Europe’s Energy Security:
Options and Challenges to
Natural Gas Supply Diversification
Michael Ratner, Coordinator
Specialist in Energy Policy
Paul Belkin
Analyst in European Affairs
Jim Nichol
Specialist in Russian and Eurasian Affairs
Steven Woehrel
Specialist in European Affairs
August 20, 2013
Congressional Research Service
7-5700
www.crs.gov
R42405
CRS Report for Congress
Pr
epared for Members and Committees of Congress
Europe’s Energy Security: Options and Challenges to Natural Gas Supply Diversification
Summary
Europe as a major energy consumer faces a number of challenges when addressing future energy
needs. Among these challenges are rapidly rising global demand and competition for energy
resources from emerging economies such as China and India, persistent instability in energy
producing regions such as the Middle East, a fragmented internal European energy market, and a
growing need to shift fuels in order to address climate change policy. As a result, energy supply
security has become a key concern for European nations and the European Union (EU).
A key element of the EU’s energy supply strategy has been to shift to a greater use of natural gas.
Europe as a whole is a major importer of natural gas. Although second to Norway as a supplier to
Europe, Russia remains one of Europe’s most important natural gas suppliers. Europe’s natural
gas consumption is projected to grow while its own domestic natural gas production continues to
decline. If trends continue as projected, Europe’s dependence on Russia as a supplier is likely to
grow. And, while it could be in Europe’s interest to explore alternative sources for its natural gas
needs, it is uncertain whether Europe as a whole can, or is willing to, replace a significant level of
imports from Russia. Some European countries that feel vulnerable to potential Russian energy
supply manipulation may work harder to achieve diversification than others.
Russia has not been idle when it comes to protecting its share of the European natural gas market.
Moscow, including the state-controlled company Gazprom, has attempted to stymie European-
backed alternatives to pipelines it controls by proposing competing pipeline projects and
attempting to co-opt European companies by offering them stakes in those and other projects. It
has attempted to dissuade potential suppliers (especially those in Central Asia) from participating
in European-supported plans. Moscow has also raised environmental concerns in an apparent
effort to hinder other alternatives to its supplies, such as unconventional natural gas.
Successive U.S. administrations and Congresses have viewed European energy security as a U.S.
national interest. Promoting diversification of Europe’s natural gas supplies, especially in recent
years through the development of a southern corridor of gas from the Caspian region as an
alternative to Russian natural gas, has been a focal point of U.S. energy policy in Europe and
Eurasia. The George W. Bush Administration viewed the issue in geopolitical terms and sharply
criticized Russia for using energy supplies as a political tool to influence other countries. The
Obama Administration has also called for diversification, but has refrained from openly
expressing concerns about Russia’s regional energy policy, perhaps in order to avoid jeopardizing
relations with Moscow. Nevertheless, although supplying natural gas to Europe from the Caspian
Region and Central Asia has been a goal of multiple U.S. administrations and the EU, it is far
from being achieved in volumes significant to counter Russian exports.
This report focuses on potential approaches that Europe might employ to diversify its sources of
natural gas supply, Russia’s role in Europe’s natural gas policies, and key factors that could
hinder efforts to develop alternative suppliers of natural gas. The report assesses the potential
suppliers of natural gas to Europe and the short- to medium-term hurdles needed to be overcome
for those suppliers to be credible, long-term providers of natural gas to Europe. The report looks
at North Africa, potentially the most realistic supply alternative in the near term, but notes that the
region will have to resolve its current political, economic, and security instability as well as the
internal structural changes to the natural gas industry. Central Asia, which may have the greatest
amounts of natural gas, would need to construct lengthy pipelines through multiple countries to
move its natural gas to Europe.
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Europe’s Energy Security: Options and Challenges to Natural Gas Supply Diversification
Contents
Introduction: Change Is Afoot ......................................................................................................... 1
Context, Background, and Different Points of Views ...................................................................... 3
The U.S. Perspective ................................................................................................................. 3
European Natural Gas Consumption and the EU’s Evolving Energy Policy ............................ 5
Russia’s Role ............................................................................................................................. 9
Gas Crises of the 2000s and Russia and Europe’s Search for Alternatives ....................... 11
Southern Corridor: Issues and Background ............................................................................. 14
Discussions on a Trans-Caspian Pipeline .......................................................................... 16
Potential Sources of Alternative Supplies ...................................................................................... 18
The Caspian Region and Central Asia: The Focus of U.S. Policy ........................................... 18
Azerbaijan: The EU’s Best Hope For New Natural Gas Supplies? ................................... 20
Kazakhstan: Natural Gas Is Second to Oil ........................................................................ 21
Turkmenistan: European Orientation? .............................................................................. 22
Uzbekistan: A Sleeping Natural Gas Giant? ...................................................................... 22
North Africa: Opportunities Amid Uncertainty ....................................................................... 23
Algeria: Security Concerns Threaten Resource Development .......................................... 24
Egypt: In Need of a Reorganization of Its Natural Gas Sector ......................................... 25
Libya: Untapped Potential ................................................................................................. 25
Liquefied Natural Gas Imports ................................................................................................ 26
Possible U.S. LNG Exports: Pricing Not Volumes May Be Key ...................................... 27
More Distant Alternatives ........................................................................................................ 27
Eastern Mediterranean: A Recent Development ............................................................... 27
The Arctic Region and Players .......................................................................................... 27
Potential Development of Alternative Sources in Europe ................................................. 28
Prospects for Diversification ......................................................................................................... 28
Figures
Figure 1. 2012 EU Natural Gas Imports .......................................................................................... 6
Figure 2. EU Dependence on Russian Natural Gas ....................................................................... 10
Figure 3. Select European Natural Gas Infrastructure ................................................................... 17
Figure 4. The Caspian Region ....................................................................................................... 19
Tables
Table 1. EU Natural Gas Data, 2012 ................................................................................................ 8
Table 2. Prospective Non-Russian Southern Corridor Pipelines ................................................... 14
Table 3. Key Central Asian Natural Gas Data, 2012 ..................................................................... 20
Table 4. Key North African Natural Gas Data, 2012 ..................................................................... 23
Table 5. EU LNG Import Capacity ................................................................................................ 26
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Contacts
Author Contact Information........................................................................................................... 29
Acknowledgments ......................................................................................................................... 29
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Europe’s Energy Security: Options and Challenges to Natural Gas Supply Diversification
Introduction: Change Is Afoot
The 28 member-state European Union (EU) has been a growing natural gas consumer and
importer for decades.1 As Europe’s natural gas production has declined in recent years, its
dependence on imported natural gas has increased. This has left it more dependent as a whole on
its primary supplier, Russia, which has shown some inclination to use its resources for political
ends. Natural gas, unlike oil, which is a global commodity, is a regional commodity with regional
buyers and sellers exerting more influence.
Over the past decade, some European officials have become increasingly concerned about the
potential for cutoffs or curtailments of Russian natural gas supplies to Europe. At least until
recently, most Russian natural gas exports to Europe flowed through Ukraine and Belarus. Fragile
and sometimes hostile relations between Kyiv, Minsk, and Moscow have in the past resulted in
interruptions in the flow of natural gas to parts of Europe, as happened in 2006 and 2009. Some
countries in Eastern Europe, which are in some cases almost exclusively reliant on Russian gas
imports, have been particularly susceptible to these fluctuations.
In response to past supply cutoffs and the potential for future energy supply interruptions,
European leaders, sometimes with the support of the United States, have sought to increase their
energy security by exploring supply diversification options. One such response, though contrary
to the U.S. perspective of energy security through diversification, has been the decision by some
EU members to support alternative transit routes for Russian gas. This includes Germany’s
decision to support construction of the Nord Stream pipeline, which directly connects Russia and
Germany, Russia’s largest importer. Russia has also committed to building the South Stream
pipeline across the Black Sea, connecting Russia, Bulgaria, and Hungary. While these pipeline
projects bypass transit states such as Ukraine and Belarus, they also bypass EU member states
like Poland and Lithuania that are more critical of Russian policies. The Russian-backed projects
are also widely seen as rivals to other pipelines supported by the EU.
The opening of Nord Stream—the second pipeline began operations in October 2012, raising its
capacity to 2 trillion cubic feet per year (tcf)—and the proposal for South Stream highlight
challenges Europe faces in diversifying its natural gas supplies: Russia has demonstrated a
willingness to go to great lengths to maintain its hold on European market share of natural gas.
However, while some European countries, Germany included, maintain that projects such as Nord
Stream enhance European security by providing alternate routes for Russian supplies, a number
of EU member states, including Poland and Lithuania, opposed Nord Stream and have questioned
Russia’s reliability as an energy supplier. Critics tend to argue, for example, that projects like
Nord Stream could give Moscow additional political and economic leverage in its dealings with
countries that have been bypassed by the pipeline.
A second EU response to concerns over Europe’s reliance on Russian natural gas supplies is what
has become known as the Southern strategy or the Southern Corridor to transport natural gas from
the Caspian region and Central Asia. Although the long-time centerpiece of this strategy, the
proposed Nabucco natural gas pipeline, is no longer considered a commercially viable project, it
has been replaced by the planned smaller-scale Trans-Anatolian natural gas pipeline (TANAP),
which would connect to the Trans Adriatic Pipeline (TAP), which goes from the Turkish border
1 On July 1, 2013, Croatia became the 28th member of the European Union.
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through Greece and Albania, and ends in Italy. Nabucco West, the rival of TAP, would have
transported natural gas from Turkey’s western border to Austria. On June 28, 2013, the
consortium that controls the Azerbaijani natural gas chose the TAP project to connect to TANAP.2
The consortium did not rule out Nabucco West or a similar project at a later date when more
natural gas is developed. Meanwhile, alternative supplies from other regions (e.g., North Africa
and Central Asia) face several significant challenges.
A third aspect of Europe’s energy security policies involves Europe’s own fragmented internal
energy market. In early February 2011, European heads of state pledged to complete the
integration and liberalization of the internal European energy market by 2014; ensure all
European member states are connected to a Europe-wide energy supply grid by 2015; boost
energy efficiency throughout Europe; and better coordinate external energy policies. European
leaders hope that further market liberalization and interconnection of electric grids and pipelines
will, among other things, allow member states to share and trade energy more flexibly than at
present, mitigating the impact of supply interruptions and overdependence on a single supplier.
