It has been repeatedly officially stated by EU representatives that ultimate target us to end EU’s dependence on Russian fossil fuel through energy savings, diversification of energy supplies, and accelerated roll-out of renewable energy[i]. This target is consistent with Paris Agreement and European Green Deal objectives which have been reassured at COP26 summit held in Scotland.

These statements were made in a challenging era for energy investors; Unilateral regulatory changes by EU states as Spain and Italy in economic incentive schemes for renewable energy production led to a significant amount of Energy Charter Treaty (ECT) cases; ECT competence and compatibility  with EU acquis has been challenged, and covid19 effect on the substantial decrease of energy demand subsequently led to the significant decrease of global energy investments[ii]. As per the IEA report[iii], although the global energy investments is set to pick up by 8% in 2022 against the backdrop of the global energy crisis, almost half of the increase in capital spending is linked to higher costs due to multiple supply chain pressures, tight markets for specialised labour and services, and the effect of higher energy prices on essential construction materials like steel and cement.

Inevitably, substantial increase of energy investments is the key element to tackle the multiple strands of today global energy crisis, and more particularly to the energy crisis of EU member states;

EU member states should significantly reduce their dependence to Russian fossil fuels, and more importantly their dependence on Russian natural gas.

The role of natural gas has been proved pivotal for the decrease of emissions in the EU since 2010; coal phase out policies provided an opportunity for natural gas and renewables replacing importantly the retiring coal capacities. Although the retirements in coal capacities did not significantly increase natural gas use as the combination of government support and higher carbon prices provided strong incentives for an increased market share for renewables, natural gas infrastructure in place provided balancing functions meeting seasonal significant peaks in Europe’s energy demand[iv].

Noting that EU took as granted the existing natural gas capacities aiming to eventually decarbonise the natural gas sector, practically discouraged the investors to invest in new natural gas projects from upstream to midstream-downstream lines notwithstanding the fact that the restrain of dependence of EU on Russian gas is not a topical matter[v]; it has been urged, and planned from 2014 when Russia annexed Crimea region, although paradoxically under energy security point of view the share of Russia in the UK and the EU has been increased from 29% in 2014 to 37% in 2019, while the domestic production share has been decreased significantly.[vi] From commercial point of view, the increase of the share of Russia in EU natural gas market makes absolute sense, noting the decrease of domestic production and the fact that LNG suppliers struggled to compete the cheaper Russian pipeline natural gas. To this respect the significant decrease of Russian natural gas flows to EU member states following the Russian invasion in Ukraine undermined vitally the EU’s natural gas supply security[vii] which led to REPowerEU plan, and other alternative options as presented by industry experts in order to provide short-run solutions.[viii] This unprecedented risk for EU energy security led to G7 to support investments in the natural gas sector as temporary response.[ix]  Practically EU targets to achieve diversification of natural gas supply targets with the engagement of other reliable natural gas suppliers, primarily from LNG spot markets as interim solution, and in order to enhance bargaining power on negotiations with the suppliers, proposed to introduce legal tools for pooling energy demand at EU level, creating an EU natural gas purchase consortium[x]. Ultimately, in the long run the demand of natural gas in the EU with the implementation of clean energy policies is expected to gradually decreased[xi] effectively through energy efficiency and the acceleration of clean energy sources production.

Having in mind the abovementioned, EU substantially failed to preserve energy security; failed to have a pragmatic approach since while the demand of natural gas in the EU has not been decreased, facing a real threat of shortage in energy and natural gas supply. The fact that natural gas[xii] and electricity demand has been decreased in Q4 of 2022, making the winter less challenging it has been a positive sign for the control of the energy crisis, although it is worth noting that rising energy prices undermined energy affordability and that factor was a key factor for the demand decline in 2022 in EU.[xiii]

Strategic implications in order to preserve energy security have been widely discussed by EU organs and briefly outlined above although the Achilles heel of all strategic plans presented is the preservation of natural gas reserves which are necessary for meeting EU’s energy demand. Russian imported pipeline natural gas quantities haven been replaced by LNG imports[xiv] (primarily from the US[xv]), and it is estimated that EU will be heavily relied to natural gas imports as domestic gas production is expected to be decreased, noting the maturity level of development of Groningen field[xvi] and the lack of additional investments in the domestic natural gas E&P sector.

EU Commission has repeatedly supported the diversification of energy resources and in particular has promoted energy dialogue at a political level for the creation of energy Mediterranean hub with North Africa countries and Eastern Mediterranean countries ( see PCI support grants for the development of gas and electricity interconnections with Israel, Egypt, Greece, and the Republic Cyprus; execution of MoU[xvii], participation in EMGF). Political support of these initiatives in the region are important from geopolitical point of view, although new natural gas projects from upstream to midstream-downstream lines are capital intensive projects which will be materialised by investors who are looking for stable and consistently favourable investment climate, and long term contracts with interested buyers.

