EU Energy Review Reviewed

'Beware the Russian bear'

By Michael Harrison

"Beware the Russian bear" is the motto Europe must adopt as it reviews its energy future .

Today sees the publication of the European Commission's review of energy - a subject which has climbed remorselessly up the political agenda in recent years to the point where it has now assumed the same kind of importance to world well-being and security as international terrorism or global warming.

The focus of Brussels' deliberations, however, is likely to be inward-looking, concentrating on the steps the European Union needs to take to reshape its own markets and, in particular, to unbundle those national monopolies on the Continent which have served to stymie competition and the free flow of energy.

If that is the case, it will be a lost opportunity because the biggest threat to the energy security of the EU is external and it can be summed up in one word - Russia. That the launch of the review by the EU's Competition Commissioner, Neelie Kroes, should take place against the backdrop of another piece of economic imperialism on the part of Moscow - the closure of its gas pipeline to Europe through Belarus - merely serves to underscore the point.

Coming exactly a year after a carbon-copy dispute between Russia and Ukraine, it demonstrates that lightning can and does strike twice in the same place and is likely to continue to do so as Russia's importance to the West as an energy supplier grows.

The point has not been lost on Angela Merkel, the Chancellor of Germany, a country which relies on Russia for a third of its gas. She has wasted no time in highlighting the Belarus episode as another reason why it is imperative not to be overly dependent on one supplier. She has called for the rapid construction of liquid gas terminals to act as a bulwark against Russia's use of its energy resources as a political weapon. She has even ventured that Germany may wish to slow or reverse its phasing out of nuclear power - a suggestion that would once have been anathema to any Germany politician.

It is true that Germany has more to fear than most due to its high dependence on Russian gas. But other EU members such as Britain cannot afford to be complacent: it is quite conceivable that a decade from now a fifth of our gas will be of Russian origin.

Robert Amsterdam, the Kremlin critic and defence counsel to the jailed oligarch Mikhail Khodorkovsky, has some trenchant views on the danger the EU runs if this unequal relationship with its near neighbour is not addressed. He catalogues how the state-owned Russian gas monopoly Gazprom, which harbours ambitions of swallowing up our own Centrica, uses its market power to divide and rule, cultivating certain countries such as Germany along with their political leaders, banks and utility companies and penalising others by withholding supplies - as it did with Lithuania as punishment for selling an oil refinery to Poland.

When cajoling and threats do not work, Gazprom simply uses its sheer might - as it did in Armenia where it pretty much bought up the local energy infrastructure to prevent Iran competing as a gas supplier to Europe.

Europe does have some cards of its own to play because the Russians are desperate for two things. One is access to and, if possible, ownership of Western distribution and supply networks - Gazprom is reliant on export markets in the West to help to subsidise the loss-making business of supplying domestic Russian customers. The second is Western expertise to help develop its huge indigenous supplies of oil and gas.

If Russia and Gazprom want more access to Europe, then they too must be prepared to reciprocate through market liberalisation of their own and parallel access to Russia for European energy companies. That may be a tall order given that Europe, as Ms Kroes will illustrate today, still has a long way to go to reform its own energy sector.

But today's publication of the EU energy review is as good a place as any to start. If Europe does not grasp the opportunity, it may come to regret the consequences.

Michael Harrison is a commentator with The Independent (UK).