran counter to the provisions of the Third Energy Package regarding the ownership and transmission of gas along pipelines.16 At the time of writing in January 2016 the European Commission was assessing the legality and the possible political and economic consequences of Nord Stream 2.17

A second corridor delivers gas from Norwegian fields. In 2013, 33% of the EU’s gas imports came from Norway.18 However, production is expected to decline in the medium term. Untapped reserves in the far north in the Norwegian and Barents Sea will be more difficult and expensive to develop.

The prospects for the expansion of a third gas corridor from North Africa must also be seriously questioned. In 2013, 22% of the EU’s gas imports came from North Africa, mainly from Algeria and Libya.19 The problems associated with the development of shale gas in Algeria have already been noted. In addition to security and political concerns, rising local demand for energy and an unfavourable investment climate will likely prevent a substantial increase in Algerian gas exports to Europe. Attempts to proceed with the 8 bcm/y capacity Galsi pipeline to connect Algeria and Italy via Sardinia have been repeatedly stalled. The continuing instability in Libya may also hamper gas exports to Europe. LNG exports have been suspended, although gas has continued to be delivered to Italy via the Greenstream network.

According to officials in Brussels, the Southern Gas Corridor could eventually meet as much as 20% of the EU’s gas needs.20 The aim is to deliver gas from the Caspian region, Central Asia, the Middle East, and the Eastern Mediterranean Basin to Europe along the corridor via Turkey.21 The first steps towards the realisation of this corridor are being taken with the start of construction of the Trans-Anatolian Gas Pipeline (TANAP) and the Trans-Adriatic Pipeline (TAP), which will connect Turkey with Italy via Greece and Albania. The intention is to deliver gas from Azerbaijan’s Shah Deniz field along the corridor from 2018-2019 onwards. However, it is not clear if further volumes of gas from Turkmenistan, Iran, northern Iraq and Israel will be delivered along the corridor given political problems and security concerns.

Energy Union

Stressing the need for Europe ‘to speak with one voice’, the Energy Union Package referred to a future European energy strategy which would address energy security concerns and would be based on solidarity and trust. In the Package, the need to develop a fully integrated energy market was emphasised. Improved energy efficiency, the decarbonising of economies, and the importance of research and innovation were underlined.22 Attention was given to the need to establish strategic energy partnerships with key producing countries and regions such as the Caspian region and North Africa and significant transit states such as Turkey.23

Poland had originally promoted the idea of ‘a single purchaser’ of European gas. This would have apparently entailed the EU member states working together in price negotiations with Gazprom, thereby strengthening the bargaining power of the EU and ensuring that Europe would not become over-dependent on Russia for gas supplies.24 This proposal had to be abandoned as it would have run counter to the notion of state sovereignty. Each EU member state has separate energy needs with their economies based on different energy mixes. Instead, smaller EU member states may in future choose to cooperate voluntarily in the negotiation of gas contracts with Moscow. However, the Energy Union Package did allow for the European Commission to check that future intergovernmental agreements on energy issues should be in compliance with EU law.25 The activities of energy companies, though, would not be closely monitored by the European Commission, and so problems could still ensue as seen in the case of Nord Stream 2.

In practice, it seems that the Energy Union Package was principally a consolidation and reiteration of decisions and agreements that had been earlier concluded. It appeared to strengthen the energy provisions of the Lisbon Treaty signed in December 2007 which had referred to the need for a functioning energy market, supply security, energy efficiency and the development of renewables, and the promotion of an interconnecting energy network.26

The Role of LNG

Increased imports of LNG could help bolster European energy security by further diversifying suppliers of gas. There has been much hype over the prospect of future deliveries of LNG from the US as a result of the shale gas revolution. Technological developments have reduced the costs of delivering LNG. Certainly, Europe has the facilities in place to receive increased volumes of LNG. Indeed, regasification units are currently under-utilised. In 2011 Europe had imported 65.6 million tonnes (mt) of LNG, but in 2014, with increasing competition from Asian markets, this figure was reduced to 33 mt.27 This meant that in 2014 regasification units in Europe were only 22% utilised.28 More LNG receiving facilities will be built in Europe in the near future; according to the Commission, ‘Considering that most of the existing capacity is located in Western Europe and the existence of internal bottlenecks from the Atlantic coast to the East, the development of a few new regasification units in Eastern Europe would be justified. This is the case in the Baltics and in South-East Europe where LNG regasification units have been identified as Projects of Common Interest…’29

A glut on the LNG market is expected as the US and also Australia will become serious players. Europe may become a clearing house for excess LNG as demand in Asia falls. More gas from Qatar, for example, may be channelled to customers in Europe. Increased competition will likely lower gas prices and this could squeeze out cheap coal imports, thereby having a positive knock-on effect on carbon emissions. The possible impact of lower gas prices in Europe on LNG imports from the US is uncertain. Russia would also have to reduce prices in future gas contracts with EU member states and rely more on the spot market. Arguably, given its ability to continue to export gas at reduced prices by making use of its pipeline network, Russia could continue to have a large stake in the European market even at a time when there is a glut of LNG. However, in these circumstances gas producers in the eastern Mediterranean may struggle with selling their gas to European customers.

