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European Natural Gas Supply Secure Despite Political Crises

Economic Bulletin of August 15, 2014

by Hella Engerer, Franziska Holz, Philipp M. Richter, Christian von Hirschhausen, Claudia Kemfert in: DIW Economic Bulletin 8/2014

Natural gas makes a major contribution to European energy supply. Consequently, the political crisis between Russia and Ukraine increases fears of the consequences of Russia suspending natural gas supplies to Ukraine and the European Union. The last time this occurred was in the winter of 2009, as Russia and Ukraine disputed the price of natural gas and transit costs. However, the European Union has subsequently increased the security of its gas supply. Measures proposed by the European Commission are becoming more and more successful, particularly the diversification of sources of supply and an accompanying expansion of natural gas infrastructure to secure supply from third-party countries. Opportunities to ease temporary supply bottlenecks have improved significantly within the Community in recent years. Nevertheless, Russia remains a major supplier of natural gas to the EU. The Russian gas corporation Gazprom is gaining importance in Eastern Europe, and increasingly also in Germany. However, this dependency is not a one-way street: Russia generates high export revenues from its natural gas trade. It currently has few alternatives to exporting to the EU. Model calculations by DIW Berlin show that Europe can cope with any supply disruption by Russia via Ukraine. Some Eastern European countries, however, suffer most from a complete supply stop by Russia. To further increase supply security to Europe in the medium term, it will be necessary to continue diversifying gas supplies, especially by making more efficient use of existing infrastructure, and expanding its pipelines and its capacity to import liquefied natural gas. Additionally, Europe should consider building up strategic gas reserves. It also seems advisable to continue to improve energy efficiency in all areas and consistently expand renewable energies as part of its energy and climate strategy.

European Natural Gas Supply Secure Despite Political Crises