The European Commission has estimated that over €1 trillion (about $1.4 trillion) of
infrastructure and other investment will be necessary to realize the EU goals.
Despite its dependence on Russian natural gas, some analysts argue that Europe is well positioned
geographically to benefit from recent changes in global natural gas development. Since the advent
of shale gas in the United States, the world appears to be potentially awash in natural gas. A 2011
study commissioned by the U.S. Energy Information Administration (EIA) showed that
technically recoverable shale gas resources worldwide may exceed current global natural gas
reserves.3 Other key developments and possible alternatives to Russian natural gas are outlined
below:
• Taken as a whole, North Africa could pose a credible alternative to Russian
natural gas supplies. The change of regimes in Libya, in particular, and in Egypt
as a result of the wave of regional unrest known as the “Arab Spring,” poses a
potential opportunity to increase natural gas production and exports from these
countries. Both Libya and Egypt have large natural gas reserves, but production
and exports have been hampered by domestic policies, and Egypt announced last
year that it will actually need to import natural gas.4 Algeria, the largest exporter
of natural gas in North Africa and the third-largest supplier to Europe behind
Russia and Norway, may also hold large volumes of undeveloped shale gas in
addition to substantial conventional reserves. A terrorist attack and ensuing
hostage crisis at a natural gas facility in Algeria in January 2013 highlighted
security concerns that could present a key obstacle to further development of
these resources, however.
• The Caspian region may hold the greatest potential for new natural gas supplies
for Europe, but currently supplies in Central Asia have to transit Russia to arrive
in the European market. The delays in expanding and fully developing southern
2 BP, “Shah Deniz targets Italian and Southeastern European gas markets through Trans Adriatic Pipeline,” press
release, June 28, 2013, http://www.bp.com/genericarticle.do?categoryId=9006615&contentId=7086179.
3 U.S. Energy Information Administration, World Shale Gas Resources: An Initial Assessment of 14 Regions Outside
the United States, Washington, DC, April 5, 2011, p. 4, http://www.eia.gov/analysis/studies/worldshalegas/.
4 “Egypt Pushes Ahead with LNG Imports as Domestic Output Falls Short,” International Oil Daily, December 31,
2012.
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corridor natural gas pipelines to Europe, including trans-Caspian links, have
forced Central Asian countries to look east rather than west to bypass Russia and
open new markets.5
• Liquefied natural gas (LNG) imports pose an additional alternative to Russian
natural gas. In 2011, LNG comprised almost 20% of the EU’s natural gas imports
and 19% of its consumption. The EU has LNG import capacity to meet its peak
winter demand for natural gas, but during most of the year the facilities are
underutilized. Nevertheless, some countries are considering building additional
LNG import terminals to diversify their sources of natural gas. In addition to
LNG import terminals, the EU could benefit from strategically located natural
gas storage facilities in order to manage import capacity during non-peak periods,
as well as more pipeline interconnections to move natural gas where it is needed.
EU officials have identified both improvements as priorities and they are being
pursued, but not without some difficulty.
• The prospect of significant U.S. LNG exports may pose an opportunity for the
United States to play a bigger role in European energy security and global natural
gas markets.6 Most proposed U.S. LNG export projects are located on the Gulf
Coast or East Coast of the United States, making shipments to Europe probably
economical. Additionally, the U.S. natural gas market is one of the only markets
in the world where natural gas is not priced against oil, giving it a cost advantage
in most of Europe. Should future U.S. LNG contracts not include an oil-indexed
formula, pressure could be added for other countries, including Russia, to follow
suit. Russian companies, including state-controlled natural gas giant Gazprom,
have adamantly defended oil-indexed natural gas prices.
Context, Background, and Different Points of Views
The U.S. Perspective
The primary focus of U.S. energy policy in Europe has been on establishing a southern corridor
route for Caspian, Central Asian, and Middle Eastern natural gas supplies to be shipped by
pipeline to Europe. Other efforts have been focused on EU market reforms, which are beyond the
scope of this report.
The George W. Bush Administration sharply criticized Russia for using energy supplies as a
means to gain political influence over other countries and urged European countries to diversify
supply sources.7 The Obama Administration has also called for diversification, but has refrained
from openly expressing concerns about Russia’s energy policy in the region, perhaps in order to
avoid jeopardizing relations with Moscow.
5 The southern corridor refers to the area south of the Black Sea and into southern Europe.
6 For additional information on U.S. natural gas exports see CRS Report R42074, U.S. Natural Gas Exports: New
Opportunities, Uncertain Outcomes, by Michael Ratner et al.
7 The White House, Vice President’s Remarks at the Vilnius Conference, May 4, 2006, http://www.whitehouse.gov.
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The progress of the TANAP project along with the selection of TAP has greatly improved the
chances of Caspian natural gas to flow to Europe in significant quantities. Both TAP and Nabucco
West were designed to be significantly smaller than the previously proposed Nabucco project,
long a centerpiece of U.S. and European energy policy in the region. Despite political support
from the United States and the European Union, Nabucco was not deemed to be commercially
viable. U.S. officials have indicated that they “support any pipeline through the Southern Corridor
that provides gas to the most vulnerable countries in Europe and that includes concrete, written
guarantees that the pipeline will be expanded as more gas becomes available.”8 The three projects
mentioned above are all viewed as scalable as supply and demand changes. Despite the Obama
Administration’s stated support of the Southern Corridor, officials reject the view that Russia and
the United States are competing for influence over Caspian and Central Asian energy supplies,
emphasizing, among other things, that the Administration has formed a Working Group on
Energy under the U.S.-Russia Bilateral Presidential Commission.9
Although U.S. and EU officials have welcomed TAP—which will cross Greece and Albania
before ending in Italy—as an alternative to Russian natural gas, some analysts continue to express
concern about Russian influence. Observers note, for example, that Russian companies have
shown interest in Greece’s natural gas sector and that Italy and Russia historically have close ties
on energy issues, particularly during former Prime Minister Silvio Berlusconi’s administration. In
June 2013, Greek officials reportedly were surprised to learn that Gazprom would not submit a
bid to purchase Greece’s state-owned natural gas supplier, DEPA. The proposed sale, potentially
worth above €900 million ($1.17 billion), was a priority for Greek Prime Minister Antonis
Samaras, who had negotiated directly with Gazprom CEO Alexey Miller. Some speculate that
Gazprom’s unexpected decision not to go through with the deal could have been the result of
opposition from the European Commission.10 Regardless of the outcome of negotiations with
Russia, the TAP project, which Prime Minister Samaras claims will bring €1.5 billion (about $1.9
billion) in direct investment and at least 2,000 jobs to Greece over the next several years, remains
a cornerstone of Greek economic development plans.11 Azerbaijan’s state company, SOCAR, was
the winning bidder for Greece’s gas transport company, DESFA, while there were no viable bids
for DEPA.
The Arab Spring brought regime change to two large natural gas producers, Libya and Egypt,
with potentially expanded sources of natural gas to Europe. The development of these resources
will depend upon the policies of the evolving governments. North Africa already has significant
natural gas infrastructure—LNG export terminals and pipelines—connecting it to Europe.
However, it is too early to determine how the changes the Middle East and North Africa (MENA)
will affect natural gas production and exports. The U.S. government, along with the EU, has
indicated its desire to expand trade and investment with the MENA region, which could help
foster economic growth and provide support for successful democratic transitions. For example,
in a speech delivered at the State Department on May 19, 2011, President Obama outlined a new
8 Remarks by Ambassador Richard Morningstar, Special Envoy for Eurasia Energy at the Economist’s Investment
Energy Summit, Athens, Greece, March 28, 2012. http://www.state.gov/s/eee/rmk/187662.htm.
9 U.S. House of Representatives, Committee on Foreign Affairs, Subcommittee on Europe and Eurasia, Hearing on
European and Eurasian Energy: Developing Capabilities for Security and Prosperity, Testimony of Ambassador
Richard L. Morningstar, Special Envoy for Eurasian Energy, June 2, 2011.
10 See, for example, Helena Smith, “Greek Gas Supplier Selloff Fails to Draw Gazprom Bid,” The Guardian, June 10,
2013, online edition.
11 “PM Hails Choice of TAP As ‘Putting Greece on Pipeline Map,’” ekathimerini.com, June 28, 2013, online edition.
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plan for U.S. engagement with MENA that includes a “Trade and Investment Partnership
Initiative.”12 Some Members of Congress have also expressed interest in deeper trade and
investment ties with Arab Spring countries.13 Although U.S. trade and investment with the MENA
region overall is relatively limited at present, this region may present growing commercial
opportunities for U.S. businesses in areas such as energy, transportation, and infrastructure.14
The 113th Congress has already expressed concern about European energy security with the
introduction of H.R. 580 and S. 192. The companion bills would, among other things, give
member states of the North Atlantic Treaty Organization (NATO) the same status as free trade
countries with regard to possible U.S. LNG exports. The 112th Congress also expressed concern
about European energy security. Section 1233 of the FY2012 National Defense Authorization Act
requires the Secretary of Defense to submit to “the appropriate committees of Congress a detailed
report on efforts by the Department of Defense, including within NATO, to address the energy
security of the NATO alliance.”
European Natural Gas Consumption and the EU’s Evolving
Energy Policy
Collectively, EU member states are the world’s largest energy importer, importing about 55% of
their energy supply—approximately 84% of their oil and 64% of their natural gas.15 EU member
states increasingly rely on natural gas, particularly to reach ambitious targets to reduce carbon
dioxide and greenhouse gas emissions. Natural gas comprised 24% of the EU’s primary energy
consumption in 2011, a number that is expected to grow to almost 30% by 2030.16 Oil made up
about 37%, coal almost 18%, and nuclear 12% of the EU primary energy supply. Coal use rose
between 2011 and 2012, in part supplied by increased U.S. coal exports. The European
Commission forecasts that the EU will import over 80% of its natural gas needs by 2030.
Analysts note that recent policy decisions, such as a 2011 German announcement that it would
phase out use of its nuclear power plants by 2020 and possible prohibitions on shale gas
development by some EU members, could mean a more rapid rise in Europe’s dependence on
natural gas imports.
Russia has long been, and is expected to continue to be, a key supplier of natural gas to Europe.
