Back 18.09.2014

Will geopolitics determine what comes through our power sockets?

The recent re-emergence of geopolitics in European energy discussion has taken many by surprise. But has geopolitics really ever left the energy discussion in Europe or have we just ignored traditional geopolitical issues in the face of the current climate discussion or in the heat of solving the euro crisis? Have we been lulled into a partly false sense of security by these past few years of smooth energy cooperation between the EU and Russia and started assuming that all problems were permanently solved?

The truth may be that geopolitical issues never disappeared from the European energy market, but have now only become more visible because the recent events in Ukraine. The outcome of geopolitics is hard to predict but a few consequences are already evident.

As I write this, the ceasefire in Eastern Ukraine is wobbly at best, and the possibility of a further conflict escalation cannot be precluded. Should the current Western sanctions remain in place for the long term, oil and gas production in the Russian Arctic region will be seriously affected.

Currently planned Siberian and Arctic oil and gas projects (e.g. Yamal LNG, Vankor) will require drilling technology, financing and other resources from the West. China and South Korea will probably not be able to fill the gap in the short run. As a result, Russian hydrocarbon exports will likely fall by the 2020s, as production in the majority of older Siberian oil and gas fields is already in decline. We may need to adjust our long-term expectations for the global oil and gas prices, and the direction is clear.

We have also seen the media teem with speculation on who is going to switch off gas supplies to whom. Geopolitics is at the very heart of this discussion. Speculation of Russia cutting off gas supplies to Europe is far-fetched because the Russian economy depends on hydrocarbon exports – some 50 % of Russia’s federal budget comes from them.

Should Ukraine feel itself pushed against the wall in the future, one of its last resorts could well be switching off the transit pipeline of Russian gas to Europe. Approximately 50 % of Russian gas sold to the EU is piped through Ukraine, and the resulting short-term supply and price shocks in the European energy market could be severe. Russia has repeatedly warned Ukraine against this.

The European energy sector can ponder geopolitical issues and their effects on energy prices but one thing is clear. As geopolitics in all its unpredictability plays once again a significant role on the European energy market – and may continue to do so for the foreseeable future – we should take a serious look at more predictable and less risky alternatives.

We should not let geopolitics alone determine what comes out of our power sockets but also consider other options, e.g. renewable energy, domestically sourced fuels and energy efficiency. In addition to making the future more sustainable, they just might let us say goodbye to geopolitical risks.

Katariina Simola

The writer is a leading consultant at Gaia. She has long international experience in the energy sector, and is currently working on energy issues and energy-related transactions.