Unfortunately, investment climate for natural gas investments in EU is far from favourable; Although EU has consented to the agreement in principle on Modernised Energy Charter Treaty[xviii] , “EU and the UK have opted to carve-out fossil fuel related investments from investment protection under the ECT, including for existing investments after 10 years from the entry into force of the relevant provisions and for new investments made after 15 August 2023 as of that date with limited exceptions”[xix]. In addition to this, France, Germany, the Netherlands, Poland, and Spain announced their intention to withdraw ECT, while the EU Commission supports that EU exit from Energy Charter Treaty appears to be unavoidable.

It is critical for the EU to facilitate a consistent investment framework for new natural gas projects of a particular scale from upstream to midstream-downstream lines.

In order to achieve that EU shall re-evaluate the role of natural gas for the preservation of energy security with the introduction of this additional strategic pillar to the RePowerEU plan, sending the message to investors that the support of EU to the investments in the natural gas sector is a part of the energy transition strategy and not a temporary response.

[i] European Commission, “REPowerEU: A plan to rapidly reduce dependence on Russian fossil fuels and fast forward the green transition”, press release on 18 May 2022  https://ec.europa.eu/commission/presscorner/detail/en/IP_22_3131 (accessed 12 May 2023)

[ii] As per IEA World Energy Investment Report 2020, global energy investments have been decreased 20% in 2020.

[iii] IEA World Energy Investment Report 2022.

[iv] See IEA “The Role of Gas in Today’s Energy Transitions“ 2019.

[v] See David Buchan, “ Europe’s energy security- caught between short terms needs and long term goals, Oxford Institute for Energy Studies 2014. https://www.oxfordenergy.org/publications/europes-energy-security-caught-between-short-term-needs-and-long-term-goals/ (accessed 12 May 2023)

[vi] IEA, Share of Russia in European Union and United Kingdom gas demand, 2001-2021, IEA, Paris https://www.iea.org/data-and-statistics/charts/share-of-russia-in-european-union-and-united-kingdom-gas-demand-2001-2021 (accessed 21 October 2022)

[vii] See IEA “Gas Market Report Q4 2022” October 2022.

[viii] See inter alia Birol Fatih“Coordinated actions across Europe are essential to prevent a major gas crunch: Here are 5 immediate measures” published 18 July 2022 https://www.iea.org/commentaries/coordinated-actions-across-europe-are-essential-to-prevent-a-major-gas-crunch-here-are-5-immediate-measures (accessed 6 October 2022).

[ix] See G7 Leaders’ Communiqué 28 June 2022 https://www.consilium.europa.eu/media/57555/2022-06-28-leaders-communique-data.pdf (accessed 12 May 2023)

[x] See  Statement by President von der Leyen on a new package of measures to address high energy prices and ensure security of supply dated 18 October 2022 https://ec.europa.eu/commission/presscorner/detail/es/statement_22_6243 (accessed 12 May 2023)

[xi] See IEA, Gas demand by region and scenario, 2018-2040.

[xii] Gas demand decreased by 21% (-25 bcm) year-on-year, amounting to 95.4 bcm; see EC Quarterly Report on European Gas Markets Report Q4 2022 https://energy.ec.europa.eu/system/files/2023-05/Quarterly%20Report%20on%20European%20Gas%20Markets%20report%20Q4%202022.pdf (accessed 26 May 2023)

[xiii] See Cam and Alvarez, “Europe’s energy crisis: understanding the drivers of the fall in electricity demand” IEA commentary 4 May 2023, https://www.iea.org/commentaries/europe-s-energy-crisis-understanding-the-drivers-of-the-fall-in-electricity-demand (accessed 4 May 2023)

[xiv] See IEA “Baseline European Union gas demand and supply in 2023” https://www.iea.org/reports/how-to-avoid-gas-shortages-in-the-european-union-in-2023/baseline-european-union-gas-demand-and-supply-in-2023 (accessed 29 May 2023).

See Umbach Frank, the European Union’s LNG supply security” https://www.gisreportsonline.com/r/eu-lng/ (accessed 29 May 2023).

[xv] See Maguire Gavin, “US LNG exports both a lifeline and a drain for Europe in 2023”  Reuters https://www.reuters.com/business/energy/us-lng-exports-both-lifeline-drain-europe-2023-maguire-2022-12-20/  (accessed 29 May 2023).

[xvi] See See IEA “Baseline European Union gas demand and supply in 2023” https://www.iea.org/reports/how-to-avoid-gas-shortages-in-the-european-union-in-2023/baseline-european-union-gas-demand-and-supply-in-2023 (accessed 29 May 2023).

[xvii] See https://energy.ec.europa.eu/system/files/2022-06/MoU%20EU%20Egypt%20Israel_0.pdf (accessed 29 May 2023)

[xviii] European Commission, “Agreement in principle reached on modernized Energy Charter Treaty, 24 June 2022 https://policy.trade.ec.europa.eu/news/agreement-principle-reached-modernised-energy-charter-treaty-2022-06-24_en (accessed 12 May 2023)

[xix] See ECT announcement for the finalization of the negotiations on the modernization of the Energy Charter Treaty, 24 June 2022 https://www.energychartertreaty.org/modernisation-of-the-treaty/ (accessed 10 October 2022)

References