Towards a Mediterranean Gas Hub?

In line with the aims of the European Energy Security Strategy and the package of measures of the Energy Union, the European Commission is planning to expand its energy ties with states in North Africa and the eastern Mediterranean. In May 2015 in Brussels a new Euro-Med platform on gas, electricity, renewables and energy efficiency was launched. As part of the process an active political dialogue will also be encouraged. The first steps have been taken to proceed with the gas platform component. The intention is to promote debate on regulatory, financing and infrastructure issues with the aim of building new pipelines and LNG units to facilitate the creation of a Mediterranean gas hub.30

The plans of the European Commission appear to overlap with the increased activities in the eastern Mediterranean of the Italian energy company Eni. Attempting to build on their success in discovering the massive Zohr gas field in Egyptian waters, Eni is hoping to create an LNG hub in the eastern Mediterranean which would supply gas to Europe. Gas from Zohr could be used to feed Eni’s dormant LNG plant at Damietta in northern Egypt. Eni officials have spoken of linking their assets in Libya and Cyprus with those in Egypt to develop a major LNG hub.31

Expectations have been raised, therefore, regarding the future importance of the eastern Mediterranean for European gas imports. However, the previously mentioned economic, political and security problems in Libya as well as in Algeria should not be dismissed. Egypt is also facing an escalating threat from extremists linked to the so-called Islamic State. Increasing competition on LNG markets may make the development of an LNG hub in the eastern Mediterranean less commercially viable. Moreover, initial production from the Zohr field will most probably be tapped to feed the expanding market in Egypt rather than supply gas to Europe. On the more positive side, political developments in December 2015 suddenly boosted the prospects for the possible delivery of Israeli gas to Turkey and Europe from the offshore Leviathan gas field. In mid-December Turkey’s President Erdoğan had surprised many when he openly spoke of the beneficial impact for the region of improved relations between Turkey and Israel.32

Conclusion

Although events are fast moving and difficult to predict, what is clear is that concerns over Europe’s energy security will not disappear. Recent discussions in Paris over climate change have reinforced the argument that gas will remain a key bridging fuel for the foreseeable future. In spite of the increasing concerns over the possible vulnerability of European economies due to dependence on Russian gas imports, major European companies have not been discouraged from striking further deals with Gazprom as seen in the case of Nord Stream 2. The European Commission’s attempts to encourage Europe ‘to speak with one voice’ on energy matters clearly has its limitations.

It is important to underline how energy issues cannot be separated from political and security concerns. This is particularly evident in the case of the expansion of the Southern Gas Corridor and in the prospects for the development of energy resources in the eastern Mediterranean and North Africa. Nevertheless, energy projects are unlikely to proceed if they are not deemed to be commercially viable.

Notes

1 European Commission, Brussels. (2014, May 28). European Energy Security Strategy, COM (2014) 330 final. Retrieved from: http://eur-lex.europa,eu/legal-content/EU/TXT/PDF/?uri=CELEX:52014DC0330&from=EN; European Commission, Brussels. (2015, February 25). Energy Union Package, COM (2015) 80 final. Retrieved from: http://eur-lex.europa.eu/resource.html?uri=cellar:1bd46c90-bdd4-11e4-bbe1-01aa75ed71a1.0001.03/DOC_1&format=PDF

2 BP Statistical Review of World Energy. (2015, June). Retrieved from: https//www.bp.com/content/dam/bp/pdf/energy-economies/statistical-review-2015/bp-statistical-review-of-world-energy-2015-full-report.pdf

3 European Council, Brussels. (2014, October 24). Conclusions, 23 and 24 October 2014, EUCO 169/14. Retrieved from: http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/145397.pdf

4 This refers to replacing mainly coal power with gas, thus using gas as a ‘bridge’ to a cleaner, low carbon energy system.

5 “European Energy Security Strategy”, op.cit. p. 10.

