In responding to the Ukraine security crisis, the European Union should have done whatever it could to insulate the Russia–Europe gas relationship from foreign-policy tension. By opposing South Stream, the pipeline system that would bypass Ukraine as a gas-transit country, it has done the exact opposite.
Understandably enough, EU leaders state that they are unwilling to cooperate with Moscow at Kiev’s expense. They appear to have suddenly realised that a bypassed Ukraine would be economically and politically weakened. At the same time, they seem to have forgotten that for 20 years Kiev extracted huge rents (in the form of cheap or free gas) from Russia, using Europe’s reliance on Ukraine’s dominant transit position as the ultimate guarantee that Moscow would not cut it off. Europe has been an extremely useful hostage, allowing Kiev to abuse its power in negotiations with Russia.
The European gas-supply crises of 2006 and 2009 were triggered by Ukraine making good on its implicit threat to steal Europe-bound gas from transit pipelines if Russia demanded that Kiev pay the market price in the long term. These incidents strengthened Russia’s resolve to build pipelines under the Baltic Sea (Nord Stream) and the Black Sea (South Stream) in a bid to shield its gas relationship with Europe from its problematic relations with Ukraine.
Following these incidents, particularly the 2009 crisis, Western European firms invested billions in Nord Stream and subsequently South Stream, clearly acting as agents of their governments’ energy policy. Bypassing Ukraine became, in effect, part of the adaptation of the Russia–Europe gas relationship to post-Cold War realities.
However, helping Russia bypass Ukraine was never considered a legitimate European policy by some EU member states. The European Commission – which had given ‘priority status’ to Nord Stream and partly exempted its onshore sections from EU regulations – had apparently insurmountable legal objections to the onshore sections of South Stream. The Ukraine crisis seems to have tilted the balance: politically, South Stream cannot proceed in the current context.
European bureaucrats have for years insisted that Ukraine would become reliable only if it implemented EU-inspired reforms of its gas industry, such as separating transport and supply. These reforms were promised by successive Ukrainian ministers, including those in the post-Maidan interim government. Kiev recently announced that joint ventures between European companies and Ukraine’s Naftogaz could buy Russian gas at the country’s eastern border. In such a scenario, it was argued, transit would be safe and South Stream made redundant.
But gas transit is not safe, and the need for South Stream will be demonstrated again soon. New arrangements for transit will not make it easier for district heating companies to pay their gas bills, nor will they help energy-intensive industries in eastern Ukraine compete internationally without Russian subsidies. Kiev’s unwillingness or inability to kick its addiction to cheap natural gas is not going away, and remains the root cause of gas-transit insecurity. Ukraine stopped receiving Russian gas deliveries on 15 June, missing out on most of the storage-filling season. It is now a matter of weeks before the heating season starts. Before the end of the year, Ukraine will start stealing gas from the transit lines.
It seems almost inevitable that there will be another European winter gas crisis like that in 2009, and that this time the shortages will last for months. All will depend on Russia’s response. One possibility is that it will agree to a large temporary discount on volumes that will allow Ukraine to get through the winter. Moscow could thereby purchase a certain amount of international goodwill in the knowledge that South Stream’s construction would ensure that this was the last time ever.
But if the EU decides to block South Stream, Moscow will be motivated to shut down the Ukrainian corridor altogether. In this case, Europe would lack 60 million tonnes of oil equivalent, a shortfall comparable to that caused by the shutdown of all Japanese nuclear reactors after the Fukushima disaster. The countries that would suffer most are those that have been strong supporters of South Stream and would benefit most from it. This would destroy the fragile European unity on the management of the Ukraine security crisis and relations with Russia.
During the Cold War, the Russia–Europe gas relationship succeeded because it was separated from geopolitics. In the current era, it has to be shielded from the battle over Ukraine’s future. Europe cannot force Russia to transport gas through Ukraine. If it tries, it will fail to help Ukraine while badly damaging its own energy security.
Pierre Noël is Sultan Hassanal Bolkiah Senior Fellow for Economic and Energy Security at the IISS. He is the author of 'Asia’s Energy Supply and Maritime Security' in the June–July 2014 issue of Survival.