Why we need a European energy union

The current Ukrainian crisis involving Russian aggression poses real dangers, but also provides tremendous opportunities for the European Union. One of them lies in the strategic area of energy policy.

The EU is to a significant extent dependent on Russian gas imports. This dependency differs, with some member states being fully reliant on Russian gas (eg Finland, Latvia and Lithuania). In the ongoing conflict this may become an issue.

The Ukrainian prime minister recently said Russia plans to cut gas flows to Europe this winter. Such possibility should not come as a surprise. The EU has already experienced short-term gas cut-offs, for example, in winter 2009. Russia used its energy lever for strategic, foreign policy aims multiple times in the past. The EU needs to face this potential danger and respond accordingly. The requisite actions will make the EU better off. It should invest more in pipeline interconnections and storage capacities; it also needs more terminals allowing for importation of liquefied natural gas (LNG) to further diversify sources of supply. The EU consumers would benefit directly as more competitive markets lead to lower prices. These investments would also stimulate the economic recovery by creating business opportunities and much-needed jobs.

LNG terminals

Some steps are already being taken. Recently Lithuania signed its first LNG supply contract. The gas is to be delivered through the first Lithuanian LNG terminal that comes online in December this year. The construction of Poland’s first LNG terminal is nearing completion. Yet more needs to be done and investments are needed around the EU. Spain, with its seven LNG regasification plants, still awaits connection to the EU through the Pyrenees.

In April, Polish prime minister Donald Tusk (the next president of the European Council) called for EU energy union. His vision echoes pleas by Jacques Delors and Jerzy Buzek, the ex-president of the European Parliament.

Tusk called for diversification of supplies, also through EU-supported investments. He pleaded for joint negotiation of gas supply contracts, as it is practised in another area (the member states jointly buy uranium for their nuclear plants through the EU’s atomic energy agency, Euratom). Until now, Russia has been able to cut deals with member states individually. In effect, prices for Russian gas differ greatly across the union.

These opportunities should be seized not “against” Russia, but for the sake of the EU and its citizens. European integration started from the ashes of the second World War. Its founders pragmatically began with economic integration, which has had spillover effects beyond economics. A more interconnected and competitive single energy market would bring the EU’s citizens more prosperity and, by addressing unbalanced import dependence, it would also contribute towards cementing peace – as the Ukrainian crisis demonstrates, this should not be taken for granted. While these efforts should be undertaken in the EU’s interests, they will impact upon Russia.

Russian exports

EU-Russia energy relations are characterised by co-dependence. Russia needs energy-export-related revenues. In 2012, about 50 per cent of Russia’s budget revenues came from oil and gas industry. As Russia exports gas almost exclusively through pipelines, it cannot rechannel exports without significant investments and is dependent on its current customers.

Moreover, Russia operates a multitier pricing system. Domestic gas prices are set below cost. The profits from gas exports are used to cross-subsidise domestically generated losses, and still significant profits are generated to fill state coffers.

A significant increase in Russian domestic energy prices could destabilise the industry and antagonise the population, leading to a backlash against the ruling elite. Were the EU successful in diversifying supplies, at the very least the Russian economy would be nudged to reform itself and stop being so hydrocarbons-dependent, to its long-term benefit.

The EU can use energy policy as a foreign policy tool. In the framework of the Eastern Partnership, the EU could help its partners to diversify energy supplies and integrate closer with the EU. The construction of a pipeline between Romania and Moldova is one example. Such projects would also provide business opportunities.

Creation of an EU energy union would bring benefits for the EU’s citizens and businesses. It would make the union more competitive and, thanks to lower dependence, more assertive in its external dealings. It would help to stimulate growth. That is a project which even Eurosceptics may appreciate.

Marek Martyniszyn is a lecturer at Queen’s University Belfast school of law