In 2012, Russia accounted for 34% of European natural gas imports, surpassed by Norway as the
lead supplier (see Figure 1). Algeria is the third-largest supplier to the EU. Russian and European
companies have developed an extensive network of infrastructure to transport Russian natural gas
12 Office of the Press Secretary, “Remarks by the President on the Middle East and North Africa,” The White House,
State Department, Washington, DC, May 19, 2011.
13 See, for example, Carnegie Endowment for International Peace, “Lieberman Delivers Remarks on Democratic
Transition in Egypt,” July 22, 2011, http://carnegieendowment.org/files/Lieberman_Prepared_Remarks.pdf; John
McCain, Lindsey Graham, Mark Kirk, and Marco Rubio, “The Promise of a Pro-American Libya,” Wall Street Journal,
October 7, 2011. On November 18, 2011, Representative Dreier introduced a resolution, co-sponsored by
Representative Meeks, that calls for the United States to initiate FTA negotiations with Egypt (H.Res. 472).
14 For more information, see CRS Report R42153, U.S. Trade and Investment in the Middle East and North Africa:
Overview and Issues for Congress, coordinated by Shayerah Ilias Akhtar.
15 European Commission, Market Observatory for Energy, Key Figures, June 2011. http://ec.europa.eu/energy/
observatory/eu_27_info/doc/key_figures.pdf.
16 Eurogas, Long Term Outlook for Gas Demand and Supply 2007-2030, June 5, 2010, p. 5, http://www.eurogas.org/
uploaded/Eurogas%20LT%20Outlook%202007-2030_Final_251110.pdf.
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long distances to European markets. Observers expect natural gas to play a significant role in
Europe-Russia relations for decades to come.
Figure 1. 2012 EU Natural Gas Imports
Source: BP Statistical Review of World Energy 2013.
Notes: The United States re-exported a minimal amount of LNG to Europe in 2012 and is included in Other.
The percentages do not include imports from one EU country to another. Units are trillion cubic feet (tcf).
Different EU member states use natural gas to different degrees and import levels and sources
vary by country (see Table 1). Some large natural gas consumers, such as Spain, do not import
any natural gas from Russia. Germany, the second-biggest natural gas consumer and Russia’s
largest market, relied on Russia for almost 35% of its imports in 2012. The opening of the Nord
Stream pipeline in late 2011 and Germany’s planned closure of its nuclear power plants highlights
Germany’s potentially greater reliance on Russia. Nord Stream is operating at approximately 80%
of its 2 tcf capacity.
In a reflection of these national differences, the EU has traditionally exerted little if any influence
over the energy policies of individual member states. However, in the face of rising concern about
Europe’s reliance on Russian energy and growing public pressure to address global climate
change, EU member states have begun to increase cooperation toward an “Energy Policy for
Europe.” As stated earlier, European heads of state have committed to completing the integration
and liberalization of the internal European energy market by 2014; promoting the interconnection
of electric grids and natural gas pipelines; boosting energy efficiency; and better coordinating
external energy policies. European leaders anticipate that these initiatives will allow member
states to share and trade energy more flexibly than at present, mitigating the impact of potential
supply interruptions and overdependence on a single supplier.
Even as EU leaders promote ideas on a common energy strategy, many question how far member
states will agree to push Russia (and Gazprom) to adopt the EU’s principles of competition and
open its energy sector to outside investment. Some analysts believe that an EU commitment to
further liberalize Europe’s energy market and a September 2012 announcement that it would
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investigate suspected anti-market practices by Gazprom could signal the beginning of a firmer
and more unified approach toward Russia. Moscow has strongly criticized the decision, which,
among other things, would require energy companies that own pipelines to sell them, or manage
them separately. Under the EU’s policy, Gazprom, which plays a key role in exporting natural gas
to Europe, could be forced to sell its significant stakes in European distribution networks. In
December 2011, Gazprom announced that its South Stream natural gas pipeline would end
(discussed in more detail in “Russia’s Role”) in Italy rather than in Austria, as was previously
planned. Company sources reportedly stated that the change was in reaction to an EU decision to
block a Gazprom bid to purchase a 50% stake in the Central European Gas Hub (CEGH) in
Austria.17 EU member states have committed to fully implementing the liberalization directive by
the end of 2014. However, European officials reportedly consider the target date unlikely to be
met.18
Some observers believe that regardless of the aforementioned efforts, Russia will continue to
exercise significant influence over Europe’s energy security. Indeed, several member states have
pursued bilateral energy deals with Russia that will increase their dependence on Russia for years
to come. Both Germany and Italy, the largest importers of Russian natural gas, have negotiated
long-term deals with Russia to lock in future natural gas supplies. For Germany and several
others, Russia’s role as a dominant energy supplier increases the importance of fostering good
relations with Moscow. Further, bilateral deals with Russia are not limited to the major energy
consumers. Bulgaria, Romania, Hungary, Greece, and others have entered into long-term energy
agreements with Gazprom over the past several years.
Such instances of individual member states dealing with Russia bilaterally have in the past drawn
harsh criticism from other EU member states, such as the Baltic states and Poland, that have had
strained relations with Russia for some time over other issues as well. Governments in these
countries have warned their European colleagues not to make energy deals that could give Russia
increased political influence over European decision-making. Many of these nations believe that
Europe’s dependence on Russian energy is likely to last no matter how successful Europe may be
in identifying energy supply alternatives. But they also feel Europe does not gain real security by
becoming more dependent on Russia. In fact, the growing presence of Gazprom throughout the
European energy market (for instance through its ownership of distribution and storage
infrastructure) has led many to worry about the EU’s ability to develop an energy policy insulated
from Gazprom’s influence.19
Although once heralded as the centerpiece for European energy diversification, the original
Nabucco project has, at least in the near term, been replaced by a project with significantly less
capacity. As currently planned, beginning in 2018, the TANAP pipeline will initially transport 565
bcf of Azerbaijan gas from the Shah Deniz field. This would be about half the capacity of the
originally proposed Nabucco project. Additionally, of the 565 bcf, 215 bcf would stay in Turkey,
with the remaining 350 bcf destined to Europe via TAP. Although Russia has long been viewed as
an opponent of Nabucco and any project associated with the Southern Corridor strategy, it has not
been been as vocal in its opposition to smaller-scale projects, such as Nabucco-West or TAP.
Nonetheless, Moscow continues to push forward with its South Stream pipeline, which observers
believe is at least partly intended to thwart European-backed diversification efforts.
17 Denis Pinchuk, “Gazprom Drops Austria from S. Stream Gas Route—Source,” Reuters, December 14, 2011.
18 “Commission Prepares EU Energy Market ‘Action Plan,’” Euractiv.com, September 17, 2012.
19 Comments provided through discussions with representatives of several European member states.
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Table 1. EU Natural Gas Data, 2012
Units equal billion cubic feet per year (bcf)
Natural Gas
Consumption
Natural Gas Production
Natural Gas Importsa
Austria 318
64
268
Belgium 597
0
1,084
Bulgaria 95
14
95
Croatia 100
57
48
Cyprus 0
0
0
Czech Republic
290
5
353
Denmark 138
226 0
Estonia 20
0
22
Finland 109
0
109
France 1,501
22
1,600
Germany 2,656
318
3,065
Greece 148
0
102
Hungary 343
109
208
Ireland 159
7
187
Italy 2,426
275
2,359
Latvia 51
0
55
Lithuania 117
0
192
Luxembourg 39 0 34
Malta 0
0
0
Netherlands 1,285
2,257 512
Poland 586
148
385
Portugal 166
0
73
Romania 477
385
115
Slovakia 212
4
145
Slovenia 31
0
26
Spain 1,109
6
1,225
Sweden 39
0
39
United Kingdom
2,765
1,448
1,734
TOTAL 15,776
5,402
14,038
Sources: BP Statistical Review of World Energy 2013 and Eurogas.
Notes: Imports plus internal production does not equal consumption because some countries export imported
natural gas or their own production within the region. Imports include natural gas received from other EU
countries.
a. Some EU countries import more natural gas than they require in order to re-export the natural gas to
other countries.
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Russia’s Role20
The Russian natural gas industry is one of the most important players in the global energy market.
In 2012, Russia had the largest natural gas reserves in the world, about 18% of the world’s total,
was the leading exporter of natural gas, and placed second in production and consumption behind
the United States. Russia was also a founding member, and currently holds the top position, in the
Gas Exporting Countries Forum (GECF).
The Gas Exporting Countries Forum
The Gas Exporting Countries Forum (GECF), also known as Gas-OPEC, is composed of some of the world’s leading
natural gas producers and exporters. It is not a cartel in the same sense as OPEC, in that it does not control marginal
production in an effort to influence prices. There are structural differences in global natural gas and global oil that
make this type of control difficult. Nevertheless, the GECF provides a venue for its members to discuss topics of
interest such as production projects, exports, etc. Its members—which include Algeria, Bolivia, Egypt, Equatorial
Guinea, Iran, Libya, Nigeria, Qatar, Russia, Trinidad and Tobago, and Venezuela—control 36% of world production
and 47% of global trade. Kazakhstan, the Netherlands, and Norway have observer status at the GECF. Major natural
gas producers that are not affiliated with the GECF include Australia, Azerbaijan, Canada, Indonesia, Malaysia, Oman,
Turkmenistan, the United States (the world’s leading natural gas producer), and the United Arab Emirates.
As noted, Russia is currently the dominant supplier of natural gas to Europe, accounting for about
one-quarter of the EU’s natural gas supplies.21 (See Figure 2.) This dependency does not go only
in one direction, however. Europe is also the most important market for Russian natural gas
exports, a calculation Moscow may take into account when developing political relations with
Europe. The bulk of Gazprom’s natural gas exports go to Europe and Eurasia. Of the 7.1 tcf of
natural gas exported by Gazprom in 2011, about half went to the EU. Of the rest, 28% went to the
Commonwealth of Independent States (CIS), many of which have been unreliable in paying what
they owe and/or receive natural gas at subsidized prices.22 The rest went to Turkey, which is
seeking EU membership, and other non-EU countries in Europe, and to Asia.23
20 For additional information on Russia see CRS Report RL33407, Russian Political, Economic, and Security Issues
and U.S. Interests, coordinated by Jim Nichol.
21 Russia also supplies the EU with about 27% of its oil imports, 24% of its coal imports, 30% of it uranium imports,
and is the third-largest supplier of electricity imports, but these fuel sources are beyond the scope of this report.
