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Introduction

“...we agree that Russian gas can and should remain a part of the diversified energy mix for Europe, but our priority is helping Europe minimize dependency on any one single supplier, and really working towards diversification that will support energy security.”

—Amb. Mary Warlick, Acting U.S. Special Envoy for International Energy Affairs, June 2017

Many European leaders recognize the strategic imperative to hedge against the risk that Moscow could feasibly use dependence on imported Russian gas as a tool to co-opt—and in some cases—coerce key political and private sector actors. Yet many countries in Europe have not been able to fully capitalize on increasingly ample gas supplies and seize the opportunity to liberalize their gas markets and with it, more fully assure gas supply security.

As Thierry Bros of the Oxford Institute for Energy Studies insightfully puts it: “A sort of schizophrenia exists between Europe's diplomacy and its market. The market chooses the cheapest gas to produce and use in Europe, which is Russian gas. Europe is said to be too dependent but nothing has been done to change this.” The issue is complex. First, European gas purchasers are not governments but commercial enterprises. Particularly in Western Europe, their decisions are driven by upfront economic costs and long-established commercial relationships with Russia. Not surprisingly, these importers are more likely to overlook Gazprom’s periodic role as an instrument through which the Kremlin conjunctively exercises economic and political influence in some Central and Eastern European countries that have historically depended heavily on Russian gas.

Second, Europe has pockets of liberalized gas trade—for instance near the NBP and TTF hubs in Northwest Europe—but nothing Continent-wide akin to the marketplace which exists in the U.S., for example. In particular, natural gas markets in Central and Eastern Europe exhibit high levels of state control that governments justify on the basis of energy security considerations, usually related to Russia’s use of energy supplies as a geopolitical tool. In effect, governments in the CEE have been focused much more on diversification of its energy supplies, putting liberalization on the back burner. Paradoxically, at the level of diversification this region has achieved to date, a well-supplied, liberalized gas market would provide a much better tool to ensure energy security and a powerful antidote to attempts by any supplier—even a large one like Russia--to use gas as a coercive or corrupting instrument.

Markets are incredibly adaptive and generally offer the best mechanism for responding to an acute energy supply crisis. However, markets also typically struggle to anticipate and allocate funding for (1) pre-emptive security responses or (2) responses to malign actions by the lowest- cost supplier of a key commodity; especially if the manipulations are not generally increasing the price of the commodity and the response requires the construction of institutional and physical infrastructure. In such cases, state-level funding and regulatory influence that “nudges” along the creation of infrastructure in key zones may provide a more effective policy response.

This paper seeks to spark a deeper conversation on the merits of geoeconomics—using “economic instruments to produce beneficial geopolitical results”—as a potential source of new and scalable policy options for the U.S., the EU and its individual member states to bolster gas supply and national security across Europe. A gas geoeconomics approach could help address two core problems currently hamstringing a more comprehensive European approach to gas supply security:

1. Why would a private commercial entity pay for gas infrastructure intended to deal with broader national—and Continental-level—security concerns?

2. How can policymakers potentially incentivize national level decision makers and monopoly gas distribution service providers in Europe to facilitate more rapid gas market liberalization?

We envision U.S.-funded investments in strategic gas import infrastructure as a way to help bridge the barriers currently posed by local political-economic structures, friction between national security and commercial priorities, and the EU’s lack of authority to effectively and directly impose gas market reforms within the member states. In a fully liberalized gas market environment, private capital would flow towards infrastructure opportunities that ultimately would help reduce Russia’s ability to use gas supplies as a coercive tool. But at present—particularly in the parts of Europe most vulnerable to Russian energy coercion—monopoly gas service providers and a lack of market liberalization effectively shuts out private funds. The U.S. government would find it neither financially nor politically sustainable to act as the sole or prime funder of strategic gas infrastructure in Europe. Accordingly, the U.S. financial backing we propose would be intended to facilitate the removal of barriers that currently repel private investment. Such funds would be most accurately thought of as “jump start money” that can hopefully help crack through walls and be multiplied by follow on private investments.

What’s more, our proposed targeted deployment of financial assets would be consistent with the current intensification of U.S. energy diplomacy in Europe. Financial support would be contingent upon recipient countries taking concrete actions to foster gas market liberalization, including regulatory reforms, unbundling of production and transmission infrastructure, and codifying third- party access to pipeline capacity. This proposal is admittedly unorthodox, but we hope it will not only offer a set of near-term actionable ideas, but also stimulate new ones and elevate the conversation on the critical topic of European gas and energy security.

This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and Rice University’s Baker Institute for Public Policy. The views expressed herein are those of the individual author(s), and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.