6 Council of the European Union, Brussels. (2015, July 20). Council Conclusions on Energy Diplomacy, 10995/15, Retrieved from: http://data.consilium.europa.eu/doc/document/ST-10995-2015-INIT/en/pdf

7 “European Energy Security Strategy,” op.cit. p. 15.

8 “European Energy Security Strategy,” op.cit. p. 2.

9 BP Energy Outlook 2035. (2014, January). Retrieved from: http://www.slideshare.net/BP_plc/bp-energy-outlook-2035-eu-region-insights-2014

10 Dutch court orders Groningen gas field output be capped at 27 bcm/yr. (2015, November 18). Reuters.

11 Boersma, T., Vandendriessche, M., & Leber, A. (2015, November). Shale Gas in Algeria: No Quick Fix. Brookings Policy Brief 15-01. Washington DC.

12 European Commission – Fact Sheet, Brussels. (2015, October 15). End of Energy Isolation in the Baltics: How the Gas Interconnector Poland-Lithuania works. Retrieved from: europa-eu/rapid/press-release_MEMO-15-5845_en.htm

13 European Commission, Press Release, Luxembourg. (2015, June 15). Commission, France, Portugal and Spain set up High Level Group to break Energy Barriers. Retrieved from: europa.eu/rapid/press-release_IP-15-5187_en.htm

14 European Commission, Press Release, Dubrovnik. (2015, July 10). Energy: Central Eastern and South Eastern European Countries join Forces to create an Integrated Gas Market. Retrieved from: europa.eu/rapid/press-release_IP-15- 5343_en.htm

15 “European Energy Security Strategy,” op.cit. p. 9.

16 Tully, A. (2015, December 9). Russia’s Nord-Stream pipeline causing unrest in Eastern Europe. Oilprice.com. Retrieved from: http://oilprice.com/Latest-Energy-News/World-News/Russias-Nord-Stream-Pipeline-Causing-Unrest-In-Eastern-Europe.html

17 Editor's note made after the submission of the original text: In June 2016 Jean-Claude Juncker, the EU Commission president, was reported not have ruled out the possibility of finding a ‘legal framework’ that would enable Nord Stream 2 to go ahead. See Rettman, A. (2016, June 17). Juncker outlines legal hurdles for Russia pipeline. EUobserver. Retrieved from: https://euobserver.com/foreign/133887

18 “European Energy Security Strategy,” op.cit. p. 15.

19 “European Energy Security Strategy,” op.cit. p. 15.

20 Maros Sefcovic: Southern Gas Corridor has potential to meet up to 20% of EU’s gas needs in future – interview. (2015, February 11). en.apa.az.

21 European Commission. (n.d.). Gas and Oil Supply Routes. Retrieved from: https://ec.europa.eu/energy/en/topics/imports-and-secure-supplies/gas-and-oil-supply-routes

22 “Energy Union Package”. op.cit. p. 4.

23 “Energy Union Package”. op.cit. p. 6.

24 EU should work on becoming a single gas purchaser. (2014, November 17). Reuters.

25 “Energy Union Package”. op.cit. p. 7.

26 For Article 194 of the Lisbon Treaty (signed 13 December 2007) referring to energy issues, see, http://www.lisbon-treaty.org/wcm/the-lisbon-treaty/treaty-on-the-functioning-of-the-european-union-and-comments/part-3-union-policies-and-internal-actions/title-xxi-energy/485-article-194.html

27 International Gas Union. World LNG Report, 2015 edition. Retrieved from: http://www.igu.org/sites/default/files/node-page-field_file/IGU-World%20LNG%20Report-2015%20Edition.pdf. p.11.

28 Ibid., p. 50.

29 European Commission. (n.d.). Gas and Oil Supply Routes. Retrieved from: https://ec.europa.eu/energy/en/topics/imports-and-secure-supplies/gas-and-oil-supply-routes

30 European Commission, Brussels. (2015, May 6). EU and South and East Mediterranean Producers step-up Energy Relations. Retrieved from: https://ec.europa.eu/energy/en/news/eu-and-south-and-east-mediterranean-partners-step-energy-relations

31 Jewkes, S. & Vukmanovic, O. (2015, September 15). Eni plans to hold the keys for east Mediterranean gas exports. Reuters.

32 Keinon, H. (2015, December 14). Erdoğan talks of positive impact of improved Turkey-Israel ties. The Jerusalem Post.

About the Author

Gareth M. Winrow is currently an independent research analyst and consultant based in Oxford and also a tutor at Oxford University’s Department of Continuing Education.

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