22 The Commonwealth of Independent States (CIS) includes Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan,
Moldova, Russia, Tajikistan, and Uzbekistan with Turkmenistan and Ukraine having unofficial status. Georgia
withdrew from the CIS in 2009.
23 Sergey Paltsev, “Russian Natural Gas Export Potential Up to 2050,” MIT Center for Energy and Environmental
Policy Research, July 2011.
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Figure 2. EU Dependence on Russian Natural Gas
Source: CRS Graphics compiled this graphic.
Notes: For primary energy, which is the base source of energy used to produce electricity and perform other
work, Russian natural gas does not comprise greater than 50% for any EU country.
The revenues generated by this trade are vital to the ruling Russian elite. At present, all Russian
natural gas exports are controlled by Gazprom. As a state-controlled firm, Gazprom has the
closest possible links with top Russian leaders (Russia’s Prime Minister Dimitri Mevedev served
as president of Gazprom). The personal and political fortunes of Russia’s leaders are closely tied
to Gazprom. In 2012, President Putin estimated that half of total Russian government revenue
came from oil and natural gas taxes. Other estimates put the figure higher. Russia’s economic
revival in the Putin/Medvedev era has been heavily dependent on the massive wealth generated
by energy exports to Europe. Gazprom offers natural gas to the Russian domestic market at
subsidized prices, which also bolsters the ruling elite politically. Government proposals to
decrease subsidies have not come to fruition.
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In addition to their financial benefits, Russian natural gas exports to Europe and Eurasia may
have important psychological benefits for the Russian elite. They may be viewed as
demonstrating the resurgence of Russian power after the collapse of the Soviet Union over 20
years ago. Russia’s “National Security Strategy to 2020,” released in May 2009, stated that “the
resource potential of Russia” is one of the factors that has “expanded the possibilities of the
Russian Federation to strengthen its influence in the world arena.”24
In the long term, Russia hopes to reduce dependency on Europe by diversifying its customer base
as well. By 2030, the Russian government plans to increase gas exports to Asian countries such as
China, South Korea, and Japan until they make up 19%-20% of the total. However, Russia has a
considerable way to go to meet this objective. In 2011, gas exports to Asia made up about 7% of
total Russian gas exports, all in the form of LNG. Russia opened its first LNG export facility in
2009 on its east coast. Long-standing Russian hopes of providing large amounts of natural gas to
China by pipeline have been stymied by the fact that China has been unwilling to pay the price
Europe pays for Russian natural gas.25
Given this situation, most experts believe that, barring the failure of Russia to increase its own
energy exploration and development, Russia will continue to remain Europe’s primary energy
supplier, including natural gas supplies, for many years and possibly decades. And, Europe will
remain the primary market for Russian energy exports. Therefore, the main goal of state-run
Russian energy companies, such as Gazprom, has been to try to solidify their dominance of
Europe’s energy sector by pursuing long-term bilateral supply contracts with some European
countries such as Germany, Italy, and Bulgaria, and by seeking to buy stakes in European energy
distribution networks and storage facilities. Russia has also used the allure of its vast resources to
co-opt European companies that dominate Europe’s energy sector.
Gas Crises of the 2000s and Russia and Europe’s Search for Alternatives
Although widely believed by industry and in some political circles, evidence that Russia has been
able to exploit its energy strength to manipulate the policy of EU and other European countries is
ambiguous. Some experts, particularly those in Central Europe, claim that Russia is able to use its
dominant role in the energy sectors of their countries to exert influence over certain businessmen
and politicians. Others, mainly in Western Europe, claim that the fact that Europe remains
Russia’s largest energy market, and thus its biggest source of foreign income, has led Russia to
exercise more caution in dealing with EU countries. Key customers of Gazprom have been able to
extract better contract terms in recent years that link part of the price of natural gas to spot natural
gas prices instead of solely oil.
Russian leaders have repeatedly said that they view the former Soviet countries as lying within
Russia’s “sphere of privileged interests.” Some have pointed out that Russia has openly used
energy to affect domestic and international policies in Belarus and Ukraine. In perhaps the most
striking example, Russia and Ukraine agreed to extend the stay of the Russian Black Sea Fleet in
Crimea until 2042, from the original withdrawal date of 2017. In exchange, Russia pledged to
provide Ukraine with a discount of two-thirds on the standard oil-linked contract price for natural
24 The text of the National Security Strategy can be found at the website of the Russian National Security Council at
http://www.scrf.gov.ru/documents/99.html.
25 For more information on Russia’s official energy strategy, see Energy Strategy of Russia for the Period up to 2030, at
http://www.energystrategy.ru/projects/docs/ES-2030_(Eng).pdf.
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gas supplies for 10 years. However, rising global oil prices (which have risen faster than spot
natural gas prices), to which Russian contract prices are linked, have negated much of the savings
Kyiv counted on, perhaps providing Moscow with additional leverage over Ukraine.26
In contrast, Russia may view countries such as Germany and France as key players on the world
stage like itself, and therefore entitled to more respect. Smaller, former Soviet-controlled
countries such as the Baltic and Central European states may fall between these categories, in the
view of Russian leaders.
In the mid- and late 2000s, many European countries suffered several unexpected energy cutoffs
due to confrontations between Russia and the key pipeline transit states of Ukraine and Belarus
over natural gas supply and transit issues. In 2009, Gazprom halted all natural gas supplies
transiting Ukraine for nearly three weeks after the two sides failed to reach agreement on several
issues, including a debt allegedly owed by Ukraine to Gazprom and the price that Ukraine would
pay for natural gas supplies. Prior to the opening of Nord Stream, about 80% of Europe’s natural
gas imports from Russia transited Ukrainian pipelines. A similar Russian-Ukrainian dispute had
led to a natural gas cutoff to Europe at the beginning of 2006. In 2010 and 2011, disputes between
Russia and Belarus over a variety of issues, including energy prices, debts owed by Belarus, and
transit fees paid by Russia for the use of Belarusian pipelines, led to temporary reductions of oil
and natural gas supplies to Belarus and neighboring countries.
Russia and some Western European countries responded to these incidents by planning new
pipeline projects to bypass what they viewed as problematic transit states. One new natural gas
pipeline is the aforementioned Nord Stream, which transports natural gas from Russia to
Germany via a pipeline under the Baltic Sea. It has a planned capacity of almost 2 tcf per year, as
compared to the Ukrainian pipeline system’s 4.0-4.5 tcf per year. The first supplies from the
pipeline were delivered in late November 2011 and the pipeline is operating at about 80% of its
capacity. Gazprom has proposed expanding Nord Stream’s capacity still further, but Germany has
rejected the idea so far.
Another pipeline project favored by Moscow is South Stream. It would run under the Black Sea
to Bulgaria and then onto other European countries. Russia broke ground on South Stream in
December of 2012, and plans to begin deliveries in late 2015. South Stream has a planned
capacity of 2.2 tcf per year and is considered a main competitor to the southern corridor projects
(see “Southern Corridor: Issues and Background” below for more on the Southern Corridor
projects).
While building pipelines that circumvent Ukraine, Russia continues its long-standing efforts to
gain control of Ukraine’s pipeline system. In fact, Russia is using Ukraine’s fear of the potential
impact of Nord Stream and South Stream on transit volumes and thus associated revenues
through Ukraine’s pipeline system to try to secure control of those pipelines cheaply. Gazprom
officials have strongly encouraged Ukrainian leaders that they should sell control of Ukraine’s
pipelines to it while they can get a good price.27 Otherwise, they say, Gazprom may find it more
profitable to build and use South Stream rather than modernize Ukraine’s aging system. Ukraine
has offered Russia joint operating rights over the Ukrainian pipeline system in exchange for a
26 Luke Harding, “Ukraine extends lease for Russia’s Black Sea Fleet,” The Guardian, April 21, 2010,
http://www.guardian.co.uk/world/2010/apr/21/ukraine-black-sea-fleet-russia.
27 “Value of Ukraine Gas Transportation System Could Fall Seriously—Miller,” Interfax, December 31, 2011.
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reduction in the price of gas for Ukraine’s domestic consumption and guaranteed transit volumes
through Ukraine’s pipelines. The two sides are currently negotiating over the proposal. In the
meantime, Ukraine has sharply reduced the amount of gas it imports from Russia, provoking
Russia to demand that Ukraine pay a $7 billion fine for allegedly violating the terms of the
current “take-or-pay” agreement between the two countries.
Russia has had more success in gaining control of Belarus’s gas infrastructure. In December
2011, Gazprom completed a deal to buy the 50% of Beltransgaz (Belarus’s natural gas pipeline
transport company) that it did not own, in exchange for reduced gas prices. The Yamal-Europe
gas pipeline, which runs through Belarus and Poland, currently carries about 20% of Russian gas
exports to Europe. Gazprom is currently studying how to expand the gas transit capacity of its
new possession, which could put further pressure on Ukraine.
Some Russian actions may be aimed at frustrating European efforts at diversification. These
include trying to sign long-term contracts with Azerbaijan and Central Asian states to lock up
supplies sought by the Europeans; lodging legal objections to the proposed Trans-Caspian
Pipeline between Azerbaijan and Turkmenistan, which would be a key link in providing Caspian
gas to Europe; and attempting to coordinate natural gas export policies with other leading
producers such as Qatar and Iran, perhaps with hopes of eventually creating a “gas OPEC” of the
GECF; and the South Stream project itself.
