Central and Eastern Europe's Dependence on Russian Gas, Western CIS Transit States and the Quest for Diversification through the Southern Corridor

Abstract

Central and East European countries have expressed strong fears about Russian gas but did little to reduce dependence. However, recently some progress has been made in the diversification and increasing security of supply. The Russo–Ukrainian gas crisis in early 2009, together with the period since 2008, help to illustrate the different opportunities each country faces, i.e. to what extent they could have taken advantage of the benefits of the changed market environment. For the Central and East European consumers, the focus is mainly on pricing, and the anti-trust probe launched by the European Commission against Gazprom stresses the crucial importance of this issue. Despite much criticism, the EU has taken a few steps that may help mitigate the fear of Russian influence. The paper is arranged into five main sections. After a short introduction, Section 2 presents the gas market changes that have occurred over the last four to five years. Supply and demand-side dynamics combined with the pricing evolution have been seriously affecting Gazprom’s market position in Europe. I shall examine how Russia has responded to these challenges, with a special emphasis on the Central and East European region. Section 3 investigates the role of gas in primary energy consumption in the Central and East European countries and the change in gas demand. Here, different gas demand scenarios are compared. The issues of domestic gas production, including unconventional and offshore gas resources, and the degree of self-sufficiency are also key questions. Section 4 addresses the issue of transit through the western Commonwealth of Independent States and Central and Eastern Europe. Bypass pipelines have already begun to affect transit and will create a large additional capacity. I argue that bypass pipelines may increase the security of supply. Here and elsewhere in the paper, attention also turns to the EU’s Third Energy Package. In Section 5, the role of Russian gas in Central and Eastern Europe (consisting of both EU Member States and Energy Community Contracting Parties) is examined country by country, emphasising the gas supply portfolios, and existing and planned physical infrastructure. Finally, before concluding, diversification projects in the Southern Corridor are discussed separately in Section 6. I argue that by the end of this decade, gas from the second stage of Azerbaijan’s Shah Deniz field development could reach Europe.