Most recently, some observers have suggested that Russia may have attempted to influence
Azerbaijan and the Shah Deniz consortium’s selection at the end of June 2013 of TAP over the
competing Nabucco West pipeline, although Russia would likely have preferred neither project be
built. The latter pipeline’s planned route and terminus in Austria were partly similar to those of
Russia’s South Stream pipeline, so was viewed as competing for the same markets (although the
volumes of gas involved were dissimilar). Historically, Russia has sought to thwart, to varying
degrees, any project that would bring non-Russian natural gas supplies to Europe. In late 2012,
media reported that Gazprom had dropped plans for a southern branch of South Stream transiting
Greece to Italy, a decision viewed by some observers as signaling Azerbaijan that Russian
concerns over the TAP pipeline had changed.28 In June 2013, Russia announced that it would ship
over $1 billion in arms to Azerbaijan that had been delayed, perhaps underlining to Azerbaijan the
importance of maintaining amicable bilateral ties and not competing directly with South Stream,
according to some observers.29
28 Olgu Okumu, “Russia Winner in Energy Transit Deal With Turkey,” Al-Monitor Turkey Pulse, July 10, 2013;
Matteo Cazzulani, “TAP Wins on Nabucco: A Total Defeat for the EU,” EastBook, July 5, 2013; “One Sure Winner
Emerges in Southern Gas Corridor Race,” EurActiv, March 11, 2013, at http://www.euractiv.com; Farid Osmanov and
Elmar Baghirov, “Nabucco West or Trans-Adriatic Pipeline,” Natural Gas Europe, June 25, 2013; Mehmet Ogutcu,
“Azerbaijan’s Shah Deniz-2 and Southern Corridor: Potential Risks,” Hurriyet Daily News, July 1, 2013; Ivan
Nechepurenko, “Putin’s Visit to Baku Highlights Russia’s ‘Clout,’” The Moscow Times, August 13, 2013. For those
stressing the financial factors in the choice of TAP, see Shahin Abbasov, “Azerbaijan: When it Comes to Pipelines, It’s
Not Personal, It’s Strictly Business,” Eurasianet, July 19, 2013; Matthew Bryza and David Koranyi, “A Tale of Two
Pipelines: Why TAP has Won the Day,” Natural Gas Europe, July 2, 2013; Central Eurasia: Daily Report, Open
Source Center, June 22, 2013, Doc. No. CEN-24292597.
29 See, for example, ‘Russia/Azerbaijan/Armenia Politics: Large Consignment of Arms Confirmed,” EIU Views Wire,
June 27, 2013.
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Southern Corridor: Issues and Background30
Establishing a non-Russian and non-Iranian natural gas pipeline system to transport natural gas
from the Caspian region and Central Asia to Europe is a stated priority for the EU supported by
the United States. Although TANAP along with TAP are significant steps in achieving this goal,
the initial volumes are not great enough to alter Europe’s dependency on Russian natural gas. As
noted above, current plans envision an initial pipeline network that would transport to Europe
well under half the capacity of the originally proposed Nabucco pipeline.
Table 2. Prospective Non-Russian Southern Corridor Pipelines
Units = billion cubic feet per year (bcf)
Anticipated
Name Anticipated
Capacity
In-Service Date
Partners
Trans Adriatic Pipeline
350
2019
AXPO (Switzerland), E.ON
(TAP)
(Germany), Statoil
(Norway)
Trans-Anatolian Gas
565
2019
BOTAS (Turkey), SOCAR
Pipeline (TANAP)
(Azerbaijan), TPAO
(Turkey)
Nabucco West Pipeline
350
TBD
BEH Bulgarian (Bulgaria),
Botas (Turkey), FGSZ
(Hungary), OMV (Austria),
Transgaz (Romania)
Source: Company websites and various articles.
Notes: Although the Shah Deniz consortium chose TAP, it is still possible that Nabucco West will be
constructed at a later date if additional natural gas supplies become available. However, OMV, one of the
Nabucco West partners, took a $73 million write-down on the project, indicating a pessimistic view of the
project’s future. The South Stream pipeline project, Russia’s response to developing the Southern Corridor for
Caspian natural gas, is a 2,200 bcf per year pipeline sponsored by EDF (France), ENI (Italy), Gazprom (Russia),
and Wintershall (Germany) to bring Russian natural gas to Europe. South Stream is also designed to bypass
troubled transit states like Ukraine and Belarus.
In mid-November 2007, Greek Prime Minister Kostas Karamanlis and Turkish Prime Minister
Recep Tayyip Erdogan inaugurated a natural gas pipeline connecting the two countries. Since
some Azerbaijani natural gas reaches Greece, the pipeline represents the first natural gas supplies
from the Caspian region to the EU.
As another alternative to natural gas shipments through Turkey, Azerbaijan, Romania, and
Georgia signed a memorandum of understanding in April 2010 to transport liquefied natural gas
(LNG) from Azerbaijan to the EU through Georgia and Romania. This Azerbaijan-Georgia-
Romania-Interconnection (AGRI) project envisions the construction of a natural gas pipeline
30 Since the mid-1990s, the United States had advocated building pipelines from the Caspian region to the west along
diverse routes in addition to existing routes through Russia, and which avoided Iran. See below, and CRS Report 97-
569, Azerbaijan’s Oil and Gas, May 27, 1997, by Jim Nichol (out of print; available from the author of this report). The
term “Southern Gas Corridor” was mentioned in Commission of the European Communities, Communication from the
Commission to the European Parliament, The Council, The European Economic and Social Committee, and the
Committee of the Regions, Second Strategic Energy Review: An EU Energy Security and Solidarity Action Plan,
Com(2008) 781 Final, November 13, 2008.
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from Azerbaijan to the Georgian port of Kalevi, where the natural gas would be liquefied, shipped
across the Black Sea, and regasified at the Romanian port of Constanta. This is an unusual
proposal to use LNG as the distance across the Black Sea is relatively short—the industry norm
for LNG utilization is 1,500 miles. The project output is expected to be 247 bcf per year, with 71
bcf of the natural gas used by Romania and the rest by other EU countries. The presidents of the
three countries (and the prime minister of Hungary, which joined the project) met in Baku on
September 15, 2010, to sign the Baku Declaration of political support for the project.
Some of the tensions between Turkey and Azerbaijan involving energy issues appeared resolved
in June 2010, during President Aliyev’s visit to Turkey, when the two countries signed accords on
the sale and transportation of Azerbaijani natural gas to Turkey and to other countries via Turkey.
A memorandum of understanding permitting Azerbaijan to conclude direct sales with Greece,
Bulgaria, and Syria involving natural gas transiting Turkey was signed. In January 2011,
President Aliyev and the President of the European Commission, Jose Manuel Barroso, signed a
joint declaration committing Azerbaijan to supplying substantial volumes of natural gas over the
long term to the European Union.
By the beginning of October 2011, the State Oil Company of Azerbaijan (SOCAR) had received
final proposals for pipelines to export natural gas from the second phase development of the Shah
Deniz offshore oil and natural gas fields. Proposals were received from consortia backing the
ITGI, Nabucco, and Trans Adriatic Pipeline (TAP; from Turkey through Greece, Albania, and the
Adriatic Sea to Italy) projects, as well as from BP, which reportedly proposed an 808-mile “South
East Europe Pipeline” (SEEP) from western Turkey through Bulgaria, Romania, and Hungary to
Austria. A substantial part of the project reportedly would involve building inter-connectors
between existing pipelines. A proposal for AGRI was not reported. SOCAR and other members of
the Shah Deniz consortium stated that they would decide on a pipeline within several weeks.
On October 25, 2011, Azerbaijan and Turkey announced that they had signed accords on the final
terms for the transit of Shah Deniz phase 2 natural gas through the southern corridor. The
agreements were signed during President Aliyev’s visit to Turkey. They specified that 565-700
bcf of natural gas would transit Turkey, of which 210 bcf would be available for Turkey’s
domestic use. Another significant accord provided for the possible construction of a new “Trans-
Anatolia” natural gas pipeline, so that the natural gas from Shah Deniz Phase 2 would not have to
go through the Turkish pipeline system. In late December 2011, the Azerbaijani and Turkish
governments signed a memorandum of understanding on setting up a consortium involving
SOCAR, the Turkish state-owned TPAO energy firm, and TPAO’s pipeline subsidiary, BOTAS, to
construct the Trans-Anatolian Pipeline. SOCAR is designated initially to hold an 80% share in the
consortium, although other companies may be invited to join later, primarily the members of the
Shah Deniz consortium.
In late December 2011, the Azerbaijani and Turkish governments signed a memorandum of
understanding on setting up a consortium involving SOCAR, the Turkish state-owned TPAO
energy firm, and TPAO’s pipeline subsidiary, BOTAS, to construct TANAP. SOCAR is
designated initially to hold an 80% share in the consortium, although other members may be
invited to join the consortium. Contract negotiations on setting up the consortium reportedly have
been contentious, however.
In May 2012, the Nabucco consortium submitted new pipeline proposals to the Shah Deniz
consortium, reportedly including the original route as well as the shorter Nabucco West route. The
Shah Deniz Export Negotiating Team reportedly indicated in February 2012 that it preferred the
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TAP proposal over the ITGI pipeline proposal. In mid-2012, it rejected SEEP, leaving TAP and
Nabucco West as the choices. The Shah Deniz Team has indicated that it will make a final
decision about the pipeline by June 2013.
In late June 2012, the Azerbaijani and Turkish presidents and oil firm heads signed accords to
build TANAP. The first stage, with a capacity of 565 bcf per year, is planned to be completed in
2018. Other investors are being invited to participate.
In late 2012, Russia finalized arrangements with transit states for the construction of the South
Stream gas pipeline, with a capacity of 2.2 bcf per year, under the Black Sea to European
markets, and began construction of the onshore portion in Russia in December 2012. The
undersea portion will extend nearly 600 miles. From Bulgaria, the pipeline is planned to transit
Serbia, Hungary, and Slovenia to Austria. The first phase of construction is planned to be
completed in 2015. According to some analysts, the pipeline is not economically viable, but is
being built by Russia to counter proposals to build the Nabucco West pipeline and perhaps a
trans-Caspian pipeline, so that Russia may maintain a dominant gas presence in Europe. To
bolster prospects for building the Nabucco West pipeline, the Shah Deniz consortium agreed with
the Nabucco consortium in January 2013 to finance up to one-half of the pipeline. Azerbaijan also
has pledged to provide some financing for TAP if it chooses this pipeline. As noted earlier, the
TAP project was chosen. The Shah Deniz consortium has taken 50% ownership of TAP, including
SOCAR (20%), BP (20%), and TOTAL (10%). Additionally, Belgium’s Fluxys, a major gas
transit operator, will acquire 16%.31
Discussions on a Trans-Caspian Pipeline
In 1999, Turkmenistan signed an accord with two U.S. construction firms to conduct a feasibility
study on building a trans-Caspian gas pipeline to Azerbaijan, but Turkmenistan failed to commit
to the pipeline following objections from Iran and Russia. In September 2011, the Council of the
European Union approved opening talks with Azerbaijan and Turkmenistan to facilitate an accord
on building a trans-Caspian gas pipeline. Such a link would provide added gas to ensure adequate
supplies for the planned Southern Corridor pipelines. Hailing the decision, EU Energy
Commissioner Günther Oettinger stated that “Europe is now speaking with one voice.”
The United States has supported building a trans-Caspian pipeline and stated that no other
country should be able to veto a decision by Azerbaijan and Turkmenistan to build such a
pipeline.
31 “Shah Deniz Partners Take Shares in TAP,” International Oil Daily, July 31, 2013, online edition.
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Figure 3. Select European Natural Gas Infrastructure
Source: Compiled by the Library of Congress Cartography Section.
CRS-17
Europe’s Energy Security: Options and Challenges to Natural Gas Supply Diversification
Potential Sources of Alternative Supplies
Global natural gas reserves have increased every year for at least the last three decades, and the
advent of shale gas makes the future of natural gas possibly even larger. The U.S. Energy
Information Administration (EIA) estimates global natural gas reserves, both conventional and
unconventional, at over 6,600 tcf and technically recoverable shale gas resources at about the
same, while consumption was about 114 tcf in 2011—or almost 125-years’ worth of natural gas.32
Two regions—Central Asia and North Africa—hold great potential to produce more natural gas
than they currently do, and given the proximity of both to Europe (see Figure 3) offer possible
alternatives to Russian supplies. Central Asia has been a focus of U.S. and European efforts to
provide Europe an alternative to Russia for natural gas through the southern corridor. North
Africa already has multiple pipelines to Europe and LNG export terminals. The main issue for
this region is whether the MENA nations, with existing reserves and infrastructure, can increase
production and delivery of additional supplies to Europe.
There has been tremendous growth in LNG liquefaction over the last few years, mainly in Qatar,
and more capacity is projected to be added by industry. Even the United States has multiple
proposed LNG liquefaction projects at various stages of regulatory approval. The addition of
more liquefaction capacity will provide the EU with other alternative suppliers even though their
ability to use LNG is constrained by a lack of infrastructure.
The Caspian Region and Central Asia: The Focus of U.S. Policy33
The Caspian region (see Figure 4) has emerged as a significant source of natural gas for world
markets. The proven natural gas reserves of Azerbaijan, Kazakhstan, Turkmenistan, and
Uzbekistan are estimated at over 1,000 tcf, among the largest in the world (see Table 3). The
International Energy Agency (IEA) estimates that the Caspian region’s proven and recoverable
natural gas reserves are about 7% of the world’s reserves, but also stresses that further exploration
could result in an upward revision of estimated reserves. Nonetheless, the Central Asian states
remain geographically isolated from world markets. Natural gas pipelines must be built long
distances and must traverse several countries, increasing political and economic risks. Those
pipelines which head westward must traverse either the Caspian Sea, where the littoral states
continue to argue over its legal status, pass through energy competitors Russia or Iran, or for
Azerbaijan, across Turkey.
32 U.S. Energy Information Administration, World Shale Gas Resources: An Initial Assessment of 14 Regions Outside
the United States, Washington, DC, April 5, 2011, p. 4, http://www.eia.gov/analysis/studies/worldshalegas/.
Reserves and resources are not the same in the energy industry. Reserves are considered a subset of resources as they
indicate that a resource is producible using today’s technology at today’s prices.
33 For additional information on Central Asia see CRS Report RL33458, Central Asia: Regional Developments and
Implications for U.S. Interests, by Jim Nichol.
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Figure 4. The Caspian Region
Source: Compiled by the Library of Congress Cartography Section.
CRS-19
Europe’s Energy Security: Options and Challenges to Natural Gas Supply Diversification
Asia is a growing prospect for Central Asian natural gas. A natural gas pipeline from
Turkmenistan to China exists, but China needs to upgrade its internal supply network to provide
natural gas to the coastal industrial areas. Kazakhstan is in discussions with China to export
natural gas as well. Turkmen natural gas fields could help meet both Pakistan’s and India’s
growing energy needs and provide significant transit revenues for both Afghanistan and
Pakistan.34 If enough capacity is constructed to China and other parts of Asia, future supplies to
Europe may be moot, which would benefit Russia.
Table 3. Key Central Asian Natural Gas Data, 2012
Units = trillion cubic feet (tcf)
Exports to
Reserves
Production
EU
Azerbaijan 31.5 0.6 0.0a
Kazakhstan 45.7 0.7 0.0
Turkmenistan
618.1 2.3 0.0
Uzbekistan 39.7 2.0 0.0
TOTAL 735.0 5.6 0.0
Source: BP Statistical Review of World Energy 2013.
a. Azerbaijan does export natural gas to Turkey, which then sends some of it to Greece.
Azerbaijan: The EU’s Best Hope For New Natural Gas Supplies?35
U.S. administrations have contested that exports from Azerbaijan could boost energy security for
European customers currently relying more on Russia. According to former U.S. Special Envoy
for Eurasian Energy and current U.S. Ambassador to Azerbaijan Richard Morningstar,
Azerbaijani natural gas “is absolutely essential to the development of the Southern Corridor.” As
noted previously, Azerbaijan will supply all the natural gas for the TANAP pipeline and the
forward project to Europe. It is likely that the price of the natural gas will be predominantly
linked to oil prices and may not give European consumers a discount compared to other sources.
It is also important to note that Azerbaijan will supply Turkey with an additional 215 bcf of
natural gas to help Turkey meet its growing natural gas demand.
The natural gas will come from phase 2 development of Azerbaijan’s Shah Deniz field, which is
in the Caspian Sea. The consortium that owns the Shah Deniz field is led by BP as the operator,
but also includes Statoil (Norway), SOCAR (Azerbaijan), LUKOIL (Russia), Total (France),
NICO (Iran), and TPAO (Turkey). Recent U.S. legislation imposing sanctions on Iran excludes
34 U.S. Department of State, Secretary Clinton Co-Chairs the New Silk Road Ministerial Meeting, DipNote, September
23, 2011; Fact Sheet on New Silk Road Ministerial, September 22, 2011. See also U.S. Department of State, Remarks,
Robert D. Hormats, Under Secretary for Economic, Energy and Agricultural Affairs, Address to the SAIS Central Asia-
Caucasus Institute and CSIS Forum, September 29, 2011; William J. Burns, Deputy Secretary of State, Remarks at
Istanbul Conference for Afghanistan, November 2, 2011.
35 For additional information on Azerbaijan see CRS Report 97-522, Azerbaijan: Recent Developments and U.S.
Interests, by Jim Nichol.
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the Shah Deniz gas project, in which Iran’s Naftiran Intertrade Copmany (NICO) holds a passive
10% share.36
Azerbaijan’s relationship with Iran is important to U.S. foreign policy. At the end of 2005,
Azerbaijan began sending about 7 billion cubic feet (bcf) of natural gas per year through a section
of Soviet-era pipeline to the Iranian border at Astara, partly in exchange for Iranian natural gas
shipments to Azerbaijan’s Naxçivan exclave. In January 2011, Azerbaijan signed a five-year
accord with Iran to supply 35.3 bcf of natural gas through the pipeline in 2011, and possibly
increasing amounts thereafter. This gas is used in northern Iran, and in exchange, Iran provides
some gas to the Azerbaijani exclave of Naxçivan.
Kazakhstan: Natural Gas Is Second to Oil37
Most natural gas production in Kazakhstan has been associated with the development of oil
fields, and most of the natural gas has been re-injected into the fields. Natural gas is mostly
produced in the northwestern part of the country, while population centers in the eastern and
southern parts are dependent on natural gas imported from Uzbekistan. In 2009, Kazakhstan
became a net natural gas exporter. According to the BP Statistical Review, Kazakhstan exported
about 406 bcf of natural gas from its western fields mostly to Russia in 2011. In December 2007,
Kazakhstan, Turkmenistan, and Russia signed an agreement to renovate a branch of the Central
Asia-Center Pipeline supplying natural gas to Russia and to build a new Caspian Coastal Pipeline,
but these plans have been delayed by Turkmenistan’s intentions to diversify its export routes
away from Russia and by reduced natural gas demand by Russia. Kazakhstan nonetheless plans to
boost its natural gas exports in coming years to Russia and China.
Until recently U.S. foreign direct investment (FDI) played a dominant role in the development of
Kazakhstani oil and gas resources, amounting to about $16.5 billion in Kazakhstan from 1993 to
2012.38 According to some reports, China provided about $13 billion in investments and loans to
Kazakhstan’s energy sector in 2009, highlighting its rising energy influence. Some U.S. energy
firms and other private foreign investors have become discouraged in recent years by harsher
Kazakh government terms, taxes, and fines that some allege reflect corruption within the ruling
elite.
At the end of October 2008, China and Kazakhstan signed a framework agreement on
constructing a natural gas pipeline from Beyneu, north of the Aral Sea, southeastward to
Shymkent, where it will connect with the Central Asia-China Gas Pipeline. The 932-mile
Beyneu-Shymkent Pipeline link is planned initially to supply 176.6 bcf to southeastern
Kazakhstan and 176.6 bcf to China. Pipeline construction began in September 2011 and is
expected to be completed by 2015.
36 For additional information on U.S. sanctions towards Iran, see CRS Report RS20871, Iran Sanctions, by Kenneth
Katzman.
37 For additional information on Kazakhstan see CRS Report 97-1058, Kazakhstan: Recent Developments and U.S.
Interests, by Jim Nichol.
38 U.S. House of Representatives, Committee on Foreign Affairs, Subcommittee on Europe and Eurasia, Hearing; U.S.
Engagement in Central Asia, Testimony by Robert Blake, Assistant Secretary, Bureau of Central and South Asian
Affairs, July 24, 2012.
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Turkmenistan: European Orientation?39
As shown in Table 3, Turkmenistan holds the largest natural gas reserves in Central Asia. A
significant quantity of Turkmen natural gas production already flows to Europe via Russia.
However, Turkmenistan’s drive for alternative export routes for its natural gas has pitted it against
some of the other Caspian countries. In September 2011, the Council of the EU approved opening
talks with Azerbaijan and Turkmenistan to facilitate an accord on building a trans-Caspian natural
gas pipeline. Russia and Iran oppose the building of trans-Caspian pipelines, claiming that the
delineation of Caspian Sea borders and the use and protection of maritime resources must first be
worked out by the littoral states. Many observers view such objections as partly driven by the
status of Russia and Iran as natural gas producers in competition with Turkmenistan. Russia, in
particular, appears to want to maintain its role as a major importer of Turkmen natural gas and to
prevent it from competing directly with Russian natural gas exports to the EU. Turkmenistan’s
claims against Azerbaijan regarding some offshore oil and natural gas fields also have stymied a
formal agreement on a trans-Caspian pipeline between the two countries. In mid-October 2011,
Russian President Medvedev warned again that all the littoral states would need to agree to a
trans-Caspian pipeline. The Turkmen Foreign Ministry retorted by terming this stance
“counterproductive” to Turkmen-Russian relations. The Foreign Ministry pointed out that several
bilateral agreements on sea use had been concluded by Russia and others, and repeated
Turkmenistan’s argument that it similarly could reach an agreement with Azerbaijan on a
pipeline.
Despite Turkmenistan’s desire to export more of its gas, thus far, its orientation seems to be
toward the east and not yet toward Europe. Turkmenistan has been seeking alternatives to
pipeline routes through Russia for some time. Since December 1997 Turkmenistan has opened
two pipelines to Iran, doubling Turkmenistan’s export capacity to Iran to about 700 bcf per year.40
In April 2006, Turkmenistan and China signed a framework agreement calling for Chinese
investment in developing natural gas fields in Turkmenistan and in building a natural gas pipeline
through Uzbekistan and Kazakhstan to China, which is in operation. Finally, Turkmen President
Berdimuhamedow also has revived his predecessor’s proposal to build a natural gas pipeline
through Afghanistan to Pakistan and India (TAPI).
Uzbekistan: A Sleeping Natural Gas Giant?41
Uzbekistan mostly uses its natural gas production domestically and is self-sufficient. It has,
however, used its network of Soviet-era natural gas pipelines to export some natural gas to Russia
and to other Central Asian states (Kazakhstan, Kyrgyzstan, and Tajikistan). Uzbekistan appears to
have sufficient gas reserves to become a potential supplier of some gas to Europe if its
infrastructure development begins to look westward.
However, Uzbekistan has been largely closed to Western energy investment, although efforts to
attract international energy firms have appeared to increase in recent years. Russian firms
39 For additional information on Turkmenistan see CRS Report 97-1055, Turkmenistan: Recent Developments and U.S.
Interests, by Jim Nichol.
40 According to the BP Statistical Review, actual Turkmen natural gas exports were about 230 bcf to Iran in 2010.
41 For additional information on Uzbekistan see CRS Report RS21238, Uzbekistan: Recent Developments and U.S.
Interests, by Jim Nichol.
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Gazprom and Lukoil are the largest investors in Uzbek natural gas development and production
and seem through their policies to want to keep Uzbek natural gas from competing with other
Russian natural gas being supplied to Europe. In 2005, the China National Petroleum Corporation
(CNPC) and Uzbekistan’s state-owned Uzbekneftegaz announced that they would form a joint
venture to develop oil and natural gas resources. In 2007, Uzbekistan and China signed an
agreement on building a 326-mile section of the CNPC pipeline, and a construction and operation
joint venture between Uzbekneftegaz and CNPC, Asia Trans Gas, began construction in 2008.
Uzbekistan also has signed a framework agreement to eventually supply 353 bcf of natural gas
per year through the pipeline. After delays, Uzbekistan has reported that these shipments began in
August 2012. A production sharing consortium composed of Uzbekneftegaz, Lukoil, the Korea
National Oil Corporation, and CNPC is exploring for natural gas in the Aral Sea region.
North Africa: Opportunities Amid Uncertainty
To date, U.S. energy strategy towards Europe has not focused on North Africa as a
counterbalance to Russian natural gas supplies. The Arab Spring may have created an
opportunity, albeit with major challenges, to increase exports from the region. Taken as a whole,
the three main existing suppliers to Europe in the region—Algeria, Egypt, and Libya—already
supply natural gas to Europe by both pipeline and LNG (see Table 4) and hold tremendous
natural gas resources that could be further developed. Collectively, the three countries supply
about 44% of what Russia supplies, of which Algeria is the source for almost 90%. Difficult
business environments and domestic demand, prompted by subsidies for natural gas consumption,
have limited development of each country’s natural gas resources. Regime changes in Egypt and
Libya pose an opportunity for each to change its policies to promote expanded development of
natural gas resources, but there has been little progress to date. At the same time, political and
economic uncertainty could continue to characterize the situation in both countries in the short to
medium term. In addition, burgeoning security concerns linked to instability and terrorism
emanating from northern Mali and, potentially, southern and eastern Libya may constrain new
and existing exploitation of energy resources in the region.
Table 4. Key North African Natural Gas Data, 2012
Units = trillion cubic feet (tcf)
Exports to
Reserves
Production
EU
Algeria 159.1 2.9 1.7
Egypt 72.0
2.2
0.1
Libya 54.6
0.4
0.2
TOTAL 285.7 5.5 2.0
Source: BP Statistical Review of World Energy 2013.
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Algeria: Security Concerns Threaten Resource Development42
The four-day hostage crisis that began when terrorists seized a natural gas compound with foreign
workers (including U.S.) in southeastern Algeria on January 16, 2013, highlights stability
concerns in North Africa’s largest hydrocarbon producer. The ramifications of the incident are
unclear, particularly how it will impact on Algeria’s energy sector and foreign participation.
According to a study by the U.S. Energy Information Administration (EIA), Algeria may hold
shale gas resources much greater than its conventional reserves, which are substantial. In March
2013, Algeria passed a new set of amendments to its hydrocarbon law to address shale gas in the
country. Depending upon the development of its unconventional natural gas resources and its
conventional resources, Algeria could become a more significant natural gas producer and
exporter. However, a difficult business environment may continue to limit its potential.
A 2005 hydrocarbon law diminished the monopoly of the state energy company, Sonatrach,
opening the sector for private and foreign investment. A 2006 law, however, required international
companies to give Sonatrach a 51% stake in new oil, natural gas, and related transport projects.
Additional foreign investment rules were enacted in the Complementary Finance Law (CFL) of
2009, which restricted imports and foreign investment. These measures require 51% Algerian
ownership of new foreign investment. Further, the 2010 CFL, effective as of September 2010,
requires foreign bidders who win construction contracts to invest in a joint venture with a local
partner.43 Such changes have prompted foreign investors, including U.S. and European businesses
and governments, to appeal for greater stability of laws in Algeria, and may have contributed to a
reported slowing of foreign investment in exploration and production.44 Still, according to the
State Department, “the 49/51 rule remains controversial but foreign investors have adapted.”45
Algerian natural gas production and exports have declined since 2005, when it produced over 3.1
tcf and exported more than 2.2 tcf. In 2011, Algeria produced 2.8 tcf and exported 1.8 tcf, with
1.6 tcf going to the EU. In 2005, Algeria’s energy minister announced ambitious plans to increase
production and export, with a goal of reaching 4.0 tcf of production and 3.5 tcf of exports by
2015. These targets are not on track to be achieved, and the country has changed its focus to
preserving its resource base and not expanding production as quickly. Domestic consumption
may outstrip exports within the next decade.
Nevertheless, Algeria continues to expand its connections to Europe. In 2011, a consortium led by
Sonatrach opened the Medgaz natural gas pipeline. The new pipeline runs directly from Algeria’s
Beni Saf port to Spain’s Perdigal Beach. The initial capacity of the line is approximately 280 bcf
per year. Despite this new addition, Algerian exports to Spain do not have much impact on the
rest of Europe, as the interconnection between Spain and France is limited. In addition to
Medgaz, Algeria exports natural gas to Europe via the 425 bcf Maghreb-Europe pipeline to Spain
42 For additional information on current events in Algeria, see CRS Report RS21532, Algeria: Current Issues, by
Alexis Arieff.
43 State Department, Bureau of Economic and Business Affairs, “2013 Investment Climate Statement—Algeria,”
February 2013, http://www.state.gov/e/eb/rls/othr/ics/2013/204588.htm.
44 Samuel Ciszuk, “Abysmal Licensing Round Result in Algeria Confirms Energy Sector Malaise,” IHS Global Insight,
March 18, 2011; Africa Energy Intelligence, “Oil Companies Steer Clear of Algeria Due to Windfall Tax, Few Bid for
Licenses,” March 23, 2011.
45 State Department, “2013 Investment Climate Statement—Algeria,” February 2013.
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and the 230 bcf Trans-Mediterranean pipeline to Italy. Algeria has also announced plans to
expand its LNG export capacity.
Egypt: In Need of a Reorganization of Its Natural Gas Sector46
Since 2005, demand for natural gas in Egypt has been on the rise, increasing almost 57% over the
time period. Although production has grown as well, the subsidy-driven demand has hindered the
government in offering attractive terms for international companies to continue developing
Egypt’s resources. Additionally, much of Egypt’s remaining natural gas is in difficult-to-access,
high-cost areas, which contributes to the lack of interest by many international natural gas
companies. That said, BP signed a deal in 2010 that was substantially higher than previous
contract terms.
Since the resignation of former Egyptian President Hosni Mubarak in February 2011, Egypt’s
natural gas infrastructure in the Sinai Peninsula has been attacked many times by either
disaffected Bedouin Arabs living in the Sinai or terrorist groups with camps in the peninsula.
These attacks have disrupted gas shipments via two separate pipelines converging at El Arish to
both Israel and Jordan. Egypt is no longer exporting natural gas to either country. No group has
claimed responsibility for the attacks, and the Egyptian authorities have struggled to protect
infrastructure in the demilitarized Sinai Peninsula.
Egyptian exports to the EU, which are solely in the form of LNG, dropped by almost 12% in
2011, after dropping almost 35% in 2010. The Arab Gas Pipeline from Egypt to Jordan, Lebanon,
and Syria has been planned to extend to Turkey in order to move Egyptian natural gas to Europe,
but given the issues surrounding Egypt’s natural gas sector this is highly doubtful. Production in
2010 fell for the first time in over a decade, but stabilized in 2011. With domestic consumption
likely to continue increasing and production probably declining, exports are not likely to increase
for some time. In part to meet its export commitments, Egypt announced in December 2012 that it
would begin importing LNG, possibly as early as 2013. Depending upon the orientation of a new
government, if it promotes Western investment in Egypt’s energy sector, and the government
addresses its natural gas subsidies, this deterioration of Egypt’s natural gas sector could be
reversed.
Libya: Untapped Potential47
Similar to Algeria, the September 11, 2012, terrorist attacks on the U.S. diplomatic mission in
Benghazi underscore security and stability issues facing the new government. Nevertheless,
Libya may have the greatest potential to increase natural gas exports to Europe once a new
regime is established and possibly a new state oil and natural gas company in a post-Qadhafi
Libya. The civil war halted natural gas production, but production has since resumed and appears
to be recovering quicker than most analysts had forecast.
46 For additional information on Egypt’s energy sector see CRS Report R41632, Implications of Egypt’s Turmoil on
Global Oil and Natural Gas Supply, by Michael Ratner, and for additional information on current events in Egypt see
CRS Report RL33003, Egypt: Background and U.S. Relations, by Jeremy M. Sharp.
47 For additional information on current events in Libya see CRS Report RL33142, Libya: Transition and U.S. Policy,
by Christopher M. Blanchard.
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Libya has one natural gas pipeline to Europe, Greenstream, which was closed during the recent
unrest, as well as an LNG export terminal. Italy received almost all of Libya’s natural gas exports
in 2011, while Libya provided approximately 3% of Italy’s natural gas imports. The pipeline was
operating below its capacity in 2011. Libya’s minimal LNG exports were to Spain in 2011. LNG
exports were approximately 3% of the capacity of Libya’s LNG facility.
Libya’s natural gas production dropped almost 90% in 2011. However, domestic consumption,
particularly for electric power generation, could increase Libya’s consumption of natural gas,
which has been stable over the past decade according to EIA.48
Liquefied Natural Gas Imports
One of the most important developments for Europe has been the growing availability of natural
gas in liquefied form (LNG). LNG represents about 25% of European natural gas imports, up
from 15% in 2010. The United Kingdom leads Europe in LNG imports, followed by Spain and
France. However, as noted earlier, the interconnection between Spain and France could be
expanded to allow Europe to take advantage of Spain’s excess import capacity for LNG or
pipeline natural gas.
The principal suppliers of LNG to Europe include Algeria, Egypt, and Qatar. Qatar is the largest
supplier of LNG to Europe, and also owns multiple LNG import terminals in Europe. Countries
such as Poland and Estonia have also begun the process of building large LNG import terminals
at their Baltic Sea ports that would enable LNG to be distributed throughout Northern and Eastern
Europe.
Table 5. EU LNG Import Capacity
Number of
Facilities
Capacity (bcf)
Belgium 1 9.0
France 3
23.8
Greece 1 5.3
Italy 2
11.0
Netherlands 1
12.0
Portugal 1 7.9
Spain 6
60.1
Sweden 1 0.5
United Kingdom
4
51.1
20
180.7
Source: Gas Infrastructure Europe, http://www.gie.eu.com/index.php/maps-data/lng-map.
48 U.S. Energy Information Administration, Country Analysis Briefs - Libya, Washington, DC, February 2011,
http://www.eia.gov/EMEU/cabs/Libya/pdf.pdf.
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Possible U.S. LNG Exports: Pricing Not Volumes May Be Key
Proposed U.S. LNG export projects, if all were constructed today, would make the United States
the largest LNG exporter. The proposed projects are at various stages in the regulatory approval
process, with only one under construction. Nevertheless, analysts have already begun speculating
on what a significant increase in U.S. LNG exports would mean to natural gas markets, especially
to European markets. Any volumes of LNG from the United States would benefit the market,
including Europe, by offering a new supplier to consumers. For parts of Europe, especially the
Baltic region and Central Europe, where the United States enjoys strong and friendly relations,
any decision to export U.S. LNG to that region would be welcomed as a potential offset to their
dependence on Russian gas.
However, the bigger effect of U.S. entry into global LNG sales may be on pricing rather than
supplies. The United States is one of the few countries that does not link its natural gas price to
the price of oil and therefore may add to the pressure to delink the two commodities. Most natural
gas sold in the world, by pipeline or as LNG, is sold under long-term contracts and indexed to the
price of oil. Historically, the two commodities competed more directly in markets than they do
today.
More Distant Alternatives
Eastern Mediterranean: A Recent Development
Although too early to tell and years from production for export, announcements of natural gas
discoveries in the eastern Mediterranean by Israel and Cyprus may open a new source of
European natural gas. Initial estimates pose a scenario in which Israel and Cyprus could become
natural gas exporters, with Europe as the largest nearby market a likely recipient. Cyprus, which
is an EU member and currently does not consume any natural gas in its economy, has embarked
on a significant, long-term program to develop necessary infrastructure to do so. In late June,
Cyprus and a U.S.-Israeli partnership, including the U.S. energy company Noble Energy, which is
conducting the drilling, signed a memorandum of understanding (MOU) to build natural gas
facilities for both domestic consumption and export. Additionally, other countries in the region,
including Lebanon and Turkey, may begin exploration efforts that could increase the amount of
natural gas produced in the region.
The Arctic Region and Players
Norway is not a member of the EU, but is the eighth-largest natural gas producer in the world and
second-largest exporter of natural gas to the EU, behind Russia. The North Sea holds the majority
of Norway’s natural gas reserves, but there are also significant quantities in the Norwegian and
Barents Seas. The United States Geological Survey has estimated that almost 25% of the globe’s
yet-to-be-discovered natural gas resources are located in the Arctic region and last year Norway
and Russia reached agreement on Arctic energy exploration issues. Norway’s Snohvit natural gas
field along with Russia’s field at Shtockman, in which Norway is an investor and development
partner, promise to make the Barents Sea a new European energy region.
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Potential Development of Alternative Sources in Europe
In addition to solidifying other sources of energy supply from other regions, experts point to
several additional factors that could decrease European dependence on Russian resources. The
development of previously difficult-to-develop “unconventional” natural gas deposits, including
shale gas, in Europe and elsewhere could diversify supplies and keep prices down. EIA assessed
the EU’s technically recoverable shale gas resources at almost 500 tcf, more than 25 years of
supply at current consumption levels.49 The growth of the spot market for natural gas and the
development of liquefied natural gas infrastructure in Europe could also help diversify supplies as
well as reduce dependence on Russian-controlled pipelines. Finally, developing alternative energy
sources within Europe, in particular, hydropower, energy from the seas, biomass, wind power,
solar energy, and geothermal energy, could all contribute to further diversification of Europe’s
energy supply, reducing overall natural gas demand.
Prospects for Diversification
There are many alternatives to Russian natural gas for Europe to choose from, but it would be
difficult, if not impractical, for Europe to consider replacing all Russian natural gas imports.
Some EU countries and companies also appear reluctant to shift significantly from the status quo.
Some of Europe’s larger natural gas companies have huge financial interests in maintaining
Russian supplies and do not see a problem in depending so much on one country. It is important
to keep in mind that Russia not only holds the largest supplies of natural gas globally, but already
has significant infrastructure connecting its resources to Europe, while some of the alternatives
remain constrained. A major test for the EU in developing a more coherent energy policy for
Europe could be how to balance these views with those of other member states that are more
dependent on Russian energy and are concerned by the political leverage Russia could exert on
parts of Europe if no alternatives are found to alleviate at least some of that dependence.
Although supplying natural gas to Europe from the Caspian region and Central Asia has been a
goal of multiple U.S. administrations and the EU, it is far from being achieved in volumes
significant to counter Russian exports. Some observers view the fact that the State Department
has not appointed a new Special Envoy for Eurasian Energy since early 2012 as one indication of
the Administration’s waning interest in the Southern Corridor natural gas effort. In addition, given
the interest in combating climate change both in Europe and in some quarters of the United
States, some analysts believe that increasing the flow of Caspian natural gas to China, where a
pipeline already exists, could have greater benefits. In this view, Chinese natural gas imports
could help reduce carbon dioxide and other greenhouse gas emissions by, for instance, limiting
the use of coal in China’s electric power sector.
In North Africa, ongoing governmental transitions in Libya and Egypt are a key factor for natural
gas development. In January 2012, Egypt held its first parliamentary elections since the ouster of
President Hosni Mubarak, bringing to power the Muslim Brotherhood and new President
Muhammad Morsi. Libya elected a new parliament in July 2012, in the country’s first national
election in 50 years, after the ouster of Muammar al Qadhafi’s government in 2011. A new
president and prime minister assumed office in August 2012 and September 2012, respectively.
49 U.S. Energy Information Administration, World Shale Gas Resources: An Initial Assessment of 14 Regions Outside
the United States, Washington, DC, April 2011, p. 4, http://www.eia.gov/analysis/studies/worldshalegas/.
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The type and character of the new governments will have an impact on natural gas development
in each country as their energy sectors appear to offer a significant potential source of economic
growth and income. Both countries have large natural gas resources, but historical political
constraints have limited the development of these resources.
The United States and Europe are in a position to aid both countries in reforming their regulatory
regimes governing natural gas development as well as establishing oversight by non-
governmental organizations and their respective parliaments. And U.S. and European energy
companies seem eager to help further develop energy infrastructure and production in both
countries. Redirecting U.S. and European efforts from Central Asia to MENA—especially Libya
and Egypt—as an alternative to Russian natural gas supplies could improve the chances of more
natural gas reaching Europe in the short run.
Meanwhile, new discoveries in the eastern Mediterranean pose a potential new source of
European natural gas. However, neither Israel nor Cyprus has any experience in developing large
scale natural gas projects. Both countries could benefit from the U.S. and European experience in
developing their resources, both on a federal and state level.
Author Contact Information
Michael Ratner, Coordinator
Jim Nichol
Specialist in Energy Policy
Specialist in Russian and Eurasian Affairs
mratner@crs.loc.gov, 7-9529
jnichol@crs.loc.gov, 7-2289
Paul Belkin
Steven Woehrel
Analyst in European Affairs
Specialist in European Affairs
pbelkin@crs.loc.gov, 7-0220
swoehrel@crs.loc.gov, 7-2291
Acknowledgments
Vincent Morelli, Section Research Manager for Europe and the Americas, contributed to the
conception, analysis, and conclusions of this report. Alexis Arieff, Christopher Blanchard, and
Jeremy Sharp from CRS’s Foreign Affairs, Defense, and Trade Division—Middle East/Africa
Section contributed to this report. Elizabeth Roberts from CRS’s Knowledge Services Group
contributed to the research for this report. Amber Wilhelm in CRS’s Publishing and Editorial
Resources Section and Jacqueline Nolan with the Library of Congress’s Geography and Map
Division contributed to the report’s graphics.
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